Green Illusions: The Limits of Alternative Energy
Are solar, wind, and other alternatives the magic bullets that will solve the world’s environmental and energy problems? Take a closer look, says Ozzie Zehner in Green Illusions . Zehner not only argues that green energy has technological, environmental and economic limits, but also that without an appropriate policy context, some forms of alternative energy could do more harm than good.
The dirty secrets of clean energy
The first part of Zehner’s book—by far the best—is devoted to explaining why neither photovoltaic, nor wind, nor biomass, nor any of the other alternatives to fossil fuels will be able to deliver a future of abundant, cheap, clean energy. Chapter by chapter, he brings out the environmental and economic limitations of each technology. Among the highlights—
- Carbon isn’t the whole story. When you count toxic sludge from making solar panels, noise from windmills placed too close to residential areas, or changes in land use patterns from cultivating biofuel crops, you find that alternative energy has negative externalities of its own that offset its low-carbon benefits at least in part, and sometimes entirely.
- Energy not only has to be produced, it has to be delivered when and where it is needed. Solar and wind power work fine in niche applications, but if you think about scaling them up to supply 20 percent or more of our energy needs, as some hope to do, you run into problems integrating these intermittent energy sources with our antiquated national electric grid. If you include the needed costs of upgrading the grid and providing backups, solar and wind start to look a lot more expensive. Of course, upgrading the grid would reduce waste for all production technologies, but as Zehner explains that the remote locations and inherent intermittency of solar and wind make the upgrades even more urgent and expensive.
- Beware of promises based on performance of alternative energy under ideal conditions. Under actual operating conditions, the costs of wind, solar voltaic, cellulosic ethanol, and the rest are typically higher than suggested by extrapolations from laboratory experiments or carefully controlled demonstration projects.
Zehner is quick to insist that he is not anti-green; he just wants to ask questions that the mainstream environmental movement glosses over. My one criticism is that he sometimes overstates his case. The first thing that raised my doubts was his claim that owners of home photovoltaic systems are routinely disappointed with high maintenance costs and performance well below what they were promised. My own 6 kW system, after five years, has had no maintenance costs and has produced about 10 percent more power than the supplier estimated. Of course, that is only a sample of one, but it was enough to make me start reading more critically. I began seeing other spots where the author overstated his arguments. For example, he was unable to resist clichés like using a photo of a flaming water faucet to illustrate his section on fracking. Unfortunately, despite hundreds of endnotes, Zehner neither cites the source of the photo nor mentions documentation from the State of Colorado (a flaming faucet locale featured in the documentary Gasland) that explains why the link from fracking to flaming faucets is far from clearly established.
Still, details like these do not negate Zehner’s main point: Yes, there are lots of ways to generate energy without burning fossil fuels. Unfortunately, none of them is reliably cheap or totally clean; at best some but not all alternative energy sources are cleaner than fossil fuel alternatives—which brings us to Zehner’s next topic.
The policy context
If alternative energy is somewhat clean, but not really as clean as its “zero carbon” claims, then it is neither all bad nor all good. Whether the benefits of alternative energy outweigh its drawbacks depends on the policy context. Zehner argues that current U.S. energy policy is far too “productivist,” as he puts it. It aims to add alternative energy to the output mix, but at the same time to keep energy “affordable,” which means pricing it at a level that encourages extravagant use. In his own words,
Alternative-energy production expands energy supplies, placing downward pressure on prices, which spurs demand, entrenches energy-intensive modes of living, and finally brings us right back to where we started. . . In short, we create an energy boomerang—the harder we throw, the harder it will come back to hit us on the head.
The solution? A pricing policy that stifles this “boomerang effect” by encouraging conservation rather than expansion of energy output. I would have liked to see this idea more fully developed, in at least three respects.
First, it would be worth putting even more emphasis on the need for a policy that mandates full cost pricing, including environmental costs, for all forms of energy. Coal should be charged for the carbon and sulfur dioxide it produces, solar panels for the toxic residues of manufacturing, wind for the upgrades to the grid that are needed to deliver it, and so on. A full-cost pricing policy would dramatically raise the prices of the dirtiest energy sources, like coal and bitumen from Canadian oil sands. It would also charge for proper disposal of toxic sludge from manufacturing solar panels and for upgrades needed to integrate wind power with the grid. Raising the price of these cleaner but not perfectly clean alternative sources would encourage conservation of energy of all kinds while still giving them a comparative advantage over the dirtiest fossil fuels.
A second point is that we should avoid policies that subsidize consumption of energy, even when it comes from relatively clean sources. The feed-in tariffs that are offered to alternative energy producers are one example, as are mandates for utilities to include a certain percentage of alternative energy in their power mix. In both cases, the result is that utilities are required to buy alternative energy at a relatively high price, and then blend it with cheaper energy from coal or other conventional sources and sell the blend at price reflecting the average cost. Such policies stimulate the production of alternative energy, but they don’t encourage conservation. (Subsidies for basic research on alternative energy would not be subject to this objection, since they do not artificially lower the cost of energy to consumers.)
A third point is that once we get energy pricing right, competition among production of relatively clean and relatively dirtier types of energy would take a back seat to competition between production and conservation as the best way to reduce energy use and its associated environmental harms. Should we put solar panels on the roof or weather strip our leaky window frames? If the panels are highly subsidized, they are likely to be our first choice, even though the return on investment in weather stripping might be far higher. (At one point Zehner quips that the cost of the solar panels per pound of CO2 saved could well be as high as the cost of weather stripping windows with gold leaf. That may not even be an exaggeration.)
Once the principle of full cost pricing is accepted, exactly how we tweak prices to their appropriate level is, in my view, a matter of secondary importance. Zehner seems to favor pollution taxes, and arguments can certainly be made in support of that approach. Other people favor cap and trade as a way to put a price on externalities. Still another option is to impose costs on energy producers and users through improved environmental liability rules that protect pollution victims and their property. Take your choice.
Social change and the environment
The preceding arguments on energy policy and technology are all set forth in the first 146 pages of Green Illusions. Unfortunately, I find the second, and longer, part of the book to be less persuasive.
In this part, Zehner develops the thesis that “unsustainable energy use is a symptom of suboptimal social conditions.” Things like women’s rights, citizen governance, and demilitarization may not seem like environmental issues, he says, but “in reality they are the most important energy and environmental issues of the day.” Environmentalists, in his view, “yield the greatest progress when addressing our social fundamentals.” Near the end of the book, he sums up his thesis in these terms:
Future environmentalists will drop solar, wind, biofuels, nuclear, hydrogen, and hybrids to focus instead on women’s rights, consumer culture, walkable neighborhoods, military spending, zoning, healthcare, wealth disparities, citizen governance, economic reform, and democratic institutions. (p. 342.)
I wonder. Do we really have time to “drop” work on energy issues in order to deal first with social policy? Women’s rights, democracy, and global peace were already the focus of social activists in the nineteenth century, or even before. If those pioneers of social reform could visit us today, they would no doubt be gratified that we have made some progress, but they would be quick to tell us we have a long way to go.
Furthermore, it is not clear that the causal linkages from social change to environmental health are as simple and linear as Zehner thinks. Take wealth disparities, for example. Why should we think greater equality of income distribution would reduce greenhouse gas emissions?
On the one hand, we know that lower- and middle-income people spend more of their income on consumer goods in general and energy in particular, which by itself, would suggest that more equal distribution of a given income would cause more pollution, not less. On the other hand, higher-income households save more, which would lead to more investment and faster growth. That would tend to cause more pollution, unless we had policies in place that reduced the quantity of pollution per dollar of GDP. However, such policies would be worthwhile regardless of income distribution. In short, the relationship between income distribution and the environment turns out not to be so simple after all.
The same could be said for women’s rights, the subject of one of the longest chapters in Zehner’s book. In his view, the issue is simple: greater women’s rights lead to lower population growth, and lower population growth to a cleaner environment. But is that always true?
Yes, it is plausible that if women in, say, Afghanistan had greater rights they might have fewer children. But what about China? From what I read, the first thing many Chinese women would do if they had more control over their reproductive rights would be to have more children. What about the United States? Is there any evidence that women in the United States want fewer children, on average, than their husbands and boyfriends do? Maybe there is, but if so, Zehner does not bother to mention it.
Furthermore, the link from population growth to environmental quality is not as simple as Zehner thinks. At one point, he writes,
When comparing a modestly consuming populace whose numbers will someday be smaller [China] with a more substantially consuming populace growing exponentially [the United States], it is not difficult to determine which is sustainable within the limits of a finite planet and which is not. (pp. 343-44)
I question that. A footnote to the quoted passage asserts that “China’s per capita consumption is growing, but is unlikely to reach American levels.” What will stop it? Why is Zehner willing to extrapolate exponential growth of the U.S. population (which is now growing less than 1 percent per year, fueled mostly by immigration, not a high birthrate), but unwilling to extrapolate exponential growth of the Chinese economy, which has been outpacing that of the United States by a wide margin? The footnote does note that China’s economy is more energy intensive than those of the United States or Europe, but he attributes that to outsourcing of heavy industry. Partly true, but why the outsourcing? Much of China’s cost advantage in heavy industry comes from the fact that its pollution controls are weaker, and from the fact that its unequal income distribution—even more unequal than that of the United States—keeps wages low. In short, despite China’s low fertility rate, I would argue that its economic model is, on the whole, even less environmentally sustainable than that of the United States.
The bottom line? I like the first part of Green Illusions. Zehner is right point out that even the best alternative energy technologies are not as green as they are sometimes made out to be, and that some of them, like “clean coal,” are a complete fraud. He is right that conservation has to be part of any green energy strategy, encouraged by prices that make polluters pay for the harm they do. Even if you don’t go in for Zehner’s full program of social change, read at least the first 146 pages and donate the rest to your local recycling center.
Recommendations for further reading:
But Will the Planet Notice? How Smart Economics can Save the World, by Gernot Wagner (see my review here)
26 Responses to “Green Illusions: The Limits of Alternative Energy”
Plan to read the Wagner book. Nice to have a review which would be right at home on ourfiniteworld.com or any of the resource oriented websites. It highlights the apparent cognitive dissonance between much of economics and ecology. Put aside the usual growth/idiot cliche. My riddle is still savings. As one at the fifth grade level, savings implies that somewhere,someone on the real planet deferred consumption. Pacing the streets with my lamp held high, there is no visible deferred consumption. The seven billion are going through resources(and sinks) as quickly as possible. Bytes in a computer will not "feed" the retiring boomers nor will virtual stock market profits. I need an elementary level explanation,but I am afraid it is Biblical, as in a less than joyous jubilee.
Just the quick review by Ed Dolan shows Zehner to be disingenuously pandering to anthropogenic-deniers. To point to the expense of rebuilding our energy distribution network as a drawback to alternative energy use is to gloss over the fact that the network needs to be upgraded no matter what! This is just more of the desperate obstructionist rationalization we're already sick and tired of hearing from oil lobbyists.
So, what happens if we don't covert to clean energy?
Also, Germany is going strong with solar and it has become profitable. Check this or many other stories about the German example. http://www.bloomberg.com/news/2012-11-13/germany-…
What will stop China's per-capita consumption from reaching, or even approaching, American levels is simple: population density. China has more than four times the number of people per square km, and average land fertility/resource density is not substantially greater. It literally can't produce, and waste, as much as the US does on a continuous basis.
The reason why the US's consumption per head is so much greater than any other country is because land is plentiful. It may not feel that way sometimes, but compared with almost anywhere in Europe or most of Asia, and even Africa for that matter, the US is ridiculously underpopulated. That's why cities tend to sprawl outwards, rather than building upwards; and why the US is almost alone, among highly-developed countries, in having a large fraction of its population living in single-storey houses. And that makes for a lot of driving.
I think we have to distinguish between two things:
(1) The case in which China's per capita consumption as a whole reaches the US level
(2) The case in which China exactly duplicates today's per capital American consumption pattern
These are not the same things. Obviously, China will never duplicate the US consumption pattern, but that does not mean its standard of living cannot rise. As Chinese consumers become more prosperous, they will consume a different mix of goods and services than Americans do now, just as we consume a different mix than Americans of the past did when incomes were lower. Just as we use less firewood and whale oil than people in past centuries did, I am sure future, more prosperous Chinese people will have a different consumption mix. That does not mean their standard of living can't continue to rise.
I think you recognize this point yourself when you mention that Americans live rather different from, say, French consumers, who have an equally high (in some ways higher) standard of living. You don't need to live in a single-storey house to have a good standard of living, or even to own a car. You don't need a lot of land to have better health care than many Americans do, etc.
Thanks for the Germany link. Yes, Germany is doing a lot to promote renewables, but I don't agree with the way they do all of it.
First, can I ask where you get the information that solar is profitable in Germany? I haven't seen that, and I don't see a reference to it in the Bloomberg article you link to. My understanding is that Germany uses feed-in tariffs to subsidize solar, and that solar would not be profitable without them.
As I explained in my review of Zehner's book, I object to feed-in tariffs because they encourage utilities buy expensive solar power and then sell it on to consumers at a cost below the cost of generating it. That is wasteful and detracts from the goal of conservation.
I don't want to knock German energy policy in general, though. For example, I was pleased to see on a recent visit there that gasoline retail prices were in the range of $7 to $8 per gallon (converting from euros per liter.) That price that not only covers the cost of producing the fuel, but also makes an allowance for pollution effects. I would recommend such a policy for the US. Some people say higher fuel prices would kill our economy, especially exports, but look at Germany, high fuel prices and an export powerhouse.
Finally, I don't think much of the biodiesel showpiece at the Reichstag. Rapeseed-based biodiesel is even less efficient than American corn-based ethanol. In addition, much European biodiesel comes from tropical oils like palm oil. Palm oil plantations are having very negative land use effects in the source countries. The cogeneration part could make sense, but run the plant on natural gas or something that is less environmentally harmful than biodiesel.
Oh sure, I have no doubt about China's average (and, let's hope, median) living standards rising, maybe to first-world status someday. But the discussion was about "per-capita consumption". You're right in saying that the French (among others) have a standard of living that's at least as good as America's, but their resource *consumption* is much lower, because their economy is that much more efficient. (Largely because the country is that much more densely populated.)
Thanks for the reply.
I enjoyed your review and find myself pretty much in synch with your analysis and approach. We should continue to stay in touch as we have strongly overlapping interests.
I find alternative energy intriguing, as what other commodity grows as quickly and has as much public support, even though at full costing, allowing for carbon emissions and all the other costs of fossil fuels that are not fully included in its price, alternative fuels are still more costly at the current time?
And we have been down this path before. In the late 70s, the U.S. under Jimmy Carter pushed solar through a feed-in-tariff like mechanism. I fully expect that alternative energies will eventually supplant fossil fuels in some uses in the coming decades. But the approach we are using to get there will lead us with new problems not necessarily preferable to the ones we have now. As Ed says, we need to get the prices right and see what types of alternatives turn out to be attractive for particular uses.
Citing purported pollution externalities as part of the "cost" of any product or service is inherently a political exercise. This is true for two reasons:
1) As Coase pointed out in 1960, the spiller and the spillee are equally causally responsible for any destructive interactions generated by spillover effects. From an economic efficiency perspective, which parties should make the adjustment is entirely a matter of the relative costs of mitigation and adaptation (to use today's popular terms in CO2 policy). On this analysis, the bias exhibited in the post toward making energy privately expensive cannot be justified a priori.
2) As the late Aaron Wildavsky pointed out
the economist's distinction between pecuniary and non-pecuniary externalities is essentially arbitrary. Externality claims are political weapons that intrinsically assume (beg the question) that governments can and should efficiently regulate them. Economists want to say that labor-saving production technologies (for example) are good and pollution is bad, so they classify all spillover effects from the former as pecuniary externalities to be ignored and all spillovers from the latter as real externalities to be priced in. But this will not do, since both types of spillover affect the physical state of the economy and redistribute gains and losses. A labor-saving innovation may force all kinds of costly retraining and relocation behaviors on workers, which are real physical costs and not just price movements along a supply curve. Economists correctly want these externalities to be ignored, but their attempt to draw a distinction with pollution is not logically supportable.
Thanks, these are very important points. I should probably expound on them both at length in future posts. Here are very short reactions:
1. "On this [Coasian] analysis, the bias exhibited in the post toward making energy privately expensive cannot be justified a priori."
No, you haven't read your Coase carefully. He says it doesn't matter who has the original property rights, the outcome will be the same. But in either case, the opportunity cost to the polluter will be the same. If the pollution victim owns the air rights, then the opportunity cost to the polluter takes the form of restitution payments to the victim. If the polluter owns the air rights, then the victim has to "bribe" the polluter to abate. In that case, the opportunity cost of polluting to the polluter is the foregone opportunity to collect "abatement bribes." The outcome in a Coasian world with zero transaction costs is, in either case, that the polluter abates pollution and raises the product price to cover the increased cost.
2. "the economist's distinction between pecuniary and non-pecuniary externalities is essentially arbitrary." For a full reply, I'll have to take the time to read Wildavsky. Thanks for the link. My short reply, though, is that the distinction between pecuniary and nonpecuniary externalities is not arbitrary. Consider, for example, Murray Rothbard's famous "physical invasion" test. It draws a sharp line that is not at all arbitrary. Maybe not the perfect line, but certainly not an arbitrary one.
Science was NEVER applied to power generation.
The good old build and try method was used.
Do you know how hydro power came up with the 92% efficiency that they claim?
It is the space left between the blades of the turbine and the housing so that it could rotate.
Absolutely no analysis of the actual water energy or how much is actually being harnessed from the water flow.
Many faults are in this system that could be vastly more efficient.
I'm sorry Ed, but you are so far into your perspective that you are mangling Coase. He in no way assumes, as you do, that the polluter should always abate to achieve economic efficiency. He is expressly critical of the "physical invasion" arguments prevalent in common-law nuisance doctrine. The reason for that is that the invaded party is often the one who should make the adjustment, not the invading party. If my country's CO2 emissions led to flooding out a small island, the efficient thing to do might be for the people on the island to move. Whether I pay or they pay for that adjustment is related to the assignment of the initial rights, but the question of who pays does not have anything to do with what the optimal adjustment is.
It may well be that the efficient thing to do is for the "victims" of global warming to adapt to the warmer world rather than for everyone to forego the advantages of cheap energy. You can't just scream "externality" and think that answers the question of what the efficient outcome is. The neighbors of airports don't like the noise, but that doesn't mean we should engineer fewer flights by laying on takeoff taxes; maybe it's more economically efficient (in a Kaldor-Hicks sense) to eliminate the affected housing.
There are two Coasean issues: Whose adjustment to the interaction is cheaper, and what institutional mechanisms might or might not lead to those adjustments. Coase implicitly advocated a kind of cost/benefit analysis by courts to decide these issues, because his point was that transaction costs are not zero and efficient bargaining may be a chimera. Richard Epstein has an interesting critique of this view along transaction cost lines, arguing that given the cost of having a court do a first-principles cost/benefit analysis in each case the old Roman-style and common-law physical-invasion doctrines are good heuristics to apply in private disputes. Tut that's not where you seem to be coming from, and it certainly doesn't apply to such a diffuse and public issue as CO2 emissions.
As for Wildavsky, the easiest way to think about the political nature of externality designations is to think about issues such as free speech. Your speech may cause third parties distress, even if it is truthful and useful communication to its intended audience. So why do we not impose taxes on these "externalities?" The rationale for freedom of speech and expression can be recast in these terms to say that 1) we believe that we are all better off if we absorb these negative externalities so that we can communicate freely and 2) free speech also has positive spillover effects that are hard to pin down in advance. Or consider whether ugly people should be taxed for going out in public or subsidized to stay out of view.
We do not have to permanently destroy our land, drinking water, air and sicken the population by fracking to have the energy we need. Has anyone ever heard the word 'conservation'? That along with renewables will do the trick.
For those who buy the oil industry sham of '100 years of energy independence', permanently shattering the earth's substrata trigggering earthquakes, contaminating our drinking water and air, storing vast quantities of radioactive toxic hazardous waste on site forever, cancer and respiratory diseases–all these will cost our society far more than conservation and use of renewables.
And need I mention the elevate rate of brain tumors among oil industry frack job workers?
As I said before, these are big issues that really ask for extended discussion, but let me try to make some points that are short enough for a comment box
1. "I'm sorry Ed, but you are so far into your perspective" I guess it would help if I were more explicit about what my perspective is. It differs significantly from that of both Coase and Wildavsky (or at least your description of W; I am traveling and still have not had time to read W.) I am taking a Lockean perspective here. I elaborated this perspective in some detail in this 2006 paper on climate change in Cato Journal. Here is the link: http://www.cato.org/sites/cato.org/files/serials/…
2. “. He [Coase] in no way assumes, as you do, that the polluter should always abate to achieve economic efficiency.” OK, point taken. In the Coasian, zero-transactions-cost approach, I agree it is true that the efficient solution is for the polluter not to abate PROVIDED the costs of abatement exceed the harm from the pollution. However, I thought we were talking about the case in which the harm from the pollution exceeds the cost of abatement. In that case, the efficient solution is for the polluter to abate regardless of the initial disposition of rights. Also, in that case, the opportunity cost of continuing to pollute is the cost of abatement or the cost of foregoing a side payment of some kind from the victim. Abatement is thus both efficient can privately profitable to the polluter.
Why did I think we were talking about the case where the harm from pollution exceeds the cost of abatement? Because the discussion was about the effects of imposing a pollution tax in a situation where, previously, the polluter bore none of the cost of the harms done. In that situation, we can be sure that the harms will exceed abatement costs at least at the margin, because the polluter will undertake no abatement at all even if the costs of abatement are only minutely above zero. (I am assuming that both harm and abatement costs are continuous functions of the quantity of pollution; there might be special cases of discontinuous functions that give a different result.)
Of course, it can happen that the tax is too high, in which case the polluter is induced to cut back too much; I admit that is possible. But (special cases aside) there will always be some tax, if not too high, that increases efficiency. (continued)
3. “If my country's CO2 emissions led to flooding out a small island, the efficient thing to do might be for the people on the island to move.” This case, in which adaption is cheaper than abatement, adds nothing new. It simply means that the proper way to calculate the harm done by pollution is to look at the net harm, after cost-efficient mitigation is undertaken. This case would be worth exploring sometime, but I don’t think it makes any difference here.
4. “It may well be that the efficient thing to do is for the "victims" of global warming to adapt to the warmer world rather than for everyone to forego the advantages of cheap energy.” Yes, it may be. This raises a very big philosophical question: As a matter of policy, do we always want to allow any action that passes a cost-benefit test?
For example, suppose my wine shop has a bottle of Chateau Palmer that would give me $200 worth of utility to drink. It is priced at $100, reflecting the store’s costs plus a profit margin. Clearly, it is more efficient for me to drink it than to leave it on the shelf. Suppose I shoplift it. That increases efficiency. Suppose I am caught and hauled before a judge. Should I be allowed to plead, in my defense, that taking the wine without paying increased the efficiency of resource allocation? No. The judge would say I should either have paid or foregone consumption. The point here is that efficiency isn’t everything. Justice matters, too.
5. “Your speech may cause third parties distress, even if it is truthful and useful communication to its intended audience” Now I think I understand what you meant earlier by saying that the economists’ conceptions of externalities is arbitrary. What you really mean is that the conception of harm is arbitrary. You say (or at least you interpret W as saying that it is arbitrary to say whether causing someone discomfort via true speech is “harm.” Or maybe you are saying it is arbitrary to say whether it is a harm of a type that public policy should deter. Yes, I take your point. If you adopt a stance of complete moral relativism, it is arbitrary.
Consider wife beating, for example. In our society, we consider wife beating to be a harm of a type that public policy should deter. However, we know that there are other societies where not just public opinion, but the prevailing law, considers wife beating a family matter that is no business of public policy.
Similarly, I consider pollution (especially of the sort that passes the common law or Rothbardian physical invasion test) to be a harm of a type that public policy should deter. If you want to call that point of view arbitrary, so be it. If you want to say that a US utility should be free to cause harm to a distant farmer through pollution that (through a long chain of cause and effect; let’s accept that the chain is valid arguendo) floods the farmer’s land is, like free speech or wife beating, a type of harm that should not be deterred by public policy, then there is certainly no purely economic argument that I can range against you.
I'll restrict myself to rebutting some of your points; I hope the outline of a broader critique is obvious.
1. You say: "Similarly, I consider pollution (especially of the sort that passes the common law or Rothbardian physical invasion test) to be a harm of a type that public policy should deter. If you want to call that point of view arbitrary, so be it. If you want to say that a US utility should be free to cause harm to a distant farmer through pollution that (through a long chain of cause and effect; let’s accept that the chain is valid arguendo) floods the farmer’s land is, like free speech or wife beating, a type of harm that should not be deterred by public policy, then there is certainly no purely economic argument that I can range against you."
OK, we could be done here. Of course, long and indirect chains of causation, arbitrarily plucked out of the vast panoply of long and indirect causal chains inherent in a complex society (an "extended order"), should not be treated on the same legal and ethical basis as short, direct, and certain causal links from action to effect. (Common law says the same thing, I believe.) We could cast this in transactions cost terms, but there are many other prudential and moral arguments for why trying to force everyone to internalize every consequence of every action leads us into an unfree and poor dystopia, as bad or worse as any that can be extrapolated from instituting act utilitarianism. This argument applies even when we agree on what harm is. I believe Thomas Sowell calls this kind of overreaching "the quest for cosmic justice," but I may have the wording wrong.
2. One of Wildavsky's big points is that libertarians (and Lockeans) undermine their own rhetorical and moral foundations by invoking externalities. You have to get into his (and Mary Douglas's) whole grid-group theory of culture to understand the logic, so I'll leave it at that.
3. I don't think you come to grips with the pervasive nature of positive externalities that go along with negative ones. For example, high levels of energy consumption enable greater specialization and gains from trade across large geographic areas, which in turn increase social resilience to natural disasters and shocks to food supplies, as well as a greater variety and quality of goods and services for everyone. Given the significant fixed and sunk costs of both transportation infrastructure and product development, your consumption of these goods lowers my cost of also consuming them. More generally, one should not neglect the creation of vast consumer surplus for each person from other people's consumption of energy.
4. On the cost-benefit approach to life, I'm not the one proposing to apply such harm analysis to every leaf that falls—you are. You're saying that every time someone somewhere does something that somehow affects someone else that there should be a compensating form of restitution. Stealing, by contrast, can be socially prohibited on a number of moral grounds, including the corrosive effect it has on overall prosperity by deterring investment and accumulation; it can be individually rejected on a set of overlapping but partly distinct grounds.
5. Your argument about harm fails for the same reason as your original misunderstanding of Coase: When someone is forced to cut back on energy consumption or pay a tax you call that a "cost" but when someone is forced to move to higher ground because sea level is rising you call that a "harm." This asymmetry is unjustified. They are both costs or both harms or both Bad Things to the people involved.
6. On what really is harm to third parties, I don't really see how you can justify saying that harms from others' speech (or others' unpleasant odors, for that matter) obviously shouldn't count socially while their CO2 emissions should. The pain of being insulted or having one's ideas challenged or mocked seems quite real, judging from everyday human behavior. The pain of losing a bit more of your beachfront property to rising sea levels each year depends on a lot of things–most people might not even notice it. Additionally, the harms from speech are usually more direct, more cheaply avoidable, and often deliberately intended, while the harms of CO2 are indirect, costly to avoid, and entirely unintentional. In this way, free speech harms are more like those from aerosol particulates–direct, foreseeable, and grossly harmful–while CO2 harms are more like those from a decision to have children–indirect, unforeseeable, and not obviously harmful at all.
7. You are certainly not justified in assuming continuous cost functions for mitigating external effects. There is always a big jump in going from zero consideration of an externality to positive consideration. Simply having to keep track and monitor the externality is itself a substantial burden, not to mention the fixed costs of switching technologies, etc. If I suggested that your personal aesthetics were imposing undue sensory harm on those you encountered so that you would have to pay a "style tax" for violating expert standards of presentation, I think you would find that the mere fact fo having to deal with this new imposition represented a substantial burden and diminution of the quality of your life.
I’d like to try to focus this public discussion on some of the more narrowly economic issues. I’ll reread my JS Mill and have a go at the more philosophical free speech issues in a separate off-line discussion, one perhaps of less interest to Economonitor readers, although very interesting to me.
1. “Trying to force everyone to internalize every consequence of every action leads us into an unfree and poor dystopia, as bad or worse as any that can be extrapolated from instituting act utilitarianism. This argument applies even when we agree on what harm is. I believe Thomas Sowell calls this kind of overreaching "the quest for cosmic justice."
I agree with your point about cosmic justice and overreaching. The cases I am concerned with fall in a narrow class where there are large, tangible, negative physical effects, but there are multiple sources and multiple victims. I would nominate acid rain and climate change as members of this class, along with other forms of pollution that involve distant transport and mixing of pollution from multiple sources. Assuming we can agree, arguendo, on the science behind these cases, neither tort law (even class-action suits) nor Coasian bargaining work well to remedy them because of high transaction costs.
The issue is then one of the proper public policy response. Should we just let these effects go, even though they are large and tangible, saying that the affected parties should “suck it up” and bear the associated “costs” or “harms” (see point 3 below for a comment on this terminology), as US law does in most cases for true speech that nonetheless causes emotional distress? Or should we introduce some public policy intervention, for example, a regulatory directive, a pollution tax, cap and trade, or whatever?
2. “I don't think you come to grips with the pervasive nature of positive externalities that go along with negative ones. . . . More generally, one should not neglect the creation of vast consumer surplus for each person from other people's consumption of energy.”
The “positive exteralities” argument is one of the most common objections to charging polluters for the negative externalities that they generate, but I confess, I don’t entirely understand the reasoning. I hope you can clarify some points.
Am I right in understanding that we are talking now about three distinct categories of externalities, (i) those that pass the physical invasion test (can be positive or negative), (ii) purely psychic or emotional effects like true but hurtful speech (negative), false but flattering speech (positive), which I agree can be very important to a person’s well being, and now (iii) market-mediated or pecuniary externalities that act through prices and consumer surplus? If I am right about this, let’s set aside (i) and (ii) for a moment, and focus on cases that involve (iii) alone. (I don’t dispute that positive physical externalites offset negative physical externalities; it is the case where positive market-mediated externalities offset negative physical externalities that I have trouble with.)
2a. First question is, do you see these market mediated externalities as transmitted solely by prices, e.g., my change in demand for a good raises or lowers the market price of that good for you, thereby increasing or decreasing my consumer surplus? (Price changes could also act on me via producer surplus if I am a supplier of the good.) If the market-mediated externalities you are thinking of do not act through changing prices, can you be a little more clear about the way your change in demand for a good (or your supply of it) affects my welfare, even though it does not affect the price of anything I buy or sell, (and, by assumption, neither production nor consumption produces any physical externalties)? Maybe you could give some more specific examples.
2b. Can you give an example of a case in which a market-mediated externality would justify a policy intervention, for example, a subsidy, if the externality is positive, or a tax if it is negative? For example, since you see positive spillover effects on me from your consumption of energy, would that, in your view, justify a general subsidy for energy, or some other policy intervention to keep energy price low?
2c. I don’t understand exactly whether you see energy as unique with regard to its spillover effects, or do you see production of any useful good (food, health care, econ textbooks, etc) as having the same kind of positive spillover effects?
What I am getting at is this: Suppose goods X and Y both produce positive market-mediated externalities of the kind you are talking about. Suppose X also produces some harmful physical pollution but Y does not. Am I right in thinking that if the presence of positive market-mediated externalities are an argument against imposing a Pigovian tax to offset the negative physical externalities of X, then they would also have to be an argument favoring a Pigovian subsidy to Y? (continued below)
3. “Your argument about harm fails for the same reason as your original misunderstanding of Coase: When someone is forced to cut back on energy consumption or pay a tax you call that a "cost" but when someone is forced to move to higher ground because sea level is rising you call that a "harm." This asymmetry is unjustified. They are both costs or both harms or both Bad Things to the people involved.”
I think we both understand Coase the same way, but maybe there is a problem with the harm/cost terminology. Here is the situation as I see it: You build a hydro station on your property for cost CH that produces electricity of value VE. Your dam floods my upsteam riverfront property, causing loss of my wheat crop having a value VW. I can mitigate the effect by building a dyke for cost CD. From a Coasian point of view, what matters are things like whether CD>VW (in which case it is never worth building the dyke), whether (VE-CH)<(lesser of CD, VW), in which case it is never worth building the hydro station, etc. Only the values of the parameters matter, not what we call them. Do you agree? If so, we can call them harms, costs, anything you want, I am just trying to use plain English.
I hope you are having a pleasant Christmas Eve with full electric power availability. I'll go through some of these points and see if we can at least converge to a common understanding of where we agree and disagree. I'm going to have to split the comment up due to length–perhaps you can sympathize.
Let me start by saying that controlling air pollution is often a good thing, and I have no problem in principle with doing so nor in using taxes or marketable discharge rights or some hybrid to do so. I'm pretty sure that a monopoly landowner of some large tract like Los Angeles would maximize the value of his holding by imposing some sort of regulations on air pollution, which is an imperfect but useful heuristic, since regulations that are too far-reaching would fail this test in a world with competing jurisdictions. (I do have some problems with how we regulate air pollution in practice: Air pollution was declining long before the NEPA was passed, most of the low-hanging fruit [benefit exceeding cost] has already been taken care of, and the newer crusades against ultra-low levels of trace elements and against non-pollutants like CO2 seem like caricatures of rational policy. Acid rain is also a good bit more equivocal than you seem to think.) With that orientation out of the way, I'll go point by point.
1. You say, "I agree with your point about cosmic justice and overreaching. The cases I am concerned with fall in a narrow class where there are large, tangible, negative physical effects, but there are multiple sources and multiple victims. I would nominate acid rain and climate change as members of this class, along with other forms of pollution that involve distant transport and mixing of pollution from multiple sources. Assuming we can agree, arguendo, on the science behind these cases, neither tort law (even class-action suits) nor Coasian bargaining work well to remedy them because of high transaction costs. "
This is your response to my point that a) there are an infinite number of long and indirect, as well as short and direct, "external" effects among the members of any complex society, b) adopting institutions to force internalizing all of them annihilates freedom in a dystopian fashion, and c) therefore common sense and common law both prescribe redressing and mitigating only direct, causally simple, and substantial spillover effects.
Your attempt to privilege air pollution externalities in this way doesn't work. First, there is nothing "narrow" about this class. Even for "physical" effects there are many, many potential chains of interaction that have never been investigated. Second, there is neither a bright-line principle nor a nuanced cost-benefit rationale for restricting ourselves to "physical" effects. (Just to be clear, is someone's high blood pressure from being insulted a "physical" effect?) Harm is harm, transactions costs are transactions costs, and there are lots of currently uncontained consequential spillovers that are much easier to measure and control than air pollution. Poor upbringing of children, public insults and ridicule, bad fashion and personal grooming, bad manners, etc., all create spillovers that would be simpler to get rid of than air pollution, but we don't. Third, the only reason air pollution effects appear to you to stand out in this clear way is that interest groups and ideologues, supplemented by focused and motivated searches within the scientific community, have promoted these specific issues to the forefront rather than others. If one-tenth of the scientific effort devoted to looking for negative effects of CO2 on climate were devoted to, say, the ecological effects of dense urbanization, I am pretty sure that cities would also have to be outlawed or heavily taxed. But urban elites and greens on the whole think living in cities is AOK (and I do too), so we don't have political debates about containing these externalities.
It also seems to me that stipulating the truth of these pollution harm claims interferes with discussing the institutional question–the uncertainty and dubiety of these types of claims in general is a big part of the reason why they are too causally convoluted to justify their being systematically internalized. Particularly when the proposed remedies involve massive and costly adjustments to the lives and livelihoods of the general population (many of the scenarios alleged to be necessary to avoid climate catastrophe involve CO2 emission levels so low as to outlaw most combustion), we ought to consider uncertain impact severity as an argument against requiring internalization.
2. "Externality" rhetoric creates an actual negative externality for supporters of a liberal society. It opens the door to an unprincipled and unending political discussion about every individual choice and market outcome that in the end may destroy individual autonomy. That's the implication of grid-group theory, anyway.
3. a) On positive externalities, I'll momentarily indulge your fetish for the "physical invasion" distinction and note that some of the ignored positive externalities are as physical as the purported negative spillovers. For example, CO2 at high levels fertilizes certain plants; warmer climates might be good for many parts of the world assuming the purported climate sensitivities are accurate; ice-free arctic shipping might be a good thing; shifting rainfall patterns will help some areas as others are hurt; and so on and so on. (One interesting facet of the climate-change debate is that every respectable person agrees that current modeling technology is effectively useless for forecasting regional effects.) More generally, we know that changing the environment hurts some species and helps others, and we know that different people benefit from different species. Energy-intensive and capital-intensive agriculture is better for long-term soil conservation than slash-and-burn, etc.
b) As far as consumer surplus externalities, my gain V-P from buying a product is only partly mediated by prices. In a competitive market where P=MC (assume constant unit costs at the post-design stage) an increase in quality that raises willingness to pay without raising costs will not appear at all in prices. The quality increase goes straight into consumer surplus, and need not affect quantity either; a better refrigerator may not induce me to buy two for my home. That's one of the reasons why hedonic price indices are important for capturing true levels of real GDP–the Price*Quantity measures miss the whole thing. This logic also works for quality decreases that don't affect price or quantity. Now plug in any kind of increasing returns at the upstream design stage or through shared inputs, and A's consumption of a good can raise B's consumer surplus. In fact, the very existence of a particular product or service variety may depend on the consumption decisions of others, and the non-existence of a product is not measurable with prices.
On the same grounds that I don't want to force "internalization" of every possible negative spillover, I don't want to do so for these positive effects. (Actually, I've left out a very compelling set of public-choice arguments in addition to the ones we've been discussing–namely that we open up a huge arena for costly rent-seeking and negative-sum policies–but I'm sure you're already well aware of those.) The causal chains are too indirect and uncertain in any specific case to justify such intervention, there may be hidden negative effects we're overlooking, etc. I'm OK in principle with R&D subsidies that are either extremely general in their targeting or very specific to a core government function like defense, but there are practical issues here as well. So, no, positive externalities do not justify public subsidies as a rule.
4. It appears that we agree on my point 4 above, insofar as you have tried to restrict the open-ended nature of the externality argument to air pollution-like cases. I don't agree that your restriction works that well intellectually, practically, or politically, but we do seem to agree that some sort of restriction is needed.
5. We may be agreeing on the semantic issue of cost and harm; I'm not sure. In your earlier comment, you talked about a polluter "paying zero cost" while imposing non-zero harm on a distant farmer and argued that that can't be optimal. But it could indeed be optimal if you understand that in a reversed case with pollution taxes high enough to deter the polluter, the farmer is bearing zero cost and the emitter is being harmed. Your use of the two distinct terms was prejudicial and hid the issue, which was why I flagged it. If you now agree that that argument is flawed, then we are in agreement on the semantics. The point is that if one rejects physical-invasion concepts and uses a Coasean cost-based analysis, when two parties' activities interfere, somebody is always going to be harmed by getting rid of the interference. As you point out, what matters is the size of the parameters, not what we call them.
6. Of course, I do not favor governmental forced internalization of speech or personal-aesthetic externalities. I simply point out that the case for regulating these in a Coasean or Pigouvian sense is stronger than for something like CO2, so a fortiori the latter should be left alone. (Soot and particulates are quite different from CO2 in this regard. Acid rain is an intermediate case.)
7. I can't tell if we agree on the point that there is a cost non-convexity at zero for regulating almost any spillover. I say that because your response, as noted in 4 above, indicated a concern that internalization not be applied to every leaf that falls. One reason for fearing this outcome is precisely the finite fixed costs of dealing with each spillover, so one might infer that you agree with this argument.
I think you have succeeded in identifying the points where we differ, and they actually turn out to have nothing at all to do with economics in general or Coase in particular. I see the key disagreement in this passage:
" there are lots of currently uncontained consequential spillovers that are much easier to measure and control than air pollution. Poor upbringing of children, public insults and ridicule, bad fashion and personal grooming, bad manners, etc., all create spillovers that would be simpler to get rid of than air pollution, but we don't. Third, the only reason air pollution effects appear to you to stand out in this clear way is that interest groups and ideologues, supplemented by focused and motivated searches within the scientific community."
It appears that you think air pollution, at least in non-local forms like acid rain and climate change, are less consequential than bad manners, and you also see the fact that am willing to entertain the contrary possibility as a sign that I have been sucked in by interest groups and ideologues. I, on the contrary, have the view that many people (I am not saying you personally are a member of this class, you may or may not be) who belittle the importance of air pollution and other environmental harms are the ones who are doing "focused and motivated" science, are being influenced by ideology, and are acting as servants of interest groups, e.g., the fossil fuel industry. So there you go. Let's agree to disagree there.
If we could find an example of externalities where we could agree on a set of facts, it seems likely that we would have no trouble agreeing on a set of economic mechanisms to remedy or at least ameliorate the situation.
Thank you for your time in pursuing this discussion. It has been instructive to me.
As a different viewpoint from Zehner’s book, I was wondering if you have read “Reinventing Fire” by Amory Lovins and Rocky Mountain Institute. This books outlines how we can meet our energy needs, and spur economic growth by saving energy by making transportation, buildings and industrial processes much more efficient and finally developing our renewable energy sources. Also, this book seems to follow the TANSTAAFL principles. In my mind, this book could be a vision for the U.S. to adopt for our energy policy but I would appreciate your comments (or maybe even a future blog) as an economist.
Thanks, Bruce. No, I have not read Lovins' book. I'll try to get a copy and comment in a future post.
By classification "Sustainability" is ultimately characterised by a system which involves no subsidy in the long run. However,solar pv as well as other forms of Sustainable energy sources will still require a heavily subsidised system in place for a length of time to allow it to grow in a protected environment and take roots so as to ultimately have the opportunity of competing against fossil fuels and the nuclear power which we currently rely so significantly upon. But for how much time will this assistance be expected?
I don’t reckon that someone who actively entered into or enters the industry either as an investor, customer, business owner or installer considered that the initial subsidies were sustainable or indeed beneficial for the community over time but without them the industry would not be where it is today!
However, lots of individuals built their UK enterprise models around subsidy principles in the form of the feed in tariff system which was changed radically by government and caused many organizations to go bust making unemployed numerous workers who were drawn into the industry. This is all fact! After evaluating the electricity industry in its entirety, the Economy and in what way best to integrate Renewable types of generation into the domain for the greater good of all i created the structure for a system which will result in “Grid Cost Parity” for renewables which will not require a subsidy system to work.
In a nutshell, the conceptual history to this patent application draws on the benefits belonging to the practice of sharecropping by groups on a collective basis included within a competitive marketplace by directly attaching the rights and everyday use to the output of the crop (In this instance Sustainable energy Electricity, farmed on a large scale basis) directly back to the owning individuals within defined limits for his / her own personal useage and thus outside of the monetary and taxation system. This financial approach being in line with the Governments current policy with regard to the advantages obtainable from the current feed in tarrif system for domestic installations.
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More information of this application together with other articles which i have written about the subject, including “Why and How the Government and the Energy Companies Sacrificed thousands of Jobs in the Solar PV Industry” are also open for discussion on my Solar blog page.
I really believe the best way forward should be to keep installing however the Green deal is actually just another load of Green Spin Policy.