Tag Archives: subsidies

Measuring success by how much you spent on the program: A renewable energy example

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Michael Giberson

In general, in public policy analysis, you’d like to judge ultimate success or failure of a program by its net results, by actual benefits less the costs involved in achieving those benefits. Admittedly sometimes benefits are hard to measure, but ultimately the point of a policy change is to bring about some improvement in something somewhere. Ultimately it would be nice, once a program is done, to try to find and measure that improvement.

What we often get instead, however, is an attempt to infer a benefit based on the expenditures on the program: how much money was spent, how many people were employed, how many miles of ditches were dug, and so on. This is, more or less, what we see this week from the U.S. Department of Energy in the study it commissioned from the National Renewable Energy Lab on the impact of the Section 1603 Treasury Grant Program.

The Section 1603 grants were payments made to qualifying renewable power projects in lieu of those projects claiming the Investment Tax Credit or Production Tax Credit subsidies for which the projects would have otherwise qualified for. The NREL study looked at the $9.7 billion in program spending up through November 10, 2011; by the time the program ended it’s three-year run in December 31, 2011 over $11 billion in federal funds had be committed.

The DOE asked NREL to estimate the effects of the 1603 program on jobs and economic expenditures. In NREL’s report they explicitly state that their work is an estimate of “gross jobs, earnings, and economic output.” This means that they don’t consider any private sector crowding out, any disincentives from the taxation needed to support the program, any consequences from duplication of other government incentive programs, and so on. They simply treat the federal resources as if it were manna falling from the heavens, and the jobs, capital, and industries that became involved in building renewable power plants would have otherwise sat idle. (Note that I’m not criticizing NREL in performing just a piece of the overall analysis, they just did the work that DOE asked for and paid them to do.)

But note that this is primarily a study which just measures the expenses of the program and a part of what the expenditures bought. So, it is a partial study of the costs of the Section 1603 program, and not any kind of estimate of any of the benefits of the program.

Nonetheless, in the DOE press release accompanying publication of the study, they said the study found “the program has been a huge success.” How does it justify its claim of success? By noting how much was spent, how many people were employed, and how many things were subsidized by the program.

The DOE is not the only one to claim success. At Climate Progress, Stephen Lacey’s assessment is titled, “Grant Program Supported Up To 75,000 Wind And Solar Jobs: Congress Killed It Anyway.” Lacey’s post does mention some of the construction activity might have happened even without the grants, and he observes it estimates just the gross impact (and, by implication, doesn’t reflect any negative effects due to the crowding out of unsubsidized economic activity). But along the way Lacey keeps claiming the program was a success. How does he know? Well, he summarizes from the NREL report: the government spent a lot of money, hired a lot of people, and subsidized the purchase of a lot of things.

Great, but resources consumed is not a measure of success. Any fool can spend money, but spending it well can be a challenge. Is there any evidence in the NREL report that the money was well spent?

If the answer to that question is “no,” then we can’t conclude that the program was a success.

ADDITIONAL LINKS: Reactions to the NREL report from North American Windpower, Solar Industry magazine, and Clean Technica. Rep. Ed Markey (MA) cited the report in calling for Republicans to support “revisions to the tax code that level the playing field for clean energy.”

A.C. Pigou, public choice economist, on the use of government

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Michael Giberson

At the end of a comment on Windfall, a new documentary on the effects of wind power development on a community in upstate New York, Michael Munger pulls out the key Pigou quote.

Pigou is relevant because the best possible case to be made for subsidizing wind power production involves correcting for the externalities associated with conventional electric power production. Maybe we imagine a Pigovian tax on conventional generators as a sort of first-best solution, and direct subsidy to alternative generators as a second- or third-best solution.

Well, here Munger whips out the Pigou:

It is not sufficient to contrast the imperfect adjustments of unfettered enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any State authority will attain, or even wholeheartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure, and to personal corruption by private interest. A loud-voiced part of their constituents, if organized for votes, may easily outweigh the whole.

From A. C. Pigou, Economics of Welfare, chapter 20, paragraph 4, available online free via the Library of Economics and Liberty.

Yes, well before James Buchanan, Gordon Tullock, Mancur Olson, Robert Tollison or even Michael Munger were objecting that government intervention may go awry, Professor Pigou was already there.

[ASIDE: I was led to wonder why this insight was seemingly lost from economics for several decades after Pigou published his work. Maybe someone has researched the question carefully. In the absence of someone setting me straight, I'll blame Paul Samuelson.

Samuelson's influential Foundations of Economic Analysis refers to Pigou several times, according to the book's index, but so far as I noticed just once it mentions that the presence of Pigou's external costs means "there is of course need to interfere with the 'invisible hand'." (p. 196)  Samuelson neglects Pigou's qualification: "The case, however, cannot become more than a prima facie one, until we have considered the qualifications, which governmental agencies may be expected to possess for intervening advantageously." (And then Pigou continues with the public choice-like lines Munger quoted.)]

Loss of ethanol subsidy boosts gasoline prices a little, E85 prices a lot

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Michael Giberson

The basic math is pretty simple: most gasoline in the U.S. has about 10 percent ethanol, so the the 45 cents/gallon VEETC subsidy reduced the price of gasoline about 4.5 cents. The subsidy expired at the end of 2011, so one reason gasoline prices have gone up a few cents since New Year’s Day comes from the loss of the subsidy. (World crude oil prices are up a bit, too.)

Normally, a subsidy would be shared by producers and consumers, so the loss of a subsidy would be shared. But the Renewable Fuels Standard quantity mandate protects producers from taking a hit. The main effect here is that the consumers’ mandated purchases of ethanol will no longer be subsidized by taxpayers, and therefore the price rises.

But lest you gasoline consumers feel too bad, consider the plight of the drivers relying on E85, a blend of 85 percent ethanol and only 15 percent gasoline. The math here is simple, too: 85 percent of 45 cents meant that E85 was receiving about a 38 cents/gallon subsidy, and now that subsidy is gone.

The Minneapolis, MN Star Tribune reports, “The Road for E85 Just got Rougher“:

The high-ethanol fuel known as E85 has gained a small foothold in Minnesota in recent years, thanks in part to a subsidized price advantage and the presence of major producers and blenders in the state.

Now, the federal tax credit that boosted the industry is gone, raising questions about the fuel’s future.

Without the 38-cent-per-gallon subsidy that went away Jan. 1, E85 prices are moving up. It’s still cheaper than gasoline, but the shrinking difference may not be enough to compensate drivers who get fewer miles per gallon because of the fuel’s lower energy content.

[Recall that ethanol has a lower energy density than gasoline, so drivers get fewer miles per gallon with E85.]

The post-subsidy era also brings tough choices for owners of flexible-fuel vehicles, including the state of Minnesota, which has more than 3,000 vehicles capable of burning E85, and in 2010 used 963,000 gallons of it.

They must decide whether to support a fuel that is 85 percent home-grown ethanol even it it’s no longer competitively priced. Minnesota is the nation’s fourth-largest ethanol producer, and leads the nation with 364 retailers selling E85.

[...]

Last week in the Twin Cities, E85 was 16 cents to 40 cents lower than regular gasoline, which also rose in price. That’s as little as a 5 percent price difference. E85′s price advantage has sometimes been more than four times better and averaged 17 percent last year, according to the state Commerce Department.

At Lerum Auto, the only E85 dealer in Richfield, owner Dean Lerum had another 1,000 gallons of E85 delivered on Wednesday — at the new, unsubsidized price.

“I am going to let the market decide,” said Lerum, for whom E85 once represented 25 percent of fuel sales, but now accounts for 5 to 7 percent. “If it drops a whole lot more, I will get rid of it.”

Two more related stories from around the web

Kevin Drum at Mother Jones makes the call: “Ethanol Subsidies: Not Gone, Just Hidden a Little Better“

As the Congressional Budget Office wrote back in 2010, ”In the future, the scheduled increase in mandated volumes would require biofuels to be produced in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included.” [Italics mine. -KD] In other words, the mandates have grown so large that the tax credits barely made a difference anymore. Demand for ethanol is driven by the mandates, not by the tax credit. When you take away the tax credit, nothing happens: Demand stays high because the law says so, corn prices go up accordingly, and corn farmers stay rich. The subsidies were a nice little fillip on top of that, but at this point it’s basically chump change.

The RFS mandates are the real reason that buffoons can ramble on about the history-making public policy magnanimity of the ethanol lobby. Drum cites Aaron Smith, of UC-Davis, writing in the American Enterprise Institute’s American.com: “Children of the Corn: The Renewable Fuels Disaster“

[W]hy did the powerful corn ethanol lobby let [the subsidy] expire without an apparent fight? The answer lies in legislation known as the Renewable Fuel Standard (RFS), which creates government-guaranteed demand that keeps corn prices high and generates massive farm profits. Removing the tax credit but keeping the RFS is like scraping a little frosting from the ethanol-boondoggle cake.

And Smith is just getting started, so if want more reasons to hate ethanol policy then read the whole thing.

ADDED, Here is a more complete analysis of the relationship between the Renewable Fuels Standard mandates and the (now expired) tax credit, and also see the list of readings at the end of the commentary: de Gorter and Just, “The Forgotten Flaw in Biofuels Policy: How Tax Credits in the Presence of Mandates Subsidize Oil Consumption,” RFF Weekly Policy Commentary (June 9, 2008).

Marc Gunther on the brewing solar PV trade wars

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Michael Giberson

Marc Gunther asks, “Should we worry about Chinese government subsidies to its solar industry? Or send the Chinese a thank-you note?“ The issue is a “dumping” complaint filed by several U.S. based manufacturers with the U.S. International Trade Commission alleging China so subsidizes its solar PV production that the PV panels are being sold here at a loss.

As Gunther notes, “it takes chutzpah (that’s a technical term in economics) for US solar manufacturers to complain about subsidies in China since they, too, benefit from … [long list of subsidies provided by U.S. federal and state policies].”

ASIDE: Elements of the wind power industry have taken inspiration, as a few weeks ago four U.S.-based manufacturers of wind turbine towers filed a complaint with the ITC against Chinese and Vietnamese wind turbine tower manufacturers.

[HT to AltEnergyStocks.com, where Gunther's column was republished.]

The “first feel-good sustainability story of 2012,” so long as you ignore the costs

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Michael Giberson

Consider the claim in the headline, “How One Man’s Roof Paid for His Car.” Here’s the introduction:

It’s the first feel-good sustainability story of 2012. A man in Orlando, Florida installed solar panels on the roof of his home, sold the excess power back to the grid, and then used that money to make a down payment on a new Chevy Volt, the plug-in car that gets 60 miles to the gallon.

Now those solar panels are charging his new car.

The nut of the story is that over the last two years the Orlando homeowner netted $5,600 in power sales to his local utility due to the oversized solar power system installed on his roof and in his backyard, and he recently made a similarly-sized down payment on a Chevy Volt.

If we were to assume that the solar panels fell like manna from the skies and were installed by angels refusing payment for their services, it still just isn’t the case that the solar system paid for the car. One indication: it took two years to accumulate $5,600, an average of about $117 per month, and actual monthly car payments for a Volt are likely north of $400. Maybe the homeowner is (reasonably) figuring in foregone electric power bills, but that value is not reported.

The story appearing at StateImpact Texas was based on a newspaper article appearing in the Orlando Sentinel under the more modest headline of “Sun Powers Orlando Man’s Electric Car.” The Sentinel article describes the homeowner’s own investment in the solar power system as “hundreds of thousands of dollars” and mentions “tax breaks and rebates” provided by taxpayers and ratepayers without quantifying them.

Let’s look at it this way: If I poured hundreds of thousands of dollars into the ocean and caused other taxpayers and ratepayers to pour tens of thousands of dollars into the ocean, and then the waves washed a few hundred dollars back each month, the claim that “the ocean paid for my car” would seem a little silly.

The Sentinel reported the owner’s own estimate of the payback period at an astounding “50 years or more.” (Astounding because, as the NPR story discussed yesterday indicates, the projected lifespan of the system is much closer to 20 or 25 years.)

Congressman called for gas relief

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Michael Giberson

Congressman Brian Higgins, of western New York, put out a press release last week welcoming the news that the Obama administration will release 30 million barrels of oil from the Strategic Petroleum Reserve. (“Higgins Welcomes News of Oil Release: Congressman Called for Gas Relief Measure in April.”) The rest of the press release was a listing of all of the efforts the congressman has supported with the intent of “keeping gas prices reasonable.”

 Our efforts include: fighting to remove subsidies to oil companies, regular monitoring of local prices to ensure they correlate to others in the region, responsible domestic drilling and aggressively pursuing alternative energy.”

I’m surprised to see “fighting to remove subsidies to oil companies” as the first listed effort to keep gas prices reasonable. Presumably the subsidies tend to shift costs from consumers as a group to taxpayers as a group and therefore lower the price of gas (if not the ultimate cost). I’m against subsidies to energy companies, however, so glad to see Congressman Higgins on the case.

A bit more, uh, laughable might be the polite term, is the press release’s claims of Higgins’s success in fighting to bring gasoline prices down:

In the fall of 2008 Congressman Higgins fought unjustifiably high gas prices in WNY.  He met with the Chairman of the Federal Trade Commission and demanded an investigation into high prices.

Over the six month period during which the Congressman vocally rallied against and demanded answers the high local gas prices decreased by $1.18 due in part to the Congressman’s actions.

In fact the FTC’s letter credited the Congressman for falling prices saying, “we note that prices began to fall soon after you raised public concerns about the elevated prices.”  The Congressman continues to monitor local gas prices through his website to make sure local gas prices aren’t unjustifiably higher than other upstate regions.

In brief, after the Hurricanes Gustav and Ike hit oil producing areas in the Gulf, prices spiked nationally for a while before resuming the sharp drop in oil and gasoline prices that had begun in the summer. Prices in Western New York were falling a little bit less sharply than prices elsewhere in the state. The Congressman began publicly complaining about the change in relative prices with respect to elsewhere in the state.

What evidence is there for the claim that prices fell “due in part to the Congressman’s actions”??? Essentially none. Notice that the FTC letter to the Congressman only observes that prices began to fall after the Congressman had complained, not that the Congressman had anything to do with prices falling. (I posted a link to the FTC letter to Congressman Higgins in a July 2009 post along with extensive commentary.)

The press release adds that Higgins is co-sponsoring the current version of the Federal Price Gouging Prevention Act, apparently languishing in committee, which I am on record as saying is a bad deal for consumers and merchants.

So the Congressman’s press release is nothing more than a list of ineffectual, misrepresented, or misguided efforts. No real suprise, right, I mean no one reads press releases for their truth content. Still, someone thought highly enough of the press release to reproduce it more or less word-for-word on a newspaper website, so I thought it worthwhile to point out some of the limits of the report.

Billionaire Boone Pickens can’t understand why the Billionaire Koch brothers don’t support the slimmed Pickens Plan

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Michael Giberson

Koch Industries and various groups supported by the Koch brothers’ political donations are opposed the Boone Picken’s plan to provide government subsidies to anyone who makes or buys natural gas power vehicles. The position seems consistent with the Koch’s generally libertarian policy outlook, though the company is involved in the natural gas industry and presumably would benefit financially from Picken’s slimmed down plan.

Rather than admire their self-sacrificing political consistency, Pickens is mystified that someone would be opposed to spending taxpayer money to fund his plan.

From E2 Wire, The Hill’s Energy and Environment Blog:

Billionaire energy magnate T. Boone Pickens slammed Koch Industries on Friday for its opposition to legislation he’s promoting that provides tax credits to jumpstart use of natural gas in the trucking industry.

“They don’t ever come toe-to-toe. They don’t get up and discuss these issues or anything. They are very mysterious,” Pickens said on CNBC.

…

But in a statement earlier this month against the bill, an executive with Kansas-based Koch Industries, which is active in refining, polymers and other sectors, said the company has “consistently opposed subsidies that distort markets.”

“We maintain that the marketplace, while not perfect, is the best mechanism for allocating resources to consumers. People deciding what fuels to purchase, instead of the government, is best for consumers and our country,” said Richard Fink, executive vice president for the company. He said that Koch does not question Pickens’ “intentions or integrity,” but added:

“We believe history has demonstrated over and over that these subsidies end up undermining the long-term prosperity of the country. For these principled reasons, we oppose this bill (HR 1380) to give tax incentives to buyers and makers of natural gas-powered vehicles and related infrastructure.”

But Pickens noted the company benefits from subsidies that bolster the ethanol industry and more broadly defended the bipartisan legislation, which was introduced by Rep. John Sullivan (R-Okla.) and has over 180 co-sponsors.

“I am trying to get away from the terrorists. I think that the money that we pay to OPEC, it gets in the hands of the Taliban,” Pickens said, calling use of domestic natural gas a viable alternative.

He also noted that the bill would provide the tax credits for a limited number of years, unlike longstanding ethanol tax subsidies.

“I just want the 18-wheelers and with those I can cut OPEC in half, and my help from the government [is] a five year and out,” Pickens said.

Massachusetts wants $22.5 million in tax breaks back from Evergreen Solar, company in dire financial condition

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Michael Giberson

Happier Days, from The Boston Globe: "Evergreen Solar's CEO, Richard M. Feldt (right), says Governor Deval Patrick's commitment to solar power played a key role in the company's decision to expand in Massachusetts. (Photo by Ellen Harasimowicz for The Boston Globe/File 2007)"

Politicians show up, grinning for the cameras at groundbreaking, they come applauding the expansion announcement (and why not, public tax breaks and other policy support for solar power manufacturers were chief among the reasons the plants were built in the first place), but where are the toothy smiles of supporting public officials when the company closes the manufacturing plant down? Evergreen Solar, a prized clean-energy/green jobs catch of the state of Massachusetts thanks to some creative economic development work by state and local governments, is closing its manufacturing plant in Devens, MA.

According to one summary, “Among the incentives the state offered Evergreen Solar were a $15 million property tax break, a $7.5 million in state tax break, $2.7 million through a subsidized lease and $21 million in cash grants. Not to mention that the state spent $13 million in construction on roads and other infrastructure to support the plant.” Another report put the figure at “at least $43m in state aid.”

Massachusetts politicians no longer swarm the gates of Evergreen Solar; instead they send notice that they want the tax breaks back, seeking $22.5 million from a company that has been losing money so quickly that it may not survive to the end of 2011. And perhaps Massachusetts should not feel especially foolish, Evergreen managed to squeak out significant support from government entities in Germany (“grants totaling approximately $34 million at current exchange rates”) and China, too  ($33 million in state-owned company loans to Evergreen and a similar amount to its Chinese partner).

Just another warning sign that the business of promoting business with tax breaks and other local subsidies is fraught with difficulty.

New Jersey is not exactly the sunshine state, but solar panels spring up with help of state government

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Michael Giberson

Casually scanning a solar resource map wouldn’t naturally lead you to think that New Jersey would be a good candidate for solar power, but state government policies have resulted in it leaping into second place in PV installations (after California) in 2010.

NREL PV Solar Resources Map

NREL PV Solar Resources Map

More PV was installed in New Jersey last year than in Nevada, Arizona, Florida, Colorado, New Mexico, Texas, or Utah. Much more than Oregon, which has a lot better quality resource for PV solar, is about 12 times larger, and no slouch when it comes to flashing its environmental credentials.

The New York Times reports that not all residents of the state are happy with the solar panels popping up on utility poles and other places. Guess you can’t make everyone happy, right? Whether they like it or not, electric ratepayers throughout the state have been helping to fund the project.

Some highlights from the Times:

ORADELL, N.J. — Nancy and Eric Olsen could not pinpoint exactly when it happened or how. All they knew was one moment they had a pastoral view of a soccer field and the woods from their 1920s colonial-style house; the next all they could see were three solar panels.

“I hate them,” Mr. Olsen, 40, said of the row of panels attached to electrical poles across the street. “It’s just an eyesore.”

…

Like a massive Christo project but without the advance publicity, installations have been popping up across New Jersey for about a year now, courtesy of New Jersey’s largest utility, the Public Service Electric and Gas Company. Unlike other solar projects tucked away on roofs or in industrial areas, the utility is mounting 200,000 individual panels in neighborhoods throughout its service area, covering nearly three-quarters of the state.

The solar installations, the first and most extensive of their kind in the country, are part of a $515 million investment in solar projects by PSE&G under a state mandate that by 2021 power providers get 23 percent of their electricity from renewable sources. If they were laid out like quilt pieces, the 5-by-2.5-foot panels would blanket 170 acres.

New Jersey is second only to California in solar power capacity thanks to financial incentives and a public policy commitment to renewable energy industries seeded during Gov. Jon S. Corzine’s administration.

…

But his neighbor Tony Christofi, a 47-year-old contractor, wondered aloud whether Fair Lawn, by not fighting, was getting more than its fair share.

“I’m fine with green energy,” he said, “but are the savings going to be passed on to consumers?”

PSE&G officials said solar energy was still more expensive to produce than more traditional power sources and acknowledged that bills were going up 29 cents a month. Each panel produces 220 watts of power, enough to brighten about four 60-watt light bulbs for about six weeks. When complete, this project is expected to provide half of the 80 megawatts of electricity needed to power 6,500 homes.

The article notes a shift in priorities that came in with the state’s new governor: “Although he supports renewable energy, Gov. Chris Christie, through a spokesman, characterized the mandates that spawned the panel project as ‘extremely aggressive.’ He has already asked that they be re-evaluated.”

In February, a New Jersey newspaper reported, “The state will move away from subsidizing residential solar projects to emphasize commercial installations and encourage the construction of more gas power plants in a revised energy master plan….”

Economic illiteracy alert of the day: Ag. Secretary Tom Vilsack

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Lynne Kiesling

I know that pointing out the economic illiteracy of politicians is akin to shooting fish in a barrel, but I have an irrationally optimistic hope that shining a light on such illiteracy will help reduce it. Today’s economic illiterate is U.S. Secretary of Agriculture Tom Vilsack, who in an interview with Ezra Klein revealed that he does not understand the economic consequences of farm subsidies:

EK: You keep saying that rural Americans are good and decent people, that they work hard and participate in their communities. But no one is questioning that. The issue is that people who live in cities are also good people. People who live in exurbs work hard and mow their lawns. So what does the character of rural America have to do with subsidies for rural America?

TV: It is an argument. There is a value system that’s important to support. If there’s not economic opportunity, we can’t utilize the resources of rural America. I think it’s a complicated discussion and it does start with the fact that these are good, hardworking people who feel underappreciated. When you spend 6 or 7 percent of your paycheck for groceries and people in other countries spend 20 percent, that’s partly because of these farmers.

EK: My understanding of why I pay 6 or 7 percent of my paycheck for food and people in other countries pay more is that I’m richer than people in other countries, my paycheck is bigger. Further, my understanding is that a lot of these subsidies don’t make my food cheaper so much as they increase the amount of it that comes from America. If we didn’t have a tariff on Brazilian sugar cane, for instance, my food would be less expensive. If we didn’t subsidize our corn, we’d import it from somewhere else.

TV: Corn and ethanol subsidies are one small piece of this. I admit and acknowledge that over a period of time, those subsidies need to be phased out. But it doesn’t make sense for us to have a continued reliance on a supply of oil where whenever there is unrest in another part of the world, gasoline prices jump up. We need a renewable fuel industry that’s more than corn-based, of course, and there are a whole series of great opportunities here. But as soon as we reduced subsidizes for biodiesel, we lost 12,000 jobs there. So if you create a cliff, you’re going to create significant disruption and end, for a while, our ability to move beyond oil. And keep in mind that the Department of Agriculture has moved, for years, to reduce our spending. We cut $4 billion in crop insurance and put that to deficit reduction. So we are making proposals to get these things in line. But a lot of our money goes to conservation, and goes to some of those 600,000 farmers who are barely making it.

I think that last sentence tells us what we need to know about U.S. farm policy and its lead practitioner: it’s backward-looking and reactionary, not really about being forward-looking and increasing productivity. It’s about creating a top-down impression of increased productivity through pushing the government-elite-approved renewable energy options for income diversification, regardless of whether or not ethanol, wind power or solar power actually create real economic value.

I’d ask Secretary Vilsack what the opportunity cost is of this spending to preserve (as an extinct insect in amber) rural communities, but I’m confident that he would fail to understand the question.

We cannot afford this kind of economic illiteracy in our political elites.

HT: Reason.