An interesting debate occurred last week on the online forum of, The Economist [1]. The issue in question revolved around the following assertion:
“This house believes that subsidising renewable energy is a good way to wean the world off fossil fuels.”
Introduction
As the moderator of the forum explained, subsidies are certainly not the only answer capable of weaning the world off fossil fuels. The intention of the discussion was to shed light on the significance of subsidies to the renewable energy sector. It aimed to assess, whether or not, subsidies still have a part to play; or, whether or not, due to a history of poor vested opportunities (see below, The Playing Field), it should abstained perhaps for another day.
As noted, the discussion unquestionably assumes that the world does need weaning off fossil fuels. Taking a perspective against climate sceptics, the world must do so:
- To prevent a temperature rise of more than 2°C—an agreed and albeit arbitrary safety limit.
- To slash global green house emissions by at least 80% by 2050.
For the world’s demands for electricity will more than double, and if clean energy reforms are not underway, it will be almost impossible to prevent the temperature soaring. With the world’s population reaching 7 billion; and emerging and established markets continuing to guzzle various forms of carbon polluting fuels; this should come as no surprise. Thus, it is also prudent to assume a good possibility of catastrophic changes in the weather, rising sea levels, melting permafrost and so forth.
Proposer & Opposition
The proponent for the assertion, Matthias Fripp, argues that subsidised funding is needed in order to hit these targets and thus wean the world off fossil fuels.
Meanwhile the opposition, Robert L. Bradley, argues that the consumer free market should decide – the “winners and losers”.
The debate is quite interesting. Despite both participants conjuring up their own elaborate statements in order to win a majority vote, it seems that the commentators (the voters) have formed their own assertion and voted for it; rather than use the information provided for by the participants (and guests of the debate) themselves.
The reason for this assumption is that, the motion assumed the world does need so weaning. Yet, on common grounds, both the moderator and commentators alike agree that within this discussion: Mr Bradley may have wandered off on a tangent. Instead he chose to argue against climate change and global warming itself; and yet, he surprisingly still won the debate.
So, rather than re-summarise all the information which can be seen in the debate itself, instead, an attempt is made to highlight the issues raised by commentators which may have influenced the vote to go against the motion. Using the very information provided for by the contributors, guests and some worthy commentators, an effort is made to explain how subsidies could help wean the world off fossil fuels.
The Playing Field
Many commentators and one guest to the debate argued that if subsidies come into effect, the playing field would be tipped in favour of renewables.
Commentators argue that government intervention leads to: complacency, dispels new competition, and therefore leads to lethargic economic development. The guest speaker Jeremy Carl stated that as a result, investment should be made to R&D; instead of towards subsidies to renewable firms.
Solyndra, a US government backed firm, was chosen by opposition as the prime example of market distortion and its worth. Backed by a $535 million loan in 2009, Solyndra was soon unable to compete and in March 2011 filed for bankruptcy. The Solyndra bankruptcy consequently has been referred to as “the first serious financial scandal of the Obama Administration [2].”
Yet, as guest Ben Goldsmith and many other like-minded pro-motion commentators have pointed out; the playing field was never “level” in the first place.
Subsidies have flowed into the fossil fuel industry for years. It has been the pre-establishment of infrastructure, knowledge, available resources, and high profit margins (and subsidies) which has allowed fossil fuels to proliferate as well as it has; in comparison to renewables. Subsidies to renewable firms still dominate today. Combined with profits on a year to year basis, fossil fuel firms continue to venture further in reach for more sources. Is this a level playing field?
All energy is supported by public subsidy and none more so than fossil fuels. Global annual subsidies calculated by the International Energy Agency (IEA) reveal a great disparity in figures [3]. However, to contrast each other, subsidies to the fossil fuel sector have fluctuated. When oil was at its peak in 2008 – subsidies rose. When prices fell in 2009 – subsidies dropped. And in 2009 the G20 agreed to phase out subsidies. However, when the price climbed again, so did the subsidies in 2010. It seems governments are still keen to continue subsidising the fossil fuel sector.
Market Mechanism
Continuing with this notion of “playing field” consideration (and ignoring for now the fact that fossil fuels are heavily subsidised). Another important issue at the hearts of many commentators is that, by picking winners, markets will be distorted and the long term health of the economy will go into disarray.
However as advocate Fripp points out, without subsidies we would not have seen the falls in the cost of wind and solar energy which we have seen today. Furthermore, as can be seen in the successes of California and some regions of Europe; renewables are indeed on their way to achieving grid parity.
In support, guest Travis Bradford states, that firms like Solyndra go bust every year and the gap it thus creates will allow the best and the brightest to shine through. He claims that, by its very nature, policies will distort markets. But shouldn’t it be the role of governments to foresee where opportunities may lie in order to achieve better, economic and sustainable welfare?
He argues that governments should; in order to make investments of public money based on where future economic value will be created and long-term energy costs will be the lowest. Bradford concedes that, some investments may fall short, some investments will be more productive than others, and some investments may slow down markets – perhaps even stunting the development of capital by private-sector participants either temporarily or permanently (until the policy can be modified). But some subsidies will also overcome market obstacles and move us towards a more stable long-term equilibrium. Bradford refers to this all as part of “Economic Darwinism.”
Because this forum has argued that the world does need weaning, it implies that by natural fit, renewables are the “winners” which should be invested in. For with the progress that renewables have made to date, it can be seen that renewables, and their technologies to make them dispatchable, will be much cheaper in the future than they are today, and will dominate fossil-fuel alternatives as well; particularly, when resources become scarce (see below, Ah Beng’s contribution).
Accounting for the Subsidies
If subsidies are to be taken into accountability; a different light could be shed. For the OECD and IEA suggest that subsidy reform would actually bring about immediate economic gains; rather than economic distortions (which many voters have expressed would occur).
According to the IEA, subsidies to fossil fuels are the subsidies which are actually most responsible for market distortions. They state that fossil fuel subsidies impose an unstoppable fiscal burden on government budgets and are weakening trade balances. For example, the IEA estimates that, in absence of reform, subsidies are likely to reach $600 billion in 2015. This is 0.6 percent of global domestic product! By removing inefficient fossil fuel subsidies they could instead be redirected in order to tackle more pressuring priorities [3].
Supporting the renewable industry makes it more ubiquitous and will soon pacify the rate at which we use fossil fuels. If history is to repeat itself, subsidies and tax breaks which have benefited oil companies for instance could instead be used to help the quest of renewables too.
Valuation
Raised by the opposition and also largely by outside commentators; a final issue of contention is valuation.
The problem here is that due to the fact that renewables are intermittent and “inefficient”, many oppose the subsidising of renewables because: “the greenest fuels are the ones that contain the most energy per pound [currency]”. Supporters of fossil fuels. it has been noted, have tended to base their arguments on the fact that at present – fossil fuels are a cheaper and more viable fuel for cheap and efficient energy production.
Yet are they really? One very simple reality which has often be raised and highlighted by environmentalists time and time again is the role of scarcity. This is important because if resources are scarce they no longer become cheap.
As Ah Beng, a fellow voter and commentator, has pointed out:
“Many who do not support renewable energy have pointed out that renewables suffer from “low efficiency.” I would like to explain why this is a red herring.
Efficiency of renewable energy is not a deficiency of technology or of the maturity of the industry. It is a deficiency of the resource. Renewable resources are low quality energy sources. The temperature gradients (geothermal), work gradients (wind) or radiative gradients (solar) are small compared to those that we can get from fossil fuels. By comparison, natural gas has an adiabatic flame temperature of 4200 degrees Fahrenheit can therefore have a theoretical efficiency of up to 90.1%. Theoretically speaking, we can extract far more energy from a fossil fuel, even at the lowest level of technology, than from any renewable source because the gradients involved are higher.
It is the ironclad laws of thermodynamics preventing renewable energy from being as efficient as fossil fuel energy or nuclear energy. But any comparison of efficiency between solar power and fossil fuels or nuclear is meaningless as a result. The issue with renewables vis-a-vis fossil fuels has nothing to do with efficiency. It is a problem of scarcity and resource availability.
What is the point of touting the advantages of efficient fossil fuel technology if there is insufficient fossil fuel to go around? [4]”
In connecting this to valuation, advocate Fripp raises and makes clear another important matter, relevant to this motion. In comparison to fossil fuels, renewables have the lowest emissions per unit of electricity delivered. They allow a power system to be built which serves two purposes, delivering energy where it is needed (and at a lowering cost), and avoiding climate change. By serving the second purpose, another aspect is also highlighted: valuation of the resource which cannot be obtained from its market or monetary value.
Long criticised by environmentalists, it has been commonly stated that economists fail to consider the broader values of goods and services. For in this particular motion, it is the value of the other externalities which may result from the use of particular resources, not just the economic values, which matter for global temperature rise and emission cutting.
These can include other values such as the cost of using the particular resource against the cost of:
- Biodiversity: Loss of wildlife etc.
- Health: Air and Water Pollution etc.
- Damage to Landscapes: For instance, the clearance of land.
- Social: Consequences of “oil” wars.
“Sustainable development really requires consideration of the ‘true’ importance of the goods and services which our decisions deliver or extinguish [5].”
If market prices only reveal how goods and services are exchanged; how could you weigh the costs of, loss of biodiversity (e.g. due to temperature warming) against damages to landscapes (e.g. clearance of land for energy – for solar panels or coal mining) for instance?
Should we be subsidising a scarce resource which may have other externalities? Or a renewable one?
[3] http://www.worldenergyoutlook.org/docs/second_joint_report.pdf
[4] http://www.economist.com/debate/days/view/777
[5] http://w.rspb.org.uk/Images/Valuingnature_tcm9-230654.pdf
