The modern rationales for energy subsidies have varied in prominence over the decades, but none has been broadly discredited in the public discussion despite the reality that each suffers from fundamental analytic weaknesses. The rationales can be summarized as follows:
- Energy “independence.”
- Support for infant industries.
- Leveling the subsidy playing field.
- Adverse external effects of conventional generation.
- Resource depletion or “sustainability.”
- Employment expansion through the creation of “green jobs.”
- The “social cost of carbon.”
Given the weak history of analytic rigor and policy success in the context of energy subsidies, greatly increased modesty on the part of policymakers would prove highly advantageous. Credit: Twenty20
Energy “independence”—the degree of self-sufficiency in terms of energy production — is irrelevant analytically, particularly in the case of such energy sources as petroleum traded in international markets, an economic truth demonstrated by the historical evidence on the effects of demand and supply shifts from the 1970s through the present.
Capital markets can sustain promising industries or technologies in their infancy—the early period during which technologies are proven and scale and learning efficiencies are achieved—so that the “infant industry” rationale for renewables subsidies is a non sequitur. Moreover, there is little evidence that there exist additional learning or scale cost reductions remaining to be exploited in wind and solar generation in any event.
There is no analytic evidence that renewables suffer from a subsidy imbalance relative to competing conventional energy technologies—the data suggest the reverse strongly—and the conventional “subsidies” that are purported to create a disadvantage for renewables are not “subsidies” defined properly as a matter of economic analysis.
Wind and solar power create their own set of environmental problems, and even in terms of conventional effluents and greenhouse gases it is far from clear that they have an advantage relative to conventional generation, particularly because of the up-and-down cycling of conventional backups units needed to preserve system reliability in the face of the intermittency (unreliability) of renewable power. And those backup costs—an economic externality caused by the unreliability of renewable power—are substantially larger than the externality costs of conventional power even under extreme assumptions.
The “sustainability” or resource depletion arguments for renewables subsidies make little sense analytically—the market rate of interest provides powerful incentives to conserve resources for consumption during future periods—and are inconsistent with the historical evidence in any event.
Nor does the “green jobs” employment rationale for renewables subsidies make analytic sense, as a shift of resources into the production of politically-favored power must reduce employment in other sectors—resources, after all, are limited always and everywhere—and the taxes needed to finance the subsidies cannot have salutary employment effects. Moreover, the historical evidence on the relationships among GDP, employment, and electricity consumption does not support the “green jobs” argument.
The newest environmental rationale for renewables subsidies—the “social cost of carbon”—is an argument deeply flawed both conceptually and in terms of the quantitative estimates now underlying a large regulatory effort. In particular, the Obama administration estimate of the social cost of carbon suffers from three central benefit/cost analytic flaws: the application of (asserted) benefits global rather than national to the net benefit calculation; the failure to use an appropriate discount rate; and the addition of such “co-benefits” as particulate reductions to the net benefit calculation. Moreover, the policies being proposed to reduce emissions of greenhouse gases would have temperature effects trivial or unmeasurable even at the international level, under assumptions highly favorable to the policy proposals. More generally, the terms “carbon” and “carbon pollution” are political propaganda, as carbon dioxide and “carbon” are very different physical entities, particularly given that some minimum atmospheric concentration of the former is necessary for life itself.
It would be hugely productive for the U.S. economy writ large were policymakers to adopt a straightforward operating assumption: Resource allocation in energy sectors driven by market prices is roughly efficient in the absence of two compelling conditions. First: It must be shown that some set of factors has distorted those allocational outcomes to a degree that is substantial. Second: It must be shown that government actions with high confidence will yield net improvements in aggregate economic outcomes. Given the weak history of analytic rigor and policy success in the context of energy subsidies, greatly increased modesty on the part of policymakers would prove highly advantageous.