Making the Wrong Case for Renewable Energy: Severin Borenstein

Feb. 14 (Bloomberg) -- What problems can the U.S. solve with renewable energy?

Four years ago, both presidential candidates acknowledged the threat of climate change and endorsed vigorous policies to move away from fossil fuels. The U.S. seemed on the verge of committing to greenhouse-gas reductions and developing alternative-energy technologies. Since then, most Republican leaders have become skeptical about global warming and now oppose any major policy response.

Democrats, including President Barack Obama, have stopped talking about the subject. Their energy proposals now target lower costs, energy security and job creation from domestic production. That doesn’t mean they no longer worry about climate change; they just decided it would be politically infeasible to adopt greenhouse-gas policies directly. Instead, they are betting they can push the climate agenda indirectly, by focusing on renewable energy as the solution to other problems.

It’s a bad bet and likely to backfire. The U.S. needs to invest in renewable energy, but not because that would be a good way to address energy security, affordability or unemployment.

While it’s tempting to roll all our energy challenges into one, the problems and the solutions are numerous and distinct. If your goal is just to maintain moderate energy costs or achieve greater energy security, your friendly neighborhood fossil-fuel producers have the answers.

Abundant Resources

Domestic coal is cheap and plentiful, and likely to remain so for centuries. Natural gas is more abundant by the month. With new drilling technologies, there probably is enough moderately priced domestic gas to last for decades.

Similar new techniques are even improving U.S. oil production. More than half of the oil we use is now produced domestically and that share is likely to rise over the next decade. Technologies for converting coal and natural gas to a gasoline equivalent are also advancing.

Sure, the cost of low-carbon energy technologies -- wind, solar, biofuels and others -- is coming down. But improvements in technologies for extracting fossil fuels are making it harder for renewables to reach cost parity. Scientific breakthroughs are hard to predict: still, the most likely scenario is that domestically produced fossil fuels will be the lowest-cost way to meet most of our energy needs and achieve greater energy security for years to come.

The employment argument also falls short. During a recession, it makes sense for the government to promote job creation with subsidies and federal expenditures, some of which may be targeted at specific industries. In the longer run, however, economists are almost unanimous that the economy creates more and better jobs when companies operate in the most cost-effective way. If we don’t count the cost of environmental damage, that’s likely to mean carbon-based energy for generations.

Some politicians argue that the government needs to invest in alternative energy because it’s the next economic frontier. The evidence doesn’t suggest such initiatives build a sustainable industry. In Spain, renewables took off during the last decade, but the industry crumbled in 2009 when subsidies were halted during the country’s fiscal crunch. Germany made a big push in solar photovoltaic technology with subsidies more than five times the cost of conventional power generation, and manufacturing of PV systems exploded. Then China got into solar-panel production and German firms’ share of domestic PV sales fell to 27 percent in 2010, from 77 percent in 2008.

Global Warming

The only compelling argument for policies to boost renewables and reduce fossil fuels is the environment. The vast majority of climate scientists believe that carbon-dioxide emissions from burning fossil fuels are the primary cause of climate change. Most believe there is a real risk that the changes could cause major ecosystem disruptions, including more frequent droughts, floods, hurricanes and wildfires, as well as rising sea levels, more conflicts over resources and accelerated species extinction.

Economists of all political persuasions agree that the free market, by itself, won’t address unregulated emissions that damage the environment. Government policy is necessary and the most efficient policy is pricing those emissions. By doing so, we give incentives to develop all possible solutions -- solar, wind, biofuels, nuclear power, improved energy efficiency and even capturing emissions from power plants and sequestering them underground.

We need to encourage all these technologies because we don’t yet know which will be cheapest or most scalable. Those incentives, however, should be even-handed, not the patchwork of mandates, subsidies and tax breaks for favored technologies that we have today. Pricing greenhouse gases helps all low-carbon alternatives without putting a thumb on the scale.

If conservatives continue to reject carbon pricing -- even though cap and trade was the brainchild of mainstream Republicans -- then subsidizing green power is probably the best option. It is a more costly way to rein in greenhouse gases, as I explain in recent research. But if similar subsidies for all low-carbon technologies maintain a level playing field, such an exchange is still likely to be a major step in fighting climate change.

Those market incentives need to be augmented by support for the scientific research that will discover the next generation of low-carbon technologies. The federal government supports basic research in medicine, telecommunications and electronics, and needs to nurture energy technologies in the same way. As a share of gross domestic product, energy gets far less support than these other areas.

What once was bipartisan agreement on the need to reduce greenhouse gases has been recast as a political food fight. Advocates of renewable energy feel cornered by the gridlock in Congress and waning interest in climate change. But arguing that renewable energy is the best way to address economic or security concerns isn’t the way to prevail. It just focuses the debate on issues where fossil fuels are almost sure to win.

(Severin Borenstein is E.T. Grether Professor of Business and Public Policy at the Haas School of Business at the University of California, Berkeley. He is co-director of the Energy Institute at Haas and director of the U.C. Energy Institute, and a contributor to Business Class. The opinions expressed are his own.)

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