Energy Dependence: Can The Free Market Solve It?

solar panels sun One of the current debates taking place in Congress (and has been for some time) is how to solve our energy crisis (both in relation to climate change, as well as our dependence on foreign suppliers, many of whom support terrorist organizations–which means we end up being de facto subsidizers of said organizations).  Because a market for alternative energies doesn’t really exist, this leaves the government as a source of R&D.  Naturally, small government/free market proponents don’t like the prospect of more government involvement which leaves them to either deny climate change altogether (surprise), or at the very least. claim that the green/alternative technology is best left to private enterprise.

The problem here is that “natural” market signals doesn’t always lead to ideal outcomes because those signals are based on demand that currently exists and will therefore provide a return on investments.  What this means is that even if R&D leads to new energy alternatives, implementing these alternatives will be costly.  Unlike our current/mainstream energy infrastructure, any new technology will be costly to implement as the technology has not come of age and there doesn’t exist the economies of scale that we see with their mainstream counterparts (which have had decades of implementation, perfection, and cost-reduction).  This leaves investors less likely to put their money in these technologies since the likelihood of seeing a return seems unlikely.  Even corporations who may see a potential profit 10 or 20 years down the road have to deal with this reality: their investors are looking for quarterly/annual growth; not money being thrown at a project that may or may not result in a profitable return in 20 years.

This is the point of government subsidies and regulation.  The more the government can do to shift the market to favor the investment in renewable technologies, the more R&D companies will invest in that direction (as was the case with solving the acid rain problem).  And the more companies produce them, the easier the technology will be to duplicate and further improve upon which will speed up the process even more.  It  takes the size and scale of the federal government to coordinate something like this (states often have the disadvantage of having to deal with businesses threatening to leave to a neighbor state to avoid what they perceive to be costly regulations).

The example of China, Japan and Germany and US History

It’s not uncommon to hear free market/small government advocates criticize seemingly failed attempts at creating a viable solar power industry in the US and point to the need for a free market as the reason.  But in reality, these American solar companies are often losing out to Chinese solar power companies who are more, not less subsidized by their own government.  For example, according to the Congressional Research Service:

China led the world in 2009 in renewable energy investment, spending $34.6 billion, with the United States second in clean energy spending, investing $18.6 billion.13

http://www.fas.org/sgp/crs/row/R41287.pdf

In other words, China is spending MORE in R&D than we are (not just as a percentage of their GDP, but more in total). So the idea that government subsidies somehow distort market signals and the free market is the correct vehicle for this up and coming industry is refuted by the very examples these proponents like to cite.

“Chinese companies have already played a leading role in pushing down the price of solar panels by almost half over the last year. Shi Zhengrong, the chief executive and founder of China’s biggest solar panel manufacturer, Suntech Power Holdings, said in an interview here that Suntech, to build market share, is selling solar panels on the American market for less than the cost of the materials, assembly and shipping.

Backed by lavish government support, the Chinese are preparing to build plants to assemble their products in the United States to bypass protectionist legislation. As Japanese automakers did decades ago, Chinese solar companies are encouraging their United States executives to join industry trade groups to tamp down anti-Chinese sentiment before it takes root.”

http://www.nytimes.com/2009/08/25/business/energy-environment/25solar.html
http://www.yourindustrynews.com/news_item.php?newsID=65330

One sad irony is this: The solar power industry was largely funded by the United States government under the Carter administration.  In 1975, Congress passed the Energy Policy and Conservation Act, which established Corporate Average Fuel Economy (CAFE) standards.  Between 1975 and 1985, American passenger vehicle mileage went from 13.5 MPG to 27.5 MPG.   This helped lead to an oil glut which caused the price of oil to drop, which demolished the oil export-dependent Russian economy, signaling the beginning of the end for communist Russia. Friedman (Hot, Flat, and Crowded).

Needless to say, free market advocacy groups spoke out claiming that these mileage standards would cause additional highway deaths (due to lighter vehicles having less protection).

cafe free market fallacy number 324556

Read this article in Google News

Of course, what actually happened is a different story.  Motor vehicle-relate deaths actually dropped in 1989 (not just per capita, but as a whole).

Years later, these programs would be gutted under the Reagan administration.  He would roll CAFE standards back a bit, and defund solar power research and development. Since then companies that were formed under the Carter administration’s policies (like Eastern Solar Technologies) have relocated to more government-funding friendly countries like Germany.

http://www.easternsolartechnologies.com/AboutEST_Page_V5T0.html

In other words, the R&D for the solar power industry, which is healthier in countries like China, Japan and Germany where their governments are serious about renewable energy, was initially paid for by US tax dollars.  China doesn’t have a Republican party arguing that the free market is always the answer to everything, and undermining progress on solar power.

Consider this letter to Barack Obama from the Economic Recovery Advisory Board

If the U.S. fails to adopt an economy-wide carbon abatement program, we will continue to cede leadership in new energy technology to other nations.  The U.S. is now home to only two of the ten largest solar photovoltaic producers in the  world, two of the top ten wind turbine producers and one of the top ten advanced battery manufacturers.  (See Appendix A.)  That is, only one-sixth of the world’s top renewable energy  manufacturers are based in the United States.  Last year, less than half the 8,500 gigawatts of  wind turbines used in the U.S. were made in the U.S.

Losing our advantage in technologies that were pioneered in the U.S. would cost us dearly. Sustainable technologies in solar, wind, electric vehicles, nuclear and other innovations will, in the view of many on our board, drive the future global economy.  We can either invest in policies to build U.S. leadership in these new industries and jobs today, or we can continue with business as usual and buy windmills from Europe, batteries from Japan and solar panels from Asia.

Leading the new green economy could be transformational for our country.  Compare it to the internet.  Fifteen years ago there was no web browser.  There was no internet at your fingertips, no ecommerce, no search engines.  Now, the internet has transformed our lives:  how we learn and inform, how we entertain and communicate, how we buy and sell goods. Today, the internet economy is estimated at $1 trillion with 1.5 billion internet users worldwide—and growing.

The new green economy has greater potential.  Energy is a $6 trillion market with 4 billion users of electricity—and usage doubling in 25 years.

* The allusion to the internet may be lost on many people here.  It was government R&D that led to the invention of the internet (Al Gore never said he “invented the internet” he said he “created” it which sounds awkward but it’s no different than when any other politician claims they “created” programs to clean up the streets or fight crime or to enhance education.  It simply means they fought for it in office.).

In their report, Economic Recovery Advisory Board lists the top renewable energy manufacturers by market capitalization.

Appendix A. Top Renewable Energy Manufacturers by Market Capitalization
Source: Lazard Freres, April 2009

renewable energy solar wind battery by country - usa germany japan china

 

1- Friedman, T.L. (2009). Hot, Flat, and Crowded. New York, NY: Farrar, Straus and Girar.

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