The bad news on climate change is almost a steady drumbeat. As such it can be too easy to grow numb to it, but it’s important to not lose sight of what’s happening and the urgency of it. For example, here is just one recent story from the New York Times:
The rate at which Antarctica is losing ice has tripled since 2007, according to the latest available data. The continent is now melting so fast, scientists say, that it will contribute six inches (15 centimeters) to sea-level rise by 2100. That is at the upper end of what the Intergovernmental Panel on Climate Change has estimated Antarctica alone could contribute to sea level rise this century."
Global warming, in short, remains urgent for the environment and the people who will bear the direct costs. Yet I don’t think we should ignore the other case for focusing on “sustainable energy”: the macroeconomic benefits.
Let me unpack this a bit. Energy price shocks are historically a contributor to modern recessions. As one of the leading economists of both time series econometrics and energy economics writes:
All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War.
There are two ways energy prices contribute to macroeconomic instability. The first is that supply shocks themselves cause price spikes, and the second is that they turn growing demand into inflation, which can lead the Fed to raise interest rates.
How does this relate to sustainable energy? One mechanism is if we achieve sustainable energy by lowering the price of energy or allowing energy to go further, than it becomes a smaller component of GDP overall and less likely that price spikes will be economically disruptive.
For example, if manufacturing and other businesses becomes less energy intensive, then energy price spikes are less likely to pass through to core energy prices and either force the Fed to respond or fool them into responding.
But the twist here is that the macroeconomic costs of energy price spikes don’t just lead to greater benefits of green energy, but also shale production. Fracking production can respond more quickly to price spikes than traditional oil production, which can help dampen the effects of other supply shocks or demand shocks.
Long story short, the historical record suggests that oil price shocks are a major macroeconomic problem. And global warming is a major environmental problem. These are two issues that if we don’t deal with them are going to come back to haunt us. The macroeconomic problems in a repeated and costly way, and the environmental problems is a cumulative and growing way.