Talking heads have been complaining about (or alternatively, celebrating) President Trump’s withdrawal from the Paris climate accord.  Lost in their arguing is a simple question.  Can climate accords make (much of) a difference?

We live in a global economy in which goods can be manufactured and sold nearly anywhere in the world.  Energy expenditures amount to ~10% of worldwide GDP.  As such, the cost of energy is a significant component of the prices we pay for goods.

China has relied extensively on coal to generate cheap energy for its industry:

China Coal

The device you are using to read this article was probably manufactured in China, and it cost you less because of coal.  The tradeoff for low-cost Asian manufacturing has been a surge in carbon emissions:

CO2 emissions

The vast majority of Earth’s seven billion people do not care where their electronics are made.  Even if an accord restrains China’s carbon emissions, what about the rest of the world?  Somewhere, someone will build a factory that uses the cheapest form of energy available—irrespective of carbon.  As such, making certain forms of energy artificially more expensive through government action—regulations, taxes, subsidies, and accords—is unlikely to make much difference.  The restrictions will simply be bypassed and overcome by market demand.

The more viable solutions to reducing carbon emissions instead involve using technology to make cleaner energy cheaper.  Examples include:

  • Hydraulic Fracturing. Notwithstanding its critics, hydraulic fracturing has flooded the United States with inexpensive natural gas, which emits about half as much carbon as coal.  The below figures illustrate how and why American energy consumption has shifted toward cheaper shale gas:

US_Electrical_Generation_1949-2011

Picture1

  • Carbon Capture. Carbon capture and storage technology (CCS) captures carbon emissions from plants and then injects them into underground geological formations.  The cost of building plants with CCS also is falling:

graphic-emissions-data_0

    Source: Stanford University

  • Solar Power. Solar technology, too, has made substantial technological gains in recent years:

Solar power cost

Innovation is the invisible hand of climate change.  As Adam Smith said in The Wealth of Nations:

“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.  Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

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About the Gaille Energy Blog.  The Gaille Energy Blog discusses issues in the field of energy law, with weekly posts at http://www.gaillelaw.com.  Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of two books on energy law (Shale Energy Development and International Energy Development).