Unnecessary opulence

At the Free Exchange blog they are discussing a New York Times article by Jared Diamond in which he lays out the crux of the environmental challenge we'll likely face over the next century. The Free Exchange explains,

Many of those sceptical about humanity's ability to reduce the threat and impact of climate change view this situation in a relatively straightforward manner--fixing the problem either means reducing our standard of living or stunting the improvement of living standards in developing nations. Since neither is likely to take place, our best hope is investing in magic technologies which may allow us to continue to consume at current levels.

The Free Exchange blogger then goes on to argue

My perspective is a bit different. Both developed and developing economies can continue to grow, so long as everyone--and particularly the most wasteful among us--becomes a bit more efficient. The best way to encourage such efficiency, it seems, is to price overused resources or overproduced pollutants to account for environmental externalities. Where greenhouse gases are concerned, this should mean an increase in the cost of carbon, via tax or cap-and-trade regime. The advantages of such a system are significant: the lowest-hanging fruit are picked first, no hard limits are placed on economic growth, return on efficient technologies increases, and developing nations may profit from preservation of valuable natural resources.

The question is then asked "Can we be confident, however, that strict environmental regulation is compatible with economic growth?" In answer to this it is noted that research carried out by Arik Levinson of Georgetown University has looked at American manufacturing since 1972 and points out that in the last three decades, manufacturing output has increased 70 percent while manufacturers' emissions of primary pollutants have dropped by 58 percent.

Mr Levinson tests whether that drop in pollution is attributable to outsourced production from America to places with lax environmental rules. In fact, he finds that such shifts are not at all the primary source of emission reductions in manufacturing. Rather, 60 percent of the gap between output growth and emission decline has resulted from technological innovation.

This result can be explained by standard trade theory. Counties like America have a comparative advantage in the production of pollution creating goods and thus such production is carried out at home, and not sent overseas.