Wealth of Nations July 2005

The New New Economy Will Be All About Energy

With a gentle push from the federal government, America's dependence on oil will shrink much faster than people think. And it would be good if it did.

The Bush administration is inching toward a new position on global warming. At last week's G-8 summit in Gleneagles, Scotland, the president joined in a statement that recognized the potential scale of the problem and the need for action. The words were softer than the other leaders wanted, and nothing suggested that George W. Bush was changing his mind about the Kyoto agreement, a plan to curb rich-country carbon emissions that most other governments support (or say they support). But he pleased his British hosts by agreeing to stronger words than before. And he got something in return: support for the idea that future plans to curb greenhouse gases must include China, India, and other big developing countries.

The politics of global warming all points one way: Something must be done. The science, to be sure, is far from settled. A few outright skeptics are still asking awkward questions, but their numbers are dwindling, and they are quieter than before. Most experts agree that man-made emissions of carbon dioxide and other greenhouse gases are forcing temperatures up, and quickly. This position is voiced ever more loudly, confidently, and angrily. Leading scientists (not always climate scientists) are demanding radical action, and get all the press they can use.

Rhetorically at least, Europe's leaders have already surrendered to this pressure. As in other things, they are using American suspicion of international action as their excuse for failing to do more themselves. Obviously, Bush cares more about opinion in America than opinion in Europe's capitals—but the steady foreign criticism may influence some people at home. And the mood in the United States is shifting anyway, for other reasons. As in Europe, television news and other media have taken to linking every unusual weather event to man-made global warming. Hollywood has chipped in with The Day After Tomorrow, a well-executed (if frequently ludicrous) movie about climatic Armageddon. Politicians are sniffing the wind.

Ex-presidents, especially. Bill Clinton turned up last week at the Aspen Ideas Festival—a gathering of intellectually engaged American plutocrats. (The meeting was co-sponsored by The Atlantic Monthly, a sister publication of National Journal.) Admittedly, that setting is irresistibly conducive to lofty environmentalism, but what Clinton said about the greatest challenge confronting the world was still striking. It was not chemical, biological, or nuclear terrorism, he said. The worst that terrorists might do, even equipped with weapons of mass destruction, is kill a few million people. That would pose no real threat to the survival of our civilization, he said. Clinton could foresee only one such peril. It was global warming.

An indicator almost as compelling as Clinton's political instincts is the fact that most of the world's leading oil companies are now betting heavily on big shifts in the use of energy. They are investing billions to develop renewable alternative sources, such as wind, tidal, and solar power, and on technologies for capturing and storing carbon emissions. Energy companies and car manufacturers are working on designs for cheaper, lighter hybrid vehicles, which use much less gasoline; they are researching new fuel-cell technologies, which burn hydrogen with no harmful local emissions; and they are developing biofuels as another alternative to petroleum. Some of the firms' chief executives (such as BP's John Browne) are ardent evangelists for an alternative-energy future, inviting governments to join in promoting this vision, and sooner rather than later.

The single most powerful incentive for innovation in energy, of course, is the price of oil—and that too, thanks to OPEC and the pressure of global demand, is pushing the same way. For environmental reasons, the bosses of many energy-producing and energy-consuming industries are convinced that new restrictions on carbon emissions are coming anyway. So the commercial reward for innovation in alternative energy and conservation could be enormous.

One could go further—as Clinton typically did—and argue that global warming and expensive oil are not setbacks for the United States so much as wonderful opportunities. Bizarrely, when you recall that he sees global warming as so grave a danger, he compared innovation in energy to the leap forward in information technology of the 1980s and 1990s. The energy economy, he argued, is the next big thing. It could be as good for living standards and the creation of new high-wage jobs as the IT-led economic expansion that began toward the end of the 20th century.

Clinton's irrepressible optimism, undaunted even by (so he says) this threat to our very civilization, was as appealing as ever. The audience loved it—what a politician. But there is a big difference between the information technology revolution and the energy revolution that Clinton is calling for. Innovation in IT has unambiguously increased the economy's productivity and its capacity to sustain higher living standards. If innovation in energy is a response to a sudden scarcity of supply, or an unduly rapacious producers' cartel, or (especially) ill-conceived environmental regulation, the overall outcome might easily be lower productivity.

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