Sunday, May 29, 2005

Oil industry execs demand... long-term policies to combat climate change?

Though not in America. In the UK, the heads of a dozen leading firms asked prime minister Tony Blair to enact regulations and incentives which make investment in cleaner technologies advantageous. Executives from BP, Shell, HSBC Bank, BAA, John Lewis, Scottish Power and others signed the letter.

As it stands, the companies find it difficult to commit to the development of cleaner technologies because they cannot forecast future government policy. While the corporations fear being competitively disadvantaged, government fears a backlash from the business community if it begins to regulate the energy business. A sort of Catch-22.

Free marketeers will point out that the signatories to the letter are trying to use government to maintain their grip on the industries that they already dominate, and will argue that this is government interference at its worst. They have a point. However, they will also argue that the government should do nothing at all, a suggestion that I find to be absurd because there's no good free market mechanism to prevent global warming. While the scientific evidence for human-induced climate change is clear, American firms have waged a campaign of denial and misinformation.

I think the government should regulate energy production and consumption as necessary. No doubt some of those regulations will harm established businesses, but favor new ones.

In America, established industry always whines about any new regulation, no matter how beneficial that regulation will be for the country and its people. All these big companies know is that they're in a good position, making money year after year. If it ain't broke, don't fix it, they say. In the past, proposed auto safety and fuel economy regulations were cursed by industry, yet after the legislation passed, corporate profits went up and consumers benefited. Alas, American executives rarely look that far ahead.

I think that this is because American executives are more ideological, more pathological than the rest of the world in their belief in free markets. They resist all efforts at government forward planning. They seem to believe that the free market will simply adjust to global warming when it happens, so there's no need to take any preventive action today. Yes, the cost of living in Manhattan will skyrocket as it becomes necessary to build flood control systems, then plummet as the city becomes submerged. That will only raise prices for properties in Colorado, perhaps the future site of New Wall Street. It sounds silly, and I would laugh if it weren't so plausible.

You see, free markets have a short time horizon. Anything beyond this horizon cannot be planned for. In a free market, someone will almost certainly benefit from cataclysm. However, the total market value of the economy may be devastated. For example, some people benefited from the 1929 stock market crash, but no one says that the crash was a good thing. Indeed, most people would agree that if a strong SEC had been in place before 1929, America would have been a lot better off.

As with biological evolution, free markets can adapt to changing conditions, but are largely undirected. Direction of free markets is supposed to come from consumer choice, but corporations have learned to use marketing and political action to subvert this vital feedback mechanism.

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