October 13, 2010

How Should We Pay For Renewables?

What’s more beneficial to our country and environment — a rapid deployment of renewable technologies through specially crafted policies and incentives or letting market determine which technologies win?

Renewable advocates argue that incentives like renewable portfolio standards or feed-in tariffs in which utilities pay consumers for power generated by the solar panels or fuel cells will kick-start domestic industries and make national energy supplies more secure.

See the German solar miracle, which has made the cloudy country the largest solar consumer in the world and a major manufacturer of panels. California has become a hotbed of solar activity because of federal and state tax credits that cover more than 30 percent of the costs of the equipment. Ideally, the incentives and supportive policies can be phased out over time.

Free market advocates argue that incentives distort the market. See the Spanish solar debacle where fluctuating incentives lead to economic chaos for solar companies that rushed to Spain. In Texas, some wind farm owners actually pay customers to take electricity because a wrinkle in the incentive programmakes it profitable for them to encourage consumption.

Historical examples support both sides. Railroads criss-crossed the country in the 19th Century in part because of sweetheart land grants from states and the federal government. The U.S. freeway system, created for national security, lead to a population boom and new cities in the Southwest. The Internet? It grew out of military research program. Companies like Yahoo, Google, eBay and Amazon wouldn’t have ever been born if the government hadn’t built the basic infrastructure.

Policy, in fact, already plays a large role in energy. Federal tax-based subsidies for fossil fuels in the years 2002 to 2008 were cumulatively $72 billion, versus corn ethanol at $16.8 billion and all other renewables at $12.2 billion, according to the Environmental Law Institute. Worldwide, fossil subsides in 2008 came to$550 billion while alternative energy subsidies only came to $45 billion, according to John Denniston of Kleiner, Perkins, Caufield and Byers.

But how about those inefficient national airlines? or hydrogen cars? Government is often not good at picking winners, say critics, but good at keeping mediocre choices alive. The computing revolution and things like inexpensive Internet-based phones didn’t happen because of government regulations and support. These industries often pushed against government control and support. Incentives will blunt the need to innovate.

What do you think we should do?

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