Friday, January 27, 2012

Arguing Against Lunacy Part II

My last blog post generated a fair amount of discussion--which is good.  It is good to explore alternate energy sources.  One day oil could run out or become too expensive and we will want an alternative.  As one friend suggested, only 100 years ago electricity wasn't a "right" it was a luxury.

Part of the discussion in the last post centered on a question of how I can claim to be anti-government involvement and yet not decry the tax breaks that oil companies are getting. Now, I have no knowledge of what "tax breaks" we're talking about...but, I'm not an expert. Maybe they are getting tax breaks...or maybe it's just a public perception because oil companies make billions of dollars and buy politicians...I don't know. All I know is that gas at the pump is taxed to the nth degree. I also know that when one province raises royalty rates, oil companies move provinces taking the high paying jobs with them.

Maybe there are "tax breaks" but I don't think that our government is throwing money at oil companies like some countries are doing for solar and wind. And, for that I am grateful and I don't apologize. Why? I read this article in the Toronto Sun yesterday. If there was any hope of alternative energy taking hold, I believed it was going to be found in Germany. Germany pledged to get rid of nuclear. They were investing billions in solar and wind and one article claimed that Germany was the hope of green energy. In fact, I remember hearing how our decision to not follow suit was going to leave us in the Dark Ages while the rest of the world moved to a new, improved economy.  

And yet, they're running away from solar and wind. Why? At this time solar and wind are too unreliable. It's one thing for a company to receive a break in taxes when we know the result is increased investment, increased employment, increased economic development, increased prosperity. It's quite another to spend  billions on unproven technologies that apparently have none of the aforementioned benefits. But, maybe that's the idea--spend all our money going green so that we have no money and are forced to live off the land...that would be green.

One day the Henry Ford of solar will emerge, on that day the public will flock to the newer and better technology. Or, perhaps as my one friend believes, the lights will go out in our generation and we should just get used to living without electricity. But, the government should NOT be throwing our hard-earned money at pie in the sky schemes that yield no benefit.

Oh, and if the Toronto Sun is too partisan here's some other articles speaking about the situation in Germany:



Reuters via Vancouver Sun

This post is now up for discussion.

11 comments:

  1. You said: "Now, I have no knowledge of what "tax breaks" we're talking about...but, I'm not an expert. Maybe they are getting tax breaks...or maybe it's just a public perception because oil companies make billions of dollars and buy politicians...I don't know. All I know is that gas at the pump is taxed to the nth degree."

    Well it might be worthwhile to do some digging before writing yet another blog post on the subject. This is a good world wide overview comparing government intervention of Fossil Fuels and alternative energy.

    This video does a very good job of illustrating the externalities I was talking about in the last post and estimates that the true cost of gas should be about $15/gallon if you factor them all in (note: this estimate does not include subsidies and tax breaks).

    So yes Gasoline is taxed to the nth degree as you put it but when looking at the externalized costs (plus tax breaks and subsidies) the price we pay is still artificially low. This distorts the market (I am starting to sound like a broken record here).

    You said: "I also know that when one province raises royalty rates, oil companies move provinces taking the high paying jobs with them."

    Huh? I doubt this very much oil extraction requires a lot of infrastructure (especially in the tar sands), moving somewhere with cheaper royalty rates is not something that happens very often. Plus oil companies can only move to other areas where there exists oil resources.

    Take a look at the north sea for example. It has one of the highest royalty rates anywhere (and a carbon tax to boot!) and guess what, oil companies still operate there and extract oil, while providing plenty of high paying jobs.

    The point is that the money oil companies are able to make (remember Exxon is the most profitable private company in history, and some state owned oil companies are even bigger and more profitable!) means that even if tax loopholes were to be closed and royalty rates raised they would still find it very profitable to continue extracting oil. But it would go a long way towards levelling the playing field with renewables.

    You said: "If there was any hope of alternative energy taking hold, I believed it was going to be found in Germany."

    Really? Germany's move to abandon nuclear has to rank amongst one of the most bone-headedly stupid things ever done. By shutting down all nuclear power plants Germany needs to replace 25% of all its current electricity generating capacity in just 10 years just to meet current demands. If demands go up then they will need to build even more capacity. Like I said bone-headedly stupid.

    The fact that it is possible to create bad policy to promote renewable power (and much of it IS bad policy) does not mean that all policy that supports (or as I have been arguing just levels the playing field) is bad.

    The main point I am trying to make is that government policy frequently (either directly or indirectly) has large influences on the market, this is especially true in the energy sector which has a long history of direct government involvement, combined with strong lobbying clout, and a pricing system that externalizes most of the costs.

    Given how uneven the playing field is is it any wonder that renewables are just a niche?

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  2. You know, I think you may have actually made my point for me. Kuwait, UAE, Qatar and Saudi Arabia have the highest per capita subsidies...whenever one hears of per-capita income is it any coincidence that those countries also rank among the highest? In this case it definitely looks like "subsidy" = "prosperity"

    And, that's what I've been arguing. It takes money to make money! What is the result of investing in alternate energy? Judging by what is happening in Germany, it is poverty.

    And, I don't see Canada on that list either so, it looks like as I thought...we aren't subsidizing our oil industry in any measurable way.

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    1. Re: "subsidy" = "prosperity"

      BUT (and it is a big one) there is still that issue of externalities. Those costs don't go away even if there is lag time before they are fully realized.

      But back to your original point of keeping government out of industry, I am starting to get the idea you don't actually mean that.

      It is a little rich to complain that alternative energy projects get government handouts because they can't compete in the market, while at the same time defending subsidies to the most profitable companies in the world.

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    2. Ok I was going to let it slide, but I can't help myself. "subsidy" does NOT = "prosperity"

      Correlation does not equal causation.

      Sure the countries that give the highest subsidies are all rich (and there is a decent correlation). But that should hardly surprise anyone, after all poor countries can't afford to hand out massive subsidies, even if they wanted to. They don't have the money.

      So that tells us nothing worthwhile.

      What is a little more interesting is to look at any overlap that might exist between the 10 countries with the top per capita GDP and the top per capita FF subsidies. There is only one country that shows up on both lists: Qatar. That is it.*

      SO it doesn't look like there is any validity to your statement. In fact if anything the trend amongst rich countries is negative (but not significant).
      ______________

      *Note: just because rich countries are not on the list does not mean subsidies are not a problem, just less of a problem than $2500 per person as in some countries.

      As the Earth Policy institute points out: In contrast to the $500 billion in fossil fuel supports in 2010, renewable energy received just $66 billion in subsidies... Not only do fossil fuel subsidies dwarf those for renewables today, but a long legacy of governments propping up oil, coal, and natural gas has resulted in a very uneven energy playing field.

      A level playing field is all I am asking for. People who claim to support the free market should be making the same demands.

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  3. Ah yes, the original point. According to your chart, Canadian gov't subsidies to oil companies doesn't exist. I favour that as I've always said. I don't think we should now start subsidizing alternate energy sources. If your argument is that because foreign governments subsidize their energy sources that Canada should begin to follow suit, I am wholly opposed to that. We chart our own course and it is working well for us.

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    1. See my comment @Jan 27, 2012 01:23 PM for a partial reply.

      But more importantly (and the issue you have not yet addressed) is the simple fact that many of the costs of FF use are externalized (see the video I linked above).

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  4. Here are some links to back up my externalitiy claim:

    Environmental Accounting for Pollution in the United States Economy:

    oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

    Mining Coal, Mounting Costs

    In a groundbreaking article released in the Annals of the New York Academy of Sciences, Dr. Paul Epstein, associate director of the Center for Health and the Global Environment at Harvard Medical School, details the economic, health and environmental costs associated with each stage in the life cycle of coal – extraction, transportation, processing, and combustion. These costs, between a third to over half a trillion dollars annually, are directly passed on to the public.

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  5. Oil causes pollution so we should charge more for it? Okay, but what's the alternative? As is being illustrated currently in Germany, there isn't an alternative. And the video you referenced is American. Our gas is already much more expensive than theirs.

    Oil isn't underpriced right now. It is what the market will bear. The Canadian government isn't subsidizing it. It causes pollution...less so now than when gas was leaded...and it will undoubtedly become cleaner--and that's a good thing...but your conclusion that governments should subsidize alternate energy and/or tax gas more because oil causes pollution just doesn't follow. The simple fact is that when alternate energy sources become reliable and affordable industry will adopt their use.

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    1. You said: "Oil causes pollution so we should charge more for it? Okay, but what's the alternative?"

      You mean what will ultimately win in the market place once the deck is no longer stacked in favour of fossil fuels? I have no idea. That is the point, though. Internalize the costs of of gasoline and let the free market work the way it is suppose to. For a deeper look into how this work (and what the ultimate cost will be) I suggest looking up the work of Mark Jaccard. He has probably looking into this with more detail than any other Canadian.

      I am specifically not asking for the government to subsidize alternative energy, because that would require the government to pick the winning technology and I don't have faith that the government has the foresight to determine which technology is best.

      BTW that video applies just as much to Canada as it does to the US since the true cost of gas they arrive at is much higher than what we pay here in Canada.

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  6. You said: The simple fact is that when alternate energy sources become reliable and affordable industry will adopt their use.

    I am dealing with this comment separately because it demonstrates that your don't understand the point I am making.

    Thanks to subsidises and the many externalized costs (see the links in my previous comments) the deck is stacked against alternative energy. Or as Wikipedia states the "existence of externalities results in outcomes that are not socially optimal"

    THAT is the problem. Plain and simple. The artificial low prices of fossil fuels (be that because of subsidies, tax breaks, or externalities it doesn't matter) slows the rate of innovation and deployment of alternatives. Because the market is distorted). This means that alternative energy wont be competitive even when its total costs are less than the total costs of fossil fuels (remember you don't pay for the externalized costs at the pump).


    And this leads to an outcome that is worse for everyone, because those externalized costs don't actually go away (see the links from the comment @ 01:38 PM).

    I fail to see how anyone who claims to support a free market can argue that the current situation is tenable.

    Remember the free market paradigm makes several assumptions, one of them is that there are no significant externalities. But if there are significant externalities then the free market becomes distorted and leads to a perverse outcome.

    That is what I want to fix.

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    1. No, I understand your argument. I just don't agree with your argument. But, I respect your right to hold it. And I thank you for engaging in a thoughtful, respectful manner.

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