When Politics Generates Inefficient Energy Solutions

 

Takeaway

  • Well-designed energy initiatives are routinely derailed by political maneuvering

To begin this discussion, I feel it necessary to clearly state my beliefs: 1) There appears to be sufficient consensus among climate scientists to take the risks associated with green house gases very seriously. 2) Initiatives to reduce these emissions certainly warrant serious consideration, and I personally favor taxes on carbon and subsidies for innovation in clean energy development. Such initiatives, if properly designed, can efficiently incentivize reduction of carbon emissions without doing serious harm to the economy.  

The problem is not economic -- the problem is political. Since there is not a sufficient consensus on how to reduce carbon in the most cost-effective way, we are engaged in a series of battles on multiple fronts. Unfortunately, these battles tend to hurt the economy, and are likely to have only a limited effect on greenhouse gas emissions.  

This point can be illustrated with numerous examples, and I describe two below: 1) the Keystone pipeline and 2) the inefficiencies of locally-focused solar panel subsidies.

Keystone Pipeline Delay

The first example is the recent initiative to delay the Keystone pipeline, which delivers oil from the Alberta oil sands to Texas refineries. The pipeline is controversial because it facilitates the production of oil from oil sands, which are associated with somewhat higher carbon emissions than conventional oil. There has also been discussion of the environmental risks associated with the pipeline itself – but this looks more like a ploy rather than a serious concern. There are always environmental risks associated with pipelines that need to be taken seriously, but it’s unclear that there is anything particularly risky about this specific pipeline. 

The advantage of building the pipeline now is immediate job creation in the U.S. at a time when the U.S. labor market has excess slack. It also provides the U.S. with a more reliable supply of oil.  

What will happen if the Keystone pipeline is not built? Probably not much in terms of global impact on the environment. If the Keystone pipeline is not built it is likely that the Canadians will build a pipeline from Alberta to their West Coast, probably at a higher cost given the more challenging terrain and because the labor market in Western Canada is considerably tighter than in the U.S. The oil will be shipped from Canada to China, and oil that would have otherwise been shipped from the Middle East to China will end up being shipped to our Gulf Coast. On net, given the extra shipping, costs will be higher, carbon emissions will increase slightly and our interest in Middle East politics will probably also increase.  

Solar Panel Subsidy Hodge-podge

There are substantial subsidies associated with installing photovoltaic panels on residential roofs and these subsidies differ from state to state and city to city. For example, in Hawaii a homeowner receives a 35% state tax credit for installing solar panels, capped at $5,000 per system, and in Louisiana, homeowners receive a 50% state tax credit up to $12,500 per system. California’s Million Solar Roofs Program offers different rebate incentives for residential and non-residential customers, depending on which utility territory they live in and the size of the project.  

Although the differences in subsidies in these states distort the placement of solar panels, these are at least locations with abundant sunshine. However, there are some locations with poor solar resources (that is not much sunshine) that offer generous subsidies to attract solar investment. New Jersey has particularly generous subsidies for solar energy, with solar renewable energy credits that are worth close to 60 cents per kilowatt hour (which is an order of magnitude higher than the wholesale cost of electricity in most parts of the U.S.). 

It is likely that solar energy may be a long-term answer to our problems; however, it makes much more sense to put solar panels on the large flat roofs of big box retailers in Arizona and Nevada rather than on houses and buildings in northern states like New Jersey. Currently, we are seeing solar panels in places that make little economic sense, simply because these are locations with a political will to take actions to limit greenhouse emissions. These actions are likely to have only a minor effect on green house gas emissions, but will place the businesses in these “green” communities at a disadvantage relative to other communities with lower priced energy. On the margin, this means we will see more economic growth in regions without a green agenda, perhaps, increasing overall emissions.

Given that the benefits of developing solar energy are national and international (rather than local), it makes more sense to subsidize solar at the national level rather than at the local level. However, since carbon battles are being waged on all fronts, we have a hodge-podge of local taxes and subsidies that add up to very bad economics. These local initiatives are a distraction and divert attention from global and national initiatives that can potentially reduce greenhouse gas emissions in a serious way.  

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

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...

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