Feed on

Last Friday we asked why solar electricity generation requires subsidy. The “economic” case can be found in two places.

  1. Solar electricity generation is supposedly better for the environment than current fossil fuel generation. But neither consumers of electricity nor individuals around the world pay for the environmental benefits that solar produces, so that solar manufacturers and producers can not reap the private returns sufficient to warrant a big investment in solar. In other words, something about solar energy is a “public good” and since we have a free-riding problem, it must be subsidized.
  2. Electricity generation is subject to large lock-in effects due to increasing returns to scale. Since current producers can price so much lower at the margin than new producers, and since new producers also have to incur large fixed costs of entry, then it would be “impossible” for new technologies to compete with fossil fuel technologies without subsidy.

We’ll leave the theoretical discussion of these two points to a future post. Any reasonable understanding of how markets actually work would raise many questions about the legitimacy of such arguments. What about practical arguments? In terms of the public good argument for subsidy, is it not the case that the tens of billions of dollars dedicated to raising awareness about global warming, including as part of grammar school curricula (hey, so what if we lag other nations in math and reading, at least our kids know how to properly condemn Wintercow for throwing out a glass bottle or driving a Ford Expedition), already get us much of the way there? Aren’t we all so socially conscious now that we knowingly would pay more for solar electricity than we could pay for fossil fuel electricity? After all, don’t we knowingly pay more for organic food and for locally produced goods? We do that without subsidy for those goods or compulsion for it. Do you mean to say that we are so ignorant that we only pay more for some things and not for others? (note, that by saying this I am not endorsing any of the view, I am merely exploring the thinking).

A more important practical argument (again, I debate the theoretical reasoning behind the above claims, but let’s continue to accept them) is this. When we subsidize a good on externality grounds or on market power grounds, at some point the subsidy is supposed to be removed. Even the most statist industrial planners recognize this (open up any economics textbook to see). OK folks, you raise your hand if you believe a single dollar of solar subsidies would EVER be cut. Ever! Remember the stimulus of $800 billion was supposed to be temporary. And it has not been. Indeed, Obama all but called the Republicans baby killers and granny killers and heartless thugs for suggesting that $38 billion of this ought to be cut, that’s still leaving in place over $750 billion of temporary stimulus. In fact, even if the economic logic for subsidy was airtight, even if the subsidies worked as planned, this problem alone should condemn any such subsidy policy to the scrap heap. Imagine the responses you would get if you dropped subsidies for solar once the technology matured. “You’ll destroy jobs and the entire economy!” If that were true, then it would have to be the case that the subsidies failed in the first place. And who would step forward to determine when it would be appropriate to remove such subsidies?

Finally, I think the most important practical argument is to reflect on the title of the post. When we were moving from a transportation system based on horses to one based on automobiles, one could have said of the development of oil and gasoline the very same things you are saying about solar today. Just think of the difficulty of building out a network of fueling stations, product movement systems such as pipelines, trucks, barrels, and the like, and think of the advantages of incumbent technologies. No private business could possibly have undertaken such investment and risk without subsidy. Right?  I’d ask you to think about when the last time you left your driveway with your car and had to worry about finding a gas station somewhere along the way to your next destination.

To summarize, we can argue against these subsidies without appealing to theory or the Hayekian knowledge problem and still condemn the idea for three reasons: efforts by environmentalists and government have already raised awareness of the need for “green” energy; the subsidies, once in place, are very unlikely to be removed; the major energy transitions in the past happened right beneath the planners’ noses with no subsidy to speak of, as is already happening with natural gas.

What would one have to demonstrate that the subsidies are uncalled for? At what point in history did the burden of proof move from those of us who respect private property and the feebleness of human knowledge to design complex systems, to those of us who do not respect private property and the feebleness of the human brain in the presence of complex social phenomena? And what would someone of that persuasion require for the burden of proof to shift back to where it rightly should be? I’ll hear nothing but c   r   i   c   k   e  t   s.

Leave a Reply