-- Risk & reward
[NOTE: This article was originally written in Chinese in January 2009, and published in the newspaper World Journal on 2/26/2009. I want to thank the World Journal for its generous permission for me to post this updated English version here.]
President Obama's $787 billion economic stimulus plan is now in full swing. The enormous government spending plan spans several key areas, including tax cuts, social welfare, education, healthcare, housing, scientific research, infrastructure, and energy. It was clear from the beginning, however, that climate change was one of the most important elements in his stimulus plan.
Aiming to turn the public's concerns over climate change (and the related issue of energy self-reliance) into the driving motor for economic growth, the president's plan will invest heavily in energy-related infrastructure construction, such as smart power grid and renewable energy. It will also invest in other venues capable of reducing greenhouse gas emission, including improving energy efficiency, electric vehicles, or green manufacturing facilities.
For those concerned with potential undesirable human impacts on the earth's climate, the stimulus package should be exciting news. Climate change, however, is still a controversial subject, entailing numerous uncertainties and risks. It will be necessary to understand these risks to properly understand the associated risks introduced into the stimulus plan, and the economy, by the inclusion of the "climate change" element.
- Government bureaucracy: Greenhouse gases are invisible and odorless, and pose no direct harm to human health. Releasing the gases into the air incurs little, if any, direct costs. As a result, large-scale reduction in greenhouse gas emission is unlikely, unless the government intervenes to regulate the activities. Government bureaucracy, nonetheless, introduces a first layer of risks into the stimulus plan.
- The gap from science to policy: A majority of scientists now agree that human activities and the greenhouse gases they generate were principally responsible for the drastic rise in the earth's surface temperature during the past century. Uncertainties, however, still exist due to several factors such as the natural fluctuations in the earth's climate, the uncertainties in our models of climate change, the uncertainties regarding the impact of human activities, and the errors in data collected. These uncertainties will result in a gap from science to policy, adding another layer of risks.
- Broad scope of influence: Every corner of our modern industrial society, including power plants, industrial factories, transportation, agricultural activities, or buildings, directly or indirectly releases greenhouse gases. The impact of any government policy will be broad in scope and enduring in time, which increases the risk of heightened political confrontation.
- Cost pressure: Businesses need to invest in research, equipments, or services to reduce greenhouse gas emission. With the weak economy, the cost pressure will transform into high political pressure, diminishing the efficacy of the stimulus plan.
- Immature technology: Green tech has made significant progresses in the past decades, leading to successful products such as solar photovoltaic panels, wind turbines, hybrid engines, etc. There is still a long way to go, however, before green tech can upstage petro fuel as our main energy source, and otherwise reduce greenhouse gas emission in other areas. In the 70's, US implemented a cap-and-trade system to reduce the emission of sulfur dioxide that was the source of acid rain. The system successfully stimulated development in new technology, and achieved its goals in less than 50 years. It is unknown, however, whether the domestic experience can be transplanted to the global climate change issue.
- Uncertain market demand: In the past several months, the oil price has fallen from ~$147 to less than $40 a barrel. [UPDATE: The oil has rebounded recently to ~$50 / barrel.] If global economy and oil prices remain depressed, so will the market for credits in greenhouse gas emission reduction (a/k/a carbon credits), delaying the development and implementation of new green tech.
- Reluctance by developing nations to participate: Among the 4 BRIC nations, China has become the world leader in the aggregate amount of greenhouse gas emission, surpassing US recently. The emissions by Brazil, Russia, and India are not too far behind or are increasing rapidly. These 4 nations, however, have been reluctant to limit the greenhouse gas emission of their domestic businesses, for fear of slowing their own domestic economic growth. As a consequence, political pressures have been mounting within US against unilateral reduction in domestic greenhouse gas emission. This political pressure will not disappear in spite of the new government.
- Unintended consequence: Several years ago, the US government encouraged the production of ethanol as a replacement of petro oil. Many farmers therefore sold the corns from their farms for the production of ethanol, which resulted in shortage of corns in the food markets and caused food prices to surge. All the other methods in reducing greenhouse gas emission may result in similar unintended consequences in the complex societal or biological chains.
In light of these risks, and the surging federal deficits, the rate of success of the stimulus package will depend on its ability to attract diverse private investments and international participation. To the private sectors, on the other hand, these risks may represent new demands and new markets. When viewed from the right angle, risk and rewards are often two sides of the same coin.
For a Chinese version published on the World Journal, please click the link at the end of this paragraph. 欲閱讀在世界日報上發表的中文版, 請按此連結鍵 here.
