Letting <em>what</em> market figure out the best way? | Gristmill: The environmental news blog

Letting what market figure out the best way?

A cap-and-trade system will not by itself eliminate dirty energy's unfair advantages

Posted by David Roberts at 10:04 AM on 19 Mar 2008

Read more about: business | coal | energy | carbon trading | carbon tax

On p. 57 of Fred Krupp's (generally excellent) new book Earth: The Sequel, it says this:

In essence, renewable standards, subsidies, and other mandates assume that the government has all the answers, rather than letting the market figure out the best way to produce clean energy at the lowest cost.

I'm never satisfied with how people talk about this stuff. On one side you have this sort hankie-waving fear of besmirching the virtue of the virgin market. On the other side you hear about how Society worships Capitalism even though the Market wants to Kill Us All.

What both sides seem to agree on is the premise -- that clean-energy regulations disturb the functioning of a free market.

I don't see why we should accept that premise. The market to which clean-energy mandates would apply is not "free" in the sense of being otherwise unburdened with preferential government policies. In fact, a whole network of subsidies, tax breaks, weak safety and environmental standards, and lax law enforcement tilts the market in favor of dirty energy. For a century, U.S. gov't policy has actively supported road-building, sprawl, large, inefficient centralized power generation, and fossil-intensive agriculture. That's left behind a deep legacy of practices, habits, and infrastructure -- an enormous socioeconomic inertia.

Take, oh, just to pick an example out of a hat, coal. Do coal companies pay the full social and environmental costs of mountaintop-removal mining? Mercury and particulate emissions? Polluted groundwater from coal ash? No. Laws are weak; enforcement is lax. (See here, for the latest in a long, long string of examples.)

Do centralized coal-fired power plants compete on a level playing field with smaller, decentralized source of energy? With energy efficiency? No; utility regulations incentivize large, capital-intensive projects.

Do courts, government agencies, and legislators treat energy sources dispassionately? No. Coal companies have spent decades stacking state houses, bureaucracies, and courts with loyalists.

In all these cases, coal has socialized its costs and privatized its benefits.

That's the market we have: not a theory or an abstraction, but a reality, a living system that carries with it its past and its current biases.

In that market -- the real market -- how do you treat clean energy?

Krupp argues that cap-and-trade is enough. It is "the market." Additional regulations, investments, and mandates just interfere with the smooth functioning of the market. This is virtually identical to what John McCain believes.

I can't get on board with that. Cap-and-trade is a weight on the scale, but does it balance the scales? Does it fully internalize the costs of dirty energy? I don't see how.

I can see a case for working diligently to remove all of coal's implicit and explicit subsidies (removing weights from one side of the scale). I can see a case for supporting clean energy subsidies and mandates (pushing on the other side of the scale). Both those would come closer to yielding a bona fide competitive market.

But stopping with cap-and-trade? That's hardly a sign of fealty to The Market. If you reduce dirty energy's head start by half, you've helped, but you've not created a fair race.

(Perhaps I'll ask Krupp about this when I interview him later today!)

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5 Comments | Post a Comment

Looking for judo

I largely agree, but think that this is a chance to use the opponents' weaknesses against them. If you're a free marketer, fine. Level the playing field. Make someone build a coal/nuke plant without public guarantees of equity returns. Put a tax on gasoline to cover the cost of the war in Iraq in the name of market efficiency (and lower income taxes by an equivalent amount to keep it fiscally neutral). Put a tax on coal-fired power to cover health-related expenses from those who live downwind of coal plants and lower income taxes equivalently - again, in the name of creating market signals that will optimize capital allocation. (Note that this last one would also substantially lower the burden on medicare, satisfying no shortage of right-wing enemies of subsidization.)

But this is distinctly different from asking for handouts on the premise that the other guys got a bigger one. Mathematically, it may work out to be the same, but it utterly re-frames the discussion and I think ultimately makes success more likely.

by Sean Casten at 10:17 AM on 19 Mar 2008

To be fair, though...

Krupp doesn't say that cap-and-trade will be enough. Page 214:

A cap-and-trade system will help, since it will increase still further the value of energy savings. But in trying to affect the decisions of millions of individual consumers, a thicket of other obstacles may need to be pruned away, through policies that complement cap and trade.

It goes on from there, talking about principal-agent problems, knowledge asymmetries, etc.

The book doesn't talk very much about energy efficiency, etc., but that's mostly because the book isn't really about those things. I think these lacunae will draw some criticism, but overall the book seems to me to make its central argument quite well.

www.terrapass.com/blog

by Adam Stein at 11:47 AM on 19 Mar 2008

If this was a free market . . .

. . . then I should be able to choose the price at which I will sell my share of rights to undamaged air quality, as well organize a collective of like minded sellers to act as a bloc (so long as it is not so large and powerful as to influence the overall market price). But the real system at hand is nothing like that.

Instead, I am represented in the market by proxies who are much more beholden to the buyers of my rights--if my rights are recognized at all--than they are to me and my fellow econo-men and women who are supposedly informed and willing participants in the "market."

It is only a free market in the same sense that the wealthy business owners in the British Empire who inspired Adam Smith to pontificate about the virtues of such a thing were involved in free, international markets that just happened to be built on the spoils of a colonial system that was anything but free. The market at hand is more or less free to those in positions of power and privilege, while those who are set up for exploitation are assumed to be without substantial rights or importance, and being so "underprivileged anyway," it is further assumed that "this is working very well for them," as former First Lady Barbara Bush once explained the basic concept. Seems like a hell of a price to pay for something that is purported to be free.

by Rune at 2:04 PM on 19 Mar 2008

FREE markets

As someone who has often been accused of capitalism-bashing, I can say that the main thing I "bash" is precisely this odious lie that cap in practice has anything to do with a "free" market, when on the contrary it's always a jury-rigged corporate welfare system.
I always call myself one of the few true free marketeers in that I would demand:

That the willing participants in any transaction pay the FULL costs of that transaction.
The corollary to this, that all externalities be FULLY compensated.

That's the only way you'd have a free market.
Howver, since the playing field has been so tilted for so long, we do need to not only strip all welfare from e.g. coal, but also give wind and solar, conservation and efficiency, a leg up.

To the poster above who objected to this "handout", I say it's the same thing as helping e.g. sea turtles, on account of how man has ravaged them, even within an ethic of noninterference in ecosystems, as some naturalists practice.

by Russ at 6:45 AM on 20 Mar 2008

Earth: The Sequel

I just reviewed this book at my blog on climate change for the Foreign Policy Association. The book has something for people thinking about carbon markets, the science and technology of renewables, and the big picture on how to get to a cooler, smarter, more prosperous earth.

by Bill Hewitt at 11:13 AM on 04 Apr 2008

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