Reading Bernard Weinstein’s letter in the Time’s November 2 edition, I am reminded that we continue to fail to grasp the failure of our supposedly 'free market system' to effectively price key commodities, if that is in fact its intent, and not merely a philosophical mantra. Let us begin with the first sentence of Mr. Weinstein's letter:
“As “Future of Solar and Wind Power May Hinge on Federal Aid” (Energy, special section, Oct. 26) points out, the renewable power industry has become addicted to federal subsidies and probably can’t stand on its own without them.”
We can acknowledge that the renewable energy industry is addicted to federal subsidies at present and for the foreseeable future. But let us apply Mr. Weinstein’s metaphor of addiction fairly. Society is addicted to fossil fuel dependent energy. If we are the junkies, Big Oil and Coal are the pushers.
“Pushers” is an appropriate term when one analyzes the price of these commodities. Their true economic cost involves approximately seven distinct elements; some short term, many intermediate or long term. But their market price is decidedly driven by short term market conditions which disregard the fundamental essence of these resources as non-renewable, and primarily seek to push the commodity through the pipeline to the consumer with utter disregard to long term consequences.
The problem with renewable energy is not that it is uncompetitive relative to fossil fuels. Rather, it is that the true economic cost of fossil fuels is not reflected in their market prices, giving them a false sense of economy in a market mechanism that does not begin to account for long term scarcity, or collateral pollution.
Let us understand the true nature of pollution. It is an un-legislated tax on society, promulgated by the producer without the informed and explicit consent of the impacted. It is a covert economic cost, even if not an overt accounting element of the market pricing mechanism. And ultimately, it manifests as an overt economic and accounting cost through collateral outcomes typically not effectivly traced, or traceable, back to the source, like human health.
To elaborate on the above point, if the market was capable and willing to price fossil fuels based on the fundamental nature of their non-renewable depletion (as in long-term scarcity) and not based on their immediate availability, the price of fossil fuels would be closer to that of renewables. If, added to that, we imposed regulation that required fossil fuel producers and major users to contain pollutants harmful to human health or society, including CO2 sequestration, the price of fossil fuels would come yet again closer to renewables, and would probably exceed the cost of renewables. This assumes that we could fairly capture projected social costs of climate change from anthropogenic sources; an interesting academic endeavor fraught with practical challenges.
Producers of fossil fuels have transferred to consumers and society the health and environmental costs of pollution that should rightfully be controlled in their production processes and reflected in the price of their commodity in the same manner that currently legislated health and safety requirements are captured and accounted for. Failure to do this is a failure of the application of competitive market pricing theory.
Therefore, the fundamental problem of renewables is a failure of capitalist market pricing theory as applied in that freaky place we call ‘The Real World’ to fossil fuels, not to the intrinsic economics of renewables. This market failure of effective ‘pricing’ is not unique to energy by any means. We are seeing it health care, finance, transportation, labor.
All of the above speaks to the challenge of fairly comparing the value of fossil fuels versus renewables on a 'present cost factor' basis. But that is not the basis on which the analysis should proceed. The more valid basis is: what will be the economics of the two over the useful life of their respective investments? In the case of wind and solar, that's twenty to thirty years. So the question becomes: What do you expect to be the price pattern of the competing resources to that time horizon? And here's where all the 'professionals' (engineers, accountants, architects, facilities managers) generally get weak in the knees. On a good day, you've got to go out on a pretty weak limb to hang a number on that question, and sign your name under it. It's much easier for arm chair economists than for accountable executives. But on that critical question of "future price" hangs the true answer of comparative economics from an investment and managerial perspective.
To leave no stone unturned, let me address a lingering market fantasy: Cap and Trade. When I read a few years ago that the market for Renewable Energy Credits could exceed the market for the commodities themselves, I was assured that The Market had finally found a replacement for sub-prime mortgages, and the directors of Goldman Sachs could rest comfortably. If wisdom resided in Washington, an energy tax would be the most prudent means of nudging fossil fuels toward a ‘fair’ price that The Market does not currently reflect. It is more scalable, more target-able in principle. An energy tax is by no means a silver bullet solution to the market pricing dilemma. Any tool in the hands of Congress is fraught with all kinds of potential dangers. But wisdom does not reside in Washington, and The Markets are dysfunctional. Choose your poison.
Mr. Weinstein’s article does touch on one dilemma that cannot be ignored. The transition from fossil fuels to renewables will be challenging under the best of circumstances; and we will not be operating under the best of circumstances in the intermediate to long term. Neither technology nor energy sources will enable us to bridge the looming energy gap and environmental impacts. Nothing short of a fundamental change in the physical structure and value structure of our society will enable a successful transition from fossil fuels to more sustainable energy. There are many potential benefits to be achieved from this transition, but we do not appear to be remotely prepared to address this critical part of the energy challenge.
Onward
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