On the tail of recent research by Stanford’s Program on Energy and Sustainable Development (PESD) examining China’s evolving coal and power sectors, program director and economic professor Frank Wolak is stressing the changing role of the U.S. in global sustainable development.
The United States should focus on innovation in energy technology now and then transition to a regulatory role once the technology has been sufficiently developed, Wolak argued online in The New York Times this month.
He based his argument on the basic economic theory of comparative advantage, which states that countries should specialize in those goods that they produce most efficiently.
“The U.S. has difficulty competing in the global market for goods that are intensive in unskilled labor, because labor costs in the U.S. are high relative to those in China and India,” Wolak said in an e-mail to The Daily. “The U.S. cannot compete with these countries in the production of goods that require workers to complete relatively simple tasks that someone without a formal education can do.”
Wolak’s Times argument helps frame research published in December by PESD on China’s efforts to restructure its coal and power industries. This restructuring would create “coal-power bases” with the potential to produce more coal annually than all the coal produced in the U.S.
Although India and China may have an edge over the U.S. in labor production, Wolak believes the U.S. has a comparative advantage when it comes to developing knowledge-intensive goods.
“Specifically, the U.S. should work on developing new and innovative technologies that rely on its educated workforce and well-developed institutions for fostering the development of new technologies and industries,” Wolak said.
During the initial stages of a product’s development, Wolak said, it is cheaper to make the product in the United States than abroad since problems with the production process can be easily identified and “there are benefits to using a more educated workforce during the early stages of a product cycle.”
After the product has been developed, however, producers will most likely shift production to lower labor-cost regions of the world, like China or India. Production in these regions, in the later stage of a product’s development, tends to be cheaper, making goods more affordable to the average American consumer.
Wolak suggests that although the United States should focus on the development of new green technologies, challenges remain. One of the major challenges to the development of green technology in the United States is, according to Wolak, the lack of a price of carbon. Coal, natural gas and oil remain the cheapest energy sources–cheaper than lower-carbon sources of energy. Producers of environmentally friendly sources of energy, like wind, solar and other renewables, are primarily being funded by federal subsidies and tax credits.
“Given the increasing scarcity of government revenues, it is becoming more difficult for governments to maintain the levels of these subsidies,” Wolak said. “This means the green technology industry is going to have an increasingly difficult time finding buyers for its products unless they can make them cost-competitive with conventional fossil fuels or find some way to get consumers to pay more for energy from these sources.”
According to Wolak, Stanford’s PESD is attempting to resolve this problem.
“A major area of research at PESD is identifying mechanisms for lower carbon sources of energy to become financially viable in a world without a price of carbon,” he said, “as well as finding ways to introduce carbon pricing in a manner that does not create significant political resistance, yet encourages less environmental damage and more investment in low carbon energy technologies.”
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