Arnold Kling  

Energy Fallacy

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A blogger writes


If consuming less bad energy is a goal, then moving more citizens over to good energy is a viable part of that goal. To move more people over to good energy, there has to be more readily available. Hence good energy subsidies.

This is a comment on my essay. I am not certain that he read my entire essay. I am absolutely certain that he did not understand it. He certainly did not understand this paragraph, which may be the core point of the essay:

It may be true, as Greg Mankiw argues in his Pigou Club Manifesto, that higher taxes on bad energy are justified. Figuring out the optimum tax is a difficult challenge, even for the Pigou Club. However, once the correct tax is set, that by itself provides all the incentive that is needed to get people to switch to good energy. The tax on bad energy will raise the price that people are willing to pay for good energy. That higher price for good energy is all of the incentive that producers need to undertake the effort to provide more good energy.

Is this point not clear?


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COMMENTS (8 to date)
Josh writes:

Arnold, I think it's a problem of static vs dynamic analysis. Some people are content doing a static analysis of most situations and using that to make decisions. For example, people consume X joules of energy today, all of which is "bad". If we give them access to X/2 joules of "good" energy, they will then only consume X/2 joules of "bad" energy.

This is the static analysis, and if that's as far as your mind will take you, then it sounds reasonable. Unfortunately, the world is not static. Changing the supply and/or demand of a system where prices are adjustable will cause a rebalancing in ways that aren't always obvious, and which may lead to demand going in the opposite direction from where you intended. That's the dynamic analysis, and it requires a lot more intellectual effort, which many people are either unwilling, or incapable of giving. I find this "intellectual laziness" to be a prominent feature of the left in general and the green-left in particular. But they probably think I over think things and end up just as wrong. Oh well...

Andrew writes:

On the other hand, it could be argued that subsidising clean energy now, to increase its use, will lead to greater improvements in the technology, with the end result that the clean energy technologies, having become more efficient, can entirely replace the older technologies at a lower cost. Thus the initial effect might be to decrease the overall price of energy, and thus increase consumption even of dirty energy, but in the long run the effect will be to displace dirty energy.

I don't necessary agree with this -- it might be the case for, say, solar panels, but not for ethanol, but I do think it's part of the rationale of those calling for clean energy subsidies.

jb writes:

Perhaps electricity is turning from a commodity item to a luxury item. One that people deliberately pay more for, in order to feel better about themselves.

Now, we all know that this would cause the price of the "commodity" energy to fall, since there would be less demand. That would (typically) translate into more demand for that commodity energy, thus doing nothing to the overall spewage of carbon.

But if I wave my magic fairy liberal wand, no one would actually use that cheap energy, eschewing it for the high quality of "luxury" energy. Eventually, those stupid people who sell commodity energy would wake up and smell the roses, and realize they would be much richer and their margins would be much higher if they just switched to windmills.

Voila, liberal market logic at its finest. Oh, and by the same logic, a Pigovian tax on gas will never fly, because it hurts the poor more than it hurts the rich. If the solution for global warming can't be paid for exclusively by the rich, it is not a solution to global warming.

Dan writes:

I think your comment has my point exactly.
I think it does make sense to combine investment in clean energy technology with taxation of dirty energy industry.

Clear point (and nifty essay) in any case.

David Hogberg writes:

Andrew,

On the other hand, a subsidy might stifle greater improvements in technology. The reason firms improve technology is to stay competitive in the market so that revenue from customers keeps rolling in. That incentive is weakened when some of your revenue is guaranteed by the government.

Best,
Dave Hogberg

dlt writes:

" If we do not act to save the environment, and the science behind global warming proves to be correct, we are knowingly bringing about conditions which will result in disease, displacement and death. How is this not a moral issue?"

The blogger is a true believer. Once again he's restating Pascal's Wager in terms of the environment.

Daniel

Andrew writes:

David - but if all suitably clean energy is eligible for the subsidy, there will still be competition between suppliers on efficiency. I have expanded the argument on my blog

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