Wednesday, April 22, 2009

Eco-nomics: Renewable Energy and Carbon Taxes

[Wind, wave and solar power all in one! Photo/graphic credit unknown]

In my previous post I discussed how wind power does not necessarily displace carbon emitting power generation, but, here in the Northwest, often displaces clean hydro power. In the comments, reader Brian talks about the problem more generally. Here are his comments in their entirety:

The problem with the wind tax credit is that it is an indirect approach toward reducing coal generation. The direct impact of the credit is to make wind more profitable, but the indirect desired result is really uncertain, and if you re-read the WW article you will notice that it is completely silent on the success of the system on reducing coal generation, and the dependence on the hydro system isn't mentioned at all.

A tax credit for wind is far more politically palatable than increasing the tax burden on coal generation, but we risk the possibility that we are picking favorites, and we are not allowing the market to find the right mix of conservation and alternative sources. It is highly likely, from an economics perspective, that the resulting outcome is inefficient.

Spoken like a true economist, and absolutely correct. The point is that supporting one particular type of clean energy circumvents the markets ability to reward the most cost effective and cleanest energy source. It also poses the risk of substantial public investment in a technology that ends up not being the most successful and thus has the potential of being wasteful.

Which leads us right back to a carbon tax. If we tax carbon appropriately, we 'get the prices right' and the market can be expected to produce an efficient outcome, just as Brian says. This is also part of the point I have made a number of times about the Governor's plans to create a 'green economy' for the state: it can't be based on particular businesses or industries, but rather creating an environment that is attractive for whatever firm has the next great idea. This means high quality schools and research institutions, a good infrastructure and a efficient and flexible government that is ready to support any new business.
And, of course, revenue from carbon taxes can fund such investments...


NickJenkins said...

Interesting scenario. From what I've been reading, it looks like good intentions on the green front often end up being completely inefficient, wasting more money and energy than is saved. The Nation did a disturbing piece on this "green" subsidy that lead to paper companies wasting fuel and making a lot of money in the process ( ). It's good that you're keeping your eye on the details of these things, which sound good on the surface. As a book I'm reading (The Power of Small - ) points out, sometimes the little details make all the difference.

Brian said...

The problem is not good intentions on the green front, it is the pursuit of politically expedient solutions. It is far easier to extract a small cost from the masses and hand it to a small group of beneficiaries (Oregon tax credits to wind generators), than it is to impose a cost on a small group of people (coal generators). When we hand money to wind generators, there really isn't anybody with a huge vested interest ready to fight it. On the other hand, if we tried to substantially increase the cost of coal generation, we will see some very well-funded opposition.

We know we want efficient alternative energy sources, but what are we willing to do to get them?