Renewable Portfolio Standards

Your pseudo-candidate for the House of Representatives is back to discuss energy policy. I have already pointed out that I would oppose subsidies for renewable energy, but support a carbon tax. The proceeds of that carbon tax would be used to provide mitigation or compensation to the likely victims of fossil fuel consumption.

I should add that, earlier, I expressed my opposition to price controls (they further force innocent people to suffer the costs of other people’s consumption and reduce the incentive to switch to alternatives that do less harm to others).

I also objected to a windfall profits tax. We have good reason to tax a large number of activities, but ‘making a profit’ is not one of them. I would, however, make sure that the carbon tax covered all additional harms that will result from the energy companies marketing lies to slow our response to the threat of global warming. However, the activity being targeted here is not ‘making a profit’ but ‘doing harm, and covering it up’.

The next plank in my energy platform will be opposition to ‘renewable energy portfolio structure’ (RPS). An RPS is a law that requires energy providers in a state to meet energy demand through a portfolio of energy supplies that includes a certain percentage of renewable energy. One of the most popular RPS objectives is “20% renewable energy by 2020”. This means that, by the year 2020, the region affected by the law should be getting 20% of its energy from renewable sources.

I do not think that politicians (including myself, if I should be elected as pseudo representative) have the information that they need to know the optimum level of renewable energy production. Technically, the level of renewable energy production we should have is that level at which 1 additional unit of renewable energy costs more than the benefit it provides.

Energy suffers from the law of diminishing returns. If somebody has 1 unit of energy available (and is rational), he is going to buy the least expensive unit of energy and put it to the most valued use. The next unit of energy will be the second least expensive and go to the second most valued use. Each additional unit will be more expensive and go to a less valued use. Eventually, the cost of a unit of energy will exceed the value of its use. At that point, the agenet should stop purchasing energy and forego all remaining uses.

“Least expensive” here actually means overall social cost. We are assuming that the agent is covering the externalities imposed on others by his or her actions. Otherwise, all of the problems with externalities occur. Also, by ‘benefits’ we are also counting potential free-riders; people who can obtain benefits without paying for them. I discussed this issue in more detail yesterday in “Subsidizing Renewable Energy.”

These principles are as applicable within types of energy as it is to energy in general. So, for example, the agent purchases his first unit of energy. That unit comes from Source X. Naturally, he will use the cheapest Source X available. His next unit of energy will be the next cheapest unit from Source X – until the price of Source X has grown so high that Source Y is now cheaper. At that point, he will add energy from Source X and Source Y according to which provides the next least expensive energy.

What is the ideal ratio of Source X to Source Y that this agent should purchase? Should it be 80% X and 20% Y? Maybe it should be 50/50? Maybe, we have not yet reached a point where Source Y is a viable alternative, and Source X consumption still has a lower social cost than Source Y consumption.

We have one good way to find out. Make sure that the price of Source X energy and Source Y energy reflects the true social costs, then let people buy energy as they see fit. They will migrate towards the optimal ratio of Source X and Source Y.

However, to obscure the true social costs behind subsidies, tax breaks, and other complications destroys the information that people need to make intelligent decisions – and drives them into making stupid decisions that harm themselves and others (or, at best, fail to realize benefits that are otherwise available).

Somebody might be tempted to argue that we do not need the information and incentives that markets provide because legislatures are so brilliant and pure of heart that they can make better decisions than the market. It’s not like they are going to sell their votes to the highest bidder – bidders who are more than willing to promote policies that promote social harm, as long as those harmed are ‘others’ and those who profit are themselves.

I suggest that this view of the power and virtue of legislators is somewhat optimistic.

Another failure that legislatures will experience is their slow response to changing situations. What new discoveries are waiting for us in the next, say, 13 years? What new problems are we going to discover?

There is, for example, the problem that food-based ethanol is an inexpensive way to meet a renewable portfolio requirement. However, this involves diverting food production from providing 2 billion people with something to eat, to instead providing 800 million people with fuel for their car. Yet, the 20% RPS does not pay attention to the cost of providing this energy – it has set an absolute goal. Once the 20% limit has been set, the market is not going to pay attention to the fact that the policy is bidding the price of corn above what a couple of billion people can afford. It has statutory requirements to meet.

One way for the legislature to get around this is to write these concerns into the law. This is where the legislators lack sufficient information to make these types of decisions, or to respond appropriately. They cannot anticipate all of the changes in understanding and discoveries that would affect this law and, once they learn the new information, it will take months to get the updated data into the law.

All of this assumes that there are not special interest groups out to make a profit any way they can – without regard to the fate of the average person. As pseudo congressman working in a pseudo lecture, I can ignore all of the special interest groups However, any serving member of congress is aware of the fact that if he says something this group will not like, he can count on directing that group’s money and labor into his opponent’s camp.

Here, I want to add a comment about belief. Many people view the effects of campaign contributions is on the agent who, without using so many words, simply announce, “I hereby offer my vote to the highest bidder.” However, the effects of cash on belief is often more subtle. Many people base their beliefs on feelings – a proposition is true if it feels right. Knowledge that a particular belief will affect campaign contributions and future job prospects will alter the feeling of a particular belief. These feelings will determine whether the agent actually believes the proposition.

So, we are not dealing with a corruption that convinces legislators to support projects they do not believe in because it is profitable to do so. We have a corruption that convinces legislators to believe in projects that have no merit, though are profitable to the people who then pay professional lobbyists and public relations staff members to manufacture particular beliefs.

The option that I would support, as your pseudo representative, is to simply do the best job we can to make sure that the cost to the consumer of using various types of fuel reflected the social cost, and let the market with its blending of information and incentive work out the details.

Once again, I need to close with a comment about political reality. The reality is that the lobbyists, public relations campaigns, the lies, and the deception of the oil companies will still be there, lobbying for the right to destroy the lives, health, well-being, and property of others to the degree that it is profitable for them to do so. Against this, it may not be possible to get the social cost of burning fossil fuels built into the price. That is exactly what these people will be campaigning against.

In light of this possibility, one may have little option but to vote for renewable portfolio standards. These, at least, may have some effect on the amount of death and suffering the energy companies are capable of inflicting in the name of harvesting profits. It may be the lesser evil. However, this does not make it good.