RIP, SUV: Gas Prices Are &q...

Maybe by the end of the summer, with fuel expected to cost $1.60 per litre or so, we'll start listening to the people who keep saying that the way to reduce fuel prices is to reduce consumption, and thus demand.

Even at current prices, the cost of carbon fuels is well below the environmental cost. Right now there seems to be no practical way to build that environmental cost in. Governments could set up a tax system that maintained the cost of fuel at or above a "floor price", so that even if oil prices fell below $100 per barrel, retail gas prices never fall below $1.50 per litre. The problem here is the same as with all other national or sub-national carbon tax schemes: unless other countries are implementing similar programs, something like this can make a country less competitive in the short run.

There is a global mechanism for this problem: the Kyoto Protocol. Yet major economies including Canada clearly have no serious intention to meet the targets specified by this international agreement. The trade competitiveness argument is unfortunately quite valid, which subsequently points the finger at the United States. The chances that the U.S. will adopt Kyoto are very small indeed. Therefore another mechanism is required.

The obvious solution to the issue of non-compliant nations is to apply tariffs to their goods and services. This approach would violate a variety of international trade agreements, which clearly never contemplated this sort of circumstance.

Which brings us to the World Trade Organization. I'm not quite sure what line of thought has led to the environmental movement to consider the WTO to be the arch enemy. It seems to me that if the WTO administers an agreement between nations, then it is the member nations, not the organization itself that is at fault. The problem with the WTO is that since it represents a consensus amongst nations with diverse and conflicting interests, its policies can only change at an unacceptably slow pace. This need not be the case. Instead of laying siege to WTO meetings, we should be lobbying our governments to open negotiations on environmental issues, ideally in a process that is independent of and thus faster than the WTO's "Doha Round". A simple change that allows governments to impose duties on countries who don't implement international environmental agreements such as Kyoto is all that's required.

The economics of pure supply and demand are like Newtonian Physics. Vastly oversimplified, they cease to work once you move beyond the simplest cases of direct experience. The environment is to economics as very high speed is to Newtonian physics. The greater the amount of human activity, and thereby economic activity, the more the rules of classical economics become inapplicable and invalid.

We may not know a lot about the art of Environmental Economics, but we know enough to start making changes. In fact we know that not making these changes will have massive negative economic impact in the not too distant future. Removing carbon fuels from the pure supply/demand relationship is one of those changes, and now is the time to make it.

Only then can we have some assurance that the announced death of the SUV isn't premature.