Why “The Economist” Is Wrong on Green Subsidies

November 28, 2008 at 6:30 pm 2 comments

Penned by Nick

The Economist ran a characteristically even-handed, slightly missing the point story on the virtues of transitioning towards a green economy (full story here).

Their point seems fair enough — subsidies, when misdirected, do more harm than good. The article goes on to lay out examples of how biofuels and solar subsidies have perverted the market, making irrational allocations to technologies that hold no real immediate merit.

From my perspective, this is very shortsighted argument, given that the US subsidizes the majority of its energy industries, such as coal, oil, and natural gas. A full market float on investment is a worthwhile goal, but it’s not appropriate in the early adoption stages–new technologies need government help to work through the initial machinations and consumer inhibitions that limit long-term uptake. What’s dangerous is when entire industries, such as oil, become dependent on tax breaks and subsidies to drive their profitability. When that happens, entrenched interests truly do distort the market dynamics.

In lieu of lambasting subsidies, the authors should embrace a phased approach that balances our interest in creating green jobs while redressing climate change. One step at a time is the only way forward. In most all cases, those first steps begin with a helping hand as we get our feet under ourselves, and first look to the horizon of a brighter, greener future.

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2 Comments Add your own

  • 1. Kathleen Connell  |  December 4, 2008 at 6:35 pm

    I agree with Nick. Another way to describe the early phase of taxpayer investment is to frame it as retiring the risk so that private capital ventures are more likely to succeed as the Green sector matures. As public capital does not need to see ROI immediately, it is more risk-tolerant. I would rather use public funds for global warming mitigation and job creation, creating clean exports as a matter of public policy choice than exporting,say, subsidized arms and war. Also, it is Ok to experiment, to fail, to learn, and to evolve our thinking. What is interesting to me is how quickly we learned the unintended consequences of food stock as biofuel, not that we attempted it in the first place.

    Reply
  • 2. Peter Kazanjy  |  December 7, 2008 at 9:27 pm

    Great point Nick. It’s easy to argue against subsidies when they’re brand new, but when you compare green tech against, say, petroleum tech that has *so* many subsidies, it’s tough.

    I mean, there are so many subsidies that make the incremental cost, say, of a gallon of gas incredibly different than it’s true cost, the mind spins.

    All things being equal, it would likely be better to get market clearing prices communicating the best information possible.

    However, couldn’t one argue that if the government is unwilling to subsidize green tech, shouldn’t there be investors willing to do so?

    Reply

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