Should there be a system of federal incentives for the implementation of alternative or renewable energy sources?

Other Knol Debates

Renewable Energy Debate - Summation 

Let’s review the debate so far. 

In the course of his rebuttal, Joe has rightly abandoned several of his initial arguments for renewable energy subsidies.  To wit, he has dropped his contention that oil imports make us poorer; dropped his argument that subsidies are necessary to overcome embedded infrastructural advantages held by incumbent fossil fuel industries; and dropped his claim that renewable energy creates jobs and/or is, by definition, good for the macroeconomy.  That’s all to the good – those are bad arguments.  Since Joe has offered no defense of those arguments when pressed, we will likewise spend no further time on them. 

Three areas of disagreement remain.  Our summation will explore those disagreements. 

First, Joe continues to argue that climate change is an urgent threat that demands immediate policy action.  Fine – as we noted both in our initial statement and our subsequent rebuttal, we are not persuaded by that argument but we accept Joe’s claim for the sake of this discussion.    

We argue instead that it is unclear whether renewable energy subsidies or mandates are the best means of reducing greenhouse gas concentrations in the atmosphere – “best” defined as that which reduces greenhouse gas concentrations below a threshold of concern at the lowest possible cost.  Many other remedies are conceivable (nuclear, carbon sequestration, energy efficiency investments, and geo-engineering to name just a few) but all involve a cost.   

Our contention is that establishing an emissions tax or a carbon trading regime would achieve exactly what Joe wants to achieve but would allow market actors the opportunity to discover the lowest-cost means of reducing concentrations.  Those who believe that renewables are in fact the least-costly way of achieving this end ought to be forced to prove their point in the marketplace.  If they are correct, then renewables we shall have.  Direct subsidies and construction orders are simply unnecessary.      

Unfortunately, Joe refuses to wrestle with this argument at all beyond the claim that it will take too long to internalize price correctly.  Why?  An emissions trading regime passed in February will produce accurate prices within a year.  Hence, until we hear some story about why market actors will under-invest in renewables even if energy prices are “corrected” by an emissions trading regime (even one ambitious enough to satisfy Joe), we have no counter-argument to contend with.  In short, those who are panicked about climate change should embrace cap & trade programs, not targeted renewable energy subsidies or consumption mandates.    

Second, Joe’s refuses to give up the ghost regarding oil depletion.  We have offered two arguments for him to do so.   

Our first argument is that, if oil is becoming scarcer in any meaningful sense, we ought to see oil prices going up.  But alas, we note that a rigorous statistical analysis of oil prices finds no statistically significant trend in that direction and hence, no concrete evidence for the proposition that oil is becoming more scarce at present.  Joe ignores the point but implies disagreement.  Does this mean that Joe believes that oil can become more scarce without prices going up?  We hope not. 

Instead of directly wrestling with the lack of hard evidence for increased scarcity, Joe notes that many oil analysts – and even some oil companies! – think that oil depletion is on the horizon.  Well, that’s true enough, but such opinions are clearly not uniformly held by all oil analysts or all oil companies.  If anything, they are minority perspectives within those two communities.  Regardless, whose opinions are correct?  Who knows?  As was well-documented in Vaclav Smil’s magisterial Energy at the Crossroads (MIT Press, 2003), forecasts from even the best authorities regarding future energy prices and market share have been grossly off-base since the beginning of time.  Citing from authority on these matters (beyond being a logical fallacy) is insufficient because there are no authorities with reasonably decent track records to cite.               

Our second argument is that future oil scarcity (if it occurs) will translate into oil price increases which will lead the market away from oil without government having to subsidize anyone to do anything.  Joe doesn’t buy this for two reasons.   

First, he claims that consumers don’t respond robustly to oil price increases.  In the short term, that is correct.  In the long term, it is not.  Consumers don’t respond immediately (very much) because the cost of adjusting to high gasoline prices – selling your house to move closer to work, putting-up with neighbors in car pool arrangements, spending more time in commute via mass transit, and junking the gas guzzler with a lot of life still left in it for a more fuel efficient car – is costly.  But eventually, respond they do … as Detroit is finding out with the collapse of the SUV, pickup, and minivan markets and as OPEC is finding out with the decline in world crude oil consumption … a decline, by the way, that began before the financial crisis hit this Fall.   

Second, Joe claims that there is no market alternative to oil in the transportation sector.  Really?  If that’s the case, then renewables are no answer to oil depletion and government subsidies won’t change that.  We suspect, however, that oil’s grip on the transportation market is more tenuous than it seems. If the champions of plug-in hybrid electric vehicles (PHEVs) are correct, those vehicles will prove economically attractive to consumers as long as oil prices average $55 or more per barrel over the lifetime of the PHEV.  Hence, electricity can indeed compete with oil if scarcity drives prices upwards in the future.  Given the fact that electricity could be generated from renewable energy, nuclear energy, natural gas, coal, or other fuels, the advent of lithium ion batteries suggests that transportation fuel markets are about to become a lot more competitive in the future.         

The final issue of disagreement that remains is the question of market failure.  We have argued that government intervention to promote renewable energy only makes sense if market prices for energy are “wrong.”  We follow with the contention that, if prices are found to be wrong for some reason (say, by not including the cost of the environmental damages associated with energy consumption), the best and most appropriate remedy is to correct the price and then leave markets alone.  Joe responds by arguing that this is hard-line libertarian ideology disconnected from observable reality and that government can indeed make better decisions about what to invest in than can market actors left to their own devices … even when market prices are “correct.” 

This, we believe, is the real nub of the disagreement between us and Joe.  More accurately, this is the real nub of the disagreement between economists and Joe.  Our contention that market actors, as a general matter, outperform government planners and that government cannot improve on market performance unless it is correcting an identifiable market failure is not a matter of hard-line libertarian ideology.  It is a matter of broad agreement among economists everywhere.  Even Nobel laureate and liberal economist par excellance Paul Krugman would not disagree.  Hence, Joe is declaring intellectual war on an entire academic discipline – economics – not on libertarianism (which is, in fact, about other things). 

Now, some would argue that economists are little more than priests and that economic theory is akin to theological dogma (that is, unproven and unprovable – a sentiment lurking in many of the comments posted to this debate).  Joe, thankfully, does not explicitly traffic in this sort of know-nothingism.  Others (like, perhaps, Paul Krugman) would apply a more elastic definition of “market failure” than we might and thus find more plausible avenues for government intervention to improve on market performance.  Joe doesn’t do that either.  Instead, Joe (explicitly!) argues the socialist conceit that both producers and consumers are simply too dumb or too short-sited to recognize the economic merits (or demerits in the case of financial markets) of certain investments and that government planners should thus correct for this dismaying situation by dictating capital flows. 

If prices were correct for energy, why would market actors disappoint in energy markets relative to Joe (or some collection of Joes)?  Does Joe have information about renewable energy that others are not privy to?  Almost certainly not.  Is Joe quantitatively smarter than the intelligence manifested by “the wisdom of [market] crowds?”  Probably not (although we admit to having conducted no IQ test on the matter).  Does Joe have better incentives than market actors to discover information that might lead to economically optimal investments?  Again, no. 

What Joes does have is evidence that market actors sometimes collectively get things wrong.  They overinvested in technology stocks, for instance, in the late 1990s.  They overinvested in housing in this decade.  They took on derivative contracts without accurately assessing the risks associated with the same.  All true.   

But does Joe have evidence that government can reliably invest in a less error-prone fashion?  No.  The fact that planned economies around the world have historically ended in smoldering ruin attests to the general superiority of markets.  The manifest failure of government regulators to identify market errors and correct the same is likewise a testament to the observation that government is no better informed than the market when it comes to these things.  For instance, it was investors – not regulators – who finally detected the rot behind Enron’s books and took that company down.  It was the market – not the fiscal or monetary regulators – that finally grew impatient with returns from the technology sector and reallocated capital elsewhere.  And it was the investor class – not government sanctioned credit reporting agencies like Moody’s – that finally woke up to the risks associated with sub-prime mortgages – risks that were oblivious to quasi-governmental institutions like Freddie Mac and Fannie Mae and to the balance of the Clinton and Bush regulatory brain trusts.   

But let’s move from generalities about government decisions in the marketplace as a whole to government decisions in the energy marketplace in particular.  What is the track record of government when it comes to overriding market outcomes in the energy sector?  Pretty bad.   

• In the 1950s, the interventionists argued that, with a bit of government help, nuclear power would prove “too cheap to meter.”  A half a century later, however, we find that nuclear power is “too costly to matter” – even with a stunning array of subsidy, it is still more expensive than conventional electricity. 
• Ever since World War II, Washington has periodically promised that synthetic oil was on the horizon and that government could and should deliver what the market mysteriously would not.  Again, a half century later, we’re still confronting claims that yet one more government stab at the synthetic energy wagon will produce affordable energy despite at least four separate mad crash programs coming to naught in the past.
• In the 1970s, government preferences for solar energy were sold as a means of delivering us unto a low-cost solar energy economy.  Now, solar has a trivial market share and has been all but forgotten in our rush to wind power despite a repeat of the same promises. 
• People like Joe were once head-over-heals in love with corn ethanol and attested to the need to move heaven-and-earth to deliver that fuel to the market.  Today, the evidence has mounted that corn ethanol will never be economically competitive with oil, cannot displace oil in any significant manner, and is almost certainly a worse conventional air and greenhouse gas pollutant than even gasoline.
• Over the past two decades, government has launch a dizzying array of frenetic programs to reinvent the car: first, to produce cars run largely upon battery electric power (California’s Zero Emission Vehicle program); then, to produce an auto fleet powered by conventional internal combustion engines that could get 70 or more miles per gallon (Clinton’s “Partnership for a New Generation of Vehicles); then, to produce an auto fleet run on hydrogen powered fuel cells (Bush’s “Freedom Car” initiative); then, to produce an auto fleet powered by cellulosic ethanol (the so-called switch-grass initiative), and now, to produce an auto fleet made up of plug-in hybrid electric vehicles.  Every year or two, either the Congress or the President can be reliably expected to come up with some bright new idea to redesign the car and launch a program to translate new wish into new reality.  We’re sure more fads will come even while acknowledging that pure chance may eventually prove one of these investment frenzies to be worthwhile.
• During the 1990s, state legislatures thought they knew best how to structure electricity markets.  The result were game-able systems in California and elsewhere that bear no resemblance to the sort of market that might have arisen had government not dictated politically favored industry blueprints to power companies.     

The above list could go on and on, but we must leave a comprehensive exegesis of government energy failure for another day.  Suffice it to say that the observation that markets are not always right about what constitutes a “good” investment is correct but insufficient.  One must also find that governments can be reliably expected to do better.  And there is no evidence in theory or practice that this is the case … particularly in energy markets. 

While libertarians are often caricatured as those who have near religious certainty about the correctness of their ideologically-charged view of the world, the reality is quite the opposite.  In short, we libertarians argue that, in energy markets, much is uncertain.  We don’t know whether renewable energy is the “best” way to reduce greenhouse gas concentrations in the atmosphere.  We don’t know for certain when (or even if) oil will meaningfully grow more scarce.  We don’t know what the transportation market will look like tomorrow.  And we don’t know better than greedy, profit-hungry investors whether money spent in this sector or that – or on this technology or that – is a better deal than money spent in some other way.  Hence, we propose to leave it to producers and consumers to sort such things out.  Nor are we libertarians the only ones who see wisdom in this policy path.  Even “soft energy” guru Amory Lovins has no complaint with leaving energy decisions to the market and letting the chips fall where they may. 

Opposing Debate

Rebuttal          

Let’s consider Joe’s arguments for government promotion of “clean” energy one at a time and then return to our central proposition.   

Argument #1 – We must subsidize clean energy in order to stop global warming.  Let’s assume for the sake of argument that global warming is a serious problem and that reducing emissions is cheaper than adapting to climate changes. Neither argument is persuasive to us (economist Richard Tol’s aforementioned survey of the literature suggests that climate damages will be extremely modest in economic terms and the Stern Review and the latest IPCC report provides strong evidence that adaptation is a cheaper and better response than mitigation), but rather than get bogged down in those arguments, let’s accept them for the sake of this discussion.   

There are many ways to reduce greenhouse gas emissions. Substituting wind and solar energy for coal or natural gas is one way.  Substituting nuclear energy for the same is another. Sequestering carbon emissions from fossil fuel plants is another possibility.  Using conventional energy sources at much reduced volumes – via energy efficiency and conservation – is yet another possibility. Beyond that, removing greenhouse gases from the atmosphere by expanding forests and other carbon sinks is a possible alternative to mitigation, as are geo-engineering possibilities that rely upon more direct human intervention in the atmosphere. 

What is the most cost-effective way to do what Joe proposes – that is, to stop global warming (or, more accurately, to reduce future warming)? Who knows? Government subsidies and/or regulatory preferences to produce “clean energy” (at least, as defined by Joe – nuclear energy seems pretty clean to us but probably isn’t what Joe is talking about) simply rigs the market to favor one approach over alternative approaches.  Better to internalize the costs of climate change into the price of energy and let market actors figure out how best to reduce emissions. Since government has no comparative advantage in figuring out the most efficient way to go about this, government has no brief for dictating answers to the market. 

Argument #2 – We must subsidize clean energy because we’re running out of oil. It’s not altogether obvious to us that oil is becoming scarcer. A recently published analysis by economist James Hamilton closely examines quarterly crude oil prices from 1970 through 2008 and finds no clear scarcity signal in the price data at all.  Regardless, if and when oil begins to disappear – or more accurately, if and when market actors believe the oil scarcity is on the horizon – oil prices will go up accordingly and the market will adjust without any need for government assistance. So while “peak-oil” arguments come and go with the related booms and busts in oil markets, there is no need for a policy argument about oil depletion. 

Argument #3 – We must subsidize clean energy to stop a wealth transfer between the U.S. and hostile oil producers. This is akin to arguing that I should start growing crops, produce, and husbanding livestock in my back yard to put an end to the wealth losses I’m incurring by spending thousands of dollars a year on food. We buy foreign oil for a reason; it’s cheaper than getting it from domestic sources. If the oil were not more valuable than the paper we exchange for it, we wouldn’t buy oil in the first place.   

Regardless, Joe’s argument that most of the people we ship our oil currency to do not share our values is curious.  The most common destination of our oil dollars is Texas and Alaska.  The next most common destination is Canada.  Saudi Arabia comes next, of course, but it is closely followed by Mexico.  Regardless, if we were only to engage in trade with people who “share our values” – particularly if Joe is defining the term – we wouldn’t buy and sell goods and services outside of blue-state or red-state America (depending upon your political point of view).  The world would be a very poor place. Until Boston or San Francisco gets into the oil business, I suspect that Joe will always be sending his energy dollars to a lot of people who don’t share his values regardless of whether we follow his policy advice or not. 

Argument #4 – We must subsidize clean energy to level the playing competitive field.  This is the eternal cry of a child who demands favors because Mom always liked Johnny (or Mary) best!  And the cries are never-ending.  For instance, you’ll find the exact same complaint forwarded by William Tucker elsewhere on the web at the moment, who is currently engaged in a very similar debate with one of us (Jerry) in a debate about nuclear power.  Bill, like Joe, claims that his favorite energy source has been short-changed by government and that it’s time to make things right.   

Without getting bogged down into a long and detailed exegesis about what constitutes a subsidy and how different subsidies affect the market in different ways, the correct answer to complaint is that, whatever its merits, the best remedy for a counterproductive subsidy is to eliminate the subsidy in question. Providing compensatory subsidies distorts the market further because investment decisions are not made strictly between, say, “clean energy” and “unclean energy.” Any subsidy that affects market prices (and, hence, profit opportunities) advantages the subsidized and comparatively disadvantages all other potential investment vehicles.  Hence, subsidizing “clean energy” investments may re-direct capital that might otherwise have gone into coal, but it might also draw away investments that might otherwise have been made in life-saving pharmaceuticals, automobile safety, genetic engineering, manufacturing, or a whole host of things.   

By the way, even Carl Pope, the head of the Sierra Club, agrees with us that eliminating offensive subsidies to energy sources Joe doesn’t like is a better policy in theory and practice than the subsidizing clean energy even more aggressively than is already the case.      

Argument #5 – We must subsidize clean energy because existing energy sources are too well entrenched in the economy.  This argument is closely related to the above, but it implies that, once a competitor has a “big lead” in the market – particularly if there is a lot of expensive infrastructure supporting the incumbent – that competitors cannot make market gains absent significant government support.  This argument is demonstrably untrue in most sectors of the economy and untrue in the energy sector as well.  If so, for instance, how can we explain the success of the Prius, which uses battery technology despite the fact that the auto industry has relied almost exclusively on the internal combustion engine for over a century?  If investments in wind, solar, biofuels, energy efficiency, lithium-ion batteries, or whatever are economically attractive – that is, if they offer the hope of profit – then those investments will be made regardless of government preferences for those investments and regardless of the sunk costs of competitors. 

Argument #6 – We must subsidize clean energy to create jobs.  Subsidies to create jobs in renewable energy simply take funds from people and businesses that would have spent them on other goods.  Job gains in the renewable energy sector will thus be offset by job losses in the industries that produce those other goods.  The contention that renewable energy is more labor-intensive than alternatives may or may not be true, but even if it is, that’s not a good argument for subsidy because creating jobs does not necessarily equal creating wealth.  For instance, we could create millions of new jobs by banning food imports and farm machinery.  The economy, however, would not be helped by such policies and wealth losses would be dramatic.  The point here is that wealth is created by putting labor, capital, and raw materials to their most efficient (profitable) use.  Subsidies in this case will re-direct investment flows from more profitable to less profitable activities and thus will impoverish the economy … no matter what one happens to believe about net job creation.   

While we’re in the neighborhood, let’s also answer Michael Cushman’s argument in response to our initial essay.  His argument boils down to the claim that governmental actors are more far-sighted – and/or are more willing to take the “long run” into consideration – than are market actors.  Joe is right to eschew this argument (or, at the very least, to forget to make it).  There are two fundamental problems.  

First, governmental decisions are ultimately made not by experts, but by politicians, and politicians – being in the vote-getting business – will reflect the time horizons and economic preferences of swing voters.  Hence, while discounting may well lead market actors to pay little attention to profits that might be available from 50-year investment plans, government is even less likely to efficiently plan for the long-haul because swing voters don’t reword politicians for doing so.  On the contrary, voters reward politicians who transfer wealth from the future to the present whether by deficit spending, promising lavish retirement benefits that can’t be sustained by future generations, or what have you.  Accordingly, politicians always have and always will rob the future by transferring tomorrow’s wealth to the present to the extent that they are able to do so. 

Second, public actors have no better information at their disposal than do private actors.  Hence, there’s no reason to believe that government “knows better” than investors about what to invest in.  Moreover, market actors make decisions based on a cold assessment of potential profit and loss.  That is, decisions are made by economic analysis (which may prove, of course, good or bad).  Politicians, on the other hand, make decisions based on a cold assessment of potential votes gained or lost.  Only by random chance will investments with political merit also have economic merit and visa versa (an observation played out in spades recently before our eyes in the ethanol debate).  The upshot is that market incentives are more likely to produce good economic outcomes than political incentives.         

We return then to our original argument.  To wit, we know that, as a general matter, free markets work better than socialism.  We know that market allocation of goods and services leads to better economic outcomes than political allocation of the same.  Only if there is a market failure – that is, only if there is something peculiar about energy markets that makes prices “wrong” – is there intellectual room for the argument that government intervention will improve efficiency.  We are still waiting for that argument from Joe.

The Case against Government Support for Alternative Energy

      by Jerry Taylor and Peter Van Doren