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The Political Economy of Alternative Energy Font Size: 
By Arnold Kling : BIO| 06 Mar 2020
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"Gore has had a consistent position of purchasing carbon offsets to offset the family's carbon footprint — a concept the right-wing fails to understand. Gore's office explains what Mr. Gore has asked is that every family calculate their carbon footprint and try to reduce it as much as possible. Once they have done so, he then advocates that they purchase offsets, as the Gore's do, to bring their footprint down to zero."
-- Denny Haldeman (scroll down to email responses to the op-ed)

Suppose that a friend of yours is trying to lose weight, and he tells you, "If I eat this salad, it will be good for me. So then I can have cake for dessert." What would you tell your friend?

Al Gore is trying to say that by investing in alternative forms of energy, he is "offsetting" the heavy use of conventional electricity for his home. This is like saying that eating salad entitles a dieter to enjoy cake for dessert.

Carbon "Offsets"

The idea of a "carbon offset" is that when you do something that causes carbon dioxide emissions to increase you might at the same time donate money to a cause that reduces atmospheric carbon dioxide by a similar amount. However, not all "carbon offsets" truly offer the sort of straightforward one-for-one trade that the term "offset" implies. Some of the "carbon offsets" are nothing but pork-barrel subsidies to energy producers, and their net effect on carbon emissions is problematic.

Subsidizing "good" energy in order to justify using "bad" energy is like eating salad in order to justify eating dessert. It is an exercise in self-deception. (In this context, good energy means energy that is produced with little or no emission of carbon into the atmosphere.)

For example, consider a "carbon offset" that consists of a subsidy to good energy. As The Economist blog points out, just because energy-user A gives energy-user B a subsidy to use good energy does not necessarily mean that energy-user B will reduce her own use of bad energy, or that her reduction will actually lead to reduced production of bad energy. All we know is that the subsidy to B's use of good energy will lead to price changes. These, in turn, depending on features of demand and supply in various markets, may reduce pollution by little or nothing.

For example, at least part of B's response to the subsidy will be to increase her total energy consumption rather than merely substituting good energy for bad energy. Furthermore, her supplier of bad energy, faced with high fixed costs and low variable costs, may lower the price of bad energy in order to keep B's demand for bad energy at a high level.

Good Energy Deserves No Subsidy

The most important, inconvenient truth about energy policy is that there is no justification for a subsidy for good energy. Subsidies for wind farms, solar energy, ethanol, and so forth, whether they come from government "energy policy" or personal carbon offsets, are pure pork.

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.

The public policy goal of those who worry about carbon emissions is for people to consume less bad energy. Whether people consume more good energy is beside the point. Trying to get other people to consume more good energy so that you can consume more bad energy is feeble-minded.

A personal "carbon offset" can be thought of as a self-imposed tax on the use of bad energy, accompanied by a subsidy of something else. The self-imposed tax is only constructive to the extent that it discourages the person from consuming bad energy. The subsidy is only constructive to the extent that it reduces carbon emissions somewhere else. Subsidizing good energy by no means ensures a reduction in the use of bad energy.

Even subsidizing the planting of a forest may not work. Although the trees will absorb carbon dioxide from the atmosphere, the planting itself may require the use of heavy earth-moving vehicles that emit pollution. Overall, adding forest in one spot may lead to a developer cutting down a forest in a nearby spot.

If you want to fight carbon emissions, then join the Pigou Club and push for taxes on bad energy. If you want to fight carbon emissions at a personal level, then act as if there were a high tax on your use of energy from carbon-emitting sources, and reduce your use of that energy. If you are not really all that worried about carbon emissions, but you get pleasure from making empty, self-righteous gestures, then do what Al Gore does -- buy carbon offsets.

Reducing Oil Consumption

For some people, the notions of good energy and bad energy are based on concerns with terrorism rather than concerns with global warming. Dirty coal would be bad energy for a global warming alarmist, but it would be good energy for someone who hates many of the major oil producers.

As I pointed out four years ago, the global energy market is integrated. It does not differentiate American oil from Saudi oil. Oil is oil. As far as our relationship with oil exporters goes, only direct diplomatic or military confrontation with Saudi Arabia and Iran will change their policies on terrorism.

Emission Entitlements

Another policy under consideration for controlling emissions is known as "cap and trade." This is an entitlement policy, in which corporations would be given licenses to pollute, which they would then trade in a market. The Wall Street Journal calls this "cap and charade."

Emission entitlements are a tax and subsidy scheme. Once the entitlements have been doled out, in order to emit more pollution than your entitlement, your company will have to buy entitlements from another company. The entitlements will have a market price. That market price will become a tax on firms that exceed their pollution entitlement and a subsidy to firms that decrease theirs.

Once again, the economic logic supports a tax without a subsidy. That is, the same goals can be achieved with a straightforward tax on emissions. However, such a tax would not give politicians as much leeway to redistribute wealth. In fact, the real dream of the cap-and-traders is to move beyond mere redistribution within nation states to international redistribution, giving new power to the United Nations or to some yet-to-be-chartered international pollution entitlement agency.

Large Private Benefits

In contrast to the lack of public benefits from energy subsidies or cap-and-trade, the private benefits are enormous. The winners are politicians, lobbyists, and narrow producer interests.

Subsidies for alternative energy are good politics. Both Republicans and Democrats like to dole out subsidies.

For Republicans, subsidies are pro-business. By supporting biofuels, such as ethanol from corn, Republicans buy votes from corporate interests.

For Democrats, support for alternative energy is an opportunity to make symbolic gestures on terrorism and global warming. Instead of making painful policy choices, such as confronting Saudi Arabia and Iran on terrorism or de-industrializing the economy, support for alternative energy gives the appearance of doing something while in fact doing nothing. It serves the same role as the "nonbinding resolution" opposing sending more troops to Iraq, which is to engage in political posturing with minimal risk.

If you are in the alternative energy business, a government subsidy is your lifeblood. Your most important investment is with your Washington lobbyist.

Under cap-and-trade, your corporation's emission entitlement will be a major asset, the size of which will be determined by legislators and regulators. As the Wall Street Journal put it,

Entergy, a utility that relies heavily on natural gas and nuclear power and thus produces relatively less CO2, would love a cap that distributes the allowances based on how much electricity you churn out, rather than on how much CO2 you produce. Entergy's "carbon footprint" is small compared to some other utilities, so an electrical-output-based cap would be windfall city. Dupont, meanwhile, wants credit for reductions already made because it sees instant profit in costs already paid. It also wants a cap to cover as many industries as possible so it can make money selling emissions-reduction products.

...There's no market here unless the government creates one, and who has the profit opportunity depends entirely on who the government picks as the winners and the losers in designing this market in the first place.

The competition for politically-driven profits is known as rent-seeking. The end result of rent-seeking is that the gains to private firms from government subsidies are dissipated through competition. In the end, only lobbyists and corrupt government officials benefit. The politics of global warming and the alleged oil/terrorism link are creating the conditions for an orgy of rent-seeking relative to energy.

Chances are, lobbyists will use up more energy than is produced by alternative energy subsidies. As for carbon dioxide emissions, cap-and-trade and energy subsidies certainly will increase the amount of jets flown by corporate executives to plead with politicians in Washington, Eurocrats in Brussels, and United Nations officials in New York. The net result is that the concentration of greenhouse gases probably will be higher, not lower.

Arnold Kling is author of Learning Economics and Crisis of Abundance.

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