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‘Gresham’s Law of Green Energy’ (Jonathan Lesser on bad energy driving out good)

[Editors note: this post is a summary/review of the article by Jonathan Lesser, "Gresham's Law of Green Energy: High-Cost Subsidized Renewable Resources Destroy Jobs and Hurt Consumers" (Regulation magazine, Cato Institute).]

“Industries that require never-ending subsidies simply cannot increase overall economic welfare. To conclude otherwise is to believe in ‘free-lunch’ economics of the worst kind. Yet, free-lunch economics are driving the push for renewable energy.”

- Jonathan A. Lesser

Jonathan A. Lesser, of Continental Economics Inc., has written a penetrating essay describing the unmet promises of subsidies to so-called green energy (or politically correct, nonhydro renewables). He looks at the supposed benefits of these subsidies and the associated costs and comes to a familiar conclusion: government-subsidized energy is uneconomic energy.

The arguments for green energy subsidies are numerous; perhaps most used are those pertaining to putting people to work and even creating wholly new industries that will re-invigorate the entire economy (the Obama fantasy). At its core, Lesser’s refutation of these notions provides quite a good lesson in some of the foundational theories of microeconomics (and good common sense).

Lesser begins by exploring the history of electricity markets, and how with the creation of markets for “installed capacity” (backup power to meet peak demand), several states reacted with price-suppression policies. The principle lesson one learns in microeconomics is that markets are intended to get the prices “right”. If extra capacity comes free, that drives down the market clearing price other utilities can receive, thus meaning they exit the market (cannot make a profit). Less competition is never good for consumers.

He refers to this principle as “Gresham’s Law of Green Energy,” an application of a principle that says that bad can drive out good (rather than the other way around) from government interference with consumer preference in an open market. Elsewhere in the piece he uses a more appropriate metaphor: transferring wealth instead of creating it. Subsidies for green energy are taken from taxpayer dollars, meaning that you and I are less well-off while the owners and employees of green energy companies are better off. But factor in ratepayers, all losers, and the wealth transfer is negative and pernicous indeed.

Arguments for ‘Green’ Renewable Subsidies 

But what of some of the other arguments for subsidizing green energy? Lesser tackles each of these in turn. First, he argues that the idea that renewable need subsidies to compete with already subsidized fossil fuels is adding a wrong to a wrong. Market distortions are harmful, and existing subsidies ought to be repealed, not added to.

Next, Lesser argues that the pollution-reduction benefits of renewable may be overstated (due to the need for backup capacity), and are far more expensive than alternative policy options.

The argument that green energy helps reduce dependence on oil, and thus price volatility, is a straw man. Lesser points out that backup capacity is fueled not by oil but natural gas, pushing us towards greater vulnerability to natural gas volatility.

The final argument is that renewables need subsidies to clear market barriers. Lesser argues there is little economic justification for funding expensive and uncompetitive technology, unless it provides a public good. However, he points out that market’s for carbon certificates already exist, solving this problem without tremendous expense.

What about jobs?

Lesser provides those skeptical of the many job creation claims plenty of ammo. Any shift in financial capital to the green energy industry (via taxpayer dollars) will be offset by higher electricity prices. Not only will consumers have less to spend, but goods that require electricity for production (practically everything) will be more expensive.

“Egregious” Cape Wind Project

His example is the Massachusetts Cape Wind project. The state government signed a 15-year contract with the utility National Grid to purchase power from the wind farm at above-market rates. In fact, starting with $75 million in the first year of the contact and ending with $140 million, the contract obligates Massachusetts to pay $1.5 billion above and beyond market rates for this electricity.

The argument is not whether building a large wind farm creates jobs and revenue for these companies. It’s whether the economic benefit of doing so exceeds the $1.5 billion in wealth lost elsewhere. Likely speaking, that money could have been better spent elsewhere, or otherwise invested in more efficient and productive parts of the economy. Lesser even points to a report advocating subsidies which concludes, absent them, the green energy industry would contract. This is the textbook definition of a market distortion, and the resulting inefficiency harms electricity ratepayers.

Conclusion

As Lesser documents, subsidies to so-called green energy are problematic, and thus we have little to show for a set of public policies that began in the 1970s. It is getting very hard for groups like the American Wind Energy Association to use the infant industry argument. With budget cuts and tax simplification ahead, the renewable energy bubble will surely burst for reasons that Lesser makes clear.

2 comments

1 Ken Langford { 02.02.11 at 7:36 pm }

Speaking on bad energy driving out good, The Texas experiment is a prime example. There are reports that shed doubt on CO2 reduction and reliability is in serious trouble during this recent storm in Texas. It’s interesting that ERCOT would say in a recent news release “generation shortage due to numerous plant trips that occurred because pf extreme weather. We know that the wind farms were forced off line. Their own outage reports contain 90 pages of wind farm owners with forced outages. Not one article in the news about the unreliability of wind in Texas!

2 Mark Krebs { 02.04.11 at 1:06 pm }

Thanks for the review and the article. It makes the case that societal affordability is at least as important as some nebulous concept of being “green.”

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