The Politics of Alternative Energy

 

Takeaway

  • Only 5 percent of respondents in the UT Energy Poll approved of Congress’ efforts to address alternative energy issues
  • A carbon tax could be a significant source of income without hindering economic growth, provided it is introduced gradually
  • Government incentives for new technologies inherently has its risks

When solar panel manufacturer Solyndra went bust in 2011, the government’s efforts to promote development of alternative sources of energy seemed to hit a dead end. Despite receiving a $535 million federal loan guarantee two years earlier, the company abruptly filed for bankruptcy and laid off all of its employees, sparking a highly politicized debate over how (or whether) to invest public money in nascent renewable technologies that may or may not pay off in the long run. 

It wasn’t the first time the energy debate was split along party lines. Whether in the form of incentives like those offered to Solyndra or the proposed adoption of a carbon tax, the tools that shape national energy policy tend to strike a nerve with voters.

Results of the second installment of the University of Texas Energy Poll, published in April by the Energy Management and Innovation Center at McCombs, indicate that Americans have little faith in their government’s ability to address energy problems effectively. Only 5 percent of survey respondents approved of Congress’ efforts in that area, while 68 percent said they were dissatisfied.

But even if an effective federal energy policy could emerge from the rancor other obstacles remain.

In addition to perceived economic downsides and a slew of logistical issues that have yet to be addressed, the transition to alternative energy is fraught with political tangles that seem unlikely to be untied during a contentious election year.

Carbon Tax

A new carbon policy is not likely to be implemented anytime soon, as election-year politics will continue to limit the discussion, says McCombs Finance Professor Sheridan Titman. But the debate could open back up after all the votes have been counted.

“It will happen eventually, but definitely not before the election,” Titman says. “I’m seeing zero leadership in Washington on virtually anything, and obviously not on carbon.”

A carbon tax could provide a much-needed source of income without hindering economic growth, he says, provided it is introduced gradually. He says putting a $20-per-ton tax on carbon today and raising it $5 a year could be a reasonable option.

“You’ve got to do it relatively slowly, otherwise it will affect the economy, but if you do it in a cautious way, the impact on the economy will not necessarily be negative,” he says. “You want [energy companies] to have time to adjust, but you want them to know it’s going to happen so they do adjust. Right now, no one’s doing anything.”

A gradual rollout might prompt electricity providers to begin making adjustments, but it would likely take time to see a measurable difference in CO2 output, Titman says.

“$20 isn’t going to kill anyone…but I don’t think anything’s going to happen until we start having taxes in the $50-$100 range,” he says.

Government Subsidies

Federal and state subsidies for alternative energy are another political hot potato. Rooftop photovoltaic solar projects in California, Arizona, Nevada, and New Jersey, for instance, are sustained with government money. But these investments don’t always pay off, and some question whether they are a valid use of public dollars.

Titman says the southwestern U.S. will likely lead the country in installing rooftop solar panels in the coming years, which makes sense given the abundance of sunlight in the region. But investing in this technology in other parts of the U.S., such as New Jersey, does not make sense from an economic standpoint. Still, to some extent, investments that don’t pay off now could bring us closer to cost-effective solar energy in the future — a vision that could come to fruition within the next few decades, Titman says.

“But we’re not going to get to that vision if we don’t subsidize it now to some extent,” he says. “It’s a matter of coming up with a sensible, holistic policy where we’re basically saying, ‘This isn’t close to making economic sense,  but we want to encourage the industry so that the technology will improve so we will be able to do it.’ I’m not sure that’s what we’re doing. I think we’re subsidizing the old technology, to a large extent.”

However, investing in new technology comes with its own set of risks. The fallout from the collapse of Solyndra is one example of how incentives can backfire.

Titman says these kinds of investments are inherently high-risk, and the government only takes on the risk because if it didn’t, it would be even more difficult for new technologies to gain traction.

“Solyndra was an attempt to subsidize new technology,” Titman says. “If you subsidize new technology, you’re taking risks, and a lot of times you will fail. And then you lose the money — but that’s the whole point. The market would never have financed that, because it’s too risky.”

The Solyndra controversy was a setback for the Obama administration, but the public may still be open to similar incentives. In the Energy Poll, 59 percent of respondents said they would likely vote for a presidential candidate who supports incentives for companies that develop renewable technologies, and just 11 percent said they would be unlikely to support such a candidate.

Political Pressure

Public opinion about alternative energy is mixed, reflecting general pessimism about the current state of affairs and an awareness of the need to make changes — but also a desire to preserve economic prosperity. Fifty-seven percent of Energy Poll participants said the government should do more to prepare for the country’s future energy needs, while 24 percent believe it is already trying to do too much.

However, an apparent contradiction emerged in response to a question that asked participants to rate their feelings about the importance of environmental protection versus economic growth. Forty-two percent of respondents believe economic growth should take priority, while 30 percent believe avoiding harm to the environment is more important.

This article is the second part of "The Truth About Alternative Energy," an ongoing Texas Enterprise series. Part three, which will outline the logistical difficulties of building an alternative energy grid, will run in May.

 

Faculty in this Article

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

About The Author

Rob Heidrick

Writer, McCombs School of Business

Born and raised in Austin, writer Rob Heidrick has spent several years as a contributor and editor at local magazines and community newspapers. He...

Comments

#1 I would like to comment on

I would like to comment on question #1 by Paula Thornton. The IP is owned by the primary investors because the government subordinated their investment to the primary investors. This is highly unusual and never happens in the real world. I think the sources of the money, the tax payers, have a very strong legal case to sue the government for subordinating the loan guarantee. So the tax payer is left with nothing but a $500m loss and nothing of value to try and recover the money lost! What's $0.5b to the government? They just raise taxes and continue to spend. Americans need to put a stop to this.

#2 Your article seems to endorse

Your article seems to endorse that government needs to invest and provide subsidies for clean energy development and delivery. I do not believe that that is a true statement. Private investors invest in new technologies and delivery systems because there is an economic value creation and a potential return on their investments. Corporations do the same thing and are another source of capital. The government extracts taxes from people and business, but they have no mandate or right to treat taxes as risk capital. The government should spend money on running the government, defending the homeland and other responsibilities described in the Constitution or other laws passed by Congress. I'm not aware that the Constituation provides the authority to invest taxes in high risk investments. I also believe that there is no existing law that authorizes the government to make high risk investments. The Solyndra investment was really an attempt to bailout a failing investment by friends of the administration. What is even worse the government made the loan guarantee subordinate to the the previous investments! This is highly unusual since no real investor would invest new money and agree to subordinate their money to older investments. I believe your article's survey is flawed because what the government did is not permitted under laws in this country and to subordinate the loan guarantee was wrong.

#3 The first question that comes

The first question that comes to mind for me is where did all of the intellectual property or any other relevant artifacts go? With that much invested by the public realm, it would seem that all of those items should be made public entities so that someone else can learn from them.

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