David R. Henderson  

Krugman's Strange Post on Solar Power

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Paul Krugman has a strange post on solar power that contradicts basic microeconomics. He writes:

Like just about everyone who has looked at the numbers on renewable energy, solar power in particular, I was wowed by the progress. Something really good is in reach.

And so, inevitably, the usual suspects are trying to kill it.


How are they trying to kill it? By banning it perhaps. Or maybe by regulating it. Or maybe by taxing it. Those are the three typical ways that opponents of a particular technology usually try to kill that technology.

So which of those methods, or which combination of those methods, do the opponents of solar power advocate? Actually, none.

What's left? How about deregulating? You read that right. These critics and opponents of solar power, whom Krugman accuses of "tribalism" because of their criticism, oppose solar power so much that they want to stop requiring that it be used and requiring that electric utilities buy it.

Krugman accuses them of wanting "to block solar even if it saves money." But the way to tell if it saves money is to quit making people use it and quit making people buy it. Then, if it really saves money, people will use it.

Krugman's piece is priceless: that is, it ignores basic price theory.


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COMMENTS (32 to date)
Bob Murphy writes:

Great post! Incidentally I may have something remarkably similar appear at another website in the next few days, but I promise David I wrote the draft without seeing your post.

Pajser writes:

I guess that Krugman has externalities into his equations and you do not. "If it really saves money, people will use it" doesn't look true to me.

Pajser writes:

Moreover, it appears to me that you're on the wrong side of fence. Conventional fuels do not cause only externalities, they cause pollution and it is an aggression. I'll not get lung cancer because I get sudden wish to smoke tobacco when I see red Corvette. It would be only externality. I'll get lung cancer because of pollution that comes out of that car and trespass my apartment and my lungs.

It seems that libertarians should fight with arms and legs to restrict fossil fuels. OK, one could say that libertarians are against regulation. But libertarians are not against regulation that protect private property.

Is there any mistake in my reasoning?

Don Boudreaux writes:

Pajser:

I think you miss the point of David's post. It has nothing to do with externalities. David points out that Krugman is impressed that the cost of using solar power is falling fast (or, at any rate, that's how Krugman reads the record). If in fact the cost of using solar power is indeed falling significantly, then people will more and more switch to solar power, without being forced or subsidized by government to do so.

Also, you write

"If it really saves money, people will use it" doesn't look true to me.

So can we assume that you do not believe that cuts in the prices of imports cause domestic consumers to buy more imports? Can we assume also that you believe that, say, getting rid of poll taxes does not increase the likelihood of people voting?

Greg G writes:

If you want to kill the development of solar power production all you have to do is stop requiring that utilities buy it. You can call that a form of deregulation if you like. I would be more inclined to call it very selective deregulation with the intent of killing off the development of solar power.

Regardless of how cheap decentralized solar power production becomes, it won't work if the individual producers can't use the grid to put it to use.

James writes:

Greg G:

Are you suggesting that power producers will choose to avoid solar power even if it is the cheapest method of producing electricity? Why would that be?

If solar became the cheapest way to produce electricity, but every existing power producer chose to avoid it, new entrants (you and Krugman, perhaps) could just get into the power production business and do it with 100% solar.

Joel Aaron Freeman writes:

Good catch, David. It's funny to see an economist reason about things the way he does.

Pajser, although this is tangential to the post, I think you'll find many libertarians are amenable to a fossil fuel tax. But the effect of a fossil fuel tax is that it benefits ALL renewable forms of energy, not just solar.

A fossil fuel tax benefits solar, nuclear, wind, hydro, biofuel, etc etc. By contrast, a subsidy encourages one particular technology path and doesn't take into account any other possibilities. In fact, if solar is subsidized aggressively enough, it would even be harmful to production of wind energy. Hence the fossil fuel tax is the less invasive approach, whereas the subsidy on solar is a step closer to central planning.

Greg G writes:

James

It makes sense to produce solar power in a decentralized way. This is not true for power produced from fossil fuels for a number of reasons. So what I am suggesting is that, when you refer to them both simply as "power producers," that lumping together confuses more economic issues than it clarifies.

If your neighbor was able to install his own coal, gas, or oil fired power plant that would create externalities for you that you would not experience if he put solar panels on his roof. And solar energy is conveniently delivered daily direct to individual homes in a way that coal, gas and oil are not.

One of the big costs of installing a solar (or any type of) power plant is simply finding a place to put your power plant. Rooftops already exist and are often ideal locations for producing solar power in a way that they are not ideal locations for producing power from fossil fuels.

And a more decentralized system of solar power production would be more robust to any number of possible threats to the larger system such as terrorism, war or natural disaster.

I am already, in fact, into the solar power production business. There are 26 panels on my roof and for 8 months out of the year we produce more electricity than we use. I am assuming your comment about 100% solar power production was simply an over exuberant rhetorical flourish. I hope that I don't need to explain to you why 100% solar power production is not a realistic goal for anyone.

Pajser writes:

Don Boudreaux criticized

"If it really saves money, people will use it" doesn't look true to me.
Essential word is people. For instance, if solar panels save money (externalities included) for the people, but costs are concentrated and benefits are largely distributed, people will not use it.

Jeff writes:

The LA Times article he links to is just as bad. The sad thing is, there probably is an interesting economics question here: is mass adoption of solar energy generated on a distributed basis going to create problems for the electric grid by slashing the profits of the companies that maintain it, or is this just rent-seeking on the part of utilities? I have no idea, but it's worth discussing, at least.

But I guess it's more fun to rant incoherently about how awful those conservatives are for trying to undo solar energy mandates.

Don Boudreaux writes:

Pajser:

You are mistaken. If the costs to me of engaging in activity X fall, I'm more likely to engage in activity X regardless of how many costs or benefits of my doing X fall on other people.

It's true that the greater the extent to which the costs or benefits (or both) of my engaging in X are not internalized on me, the less likely I am to engage in the 'socially' appropriate amount of X. Nevertheless, if and when the costs to me of engaging in X fall, I am indeed more likely to engage in X (or in more X).

mickey writes:

Emissions and such can be aggression but not necessarily. They can instead be a noncash part of the cost you pay for a product or arrangement.

Kevin Erdmann writes:

Pajser,
To argue that solar has no externalities is like arguing that coal has no externalities because the electricity doesn't emit pollution as it runs through the electrical lines.

mike davis writes:

I think the real value of David’s comment is to draw attention to the unfortunate rhetoric that PK (and lots of others) use to make their point. A perfectly good case for subsidized solar can be made by some combination of claims that (a) fossil fuels come with substantial negative externalities and/or (b) private financial markets will not fund positive NPV investment in such new and uncertain technologies. I don’t think those are winning arguments, but I’ll listen to someone make the case and I really do think I’d change my mind if the evidence is solid

But that’s not what Krugman does. He claims that opponents of solar are motivated by their economic stake in fossil fuels and/or “tribalism”. This is not rhetoric designed to change anyone’s mind—telling someone they are evil and stupid will not usually cause them to be nice and smart. So why does Krugman take this approach?

Two theories:

Theory 1: Maybe Krugman really does hold the opponents of solar in such utter and complete contempt. If that’s really what he thinks, then there’s nothing wrong with him saying it. The problem is--as David’s blog makes clear--the anti-solar side is simply saying that markets for new technologies usually work better without subsidies. This doesn’t seem all that wicked or idiotic to me.

Theory 2: Maybe Krugman doesn’t care about the economics. We all enjoy short, simple arguments that support our priors. People pay good money for that sort of thing. If your goal is to secure fat speaking fees, adulation and a no-work/no-show contract at a school located in a very comfortable city, then that’s the way to go.

I’d like to think that Theory 1 better describes a public intellectual with a Nobel prize. But who knows? I do know that we all sometimes fall into the trap described by Theory 2. Whether it’s in op-eds, blogs or at the faculty lunch table we deploy dismissive, disrespectful rhetoric to make us feel better about ourselves and admired by others. We shouldn’t do it.

Tom West writes:

As is almost always the case, the inaccurate term "killing" covers the very real truth that solar power, like lots of transformative technologies, won't be achieved in an environment in which the investment must be financially justified regularly on a short-term (years, not decades) basis.

Like evolution, continuous short term justification produces a lot of wondrous adaptions, but also like evolution, it precludes certain design decisions that could provide enormous over-all gain if one could just "get over the hump".

Solar power regulation is an attempt to jump start something that could not exist in our current environment. Removing the "unnatural" regulation will make it near impossible for it to succeed in the transformative sense.

Whether you want to classify this as "killing" is purely a matter of semantics. Whether the goal is worthwhile in and of itself is a totally different question.

vikingvista writes:

"Krugman's piece is priceless"

Krugman himself is priceless, for he is a perpetual reminder that even at the most esteemed and anointed intellectual levels, any economic argument can unabashedly be used to explain anything at anytime--even by the very same person.

This is priceless, because it reminds us mere mortals that intellectuals cannot be valued as authorities on truth, but only for their abilities to enlighten our own reasoned understanding. If it doesn't make sense to us, it makes no difference what an authority or his army of appealing sycophants proclaim.

And confidence in the limits of our understanding, even in the heavy handed face of such proclamations, is a tremendous safety check against the advancement of state impositions.

MikeP writes:

It's funny to see an economist reason about things the way he does.

It's also funny to see how unquestioningly he swallows the purported economic cost:

In fact, even under the most ambitious goals the assessment considers, the estimated reduction in economic growth would basically amount to a rounding error, around 0.06 percent per year.

It isn't clear that he comprehends that even this "rounding error" is compounded over a century and represents a 5% shortfall in 2100. As the AR5 WG3 Summary for Policymakers notes:

Scenarios in which all countries of the world begin mitigation immediately, there is a single global carbon price, and all key technologies are available, [i.e., the very best case scenarios on all dimensions] have been used as a cost‐effective benchmark for estimating macroeconomic mitigation costs... Under these assumptions, mitigation scenarios that reach atmospheric concentrations of about 450ppm CO2eq by 2100 entail losses in global consumption — not including benefits of reduced climate change as well as cobenefits and adverse side‐effects of mitigation — of ... 3% to 11% (median: 4.8%) in 2100 relative to consumption in baseline scenarios that grows anywhere from 300% to more than 900% over the century.

The Economist, no enemy of addressing climate change, says about the touted 0.06% "rounding error":

These numbers look preposterous. Germany and Spain have gone further than most in using public subsidies to boost the share of renewable energy (though to nothing like 80%) and their bills have been enormous: 0.6% of GDP a year in Germany and 0.8% in Spain. The costs of emission-reduction measures have routinely proved much higher than expected.
Bill writes:

Last paragraph is "gold."

ThomasH writes:

The justification for subsidizing solar power (or any other zero CO2 emitting technology) is that it reduces the negative externality of the CO2 emission. Set asides and capital subsides are not the most efficient ways of dealing with the externality, but unfortunately we do not have the first best policy in place. But if the subsidy is justified at all it may remain justified even if the cost of solar power declines. Maybe it depends on the model used to calculate the optimal subsidy if there is no carbon tax.

JLV writes:

When the opponents of solar subsidies spend an equal amount of time opposing R&D subsidies for fracking and other tight oil technologies, I'll believe its about sincere free market ideology and not tribalism/financial self interest, etc.

Hopaulius writes:

Greg G says: "And solar energy is conveniently delivered daily direct to individual homes in a way that coal, gas and oil are not." This is a well-crafted, caveat-riddled sentence that is still false. Natural gas "is conveniently delivered daily direct to individual homes," and it flows at night as well as during the day. Oil is just as conveniently delivered to individual homes, just not daily. I have lived in homes with both these convenient energy sources. Somewhat less convenient was the coal-burning stove I had in one house. It was also not delivered daily. But it produced a lot of heat!

David R. Henderson writes:

@JLV,
When the opponents of solar subsidies spend an equal amount of time opposing R&D subsidies for fracking and other tight oil technologies, I'll believe its about sincere free market ideology and not tribalism/financial self interest, etc.
I don’t know how much time they spend opposing other subsidies, although it’s clear that the big subsidies are in solar. In fact, I’m not even aware of R&D subsidies for tracking, although that might be just a lack in my information. Can you provide a cite to those subsidies?
But I think you’re missing the point: Krugman went to intentions rather than economics to justify his claims. You’re doing the same thing. If various critics of solar also advocate their pet subsidies, that’s bad, and, if you read this blog much, you know that I’m critical of them. The nice thing about economics is that we can do analysis without having to judge intentions.

MingoV writes:

The only cost-effective solar power is passive solar heating to generate hot water for bathing or heating a building. That technology has been used for decades. It's not sexy. It saves electricity but makes none. Therefore, leeches convince governments to pay for the development of solar power technology that any knowledgeable chemist or engineer can prove to be too costly to compete with the energy sources available today. The only condition in which solar power is cost efficient is in a sunny clime in a region with no electrical grid and no inexpensive transport of fuel. Think of a research station in the middle of the Sahara. Which is where we should send ignorant promoters of solar-based electrical power.

Steve Sailer writes:

It shows Krugman is a team player: Democrats make a lot of money off alternative energy subsidies, so he's doing his part for the team.

James writes:

Greg G,

Earlier you claimed that "If you want to kill the development of solar power production all you have to do is stop requiring that utilities buy it."

What you still haven't explained is why power producers would need to be compelled by regulation to use solar energy if it's cheaper than alternatives.

If you want to say that solar isn't actually cheaper than other energy sources because a full accounting includes the cost of space, I'll take your word for it. But if the cost of space makes solar costlier than other energy sources then solar isn't really cheaper, as Krugman initially suggested.

Greg G writes:

James

Solar power is not yet cheaper to produce but the gap is narrowing fast. I did not claim it is now cheaper to produce and I can't find where Krugman did either.

One reason that gap is narrowing is that many consumers are willing to pay more for solar. But it will never be possible to produce solar on a decentralized basis if you repeal net metering which is what the opponents of solar want to do.

Even when solar power is economical to produce, it is not economical to store. If you can't sell it back to the utility in a way that offsets your usage when you are not consuming power then you either have to stop producing or dump the power as waste heat. Neither of those two options makes economic sense.

Peak power demand usually comes on the hottest and sunniest days. This causes solar to fit quite nicely into a system where the larger grid is more robust.

All of you who are so shocked at the idea of government subsidies for alternative energy ought to learn a little about the history of the electrification of America using fossil fuels. That process was filled with government subsidies that probably never shocked you at all.

So why then did the government encourage the electrification of America using fossil fuels when fossil fuels were the cheapest way to produce power anyway? The answer is that a majority of voters thought that it was in the public interest to speed that process.

MikeP writes:

The answer is that a majority of voters thought that it was in the public interest to speed that process.

Are you under the impression that a majority of the posters or commenters here would agree with these voters?

Mandates, prohibitions, taxes, and subsidies are prima facie bad and should be avoided except when inescapably necessary. No one should pretend they know enough about future costs and consequences to imagine they should use them for social or economic engineering.

Greg G writes:

No Mike, I am not under the impression that "majority of the posters or commenters here would agree with these voters" or with me for that matter.

I don't want to shock you but I think it is a good idea if we are all exposed more to ideas that we disagree with. Such an exposure to a wider range of ideas will reveal that your "inescapably necessary" test will not settle as much as you think it does under a system where different people are free to have different opinions about what is necessary.

Hazel Meade writes:

Greg G,

You're off base on a couple of things:
1. The regulations in question are (in general) not directed at creating a decentralized grid. They are directed at forcing utilities to buy energy from large solar power developments - which incidentally, a lot of Democratic party donors have inventments in.

2. The primary reason that homeowner's solar panels aren't hooked up to the grid is becauce solar power is DC and the grid is AC, and there are technical challenges involved in first converting DC power to AC and secondly, matching it up to the voltage, frequency, and phase that the grid operates at. This is a non-trivial engineering problem.

3. If the utilities don't want to make R&D investments in the technology, it's probably not because they are only interested in short-run profits, but rather because electricity utilities are heavily regulated monopolies whose profit margin is essentially fixed by local utility commissions. If utilities were going to be allowed to keep the gains from hooking up a bunch of cheap solar power to the grid, they would do so. But the reality is that the utility comission would just mandate lower electricity prices. Utilities do not operate in a competitive environment. They have no budget to spend on R&D, and no prospect of long-term gains from investment.

Greg G writes:

Hazel

Regarding those three points:

1. Regulations always affect more people than those you feel they are "directed at."

2. Everyone homeowner I know (including myself) who has solar panels has them hooked up to the grid. I did not, and will not, call the engineering involved non-trivial. In fact, I think it was an important piece of engineering. Such hook-ups to the grid really are quite routine now. What would homeowners be doing with all these panels if not hooking them up to the grid?

3. Yes, the electrical grid is essentially a regulated monopoly with all the problems that come with that. That's exactly why this is being fought out at the regulatory level. I'm not sure what you think the alternative is to that basic system. You don't really envision competing electrical grids do you ?

Jay writes:

Aren't we glad we instituted the subsidies for ethanol? There's a reason those on one side are (rightly) skeptical of the government's ability to guess the next big thing by using taxpayer money.

Greg G writes:

Those are good points Jay and they are the reason that I think a carbon tax would be a much better way to encourage alternative energy than a system of subsidies.

But voters have long preferred a system of subsidies for a wide range of energy production despite what you and I think.

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