acknowledge that there are some risks. However, Mr. Smith argues that economic development will provide the means for future generations to cope with climate

change, rendering actions by the current generation basically unnecessary.

46-495-18

HEARING OF THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT COMMITTEE ON SCIENCE

U.S. HOUSE OF REPRESENTATIVES

on

Countdown to Kyoto-Part 3: The Administration's Global Climate Change Proposal

Thursday, November 6, 1997

Post-Hearing Questions and Answers

Mr. Fred L. Smith, Jr.

President

Competitive Enterprise Institute

Technological Change

Q1.

Al.

Your testimony refers to the costs associated with delaying or blocking economic and technological change. Could you please expand on what some of these costs might be?

The costs of delaying technological change are opportunity costs - the value of the opportunities that are lost or foregone due to the delay in technological development. It is the value of what we could have achieved, were it not for policies that prevent technological advance and the benefits to human welfare that such advances bring.

The concept of opportunity costs is basic to economics. For instance, in increase in economic wealth creates a new base upon which new growth can occur. If that economic growth is delayed, then we not only lose the additional benefits of economic growth in the first time period, but also the increments that would result from the additional wealth generated through economic growth over time. Economic losses are irreversible just as are the alleged ecological damage that might occur if global warming materializes. All the sacrifices made because of slowed economic growth are lost forever and can never be regained. The poverty that would have been eliminated earlier had energy use not been curtailed can never be alleviated by future wealth increases. In more extreme terms, future economic advances to not alleviate the present suffering of those left without the

The gains associated with suppressed technological growth are of a comparable nature. Technology provides the means whereby mankind can do more with less. Biotechnology, for example, might make it possible to provide greater nutrition. Various natural food substances lack critical nutrients; biotechnology may make possible the augmentation of such natural nutritional values to provide full spectrum nutritional value in a much wider array of crops. Since in many areas of the world, only certain crops are well suited for local cultivation, such change would improve global health and welfare. Blocking biotechnology denies those advantages, possibly for many generations. Similarly, increases in agricultural productivity, brought about by technological advances, alleviate the pressure to clear forest land for cultivation. The cost of preventing these technological advances would be the loss of literally millions of acres of habitat in order to grow food for human consumption.

An analogy with the Food and Drug Administration illustrates well the cost of technological delay. When the FDA announces its approval of a new drug that will save thousands of lives in the next year, then, effectively, they are conceding that thousands of lives were lost in the year prior to that approval. Those lost lives can never be replaced. Only if that testing period adequately reduced risks can we justify those sacrificed lives. It is that challenge - the risk vs risk challenge - that is too often obscured in the biased application of the a so-called "precautionary principle" to global warming.

Opportunities to Improve Efficiency

Q2. Mr. Chupka has testified that: "If we fail to act.

A2.

we risk foregoing significant opportunities to enhance efficiency, improve productivity, and capture growing markets for environmentally sound technologies.” In your view, is this a sound argument in favor of a UN treaty?

Mr. Chupka sees only the gains associated with government investments in politically preferred technologies. To Mr. Chupka, markets are highly inefficient institutions; government, on the other hand, can quickly and accurately invest in those areas most likely to enhance human welfare. In practice and in theory, there is very little evidence to suggest that Mr. Chupka is right. Reductions in energy use may or may not be efficient. The mere fact that the Department of Energy can identify a low-energy appliance does not mean that adopting it is a more efficient use of resources. A Geo Metro may be “efficient" for a solo commuter, but it is hardly so for a family of five or six, despite its high fuel economy.

In evaluating efficiency the challenge is to see whether the overall costs economic and otherwise - of a government sponsored technology are less than those of the technologies that would be achieved in the absence of government intervention. The scarcest resources of our society are managerial and entrepreneurial talent the creative energies needed to translate ideas into practical technologies. To divert those efforts to areas valued by political institutions, rather than by the market, is to weaken our ability to reach those results preferred by society.

The history of government sponsored energy R&D scarcely provides any confidence in Mr. Chupka's assertion. During the last major energy crisis in the United States, during the Carter era, the government embarked upon a massive synthetic fuels program. Although some eight billion dollars were spent, essentially no energy was produced. Vast monuments to government hubris and arrogance littered the energy development landscape but few social benefits resulted.

The challenge of knowing which technology path will actually prove useful to mankind is among the more daunting facing society. Only those who have their money at risk are likely to be able to tread that path consistently and successfully. There is no evidence that government sponsored R&D out-performs private R & D, and much evidence to the contrary.

The Administration's Proposal - Will It Ensure our Technological Lead?

Q3. Mr. Chupka has testified that the President's plan “is designed to enhance our role as the world's number one economic power by ensuring our continued competitive edge in developing and marketing technologies in an increasingly global marketplace . . ." Do you think the President's plan does indeed "ensure" this?

A3.

Were Mr. Chupka's assertion correct, then one would expect Europe to lead the world. Europe has vastly higher energy prices, encouraging a reduced use of energy compared to other inputs in European production. Yet, the United States is fully competitive in all areas of the world economy, indeed, in most areas, the U.S is the leading competitor. The argument that politically directed research is a way of assuring competitiveness gains little support from the example of the formerly planned economies of Eastern Europe and the former Soviet Union. The recent turmoil in Asia should also be a warning against engaging in the greencoated industrial policy that the Clinton Administration seems to endorse. The more political entities seek to direct the marketplace through subsidies, tax policies, and other interventions, the less stable the system becomes.

Haste Makes Waste

Q4.

A4.

David Montgomery testified before this Subcommittee recently and said regarding commitments to reduce carbon dioxide emissions that “haste makes waste" because of the many cost-saving opportunities that would go begging if action were rushed. I take it, based on your testimony, that you would agree with that analysis. Is that so?

I certainly would support Dr. Montgomery's comment that “haste makes waste." Just as spending money today creates irreversible losses down stream, foregoing spending today creates benefits downstream - benefits that, in the light of the improved abilities to address all social problems over time suggests that problems are best addressed when they occur, not when they are dim potentials in the far future. Indeed individuals who support global warming policies have conceded in scientific articles that were we to delay action for one or two decades, the effect some hundred years hence would be at most a few fractions of a degree centigrade change in equilibrium temperatures. That is, even given all the assumptions made by the global warming advocates, the cost of delay would be minimal. This is amply demonstrated by the work of Manne and Richels. Their effort to identify the least-cost trajectory to atmospheric stabilization of CO2-equivalent determined that no reductions are required in the next several years, even_if_atmospheric stabilization is the ultimate policy goal.

Removing Barriers to Technology

Q5. Mr. Chupka has testified that the Administration is “committed to working to remove barriers to expanded markets for existing energy-efficient technologies." What are these barriers to which Mr. Chupka refers?

A5.

Former OMB official Glenn Schleede defined "market barriers" as the phrase is typically used in political debates:

"Market barrier, n. a decision by a hard-working consumer in a market economy to spend his or her after-tax dollars in a way that is not pleasing to a government bureaucrat, energy efficiency advocate, or other central planner (each of whom probably derives his or her salary from taxes paid by the hard-working consumer).”

This is the concept to which I believe Mr. Chupka is referring.