A GOOD CASE FOR GOVERNMENT INTERVENTION IN ENERGY

The energy crisis is not going to solve itself without government intervention in the form of taxes and incentives. That’s because while the free market can potentially tackle the problem, many experts on climate change have said that it cannot do that soon enough before we are already in a devastating free fall. While many libertarians (or “religious libertarians”- those who stick to extreme libertarianism) opposed climate change precisely because its solution would entail government intervention, now even libertarians realize that the government will have to step in if big change has to be affected soon enough. In an informative and engaging interview with Charlie Rose, Thomas Friedman gives a good example of why the government needs to shape the free market to move to a cleaner future.

http://video.google.com/googleplayer.swf?docId=7243455879973824994:152000:3209000&hl=en

He gives the example of someone inventing the first cell phone and bringing it to you. You would be willing to pay 1000$ a piece and buy 10 pieces because it’s going to be enormously useful to you. But naturally as many people invest in this product the way you did, prices will go down and cell phones will become widespread and cheap. Why can’t the same happen for, say, solar power (I am not really a fan of solar power but this is an example)? Why can’t someone bring an expensive solar panel to your house, expect you to buy it and watch as the cost curve goes down? Simply because right now you don’t recognise a real need or advantage for solar power. You don’t really care where you get your electricity from because it’s cheap.

But the reason it’s cheap is because oil has been subsidised. So the oil and gas market has never even been a free market. Friedman asks what would happen if you were asked to pay the full cost of the oil and coal that power your house. This cost would ideally also include the cost of deploying troops to the Middle East to secure oil deposits as well as the cost of maintaining friendly relations with the big oil producers there.

If you really had to pay this cost and if there were no subsidies for oil, then powering your home with oil would become about as expensive as initially powering it with solar power. Then you would be willing to give solar power a shot, after which economics would slowly work its way down the cost curve.

Clearly we will have to get rid of subsidies and perhaps tax oil if alternative energy has to become cheaper. The other thing we can do is wait until desperation, global energy conflict and disastrous climate change make us painfully aware of switching to other sources of energy. By then it would have been too late. That’s why the best option is to start right now and have government shape the energy market that was previously designed for dirty oil. Then market forces will work their magic and we can soon see a landscape of clean alternative energy.

CORN ON THE SOB

There’s an interesting debate in the December issue of Chemical and Engineering news, which pits two professors and well-known energy experts- David Pimentel of Cornell and Bruce Dale of MSU- on opposite sides of the biofuel debate, specifically the ethanol from corn debate.

The debate is quite instructive and you can read about it yourself (access should be free). I have been an opponent of ethanol from corn ever since I first heard one of David Pimentel’s viewpoints. The main issue concerns the “energy balance” of corn production. It turns out that by many estimates, more energy from fossil fuels (in terms of corn fertilizer, transportation etc.) is put into producing ethanol from corn than is obtained from using the ethanol. Pimentel believes that this balance is negative; you put in much more energy than what you get. Dale makes some arguments which I find strange, arguing that one must consider the exact character of the fossil fuel sources that are being used (gas, coal or oil) otherwise one is comparing apples to oranges. As far as I am concerned, all are fossil fuels, so it’s not going to matter which one is used. All are going to be expensive in the future, in one way or the other. Ethanol from grass provides a better alternative to that from corn, but even there Pimentel contends that that sheer volume of carbon source that one gets from grass is less than that from corn.

In any kind of energy source evaluation, it is always important to consider the ancillary sources involved that may contribute unfavorably. For example, in considering solar and wind-power, one must consider the cost of materials for construction, the land used and the fate of those materials in the future to name a few significant factors.

Many Americans don’t realise that diverting corn away from food production can have an immense impact on the American way of life. Michael Pollan’s truly excellent The Omnivore’s Dilemma makes it clear how much dependent Americans are on corn, which pervades almost everything they buy in the supermarket. We should shudder to think of an “American Corn Famine” akin to the Irish Potato one. If corn is diverted to produce ethanol, Americans will wake up to an unpleasant shock, where almost everything they buy for their daily consumption has become expensive. More than 60% of all corn goes not in human food products directly, but into animal feed. Cattle, hens, and even salmon are fed corn these days. (Maybe that’s why grandmothers don’t like meat that much anymore). Cheap corn-fed beef is a luxury Americans may not enjoy if corn supply starts getting diverted into producing ethanol. And even with much corn being used for fuel, as Pimentel demonstrates, it won’t fulfill more than a small amount of this energy-hungry nation’s energy needs.

In any case, I have always thought that the reason ethanol from corn has received so much attention is because of the gratuitous lobbying in Washington from corn companies, and the resulting shameless pandering that Bush and other officials have demonstrated in terms of the obscene subsidies that corn gets. Seriously, is the United States truly a free market economy, with such ridiculous subsidies offered to corn and oil?

Clearly there has to be a better solution. As with so many other things, ethanol and corn seem to have been oversold by George W. Bush, along with the accompanying corny lines.