Friday, February 22nd, 2008
Apparently the dramatic increase in oil prices over the past few years has, in addition to spurring massive investment in alternative energy sources, also caused many individuals living in colder climates to switch from gas to wood for warming their homes.
This is an interesting trend because it has often been assumed that the rise in oil prices will cause the market to find cleaner alternatives. Unfortunately, this is not always the case, as seen with this increase in wood burning. Similar to coal power plants that are not governed by carbon regulations, wood burning also fails to accurately price in the externality of air pollution.
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Wednesday, February 6th, 2008
An article in the Wall Street Journal reports that three major Wall Street banks (Citigroup, JP Morgan, and Morgan Stanley) are now requiring energy companies seeking financing to prove that their projects would still be profitable under a cap-and-trade system that is predicted by the banks to be imposed within the next few years.
This news is important for a number of reasons. First, because Wall Street banks have so much at-stake in the financing of energy projects, they pay extremely close attention to the winds of policy change in Washington. If they believe CO2 regulations are on the way, they are most likely correct. Second, if the cap-and-trade system is put in place, it will, as we have discussed in a series of earlier posts, take into account (in whole, hopefully, but at least in part) of the externality of air pollution that exists in the burning of fossil fuels. By charging utilities a financial penalty for excess CO2 emissions, the cost borne by society for those emissions will be internalized into the cost of that energy’s production. In theory this should make renewable forms of energy more competitive in the market.
A common theme that should be evident in our postings here is the importance of renewable energy becoming a financially viable alternative to fossil fuels. Critics contend that this is only possible by subsidizing the renewable sources so that they are then artificially competitive with fossil fuels. However, we would argue that a better way to frame the situation is to say that by imposing financial penalties on CO2 polluters we are instead reducing the current subsidy that society pays the traditional energy companies with our breathing of unclean air and the acceleration of global climate change which allows them to sell their product at an artificially depressed price.
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Sunday, February 3rd, 2008
On Friday we had a post alluding to the concept of environmental externalities in explaining why solar energy isn’t yet cost efficient. Interestingly, the country of Ireland has a great example of how to restore balance into the pricing of products that are causing economically unaccounted for damage to the environment. In addressing the waste and environmental damage caused by the use of plastic bags at grocery stores, a few years ago Ireland imposed a 33 cent end-user tax on plastic bags (recently raised to 50 cents). According to the New York Times, the result was a 94% percent decrease in the use of plastic bags! Again, with most things that damage the environment, the true cost of that damage was not being paid for by the consumer (since plastic bags were completely free until the tax). By imposing this fee, the government of Ireland did two things: First, it more accurately priced the cost of plastic bags (by forcing the consumer to pay for the cost of environmental damage resulting from these bags). Second, and probably even more important, it created a collective awareness and social norm that rejects and socially condemns the use of these bags.
Photo credit.
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Friday, February 1st, 2008
The New York Times had an interesting analysis of the continued growth of solar energy in California. As with most alternative forms of energy, solar has long been criticized as being too expensive and inefficient to provide a substantial alternative to fossil fuels like coal. While this is still the case today (power derived from the sun is “three to five times” more expensive than that derived from coal) there are two main reasons solar energy continues to grow and receive private funding in the state. First, both state and local governments are providing substantial subsidies which have resulted in an huge influx of private investment. And second, California residents and businesses in general are often willing to pay more for access to solar energy because of their personal pro-environment positions. However, while it is unlikely that either of these two motivating factors will disappear in a state like California, in order for solar energy to cause a material decrease in our burning of fossil fuels, it will have to be more widely adopted across the nation and world. And since everyone doesn’t share California’s willingness to subsidize, in order for this to occur, the price of generating solar power must still come down. Otherwise, the cost of fossil fuels must come up. (We believe the environmental cost may already exceed that of solar. Unfortunately, however, this isn’t priced into its economic cost yet.)
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