PRAGUE – I am surprised at how so many people nowadays in Europe, the United States, and elsewhere have come to support policies underpinned by hysteria over global warming, particularly cap-and-trade legislation to reduce greenhouse gas emissions and subsidies for "green” energy sources.

I am convinced that this is a misguided strategy – not only because of the uncertainty about the dangers that global warming might pose, but also because of the certainty of the damage that these proposed policies aimed at mitigation will impose.

I was invited to address this issue at a recent conference in Santa Barbara, California. My audience included business leaders who hope to profit from cap-and-trade policies and from subsidies for renewable energy and "green” jobs. My advice to them was to not get caught up in the hysteria.

Europe is several years ahead of the US in implementing policies intended to mitigate global warming. All of the European Union’s member countries have ratified the Kyoto Protocol and adopted a wide range of policies to lower their emissions and meet their Kyoto targets.

These policies include a cap-and-trade initiative known as the Emissions Trading Scheme, steep fuel taxes, and ambitious programs to build windmills and other renewable energy projects.

These policies were undertaken at a time when the EU economy was doing well and – one hopes – with full knowledge that they would have significant costs. With the global financial crisis and the sudden economic downturn, two things are becoming clear.

First, it will be difficult to afford these expensive new sources of energy.

Second, energy rationing policies like cap-and-trade will be a permanent drag on economic activity. Ironically, emissions have not decreased as a result of these policies, but are doing so now as the world economy moves into recession.

This is not a surprise to someone like me, having been actively involved in my country’s transition from communism to a free society and market economy.

The old, outmoded heavy industries that were the pride of our Communist regime were shut down – practically overnight – because they could not survive the opening of the economy.

The result was a dramatic decline in CO2 emissions. The secret behind the cut in emissions was economic decline. As the economies of the Czech Republic and other central and eastern European countries were rebuilt and began to grow again, emissions have naturally started to increase.

It should be clear to everyone that there is a very strong correlation between economic growth and energy use. So I am amazed to see people going along with the currently fashionable political argument that policies like cap-and-trade, government mandates, and subsidies for renewable energy can actually benefit an economy.

It is claimed that government, working together with business, will create "a new energy economy,” that the businesses involved will profit, and that everyone will be better off. This is a fantasy.

Cap-and-trade can only work by raising energy prices. Consumers who are forced to pay higher prices for energy will have less money to spend on other things.

While the individual companies that provide the higher-priced "green” energy may do well, the net economic effect will be negative.

It is necessary to look at the bigger picture. Profits can be made when energy is rationed or subsidized, but only within an economy operating at lower, or even negative, growth rates.

This means that over the longer term, everyone will be competing for a piece of a pie that is smaller than it would have been without energy rationing.

This does not auger well either for growth or for working our way out of today’s crisis.

Václav Klaus is president of The Czech Republic, which holds the presidency of the Council of Ministers of the European Union until June 2009. He is the author of Blue Planet in Green Shackles – What Is Endangered: Climate or Freedom?

Copyright: Project Syndicate, 2009.
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