The room was pregnant with irony. After the applause died down in this morning's ECO:nomics session, following the pronouncement by E.U. President Vaclav Klaus that environmental regulations are "...the greatest threat to human freedom," it was clear the recent pileup of bad economic news was all but lost on many of the Wall Street bankers, corporate executives and free-market fundamentalists in attendance.

The news — that we lost 650,000 jobs in February alone, that the stock market is down to 1997 levels and has lost $12 trillion in value, that we are now most certainly entering a deflationary recession, that Bernie Madoff lawyers are signaling a guilty plea — all point to the one simple and unavoidable conclusion:

The free market left to its own devices will ultimately be consumed by the rush for short-term profit, to the long-term detriment of all.

That is why we need regulation. And that is why we elected President Obama. So when I asked Klaus about ways to mitigate the potential economic risks associated with climate change, he dismissed it with a rhetoric of false polarities: "I'm worried about human freedom. Not the climate."

Even though the two are inextricably linked, why are Klaus and the free-market capitalists who created their own fiscal demise still applauding the tenets of an unfettered carbon-based economy?

I carefully examined the language in use, and came up with some observations. They may or may not be right, but I feel I must at least attempt to understand the "other side" even though to me that other side looks a lot like a very oily, very slippery 10,000 foot slope into oblivion.

As I twittered during the event, there are 3 basic equations that have somehow installed themselves (like that first version of Vista) into the faulty hard drives of otherwise intelligent and well-meaning people:

1. environmentalism = socialism

2. cap & trade = redistribution of wealth

3. carbon emissions = economic growth

To each of these there is certainly an element of truth, but that element has been misappropriated to create something akin to a religious doctrine which, much like the creationist rhetoric of christian fundamentalism, posits a polarization of two points of view, making the rather obvious solution — compromise — untenable (God created the earth AND evolution; The economy can flourish AND be carbon-free).

I believe this "free-market fundamentalism" is the most dangerous threat to the survival not only of the earth's complex biosphere (and the human population which it supports), but also to the survival of our economy.

As has been been demonstrated over and over again (by Amory Lovins of RMI, the Mckinsey Institute, the Apollo Alliance, Thomas Friedman and many smart CEO's like Eric Schmidt of Google and Anne Mulcahy of Xerox, both of whom presented this weekend) producing goods and services more efficiently using less resources more cleanly just makes good business sense.

The initial investments are paid off in reduced overhead, improved productivity, market opportunity, competitiveness, drive for innovation, to name a few. And the cost of not mitigating the problem? 

Let's just pretend Al Gore is wrong, and T. Boone Pickens is wrong, and the National Science Academies of 32 nations representing a consensus of thousands of scientists are all wrong, there is still this thing called "risk." Wouldn't a smart economist want to at least look at the potential costs of a failed externality — like a shortage of water or oil or the end of "free" carbon-dumping?

And if the scientists are right, then wouldn't any smart economist want to look at the cost benefits of averting the emergence of new externalities — like rising sea levels, mass human migrations, famine, new disease epidemics, unstable weather patterns and the many other possible outcomes of a global warming?

It seems obvious, yet many of the influential attendees of ECO:nomics, clearly do not get it. What could explain this lapse of basic logic? Let's go back to the three equations above.

Environmentalism = Socialism

It is quite understandable why this particular formula would have so deeply embedded itself into the brain tissue of Vaclav Klaus. As he recounted, he grew up in the USSR, and under its socialist regime saw the total decay of his country's economic and environmental condition.

So his fear of regulation turning into over-regulation turning into the demise of the free market is quite warranted for Klaus. He lived through it, and he saw the emergence of prosperity after the free market was restored. But to imagine, as he says, California ever turning into a socialist state as he stated this morning, is ludicrous. California is the land of capital, and it has seen time and again that a little regulation can actually help spur the development of new industry. 

Cap & Trade = Redistribution of Wealth

That favorite catch phrase of the conservative movement, "the redistribution of wealth" is a real crowd pleaser. It always gets a rise by teasing out the American disdain for taxes. But in this specific case there is a warranted concern — under cap & trade, wealth could move out of the midwest and south (which is more than 50% coal-dependent) and into the coastal regions, in particular California which has heavily invested in renewables.

As James Rogers of Duke Energy pointed out today, this would be unfair. The residents of the midwest had no choice in the matter and should not have to pay the price for the Coal industry, which was in fact heavily legislated upon them in the 70's. This would be the likely outcome of a pure auction-based cap & trade system. But at this point, it is assumed the U.S. will pursue a gradual transition to a cap & trade system that is only partially auction. To learn more I suggest Dave Robert's excellent intro to cap & trade on Grist. 

Carbon Emissions = Economic Growth

Of all of the philosophies espoused by Klaus in his book Blue Planet in Green Shackles, perhaps none is more disturbing that his direct correlation between fossil fuel consumption and economic prosperity. Flying in the face of logic, he sees any form of regulation that would incentivize businesses to develop renewable energy sources as a barrier to progress, rather than an opportunity for long-term economic growth.

In an even greater inverse of logic, this philosophy is extended to energy efficiency measures which are also seen as a barrier to growth, despite the frequently proven fact that these measures are paid back in 2-3 years and then earn net revenue for the life of the installation (10 years or more). You don't have to be an economist to see the benefits here.

I'll give him one thing — Klaus does believe in environmental conservation. But in an evil twist of rhetoric blames environmentalists for causing the wave of deforestation in the Amazon for biofuel crops, which is patently not true (biofuels were being grown in Brazil long before Woody Harrelson got his hands on that first can of biodiesel). Klaus believes that environmentalists have been coopted to support a fictionalized global warming catastrophe used to help spur renewable energy industries that require subsidization (as if the nuclear and coal industries are not subsidized).

It it just fear of total economic collapse? Or frustration from the poor performance of the Europe's cap & trade system? Or maybe some ulterior motive, like ensuring the continued expansion of the Czech Republic's fossil fuel industry?

I don't know. But one thing is for sure. It is frightening that a man with such extreme views is now ostensibly the head of the entire Economic Union, as the mantle of its leadership passed from France to the Czech Republic Jan. 1. According to the The Times, the Czech government is trying to keep Klaus as far away as possible from anything but symbolic duties in the E.U.  

Let's hope so.

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