By Institute for Energy Research —— Bio and Archives February 26, 2010
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A market-based approach to reducing greenhouse gases [i.e. cap-and-trade] will provide incentives for research and development (R&D) into new clean energy technologies as firms search for ever cheaper ways to address the negative externality associated with their emissions. However...there is a separate externality in the area of R&D. Because it is difficult for the person or firm doing research to capture all of the returns, the private market supplies too little R&D--particularly for more basic forms of R&D...In this case, government R&D policies can complement the use of a market-based approach to reducing greenhouse gas emissions and yield large benefits to society. A policy that broadly incentivizes energy R&D is more likely to maximize social returns than a narrow one targeted at a specific technology because it allows the market, rather than the government, to pick winners. Likewise, funding efforts in support of basic R&D are less likely to crowd out private investment because differences between private and social returns to innovation are largest for basic R&D. (Economic Report, p. 243, bold added)
In its 2011 proposed budget, the Administration has stated a commitment to fund R&D as part of its comprehensive approach to transform the way we use and produce energy while addressing climate change. The Recovery Act investments begun in 2009 are a first step in this clean energy transformation. They fall into eight categories that are briefly described here. Energy Efficiency. The Recovery Act promotes energy efficiency through investments that reduce energy consumption in many sectors of the economy. For instance, the Act appropriates $5 billion to the Weatherization Assistance Program to pay up to $6,500 per dwelling unit for energy efficiency retrofits in low-income homes... Renewable Generation. The Recovery Act investments in renewable energy generation also are leading to the installation of wind turbines, solar panels, and other renewable energy sources... Traditional Transit and High-Speed Rail. Grants from the Recovery Act also will help upgrade the reliability and service of public transit and conventional intercity railroad systems. For example, $8 billion is going to improve existing, or build new, high-speed rail in 100- to 600-mile intercity corridors... Clean Energy Equipment Manufacturing. The Recovery Act investments are increasing the Nation's capacity to manufacture wind turbines, solar panels, electric vehicles, batteries, and other clean energy components domestically. As the United States transitions away from fossil fuels, demand for advanced energy products will grow, and these investments in clean energy will help American manufacturers participate in supplying the needed goods. (pp. 243-245)In the quotation above, we have omitted some of the items--such as research on batteries--that could plausibly be classified as "basic R&D." But as the list above shows, much of the spending programs are the furthest things from basic R&D, and are quite obviously examples of the government shoveling money to favored constituencies. Engineers already know how to weatherize homes and build traditional transit systems; there is no "market failure" here from spillover benefits from R&D spending.
[T]he projected losses for the most likely range of temperature changes are relatively modest. For example, at the Intergovernmental Panel on Climate Change's most likely temperature increase of 3ÀöC for a doubling of CO2 concentration (concentrations in 2100 are likely to be higher), the projected decline is 1.5 percent of GDP. (Box 9-2, page 242, emphasis added)That is worth repeating: The Administration's own report, in a chapter devoted to the need to "transform the energy sector," admits that doing absolutely nothing would "most likely" lead to a "relatively modest" impact. This is consistent with the CBO's modeling which showed that a "pessimistic" estimate of the damages from inaction are lower than the high-end estimate of the economic cost of the Waxman-Markey cap-and-trade bill by the year 2050. Of course, it's always possible that unchecked greenhouse gas emissions will lead to disaster. After letting the cat out of the bag regarding the "most likely" impacts from letting the market and nature run their course, the president's report tells us:
The projected relationship between temperature changes and consumption losses is nonlinear--that is, the projected losses grow more rapidly as temperature increases. For example, while the projected loss for the first 3˚C is 1.5 percent, the loss at 6˚C is five times higher. And the estimated loss associated with an increase of 9˚C is about 20 percent [of consumption's share of GDP]...Overall, it is evident that policy based on the most likely outcomes may not adequately protect society because such estimates fail to reflect the harms at higher temperatures. (ibid, bold added)Those are scary numbers, it's true. But how likely is it that human activities will cause the world to increase 9˚C, when the total warming since the start of the Industrial Revolution has been about 0.7˚C? As this graph from the IPCC's latest report shows--across three different emission scenarios and five different modeling teams--the probability of such a rapid warming is virtually zero. Once the government gets permission to transform entire sectors of the economy because of the dangers posed by extremely unlikely outcomes, the sky's the limit.
The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.