Monday, April 1, 2013

Clean Energy and Dirty Politics

Murray Weidenbaum is a prominent figure in business and government. He served as Assistant Secretary of the Treasury from 1969 to 1971, and in 1981-82 as Chairman of the Council of Economic Advisers. His research and teaching interests are government regulation of business, public finance, and economic policy. Weidenbaum is an honorary fellow of the Society of Technical Communication and a fellow of the National Association of Business Economics. His book, Small Wars, Big Defense, was selected by the Association of American Publishers as the outstanding economics book of 1992. His Bamboo Network was a finalist for global business book of the year in 1996. His book, One-Armed Economist: The Intersection of Business and Government was published in 2004. In 2008, The Competition of Ideas: The World of Washington Think Tanks, was published by Transaction Press.  He founded the Center for the Study of American Business at Washington University and directed the Center for many years. The center was renamed in his honor in 2001 to the Murray Weidenbaum Center on the Economy, Government, and Public Policy. Professor Weidenbaum teaches a popular course on business and government. 

It takes a hard heart or an economist (some might say that I am repeating myself) to question the notion of clean energy.  After all, who wants to advocate dirty energy?  As an economist who breathes the same air and drinks the same water as other people, I do not quarrel with the goal of clean energy.  Rather, I take issue with the specific ways in which public policy is trying to achieve that worthy objective. 
            My fundamental concern is that most of the public investment in clean energy is going to subsidize projects using old (i.e., existing) technology.  That means that, if or when government tires of providing handouts to a lucky few recipients, those projects are likely to be abandoned or curtailed sharply.  Those subsidies are neither modest nor merely marginal.  They are the result of what can be called traditional political lobbying and log-rolling, or in these cases, “dirty politics.”  Little if any of the government’s generous support is likely to result in long-term improvements in the environment.
            For example, of the estimated total capital outlays of $1.6 billion for the California Valley Solar Ranch, approximately $1.4 billion is in the form of federal grants, tax abatements and benefits, and payments of above-market prices for the energy that is supplied.  That is no exception.  The New York Times reported that similar subsidy packages have been given to 15 other solar and wind power electric plants since 2009.  The Times quoted one senior business executive participating in the program, “I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects.”
            A study by the University of California at San Diego reports that nearly seven-eighths of all clean-energy investment worldwide now goes to deploying existing technology, most of which are not competitive without the help of government subsidies.
            As for the promise of all those green jobs, I worry about the unemployed students who took on large indebtedness to develop green job skills that were supposedly highly marketable.  Apparently, nobody reminded them that energy is one of the most capital-intensive sectors of a modern economy, with a relatively modest component of labor.  Apparently, the problem is not limited to the United States.
            For example, China has been criticized because many of its renewable-energy projects reflect the desire of local governments to generate employment rather than to produce commercially viable sources of energy.  It has been estimated that one-half of that nation’s wind farms are idle because of a lack of connection to an electricity grid.
            Regardless of national borders, there is a natural tendency for government officials to write reports that please their supervisors.  For example, the U.S. Department of Labor reports that it includes bus drivers generally as “green” workers.  The tenuous rationale is that buses generate less pollution than the variety of passenger automobile usage that they replace.  Then again, I can recall the times when people called economists “green eyeshade types.”  Apparently, we should have taken that as a compliment.
            Is there a positive, more sensible approach to promoting clean energy?  Actually, there is considerable experience to back that up.  In the broad sweep of American history, the shift from one energy source to another was not the result of costly interventionist public policy.  Rather, the key factor was price competition in the marketplace.  That is how Americans shifted successively from wood to whale oil to kerosene to coal to electricity for household heating and lighting.
Back then, subsidies were not provided to new energy sources, nor was there a “Save the Whales” movement (whales never became extinct).  Neither was there a conserve forests program.  When the price of the new alternative energy source became cheaper (and often the new energy source became more desirable), consumers voluntarily switched.  In retrospect, a federal subsidy program back then likely would have ignored Thomas Edison.  Some federal agency might have given a grant to a candle maker to develop an improved wick.
Moving to a more sensible clean energy policy does not mean a “do nothing” approach.  For starters, Congress should shift some of the subsidy money from the politics-prone Department of Energy to the National Science Foundation.  The idea is to expand the research-and-development base from which private sector innovators could generate more cost-effective and hence more competitive clean energy sources.
It would also help to do some serious regulatory reform of the labyrinth of agencies, permits, and restrictions now imposed on every new energy project — traditional or innovative — by a variety of federal, state, and local government reviewers and officials.  Yes, that would be truly promoting clean energy by cleaning house!

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