Paul Krugman commented on hydraulic fracturing for natural gas and on solar energy the other day.
His main thrust is the good news he finds on solar energy, but he detours into a few comments on fracking to generate a charge of political hypocrisy. Fracking is, he says, “a technology that imposes large costs on the public.”
We know that it produces toxic (and radioactive) wastewater that contaminates drinking water; there is reason to suspect, despite industry denials, that it also contaminates groundwater; and the heavy trucking required for fracking inflicts major damage on roads.
Economics 101 tells us that an industry imposing large costs on third parties should be required to “internalize” those costs — that is, to pay for the damage it inflicts, treating that damage as a cost of production. Fracking might still be worth doing given those costs. But no industry should be held harmless from its impacts on the environment and the nation’s infrastructure.
Yes, fracking produces toxic and radioactive wastewater and there are cases in which that wastewater has spilling into streams. Yes, there are reasons to believe that in some cases gas drilling (but not the fracking process itself) has contaminated groundwater. But these cases are relatively rare and, at most, locally significant for a little while. Krugman doesn’t, and I don’t think he can, justify his claim that fracking “imposes large [external] costs on the public.” Still, Krugman’s “internalize the externalities” is pretty basic economic policy advice.
(I’ll agree that the heavy trucking required for fracking can inflict major damage on minor roads, but I assume that those trucks pay diesel taxes and other fees just like any other commercial vehicle would. The tax is supposed to “internalize the externality” of road use, just like Krugman wants. What is the complaint?)
Krugman quotes from the industry-supported website energyfromshale.org and follows it up with “it’s worth pointing out that special treatment for fracking makes a mockery of free-market principles.” Well, if Krugman is searching for free market principles, neither industry-backed websites nor politicians of any stripe are likely to be reliable resources. If instead he wants to mock politicians that mouth free-market principles as cover for corporate welfare, I’m all in favor. But c’mon Dr. K, name some names!
He turns to solar power for some happier news:
Solyndra’s failure was actually caused by technological success: the price of solar panels is dropping fast, and Solyndra couldn’t keep up with the competition. In fact, progress in solar panels has been so dramatic and sustained that, as a blog post at Scientific American put it, “there’s now frequent talk of a ‘Moore’s law’ in solar energy,” with prices adjusted for inflation falling around 7 percent a year.
This has already led to rapid growth in solar installations, but even more change may be just around the corner. If the downward trend continues — and if anything it seems to be accelerating — we’re just a few years from the point at which electricity from solar panels becomes cheaper than electricity generated by burning coal.
The declining cost of solar is, in fact, good news for consumers.
However, I think a good part of the most recent and dramatic cost declines for installed solar PV systems are not technology driven. As energy prices soared in 2008, a good deal of additional capacity to produce high-grade silicon came online. At the same time, additional capability to produce both silicon and non-silicon forms of PV panels came online. The late-2008 financial crisis suddenly cut spending on many new projects. Economics 101 tells us that when the supply is up and the demand down, the price of solar panels will drop.
Technology is improving, and contributing to cost reductions for solar PV. I’d just be cautious about drawing a line through recent year prices to forecast prices a few years hence. (Uh-oh: Checking for data at EIA shows PV installations up in 2009 and 2010 compared to 2008, so maybe the demand side of my solar story is weak. Don’t see data on manufacturing capability.)
In any case, though Krugman doesn’t mention it, his endorsement of an “internalize the externalities” approach to policy probably commits him to leaning against the Renewable Portfolio Standards, direct-to-industry grants, and production subsidy approaches to encouraging renewable power (none of these policies do a good job of linking subsidies to public benefits). On the other hand, he probably leans in favor of directly taxing various forms of pollution or, even better, application of strict liability standards when the pollution and resulting harm is readily identifiable. Those are my views, too; glad to have such a notable economist on my team.