Green Energy Proposals Part I: An Overview
Aug 26, 2011

Green Energy Proposals Part I: An Overview

With a variety of different green energy proposals floating around, it is worth recalling what the various schemes are and what their advantages and disadvantages are. In Part I, I look at an overview of the particular at the systems being implemented or discussed, particularly in Canada; in Part II, I note the positions of the political parties with some emphasis on the NDP and the 2011 Ontario Election.


Energy policy is dominated by the simple economic fact that short and medium term cost projections for green energy technology is more expensive than fossil fuel based technology on a cents/kwh basis. For those wanting to change the relative prevalence of these technologies - whether for reasons of global warming or future fossil fuel depletion - we must advocate for policies that effectively change this economic relationship.


There are essentially two ways that a government policy can change it. One can either create incentives for clean energy that makes it cheaper, or one can impose disincentives on fossil fuel technology that makes it more expensive. Or, of course, a combination of the two. Some schemes for doing this are more effective or more egalitarian than others, but that basic calculus doesn't change.

One constant, at least in the shorter term, is that a net cost is incurred in society either from providing the incentives or by raising the price of fossil fuel commodities that people buy. In principle, that money can come from anywhere. It could come out of education budgets or add to the debt load, but most schemes involve a relatively flat increase on people such as a flat tax on carbon or a flat raise in the cents/kwh cost of electricity. More on this cost later.


The BC and Ontario Liberal governments have chosen opposing options. In BC the principle option took the form of a broad carbon tax (or a Fee and Dividend scheme) that raises the cost of fossil fuels and thus changes the relative costs of fossil fuels to green energy making green energy more likely. Consumers feel the pain from rising costs associated with anything deriving form fossil fuels. That pain is partially offset by the fact that the money that is taxed can be reinvested in anything from green energy to education to debt relief, at least in principle. Note that even if a dollar taxed from fossil fuels is spent on a dollar of green energy there is still a net cost to society (one might naively assume it was zero) because that dollar buys more energy of fossil fuels than it does of green energy based on the current cost discrepancy. Ontario, on the other hand, has a Feed-In-Tariff program that gives a fixed, and artificially high, price for green energy fed into the grid. The cost to society here is more straightforward: rising electricity bills (and associated effects) given the higher price of electricity promised.


Cap and Trade is similar to the Fee and Dividend schemes in that they are working on the side of raising the price of carbon. By setting a fixed cap on the allowable amount of carbon, and then letting companies trade carbon credits, is an additional cost on fuel corresponding to however much it costs to buy the credits. Like the carbon tax, there is a dividend given to companies that can cut emissions and sell those credits and, again, while the net sum of all carbon taxes bought and sold is necessarily zero, the net cost to society comes from the difference in economic output of a dollar before the system versus after the system. I have compared these two schemes in more length here, arguing for the superiority of Fee and Dividend schemes over Cap and Trade.


One judge of policies is on the question of whether it is a net regressive or progressive force on our currently too wide wealth distribution. A scheme, even a wildly effective and efficient one, that is overly regressive should be avoided. Typically when we experience a "flat" tax or price increase, this is going to end up being very regressive as the poor spend higher portions of their incomes on the kinds of basic commodities being taxed. This is very true of electricity bills (as might go up under Ontario's feed-in-tarrif plan) or of rising gas costs (BC's carbon tax). In the BC case, and in any scheme where you get a tax dividend to spend, how you spend that dividend is going to determine if it is a net progressive, regressive or flat shift. BC spends its dividend on a combination of income tax cuts for individuals and corporations and tax credits for the poor. As it turns out, the net effect on the bottom 40% started as very slightly porgressive and is now a little regressive (as the amount taxed rose but the tax credits rose less). With Ontario where it is funded by electricity bills it is regressive and one doesn't have any wiggle room except to do something progressive somewhere else that compensates (such as income tax changes).


So far it might seem like the BC carbon tax is superior because it has a redistributive mechanism in the dividend that can compensate for the regressivity of rising commodity costs. However, it has a major disadvantage in that it gives a jurisdictional disadvantage compared to its neighbors while the Ontario scheme gives a relative advantage. In Ontario, there is now incentives for companies to come to Ontario and take advantage of the perks by supplying green energy, creating jobs along the way. In BC, the higher costs drive away certain businesses. While largely a success, this has possibly been a relevant factor in the collapsing cement industry (heavily fossil fuel dependent) where BC has gone from a net exporter to a net importer. Both will experience smaller net GDP in the shrift term because of the imposed costs, but the degree of this is modulated by the above difference.


I keep referencing the short term costs imposed by any scheme which is just a reality of forcing a non-market economic change. One can make them revenue neutral for the government and make them flat on a progressive/regressive scale but one cannot eliminate them. However, as I have argued previously, these costs can be considered an investment. Because such retooling from fossil fuels to green energy will have to occur at some point regardless (due to the converging problems of cheap fossil fuel depeletion and global warming), one is essentially making a down payment on an investment in the future. Especially as one adds in the competitive advantage of being a first actor in the newly expanding green energy markets, that investment has the potential to be very luctrative. It is not entirely clear what the price and quantity changes are going to be in fossil fuel depletition, but there is the potential for there to be very abrupt drops in supply and rises in price - this kind of short time scale uncertainty is one of the most disruptive things that can happen economically. By slowly equalizing the relative prices of carbon and green fuels now, one is investing in a more gradual future transition with the various positive externalities associated with that.


Ultimately, both sides of the economic equation are going to be needed. We should be kick starting our green energy industries, promoting energy conservation and directly raising the price of carbon fuels. The measures proposed this far are but a start on a much larger problem, but they are an important start. However, what is going on at the provincial level cannot be sufficient. In order to eliminate the jurisdictional disadvantage of BC, for instance, one needs to know that neighboring jurisdictions also get the same basic kind of rising carbon costs. While there is some hope for multilateral organization at the provincial/state jurisdiction level such as the Western Climate Initiative, national and international organization must be part of the final solution.

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