Is subsidising renewable energy is a good way to wean the world off fossil fuels?

Michael Giberson

The Economist is hosting an online debate on the motion, “This house believes that subsidising renewable energy is a good way to wean the world off fossil fuels.” Matthew Fripp of the Environmental Change Institute at Oxford University has presented the affirmative case for the motion, Robert Bradley, Jr., of the Institute for Energy Research has argued the negative.

In closing arguments, Fripp makes what seems to be the best possible case for a combination of directed renewable energy subsidy (either renewable portfolio standards or feed-in tariffs) and gradually increasing carbon tax. While actual policy is unlikely to be as gradual, certain, and efficient as Fripp suggests, it seems desirable for policymakers to at least try, right?

That is, it seems desirable for policymakers to aim for gradual, certain, and efficient policy support for renewable energy assuming we accept the goal of weaning the world off fossil fuels. Bradley doesn’t.

Against a proposition that is formally about the means to an end, Bradley closes by arguing against the end. He argues cheap energy is good energy:

Good public-policy intentions are not enough …. Higher-quality, less-expensive energy enhances living …. This fossil-fuel dividend, if you will, enables a variety of lifestyle enhancements, including those for better health. Wealth is health, and human health should be at the core of environmentalism.

To me Fripp’s polished policy scenario is unappealing in part because of how appealing he makes it seem. (!) I’m not at all ready to turn the energy industry over to a central planning bureau, even Fripp’s ideal which would limit its interventions to minimally intrusive ways of promoting renewable power while a carbon tax was phased in and then disappear. Government attempts to manage the economy tend to destroy economic value; Fripp hasn’t convinced me government has overcome the knowledge problems and coordination problems inherent in economics action.

When renewable energy sources earn a place at the “high-quality, less-expensive” table, we’ll all be wealthier and healthier for it. In the meantime, in a world with significant problems of poverty and disease, wasting resources to install inefficient technology on large scale is destructive of wealth and health.

NOTE: At the moment I’m posting, the reader voting shows 49% in agreement with the motion and 51% opposed. Today, November 17, 2011, is the last day for reader voting. My recommendation: if you like government planning for the energy economy, vote Yes; if you prefer wealth and health, vote No.

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9 thoughts on “Is subsidising renewable energy is a good way to wean the world off fossil fuels?

  1. Carbon dioxide is a globally well mixed trace gas. Those who believe in AGW believe that the increasing atmospheric concentration of CO2 in the atmosphere is primarily responsible for the recent (though not current) global warming. Those who believe in CAGW assert that continuing to increase the atmospheric concentration of CO2 will lead inexorably to catastrophic warming and perhaps the end of life on earth as we have known it.

    There is no universal agreement on the percentage by which global annual CO2 emissions would have to be reduced to halt the increase in the atmospheric concentration of CO2, though there is a good argument that global annual CO2 emissions would have to cease totally to achieve that result. (Hopefully, there would be an exemption for the exhalations of the ~1 billion of the earth’s current occupants who would constitute the “sustainable residue” of the current population.)

    However, logic would appear to dictate that the essential first step in halting the increase in atmospheric CO2 concentration would be to halt the current increases in the rate of global CO2 emissions. (Global politics would appear to require a different approach.) That essential first step would then be followed by progressive reductions in global annual emissions, until the necessary reduction percentage had been achieved. Some argue that this second step would have to be followed by active efforts to remove some of the CO2 currently in the atmosphere to restore the atmospheric concentration to some lower value, such as the apparently magical 350 ppm or the pre-industrial 270 ppm.

    There is no rational single state (CA), multi-state (RGGI), national (US) or group (OECD) “solution” to halting the increase in global annual emissions, no less reducing global annual emissions below current levels. However, actions on these levels could reduce the future atmospheric concentration of CO2 below what it might otherwise have been in the absence of those actions. Halting the increase in global annual CO2 emissions would require actions by those nations which are currently contributing to the emissions rate increases (China, India, Malaysia and other “developing” countries). The history of the Conferences of the Parties (COPs) suggests that this outcome is highly unlikely.

    Eliminating global annual CO2 emissions would require the investment of ~$150 trillion over and above a “business-as-usual” scenario over a period of ~40 years to achieve the “solution” by the also apparently magical 2050. The US alone would be required to invest ~$30 trillion over that time frame. That annual incremental investment of ~$750 billion would require an annual incremental return on investment of
    ~$75 billion per year. That annual incremental return requirement would be added directly to US consumer energy bills. Any forced early retirements of current fossil fueled facilities and equipment would produce economic dead losses. Any carbon tax imposed, purportedly to incentivise CO2 emissions reductions, would merely add to the increased consumer costs. (There have been allusions to a “fully refundable” carbon tax, but such allusions are merely oxymoronic illusions. Waxman-Markey included an effective carbon tax of ~$65 billion per year, most of which would have been consumed by renewable incentives and income redistribution.)

    It is appalling, though hardly amazing, that those who believe in AGW and/or CAGW have not yet established a unique, publicly articulated GOAL for the efforts they believe are essential to solving the “problem” they perceive. Fripp appears to have a PLAN without a GOAL.

    “A goal without a plan is just a wish.”, Antoine de St. Exupery

    “A plan without a goal is insanity.”, Ed Reid

  2. What I find most interesting about this ‘debate’ is the seeming assumption that renewables are subsidized and fossil fuels are not. I’d find the economic arguments more compelling if there were a bit more honesty in the debate about the starting point. While there are subsidies for renewables (mostly geared toward electricity production), they are dwarfed by the direct subsidies for exploration, drilling, transportation and production of fossil fuel energy. (See, for example, http://www.gao.gov/products/GAO-08-102 or http://mediamatters.org/research/201110280022. There are many other sources.)

    As economists, I would think that you would apply your same arguments to fossil fuels as you do to renewables. Sadly, that never seems to be case. Rather, these debates move forward with the received wisdom that fossil fuels are subsidy-free. For me, that undermines the credibility of the economic arguments.

  3. To Ed Reid,

    I think the economics are worse than you state. If we were required to pay $30 Trillion over 40 years to reduce carbon emisisons, then the cost is at least $750 billion per year. More, if we apply an investment rate of return to estimate the opportunity cost of investing in reduced carbon rather than in other production.

    The “annual incremental returns on investment” of $75 billion would apply for a stream of years following each yearly investment of $750 billion, not just for one year. Adding them all up in a complicated way results in more than the $30 trillion.

  4. You are certainly correct. Interestingly, you are the first person who has suggested that these numbers were not high enough. Assuming 40 year, straightline depreciation, the returns to investment over the period would be ~$60 trillion. But, who’s counting?

  5. Mike,

    Lots of luck with “kill all the subsidies”. The differences in the level of “subsidies” between traditional forms of energy and the various forms of renewable energy per unit of energy delivered would halt the spread of renewables in its tracks. (NOTE: RPSs, “must take” requirements, feed-in tariffs, etc. are also subsidies.)

    Also, there is a difference between a “tax expenditure” (tax deduction) applied to reduce the taxable income of a tax paying entity and a “subsidy” provided to an entity which does not pay taxes (though it might some day). These subtle differences are frequently “blurred” or totally ignored in energy discussions.

  6. At the risk of ovresimplifying, I think we’d all be better off if all subsidies to any commercial efforts were eliminated. Then we could let the marketplace find the “best” energy sources and solutions.

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