Basicwomen's Blog

{November 4, 2010}   Green Energy Subsidies, Bad for the Environment?

– by Vivekananda Nemana, Staff WriterGreen Energy Subsidies, Bad for the Environment?

Subsidizing clean energy might actually worsen climate change, according to a new economic study by the University of Victoria.

Impossible, right?

It isn’t, according to the study’s authors. Higher emissions due to low-carbon energy subsidies, they say, could be a very plausible result of thefundamental principle of economics:  supply and demand.

Basically it works like this:  when governments subsidize alternative energies, it lowers the market price of those fuels.  A lower price means a higher demand for that good, which translates into more consumption of fuel.  Since alternative fuels, especially ethanol, aren’t perfectly emissions-free, say authors Emma Hutchinson, Peter Kennedy and Cristina Martinez, the resulting increase in fuel consumption could actually push emissions higher than current levels.

But that broad generalization leaves lots of variables open, doesn’t it?

It does, and the authors do address most of them.  We have the emissions level of the low-carbon fuel, which can be illustrated as a ratio of fossil fuels emissions, the market share of fossil fuels and alternative energy, as well as something known as price elasticity of demand, which measures how much more or less of something you would buy when the price changes.  Suppose you had $100 to spend on gas per week, and gas cost $10 a gallon (not all that unrealistic, as assumptions go).  Now let’s say the price of gas suddenly dropped by half, to $5.  If your demand for gas were highly elastic, then you would double your consumption to 20 gallons a week and continue spending $100 a week.  On the other hand, if elasticity were highly inelastic, then you would keep buying 10 gallons per week and just spend $50.  Usually elasticity is somewhere in the middle, in which case you would spend less than $100 but still buy more gallons should the price drop.

Like most economic research, the University of Victoria study is theoretical in the sense that the authors did not actually measure an increase in emissions themselves.  But they did use real data in their calculations to give their results a bite.

Using relevant studies, the authors calculated that the market share of high-carbon energy in 2004 was 97.5 percent, and that ethanol released three-fourths as many emissions as ordinary fossil fuels. From this they determined a critical elasticity ratio of 0.33.  If the elasticity of demand exceeded this number, then a subsidy would actually increase emissions.

The elasticity of demand is difficult to determine, so the authors mapped nine different estimates (made by other studies) over the critical ratio. They found that fully seven of the estimates exceeded it—meaning that, at current economic and technological levels, subsidizing ethanol would actually increase emissions and worsen climate change.

Much of the debate surrounding alternative energy has so far centered around pure economic efficiency—fossil fuels are prohibitively expensive, say skeptics, so it doesn’t make sense to pursue them.  Of course, technological progress always makes things cheaper, and the more research and development we conduct the cheaper fossil fuels will become.  This is the major economic argument in support of subsidizing clean energy, in addition to the threat of economic disaster should global warming hit a tipping point.

The University of Victoria study, however, raises a different question: with all our pure environmental intentions, are we actually making things worse?

Theoretically, yes. But realistically, the study leaves out some important considerations that limit the strength of its message. F or one, it assumes ethanol to be the only alternative to fossil fuels, when that’s certainly not true.  Nor is it the best alternative we have.  Almost any climate scholar would agree that “traditional renewables” such as wind and solar energy are better for the environment than corn-based ethanol. Plus the authors make the questionable assumption that the price of green and regular energies is the same, though we should infer that it was probably to make the calculations more manageable.

For better or worse, subsidies for green energies are puny next to those of fossil fuels. According to the Environmental Law Institute at the Woodrow Wilson International Center for Scholars, fossil fuels received a combined $72.5 billion in tax breaks and direct spending between 2002 and 2008, whereas renewable energy sources only got $29 billion. (Check out the report here [] and a very helpful graphic here []).

What’s more is that just $12.2 billion of the renewable money went to the greenest sources, traditional renewables, while $16.8 billion went to corn ethanol. But that number is rising. Between 2007 and 2011, the US government spent $35 billion on green subsidies.

So what exactly does the University of Victoria study tell us to do? I have not yet been able to get in touch with its authors, but the main lesson here seems to be that subsidies, any subsidies that is, have a side effect that governments must consider.  It certainly doesn’t mean that the government shouldn’t incentivize clean energy, or that it should continue subsidizing fossil fuels.  It only means that we must approach subsidies with caution.

For decades economists and activists alike have pointed out the detrimental effects that corn subsidies have by lowering the price of corn. The same is true of alternative energy, even though alternative energy on its own is desirable.  While this dimension generally gets neglected by policymakers, the good news is that the effectiveness of subsidies is falling under increasing scrutiny.

At the end of the day, we cannot draft blunt policy lines to cure a complex problem.  We have to thoroughly consider short-term and long-term costs and benefits to draft an environmental policy that is best suited to stave off an imminent climate change disaster.

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