Arnold Kling  

Energy Conservation

Ayn Rand, the Russian-American... The Three Percent Solution?...

In this essay, I argue that energy conservation is not a useful tool of foreign policy.

In my view, the worst policy option of all is to subsidize the use of alternative forms of energy. If other forms of energy are not economical on their own, then taxpayer subsidies are only harmful. The use of subsidized alternative energy does more damage to our own economy than to Saudi Arabia's.

For Discussion. Is it wrong to doubt the value of subsidizing alternative forms of energy?

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COMMENTS (13 to date)
spencer writes:

It can be rational to make all energy more expensive by something like a $50 tariff on imported oil for reasons of national security.
This would raise the marginal price, and all other energy sources would have a higher competitive ceiling to operate under.

It will have an economic cost but it could be rational to pay the additional cost to reduce US dependence on arab oil. If you factor in the additonal military spending we have because of that dependence such a policy would be rational.

Randy writes:

I think what is wrong is the idea that we are "dependant" on foreign oil. We choose to use foreign oil because it is cheaper than the existing alternatives (coal, nuclear, wind, hydro, natural gas, ethanol) - any or all of which could easily be put into use within 5 years. Sould we subsidize the alternatives? No. Oil prices will rise - this we know. Let the market adapt.

Jim writes:

I think one dimension of the discussion that should be considered is the expected life of the investment, i.e. is it a strongly depreciating asset?

two examples:

good example: hoover dam, very expensive & high risk that the private sector wouldn't fund alone. people are still reaping the benefits of v. cheap energy, flood control, and water availability.

bad example: california gives tax benefits for electric cars to benefit the environment, but really is wasting money on putting a whole lotta lead (in lead acid batteries, the only feasible choice) in cars that will be disposed of.

would the same quarter trillion dollars spent in iraq have led to more energy freedom if it were spent putting a quarter million mega-watt wind turbines on a quarter million acres of s. dakota?

Boonton writes:

Taxing oil use would be justified by classic free market doctrine of externalities. The 'cheap' oil of the Middle East has the hidden cost of increased terrorism and military action.

The tax would make alternative technologies look more attractive as well as the less sexy, 'boring' alternatives like driving less...carpooling more and so on. If you object to incrased taxation it could be done in a neutral manner, decreasing other taxes so the net effect is no net increase.

Paul N writes:

I'm disappointed that even on this message board, the belief is so widespread that the war in Iraq, or U.s. foreign intervention in the Middle East in general, is chiefly because of oil.

Lawrance George Lux writes:

Is it wrong to doubt the value of subsidizing alternative forms of energy?

Never! An Economist must question all aspects of the Production process. So much for the idealistic Bull. Now for a real analysis.

Alternative energy system must provide a significant largesse of energy at comparable price, in order to be a serious Contender in the Energy game. It must be a viable Substitute for current energy practice, or a significant replacement by percentage on consistent basis. Almost all alternative energy sources fail this criterea.

An interesting development is Tosiba trying to put a experimental nuclear reactor in an Alaskan town. I have proposed for a decade that nuclear systems should be based upon CAD-designed Fuel cells which prohibit meltdown--reaction sufficient to heat the necessary Steam, but insufficient to cause reactor damage with Loss of Coolent. I would like more information on the system--which is supposed to run without supervision. Such a system could take over a significant amount of energy need. lgl

Bernard Yomtov writes:

A badly phrased question, Arnold.

Of course it's not "wrong to doubt the value of subsidizing alternative forms of energy," any more than it is "wrong" to advocate subsidizing alternative forms of energy.

Still, I do think that energy is an area where externalities, political and environmental, are very important. So I think it is wrong to look at it from a pure market point of view, just as it is to take the "fossil fuels are inherently evil" stance.

Fazal Majid writes:

You are responding to a political question with an economic answer. Economic well-being is only one of several competing political priorities, national security and sovereignty being others that often can and should preempt short-term economic considerations.

If our ability to sustain economic hardship is greater than Saudi Arabia, barring any preferrable alternatives, this may well be the rational political choice. We won the Cold War because our economy was more resilient than the Soviets', and then engaging in a wasteful and economically negative arms race, because the political outcome trumped the short to medium term cost we bore, but not Japan or Europe.

All indications are that there is little short-term price elasticity to oil, and larger medium term price elasticity as consumers replace their cars with more fuel-efficient models, as happened during the 70s and 80s. It could be argued it is not so much the price of oil that we want to reduce, but volatility in oil prices.

This can be achieved by reducing the time it takes to switch to more efficient but less desirable options, e.g. by building public transportation capacity so there is an rapidly implementable alternative to cars. There is no such option on the electricity-producing side, as that requires heavy capital investment no matter what form of alternative energy is required, but public funding for alternative energy research (including nuclear) would also reduce substitution time.

jaimito writes:

Subsidies to alternative energies are important. They create a variety of technologies that will be available when oil becomes too expensive. Europeans may be too agressive in pushing expensive technologies, but they have a point.

Ronnie Horesh writes:

Stopping subsidies to conventional energy production would be a start. The OECD found that subsidies for energy in OECD countries were running at between $70 billion and $80 billion; their main purpose being to support energy production. Coal receives most subsidies, followed by nuclear energy and oil.

Kevin Carson writes:

The best way to "subsidize" alternative energy is to eliminate special tax advantages for the fossil fuel industry, like depletion allowances.

And while we're on the subject, U.S. foreign policy is a subsidy to fossil fuel consumption.

When the consumer of oil internalizes all the costs involved in guaranteeing access to foreign oil, all that hippie-dippy alternative energy stuff will start looking pretty good.

Bob Knaus writes:

You guys talk alternative energy, I do it. I'm anchored aboard my sailboat just south of downtown Miami. The sun is shining, the wind is blowing, and I'm getting electricity from my wind generator and solar panel. No subsidies required.

Now granted, the only way I am able to do this is to reduce my energy consumption to a level that most Americans would feel uncomfortable with. But I happen to like the lifestyle, and since I'm semi-retired it makes a good demonstration project of just what is required for energy independence. I don't think most people would want to make the sacrifice.

So here's to great big nuclear plants, the only practical way to satisfy the nation's hunger for energy without foreign dependence, carbon emissions, and environmental degradation. I'll gladly buy whatever hydrogen fuel they put out to power my engine.

Capt. Bob Knaus

William Woodruff writes:

Boontown and Kevin are precisely correct. We often forget to include the fully entrenched subsidies we afford to fossil fuels ! The cost imposed (from subsidizing fossil fuels)should be the topic of discussion.


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