Monday, February 20, 2012

Two Cheers for "Windfall"

New movie on wind power. It seems that the left has finally discovered that the alternative energy "industry" (sic) is "all about the money."

Folks, there IS no alternative energy industry. There is a rent-seeking, subsidy-sucking-down industry, and the people who work in that industry are smart, hard-working, and relentless. In 2007, they were mortgage loan originators. Now, they are windfarm contractors.

In this trailer for the movie (two cheers for the movie; not three cheers, but two cheers) you will see the problem documented.
They get a lot right, but the problem is that the problem has to be "it's all about the money." Um, no. The problem is that this was NEVER about the money, in the sense of real cost per KWHr. It's about the subsidies.

If it were about the money, the only reason we would have solar, or wind, or whatever, "alternative energy" is if those technologies actually produced power at competitive rates.

Instead, all of the "alternative energy" pirates were just after the subsidies. Everybody in the industry knows that the negative externalities of wind power, combined with its operating costs (at least twice, and ofter as much as FOUR times, the cost of electricity now generated through conventional means), make wind energy uneconomical. So the corporations that are acting this way are fooling people into accepting a pittance to put a turbine on their land, taking the enormous subsidy from Mr. Obama and Mr. Reid, and then skedaddling. There was never any hope of this being a viable energy source, at least not with existing technology. It's too expensive, dangerous, and noisy.

That's where "the money" comes in, or where it SHOULD come in. Suppose you have two technologies, C and W. C uses certain resources, produces certain externalities, and produces a certain amount of power. W uses quite different resources, produces externalities, and produces a certain amount of power. Which one is "better"?

For a command system, there is no way of knowing. The problem is that (1) there is no price information to help you know which system uses the fewest resources. (2) Given a decision to subsidize, that "price" swamps all the information that could have been inferred from people who actually know something about power generation technology.

Here's the thing. It's a theorem.

The system that costs least uses the fewest resources.

The only way, the ONLY way, to add up resources is to sum the opportunity costs that using them in one way precludes for other uses. The only way to sum opportunity costs is to use price. Now, it doesn't matter at all what UNITs the prices are stated in.  And it may be hard to account for externalities, because those often aren't priced. But if externalities are hard for markets to price, why do we think that governments, dominated by rent-seekers who want subsidies for useless crap like wind turbines, will do any better?  If anything governments are likely WORSE at pricing externalities accurately. There is no force on earth that can change the fact that the alternative that costs less uses fewer resources, or less valued resources, or produces more power.

The king of the tax / subsidy paradigm, A.C. Pigou, actually foresaw this in 1920. This is not Coase, or Stigler, or Tollison, mind you. This is PIGOU:
It is not sufficient to contrast the imperfect adjustments of unfettered enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any State authority will attain, or even wholeheartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure, and to personal corruption by private interest. A loud-voiced part of their constituents, if organized for votes, may easily outweigh the whole.

Why would you think that the government can get prices right for externalities? Why do you think the government WANTS to get prices right, given how much money there is to be made from campaign contributions from rent-seekers?

7 comments:

JD Cross said...

Well done.

mctaverne said...

You do realize that coal, nuclear, and oil all receive subsidies as well. When all the subsidies are eliminated, THEN you can talk about level playing fields.

Hasdrubal said...

A lot of the people I know in favor of wind and other alternative energy resources are concerned about _what_ resources are being used, not just the market value of them.

They really worry about fossil fuels because they're a finite resource, they worry about what will happen once they're gone. They also don't think the damage done extracting fossil fuels isn't properly priced.

One of the biggest things they worry about is running out of fossil fuels too quickly, not a slow rundown where prices will slowly rise encouraging investment in new technologies (or technological development taking too long) but supply levels crashing suddenly and unexpectedly. They take that "n years of oil supply left" as set in stone, and don't see a replacement.

I honestly can't point to any theory or logical reason for why this won't happen. I can explain the difference between proven reserves and actual amounts, but I can't guarantee replacement technologies will be available. Also, it's easy to look at a transaction and say too little is being paid when you're neither the buyer or the seller, but it's harder to explain why an outsider's opinion doesn't matter. It is useful to point out that the government that people want to save the environment is the same government that is selling off mineral rights too cheaply.

Pelsmin said...

Hasdrubal,
The oil won't run out all at once -- it can't. There are thousands of sources around the world; as some run dry, their production stops. The remaining sources become more scarce, and total output slows. Prices rise.
On top of that, many of these sources won't suddenly run dry, the cost of extracting will just keep increasing as you dig deeper, sink wells further off shore, use more expensive technology to extract from oil sands, etc. There's too much money at stake for the industry to see supply levels crash "unexpectedly."
As for it being hard to explain why an outsider's opinion doesn't matter; no, it's very easy. NO-ONE'S opinion matters, outsider, buyer or seller. All that matters is what people DO in terms of selling or buying. If you ain't doing one of those, you don't matter.
And mctaverne: don't confuse general tax breaks for business investment (whether drilling wells or building bakeries) with paying subsidies for carrying out favored work like building wind farms or feeding hungry unicorns.

Algosome said...

This post is a perfect example of the perfect being an enemy of the good. It's not that the government produces accurate pricing for externalities, it's that the government produces any price at all for externalities, which the market by definition ignores. Fossil fuel, and pollution in general, damages the commons that nobody owns in its particulars and thus cannot be priced individually. It's up to government to focus those costs into individual transactions; subsidies are a useful mechanism to accomplish this.

"There is no force on earth that can change the fact that the alternative that costs less uses fewer resources, or less valued resources, or produces more power." Wrong, wrong, and wrong. The force that can change this is scientific knowledge and technological expertise that shows that the prices assigned by previous transactions based on incomplete knowledge were incorrect. We can't retroactivly reprice those those transactions, but we can force future transactions to incorporate corrective loads to recover the costs to my ancestors' and descendants' health that that we are now now being forced to pay for.

Those subsidies are directed to green industries in order to drive the industry to economies of scale that will make their efficiencies obvious to even the most short-sighted of customers. And the Chinese are eating America's lunch at that scaling project.

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Abdul Basit said...

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