Environment v. Economy: Precaution or Peril?

Published: 
Friday, August 9, 2013

For over 40 years, the Precautionary Principle has offered a kind of Hippocratic Oath to environmentalists — a prevent-any-harm obligation to address risks even if scientific assessments are unsettled. Introduced as a catalyst for 1970s environmental policies in Europe, the Precautionary Principle is now referenced in numerous international treaties and declarations, as well as a growing body of case law. Prominent political figures from former Secretary of State George Schultz to President Barack Obama have also referenced the principle to build public support for clean energy.

Rather than preventing harm, however, precautionary measures can constrain economic opportunity while doing little if anything to improve environmental quality. To see this paradox, it is important to understand how economies grow and how growth can affect environmental quality. Almost nobody, ever, has enjoyed the economic opportunities available to Americans today. A Brown University economist, Oded Galor, reports that annual per capita income across all countries was only $500 until 1000 AD. And the next several hundred years weren’t much better.

After that point, social scientists like MIT’s Daron Acemoglu and Harvard’s James Robinson argue, institutions for private property took hold. Countries that adopted those institutions prospered, with the richest enjoying per capita incomes of over $50,000. The poorest, unfortunately, continue to stagnate at income levels that were typical over 1,000 years ago.

How did these institutions expand economic opportunity, and what is their relationship to environmental quality? By encouraging value creation rather than distributional conflict, competitive markets produced more of what people want (goods and services) from less of what they don’t want (environmental degradation, for example).

To the extent that clean-energy politics undermine this type of dynamism, it may be creating risks for both the economy and environment. Productivity differences between politically and market-driven investment, for example, suggest that every $100 billion of public support for clean energy can shave over 0.40% from GDP. Compounded over a generation, annual reductions like this would approximate today’s per capita income gap between the United States and Italy.

Productivity losses mean more scarce resources going into fewer goods and services, a process that appears unsustainable from either an environmental or economic perspective. In addition, precautionary policies like clean energy subsidies can shrink household budgets and thus weaken demand for environmental amenities. A widely cited 1990s study by Princeton economist Gene Grossman and current CEA Chair Alan Kreuger reports, for example, no evidence that economic growth systematically reduces environmental quality. Rather, this research suggests that environmental quality increases when wealth-levels pass a sufficiently high threshold.

More recent work from the National Bureau of Economic Research tells a similar story. Juan Moreno Cruz and M. Scott Taylor show, for example, how the remarkable power deficiency and voracious geographic demand of renewables like wind and solar combine to reduce environmental quality and economic welfare. Nobel Prize-winning physicist Robert Laughlin offers related views in a recent book.

Precaution can be good. Research reviewed here suggests, however, that precautionary environmental policies can also create unacceptable perils.

Cross-posted from the Bush Center's Economic Growth blog.

Through 20 years of experience in business, policy, and academic research and teaching, Dino Falaschetti (PhD, MBA, CPA) managed Fortune 100 audit-engagements and corporate finance operations, created insightful business analytics and litigation support strategies, and helped develop productive policies for the White House and state legislatures...
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