A Cautionary Note on the “Push” Towards Renewable Energy
It looks like an energy bill that attempts to address the issues of climate change, global warming, and carbon emissions will (soon) be introduced in Congress. Against that backdrop, together with the recent approval of the “Cape Cod” wind farm, I’d like to provide a synopsis of the Earth Day lecture I gave on April 21. The presentation was a collaborative effort based on some research I’ve been doing with my colleague Kevin Forbes who is the Director of CUA’s Center for Energy Studies and Environmental Stewardship. (Note: For full disclosure, Forbes was actually scheduled to give the lecture but was unexpectedly “detained” in Germany as a result of Iceland’s volcanic eruption.) The title of the lecture was “Renewable Energy, Cap and Trade, and Carbon Emissions”. The main point we tried to get across was this. Achieving meaningful reductions in carbon emissions at the lowest possible cost requires either the imposition of a carbon tax or the implementation of a cap-and-trade program—period. Subsidizing renewable energy technologies and/or consumption, by itself or in conjunction with a carbon tax/cap-and-trade program, is a waste of resources that actually moves us in the wrong direction regarding total energy consumption and production. I’ll try to provide the intuition behind this without relying on the several graphs we showed in the presentation.
Let’s take as givens that right now we are (1) consuming too much energy overall and (2) too much of that energy comes from “dirty” sources, i.e., fossil fuels, especially coal. A major reason behind these two facts is that the social costs (or in econspeak, the external damages) associated with energy produced from dirty sources, e.g., adverse health and environmental impacts, are not fully reflected in energy prices. Think of it this way. The polluters are using the ambient environment (air, water, ecosystems) as a trash bin and they’re doing it free of charge. Energy from dirty sources is cheaper than what it should be because the polluters are not forced to pay a price for these “environmental inputs” as they must for all the other inputs they use (labor, land, capital, and materials). The solution then is a policy that puts a price on these inputs and that is exactly the intent of a carbon tax or a cap-and-trade program. This is all that’s necessary—the proper pricing of energy produced from dirty sources. This will reduce our consumption of energy overall and will increase the portion of energy that is produced from “green” sources.
If we also rely on subsidizing green power, we will still be consuming and producing too much energy overall. Subsidizing green power will make it artificially cheaper than what it should be and hence its production and consumption will rise above the optimal level. This means that resources that should be allocated to the production of other goods and services will be needlessly diverted to energy production. If we rely solely on subsidies to green power, energy production will again be greater than what is optimal AND though the composition of energy sources will be greener, the necessary meaningful reductions in dirty power will not be achieved.