This initiative is generally viewed as an effort to do two things: 1) reduce the United States' dependency on fossil fuels, and 2) put the U.S. at the forefront in the fight against climate change.
While there is currently a more than sufficient supply of coal and natural gas to meet the demand of the U.S. market, the resources will in time run out, and the U.S. will depend on an ability to generate power without these resources. The Energy Information Administration estimated in 2014 that the U.S. will demand 26.6 TCF per year, and that at that rate, the U.S. will run out of natural gas in year 2107. While that is a long time away, United States coal is expected to meet demand even longer based on similar demand assumptions, lasting an estimated 256 years.
With those sorts of timelines, it is understandable to question whether or not green subsidies for otherwise currently uneconomic production are a worthwhile use of today's dollars... but here is the case for why this initiative should be questioned only insofar as how we can most effectively subsidize green initiatives to increase its presence in the U.S. power mix, and not if or why it should be reduced.
Several, if not all, historically large infrastructural changes have required not only a public interest to succeed, but also and sufficient time to create the optimal environment for our country's population. For example, AT&T accepted ~$3B dollars over six years to expand and improve broadband service in rural areas to help generate a more productive population. This is not just a recent phenomenon, the Federal Aid Highway Act of 1956 was signed by President Dwight Eisenhower as a matter of National Defense, while presenting not only additional security to the U.S., but also transportation and business opportunities. Through this act, a federal fund paid for 90% of the costs to build out highways, while placing just 10% of the burden on states. Lastly, if this is not close enough to the energy sector for our readers, a 2011 study by Management Information Services found that fossil fuels received 70% of total energy subsidies from 1950 - 2010, and Coal alone had subsidies totaling $104B in that time frame.
It is difficult to argue against any of these subsidies in hindsight, realizing that the public sector's support identified the need for this infrastructure, whether it be for improved production out of its population, safety, or power supply reliability, and delivered it to its population more quickly than the private sector had been offering it on its own. Knowing that natural and gas supplies will eventually diminish, reducing America's dependency on those assets is the only way create energy sustainability. How we can meet the U.S.'s growing power demand as those assets reduce? By providing subsidies to maintain our country's homeostasis in a timely manner.
Reason 2 (not in order of importance) for green subsidies is a concern over global climate change, resulting in a need to reduce carbon emissions while we will continue demanding power, and providing an opportunity for the U.S. to develop technologies that can be sold and used worldwide. The has been an estimated 40% increase in atmospheric carbon in the last century and a half, sea levels have risen nearly 8 inches over that time period, and NASA satellite images show that sea levels could rise from 1-4 inches by year 2100 (before our natural gas supply diminishes), which would pose a threat to 11 over the world's 15 largest cities (per Morgan Stanley, 2016).
These threats indicate the urgency of reducing our dependency on fossil fuels that emit more CO2 than their green counterparts. To date, alternatives include green technologies and Nuclear generation.
In summary, an immediate need to begin reducing carbon emissions coupled with a mid-term need to retool existing U.S. infrastructure and dependency on depleting assets provide support for continued, if not increased, subsidies in the green energy sector. These subsidies, like many in the past, are expected to support investment, research, and development in one of the most critical components to U.S. and world sustainability.
https://www.eia.gov/energyexplained/index.cfm?page=coal_reserves
https://www.eia.gov/tools/faqs/faq.php?id=58&t=8
https://energy.gov/sites/prod/files/2015/01/f19/DOE%20FY%202016%20Budget%20Fact%20Sheet.pdf
https://www.morganstanley.com/articles/fossil-fuels
https://gofossilfree.org/commitments/
http://www.world-nuclear.org/nuclear-basics/greenhouse-gas-emissions-avoided.aspx
I think it is very interesting how you structured your post. First, you mention how long coal and natural gas reserves are currently projected to last, while only later you mention that climate change is also an issue to consider. To me, it really doesn't matter how long the reserves will last, because if we actually do burn all these coal resources (just the ones in the US, not to even speak of global reserves) we can say 'goodbye' to the planet as we know it with a very high certainty. Not just will we have managed to melt all the ice in Greenland, the Arctic ocean and Antarctica, but we may well also create a runaway greenhouse effect that will be impossible to stop.
ReplyDeleteAnother thing worth mentioning here is that subsidies are not just an instrument to 'level the playing field' because fossil fuels have enjoyed subsidies in the past, but they are in fact necessary because the US (like many other industrialized nations) has so far been unable to properly account for the externality of greenhouse gases emitted by fossil fuel powered plants. If this externality were properly accounted for, many wind and solar projects, and probably also existing and new nuclear plants, would be more than competitive in terms of costs with coal and natural gas.
Hi Alex,
ReplyDeleteThank you for an interesting post which provided an even-handed analysis of both the pro and con sides of renewable energy subsidies. I had a couple of thoughts as I was reading you post:
1) In the opening I think you were referring to the FY2016 budget request for the Office of Energy Efficiency and Renewable Energy (EERE), which was $2.7 billion. EERE is an important office, but its budget does not include the value of tax subsidies (administered by the IRS), or funds disbursed by other federal government offices (such as the Advanced Research Projects Agency-Energy). The EIA periodically releases a complete summary of direct federal energy subsidies which would be a better source in this context (https://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf).
2) I liked how you framed the future question as "maintain[ing] our country's homeostasis," but I wish you had gone into more detail on that. For instance, energy efficiency investments can allow you to do more with less (e.g. generate more economic activity while reducing energy consumption). The cheapest kWh of electricity is the one you never have to purchase. These investments can have a huge impact over time, delaying or negating the need for large power generation and transmission capital expenditure. McKinsey has published a series of notes on Energy Efficiency which might be of interest if you are considering looking into this further (http://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/giving-us-energy-efficiency-a-jolt).
Overall, a good post on an interesting topic.
Government subsidies are always a controversial subject. Energy providers are a private enterprise and thus government subsidies of any private entity would lead to an economic dead weight loss. Your arguments of rural phone service and the Interstate Highway are not necessarily great as these are/were needs that only a government entity could fulfill e.g. only a government is allowed by law to take land by eminent domain and build/maintain a road on it.
ReplyDeleteYour argument on the reserves is also not persuasive. Basic economic theory would say that we should use the cheapest resource available, and when it starts to deplete, the price rises, and then renewable energy becomes economical without government subsidy. Furthermore, your argument assumes that we will (1) not find new sources; and (2) the technology will not improve which would effectively extend the years of resources left available.
Your best argument for subsidies is that traditional accounting standards do not take into account the costs emissions from fossil fuels has on society/planet. Thus having the government impose a charge for fossil fuel plants which it could redistribute to help those developing technology for renewable power generation sources is a possible solution. This would help to even the playing field in terms of the economic argument. The issue then becomes what should the charge should be?
Thank you for your post!
ReplyDeleteI agree with the need to invest in sustainable energy and the need to continue to provide subsidies to be able to supply the growing demand of energy. The International Energy Outlook 2016 (IEO2016) highlights the significant growth in worldwide energy demand over the 28-year period from 2012 to 2040. Stating that the world consumption of marketed energy expands from 549 quadrillion British thermal units (Btu) in 2012 to 629 quadrillion Btu in 2010 and to 815 quadrillion Btu in 2040 – a 48% increase from 2012 to 2040.
Regarding your second reason, global climate change is a reality that is present for many, but ignored by others. The evidence is clear. Over the past years, observations across the States and world provide multiple lines of evidence that climate change is happening. Countless places have seen changes in rainfall, resulting in floods, droughts, etc. In 2015, nearly 200 countries signed up to the 17 goals of the 2030 Agenda for Sustainable Development and the Paris Climate Change Agreement. The ability to deliver depends on the speed with which the countries can achieve transformational changes, notably the transition to clean, sustainable and renewable energy that supports so many of the goals. Specifically looking at the low-carbon transformation, governments will need to create a level playing field for clean investment through carbon pricing, subsidies and encouraging the support of investing in green initiatives.
The United Nations Environment Programme (UNEP), stated that 2015 produced a new record for global investment in renewable energy. The amount of money committed to renewables, excluding large hydro-electric projects, rose 5% to $285.9 billion. This was achieved despite exchange rate shifts that depressed the dollar value of investments and the sharp falls in oil, coal and gas prices that protected the competitive position of fossil fuel generation. This is good news, although UNEP and Bloomberg New Energy Finance have also stated that the investment in the developed world has been on a downward trend since 2011.
Overall, I understand how controversial this subject is, but it is important to acknowledge the subject and discuss it.
http://fs-unep-centre.org/sites/default/files/publications/globaltrendsinrenewableenergyinvestment2016lowres_0.pdf
Very strongly argued Alexander. Same comment I gave to Mr. Schaffer. Your competing posts really complement each other nicely. Well done. Please see my comments about Chris Schaffer’s post for my own views on a few of the issues you touch on.
ReplyDeleteYour arguments --- in particular the finite-supply argument --- are essentially arguments stating that energy infrastructure is a “public good,” analogous to roads and bridges, and, because of the usual public goods arguments (non-exclusivity, non-rivalrousness), there is a role for government intervention. The standard counter to this is “OK, but why can’t the private sector deliver these goods?” (essentially refuting that they are public goods). This is worth thinking about as we go forward. Why should we not believe that private firms can/will innovate and achieve the same outcomes that government intervention is intended to achieve? I’m not sure that pointing to other public goods in the past is the greatest argument. One would like to, at least, argue that green energy has a lot in common with the public goods that you point to.
Grading Rubric (badly formatted because comments don’t allow formatting)
Possible “grades:” Excellent (E), Very Good (VG), Good (G), Could be Better(CBB)
Takes a clear position: E
Substantiates the position: VG
Informs the casual reader: G
Clarity/quality of exposition: VG