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Gresham’s Law of Green Energy

The concept of Gresham’s Law can be broadly stated as “the bad drives out the good.”

Industries that require never-ending subsidies simply cannot increase overall economic welfare. To conclude otherwise is to believe in ‘free-lunch’ economics of the worst kind. Yet, free-lunch economics are driving the push for renewable energy.

 

Jonathan A. Lesser, of Continental Economics, wrote an interesting essay describing the implication of subsidies to so-called green energy. Lesser argues that subsidized renewable resources drive out otherwise-competitive-generators in what he calls “Gresham’s Law of Green Energy.”

 

But what of some of the other arguments for subsidizing green energy? Lesser tackles each of these in turn. First, he argues that the idea that renewable need subsidies to compete with already subsidized fossil fuels is adding a wrong to a wrong. Market distortions are harmful, and existing subsidies ought to be repealed, not added to.

 

Next, Lesser argues that the pollution-reduction benefits of renewable may be overstated (due to the need for backup capacity), and are far more expensive than alternative policy options.

 

The argument that green energy helps reduce dependence on oil, and thus price volatility, is a straw man. Lesser points out that backup capacity is fueled not by oil but natural gas, pushing us towards greater vulnerability to natural gas volatility.

 

The final argument is that renewables need subsidies to clear market barriers. Lesser argues there is little economic justification for funding expensive and uncompetitive technology, unless it provides a public good. However, he points out that market’s for carbon certificates already exist, solving this problem without tremendous expense.

 

What about jobs?

Lesser provides those skeptical of the many job creation claims plenty of ammo. Any shift in financial capital to the green energy industry (via taxpayer dollars) will be offset by higher electricity prices. Not only will consumers have less to spend, but goods that require electricity for production (practically everything) will be more expensive.

 

“Egregious” Cape Wind Project

His example is the Massachusetts Cape Wind project. The state government signed a 15-year contract with the utility National Grid to purchase power from the wind farm at above-market rates. In fact, starting with $75 million in the first year of the contract and ending with $140 million, the contract obligates Massachusetts to pay $1.5 billion above and beyond market rates for this electricity.

 

The argument is not whether building a large wind farm creates jobs and revenue for these companies. It’s whether the economic benefit of doing so exceeds the $1.5 billion in wealth lost elsewhere. Likely speaking, that money could have been better spent elsewhere, or otherwise invested in more efficient and productive parts of the economy. Lesser even points to a report advocating subsidies which concludes, absent them, the green energy industry would contract. This is the textbook definition of a market distortion, and the resulting inefficiency harms electricity ratepayers.

 

Read a summary of the paper. Read the paper.