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July 11, 2005

Subsidizing the Sun – Global Warming is an “Externality”

Although we do intend to take advantage of New Jersey’s generous rebates and install solar electrical panels on our roof, I am dubious about the public policy implications of the subsidies New Jersey and other states offer for “renewable energy”.  The subsidies which we will get come from those who do not choose to or cannot afford to install politically correct renewable energy themselves.  Their taxes and/or electric bills will be higher in order to reduce my energy costs.

Also, it’s important to ask, if photovoltaic energy is such a great thing, why is a subsidy necessary at all?  The marketplace is usually a much better determinant of economic efficiency and relative value than politicians and bureaucrats. [full disclosure: in a long career, I’ve been a politician and a bureaucrat as well as an entrepreneur.]

The argument FOR subsidies starts with what economists call an externality: the cost imposed on third parties by those who consume hydrocarbon-based electricity.  Let’s assume that there is at least a chance that hydrocarbon emissions are contributing to global warming and increased ocean acidity and that these are bad things.  When we buy electricity generated from hydrocarbons, we impose a cost on those whose houses may be inundated by a rising ocean or whose sea food may become harder to find (more expensive) in a more acidic sea.  We don’t compensate these potential victims for the cost of the risk we are exposing them to.

Free markets are not good at dealing with this type of externality without some regulation.  Superfund sites exist because industries were allowed to impose the externality of hazardous waste without paying a price.  It is very hard for a business in a competitive market to voluntarily shoulder the cost of a social good that some of its competitors are ignoring.  It is hard to get consumers to pay more for a product made “responsibly” than for a product which is cheaper because the cost of its pollution is imposed on someone else.  The problem for a business is even worse if the product in question is not a consumer product but ingredients like steel or chemicals which are purchased by sharp-penciled buyers at other intermediaries in the manufacturing chain.

In this case regulation actually helps businesses be responsible by assuring that there is a minimum standard which all competitors will have to meet.  If everyone has to dispose safely of the byproduct of whatever manufacturing process you are engaged in, then the cost CAN be included in the cost of the end product without putting you out of business.  Moreover, you now have an incentive to find ways to make your product without making as much of the hazardous byproduct as you used to.  The regulation also creates an incentive to find better (cheaper) ways to dispose of the byproduct.

OK.  Back to electricity.  The presumed hazardous byproduct is carbon dioxide.  If governments were simply to decree that power plants and cars were not allowed to emit carbon dioxide, we would suffer immediate economic and physical paralysis.  It’s true that we have helped create this dependency on hydrocarbons by a knee-jerk reaction against nuclear power and a refusal to deal with the externality of nuclear waste but we are where we are.

So we can’t just ban carbon dioxide.  What makes sense is to impose a cost for emitting carbon dioxide which approximates the external cost imposed on society by those emissions.  The problem with this approach is that any country which voluntarily makes its own energy more expensive will find its good priced out of world markets.  Countries which are struggling to bring their people out of poverty don’t want to increase energy costs just as more people are about to be able to afford to buy more energy.  The Kyoto Treaty was an attempt to get everybody to agree to regulate at the same time but it didn’t deal with the problem of emissions from developing countries (China and India, for example) and hasn’t been joined by the US.

It is easier for governments to award subsidies to those who behave they way they want them to than to openly increase electric rates for those who don’t.  So that’s why we have the subsidies which help us install solar power.  These subsidies do actually result in higher electric rates for everyone because most of them increase the operating costs of electric utilities; but politicians know that the electric companies and not those running for reelection will be blamed for these increases.  Much of the cost of these subsidies are imposed on ALL power – including solar, nuclear, wind and hydro – so the mechanism does NOT properly allocate the cost of carbon dioxide emission nor create an incentive to reduce it. 

In New Jersey, nuclear power does NOT count as “renewable” for a utility which it is technically not;  but it is penalized as if had carbon dioxide emissions which it definitely doesn’t.  In Vermont, hydro power from Quebec does NOT count as renewable which it certainly is because, for historic reasons, that power is politically incorrect.

By the way, you may ask, how much carbon dioxide emission is being avoided as a result of the subsidy?  If we install ten kilowatts of generating capacity, New Jersey estimates we will eliminate 21,000 pounds of emissions annually.   This is already a stretch in assumptions because most of our power comes from a nearby nuke but, hopefully, the nuclear power we don’t buy will go somewhere else and eliminate some emissions.

What does 21,000 pounds of carbon dioxide mean to the environment?  No one really knows so its hard to say how much we ought to be subsidized for avoiding it or someone else penalized for creating it.  Driving 10,000 miles in a gasoline car which gets an average twenty miles per gallon releases about 12,000 pounds of carbon dioxide (derived from a calculator at http://www.natenergy.org.uk/convert.htm) so, in theory, we have compensated for the emissions of almost two cars.  According to wikipedia, humans breathe out about 700 pounds of carbon dioxide annually so our whole extended family of about thirty people will be able to breathe guilt-free.

Last week I blogged about the specific incentives offered by New Jersey in particular and other states in general for installing residential solar voltaic generating capacity.

Even given my public policy doubts, we’re going ahead with the installation and I will blog more about that and energy issues.

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