When it comes to discussing market
incentives for green energy promotion, policymakers are blessed with a variety
of different options for helping nascent industries compete with the
established market.
In order to
provide monetary scaffolding for companies to grow, the government has provided
a combination of tax credits and subsidies for alternative energy companies,
and direct stimulus to governmental departments focusing on green energy
research.
The approach is known as
“industrial policy,” and the idea behind this strategy is that it represents a
“one-two punch” to help specific sectors compete more effectively with outside
competition.
But is such an
approach really beneficial for the energy sector in the long run?
One new study by the centrist Brookings
Institute questions the viability of the current approach, and compares it to
former methods practiced with other institutions in the past.
While agreeing that some federal
funding may be appropriate, the authors instead make a case for a continued
push for a carbon “cap-and-trade” system, in order to more properly capture the
hidden costs of fossil fuel consumption.
Industrial
policy measures have been a staple of green energy promotion in the past. In the 1970’s, during a time period of
stagnation in America’s industrial sector, policymakers looked for solutions
that would help revive manufacturing and increase its competitiveness in the
face of new industrial powers in Japan and Germany. One such school of thought postulated that the federal government
could be used to push industry in specific, preordained directions through
“indirect measures,” like tax credits and subsidies, and direct stimulus as
well. The idea was that these
measures would shift industry into the “proper” cutting-edge technologies, and
create increased American competitiveness in those sectors. While this school of thought died out
in the early 1980s as American productivity rebounded and Japan’s economy
slowed down, the ideas behind industrial policy still appeal to various
interest groups, particularly those with left-leaning ideologies. Although these policy ideas are
primarily associated with the industrial sector of the US economy, they have
also been applied to the green energy sector as well. Over the past 40 years or so, the industry has been the
recipient of a combination of subsidies and grants, beginning with a massive
effort by the Carter administration to produce synthetic fuels, and continuing
off-and-on throughout subsequent decades.
With the advent of the financial
crisis of 2008, policymakers espousing industrial policy found an opportunity
to promote green energy technologies within the context of a stimulus for the
economy as a whole. Advocates of
this policy touted that “[the investments] will help address global warming
and…promise greater ‘energy security,’ but also deliver thousands of ‘green
jobs.’” Like the Carter
administration in the 1970’s, the Obama administration made a push for
alternative energy development a centerpiece of its policy initiative, and
authorized $32 billion in stimulus funds to go to the Department of Energy
(DOE) for green energy research.
History has shown us that this approach is iffy at best in its
effectiveness: while a 2001 study
by the National Academy of Sciences showed that DOE projects yielded returns of
about $40 billion at a cost of $17 billion, “just three of the energy
efficiency programs produced 75% of the benefits.” Additionally, most of those developments occurred in the
building efficiency sector, while most of the other initiatives in other
sectors merely broke even, or suffered from cost overruns. Given these facts, it’s easy to see
that direct investment on an industrial scale can be a dicey proposition.
Many advocates of green energy
industrial policy proclaim that we are in competition with other nations, like
China, Germany, and Brazil, to produce effective alternative energy solutions,
and that taking control of this industry’s development, and “winning” the
competition, will result in increased jobs and a stronger economy. Using this logic, initial investments
to support industry growth will result in a quicker rate of technological
progress and a leg up on the competition.
However, the logic isn’t as sound as one might think; the authors turn to
the liberal-leaning economist Paul Krugman to debunk these claims. According to them, “Krugman notes that,
while the term ‘competitiveness’ is meaningful when applied to individual
firms, it makes little sense when applied to the economic relationships among
countries.” What he means by this
is that one can’t lump countries and corporations in the same boat when talking
about competitive principles. A
corporation is a singular entity, and while corporations benefit from obtaining
greater market share, international trade actually ends up helping countries
more than it hurts them. It’s
tempting to believe that countries can gain a boost in GDP from aggrandizing
the competitiveness of their industries in order to gain market share, but
Krugman found that even if a strategic American trade policy could be crafted to
gain a majority share in markets to maximize any monopolies enjoyed by US
firms, the process would net less than a percent to U.S national income. In contrast to industrial policy,
empirical data support the idea of international trade to lower energy
costs. The authors of the study
note that when other countries develop cheaper green tech, more of it will be
used in the US as well, which will then minimize costs for conversion, and help
the environment too. Indeed, they
cite recent anti-dumping cases levied by solar firms against firms in China as
an example that dumping cheap solar panels in the US may actually help US consumers “by artificially
lowering the costs of solar power,” and making it more competitive with
nonrenewable energy sources.
The
final question concerning industrial policy is whether the claim that policy
measures of this type can produce “thousands of green jobs” hold up in
practice. The first thing we need
to take into account is the nature of this policy. Industrial policy composed of direct stimulus tends to be
“timely, targeted, and temporary.”
And in the 2009 stimulus proposed by President Obama, the money
allocated to the Department of Energy and other green entities was just
that: a short-term burst of direct
funds and tax cuts designed to provide demand for services when the private
markets are unwilling or unable to do so.
Unfortunately, the Institute notes, this form of stimulus is at odds
with the goals of most energy research.
This research is a time-consuming process, and beginning a project
“require[s] detailed proposals, competitive contract selection, and
negotiations over the scope of work,” unlike, say, a transportation or
construction project. Green energy
research also tends to draw from a highly educated pool of labor that is less
likely to be affected by downturns in the market, and therefore, causes less of
a dent in unemployment than projects requiring less-skilled workers. Thus, the authors conclude that
“programs designed to promote the sustained commercialization of new
technologies are seldom effectively counter-cyclical.” Unfortunately, while green energy can
provide many benefits to the environment, it is not the most efficient vehicle
for promoting job creation.
Since industrial policy seems to
falter on several of its selling points, what then would be a more efficient
solution? The authors come to the
conclusion that “getting prices right” is the most logical first step in making
green energy more attractive to commercial enterprise. Properly factoring in the “hidden
costs” of carbon production, like the harm carbon emissions pose to the
environment and society, can help to level the playing field between green
energy producers and more traditional energy companies. The authors propose that a carbon
cap-and-trade system be the main focus for creating a price scheme reflecting
all costs of production, but also note that targeted governmental investments
can provide a nice complement to private research and development. To this effect, they note that the DOE
would do well to shift its policy portfolio to focus on investments that “would
have been taken by firms in the presence of an effective carbon price” until
cap-and-trade can be implemented in Congress. Therefore, the DOE should focus on “technologies with the
lowest expected cost of abatement and the highest probability of market
penetration,” instead of its current priorities. In short, they recommend a focus on technologies that would
provide a firm the maximum amount of profit if carbon were properly
priced. This combination of
solutions, they argue, would be a more market-friendly solution and more
properly set the carbon market at a level where green tech could compete.
It’s
interesting to note that the Brookings Institute is recommending a shift in
government policy, rather than having the more often-heard debate on whether
government should be helping the industry at all these days. It says something about the importance
of having government provide support to certain industries, even though there
can still be plenty of debate about how that support should manifest itself,
whether it be cap-and-trade, direct investment, or other methods. Although throwing money willy-nilly at
every possible energy solution seems inefficient, a more sensible solution for
proponents of direct investment is to keep closer tabs on research projects,
and instead move to support those projects that show the most return, like the
three projects that accounted for 75% of the DOE’s profits. That way, targeted direct investment
can produce the maximum “bang for the buck,” and provide a nice complement to a
future cap-and-trade program or a carbon tax. Investing this way will help to pick up any
slack in research that exists in the private sector, and help to ensure that
green energy development won’t be consigned to the wastebasket in case of a
future downturn in fossil fuel prices.
