North Dakota’s beef about Minnesota’s restrictions on electricity generated from coal together with California’s new greenhouse gas cap-and-trade system illustrate a knotty economic question. How does a society decide issues in which some, but not all, people feel morally bound to take actions that may have immediate economic costs in return for uncertain benefits?
North Dakota has sued the State of Minnesota challenging our 2007 Next Generation Energy Act that limits utilities’ ability to import electricity from new coal-fired plants in other states. North Dakota has enormous deposits of low-BTU coal that is not a competitive fuel source except for power plants located near the mines. It generates more than three times as much energy as the state itself uses, with much sold to Minnesota.
Minnesota’s law, like California’s new cap-and-trade system, is intended to reduce environmental harm from electricity generation. Such harm includes climate change from greenhouse gas emissions, an issue that has become politically charged, to put it mildly.
The North Dakota attorney general, in arguing that the law represents unconstitutional meddling with interstate commerce, asserts that it will have little effect on global warming. This is true since other emitters are not cutting back and some, particularly in newly industrializing countries like China and India, are increasing emissions rapidly. This position is supported by economic theory that demonstrates people have little incentive to take some positive action when other “free riders” don’t. This is an outcome of the game theory analysis that has come to play a major role in economics.
Economic theory also supports the argument that if one political jurisdiction, state or nation, takes some isolated action that increases the cost of a major input like electricity, businesses located there will face higher costs than their competitors in other areas that avoid similar actions. Output and employment will be lower than otherwise, as will cash incomes for residents.
If the area in question gains substantial non-monetary benefits, such as improved environmental quality for the current generation or their descendants, then the trade-off nevertheless may be a good one. But if the benefits are small, or most of them accrue to people elsewhere who make no current sacrifice, then the result is a lowering of the economic well-being of the group.
Yet many feel that climate change is a moral issue on which they must take a stand – by not only reducing emissions caused by their own consumption, but those of our society as a whole, even if that has a significant economic cost.
That sort of “here I stand, I can do no other” position is familiar to most people. Nearly everyone has some belief, some moral value, that supersedes any calculation of cost and benefit.
Unfortunately, such issues vary from one person to another. For one it may be the environment; for another, abortion; for a third, freedom from government intrusion; and so on.
Jeremy Bentham, the 19th-century philosopher, argued that public policies should result in “the greatest good for the greatest number.” Humans, he said, make a “hedonic calculus” weighing the pleasure and pain derived from each alternative in life. The same should hold true for collective decisions that affect society as a whole. This approach became known as “utilitarianism.”
Unfortunately, we cannot measure “utility” or human satisfaction in any objective quantifiable manner. And thus there is no way of knowing what set of policies produces the greatest satisfaction for society at any given juncture. Moreover, barring any dramatic breakthrough in neurology or psychology, perhaps we never will.
Yet society must somehow decide divisive issues on which people have deep moral convictions. It took a century for us to resolve slavery and the bloodiest war in our history. All subsequent issues, including abortion, women’s rights and climate change, pale in comparison.
What is clear is that economic analysis is limited. Microeconomists like Nobel laureate Gary Becker and Gordon Tullock extended economic analysis to individual personal decisions like marrying or having children. Their insights are useful, even if the decisions are far more complex than Becker or Tullock admit. But when it comes to collective societal choices, economists cannot say much. We know that democracy is the best process for making such choices, but can add little beyond that.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.
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