Thursday, November 22, 2007

Climate changes and market forces

This post is a response to a (German) radio cast "Das verheizte Klima" (MP3). Looking 25 years into the future, it predicts that everything will be much the same as it is now, except that gas will cost 12 Euros per liter (a 8x increase over current German prices), that the North Pole will be permanently free of ice and that a trans-European power grid to connect wind parks all around Europe will be established. However, the interviewed experts, especially Claudia Kemfert from the German Institute for Economic Research, are very skeptical about any big change, arguing that any technology (in power production and transportation) will take at least 20 years of development before it becomes widespread on the market.

For example, Prof. Kemfert thinks that in 25 years rationing of fuel will be widespread throughout Europe, so that vital industries (the medical and plastics industry are mentioned) can use the oil. I think this underestimates the power of the market:

Energy prices will increase in the future, as the demand in the developing countries grows quickly. However, this will be followed by an increase in supply of fuels, because it becomes economic to use sources that are too expensive to exploit today. So this won't save the world.

However, willing governments can push the markets into a more environmentally friendly direction with a carbon tax that assigns an equal price for every unit of carbon dioxide. (Of course, one needs to make sure that a carbon tax in one country doesn't just shift the emissions across the border.) Such a tax only increases the cost for the consumer, but not the income of the supplier of fossil fuels, hence supply doesn't increase.

Thus follows the good thing for the climate: demand will decrease in response to a carbon tax! On one hand, conservation efforts and increases in efficiency have greater returns on investment. On the other hand, renewable energy sources such as solar and wind power are favored and will be adopted more quickly.

So, I predict that if gas prices increase eight-fold in the next twenty years, we'll quickly see plug-in hybrids and electric cars. People will still have fun with their cars, but the necessary power can come from renewable sources.

Where will this energy come from? There are plenty of possible sources.

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