Force Change

McCain opposes ethanol subsidies but supports cleaner coal and nuclear subsidies

The concept of unintended consequences is one that we look at frequently on this blog, with ethanol, of course, being one of our biggest discussion topics.  Sen. McCain throughout his career and on the campaign trail has claimed that he is opposed to government mandating specific solutions, opting instead for market based answers.  He has directed much of this criticism towards Sen. Obama for his support for ethanol subsidies.  However, it is not clear that McCain is completely consistent in this approach, since he has recently been advocating subsidies for cleaner coal and nuclear power. 

Of course the most obvious criticism of McCain here is for hypocrisy.  However, the more interesting question is what role should our government play in promoting alternative energy and clean technology?  We generally believe that market based solutions like the proposed cap-and-trade system are most likely to produce the best result.  However, tax breaks and subsidies may also play an important role, as they have with solar and wind energy development.  The problem is when the government’s directives result in a “solution” that may not be the most efficient or practical (as may be the case with ethanol), and we then are faced with a series of undesirable and unintended consequences.  Of course it is easy to judge, in retrospect, which solution was good and which was bad. The hard, if not impossible, part is to do this prospectively, which probably cuts in favor of market based, instead of government mandated, solutions.

Photo credit.

Posted in Energy, General, Greenhouse Gas Emissions, Politics | No Comments »

Germans debate continued solar subsidies

There is a debate going on inside Germany regarding the appropriate level of subsidies that should be allocated to solar energy generation.  After years of government encouragement, solar energy generation in that country has boomed.  In fact, the world’s largest manufacturer of solar cells, Q-Cells, is based in Germany.  Now critics are arguing that these subsidies have led to unreasonably high energy prices.  On the other side, solar proponents counter that without government protection, Germany’s dominant solar energy industry will go the way of past world leaders, like the United States and Japan, whose governments failed to maintain high incentives for solar power.

One of the unique components of Germany’s solar energy policy is that it requires power companies to purchase all of the energy generated by solar panels, even if they are just located on a private citizen’s roof.  This has created a huge demand across the country to install solar panels on a micro-level. 

While we are far too removed from the intricacies of domestic German energy policy to be able to take sides in this debate, it is interesting to see how much effect governmental policy (subsidies) can have on the development of alternative energy sources.  But with these subsidies, there is always the danger that the alternative that is being encouraged may turn out to be a less than ideal solution.  (Not that we believe there is any indication that solar energy is a bad solution.) 

We feel that while governments should take measures to encourage clean technology, mechanisms that properly price the cost of externalities into polluting energy sources (i.e., carbon taxes), rather than subsidies for alternative sources, may prove to be a more efficient solution.  Of course budding technologies often require some propping up, but at some point they must be able to stand on their own.  And one way of ensuring this is to properly price the cost of energy generated from fossil fuels through a carbon tax.  Subsidies may be necessary at first, but should probably not be a long-term policy.

Photo credit.

Posted in Energy, General, Governmental Regulations, Greenhouse Gas Emissions | No Comments »

Is ethanol really that bad???

As was widely reported a commonly held piece of conventional wisdom was shattered by a study published in the magazine Science (unavailable without a subscription).  The study found that the production and use of corn-based ethanol actually results in a DOUBLING of CO2 emissions compared to that released by the burning of oil.  It had previously been claimed that replacing oil with ethanol would reduce greenhouse emissions by 20%.  If this study is accurate, not only are our attempts at converting to ethanol not helping but they are in fact substantially exacerbating the problem. 

The study asserts that it’s not the burning of ethanol itself that is the problem but rather the need to clear and convert massive amounts of natural forest and grasslands in order to grow the biofuel crops necessary to produce the ethanol.  A major problem is that for every bit of farmland that is designated for fuel production, an equal amount of previously unused land must be claimed in order to make-up for that loss in the food supply.

Further illustrating the inefficiency of ethanol the study notes that it currently costs $30 to purchase a tradable emission credit to offset the release of one ton of CO2, yet it costs $500 to avoid releasing one ton of CO2 through the use of corn-based ethanol.

(more…)

Posted in Energy, General, Science and Innovation | 2 Comments »

Wall Street tightens investment in coal polluters…

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.

Posted in Investments | No Comments »

Solar energy generates billions in investment and subsidies but when will it exist on its own?

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.)

Posted in Investments | No Comments »