Gresham's Law and clean energy

Recently, an article on clean energy by economist Jonathan Lesser came to my attention.  In brief, it argues that government support for renewable energy sources, whether through direct tax incentives or renewable energy standards requiring utilities to buy some percentage of their electricity from renewables, gives rise to Gresham's Law.  Less economical (clean) energy sources, according to Mr. Lesser, “drive out” more economical (dirty) sources due to government support, and society as a whole is rendered poorer as a result.

Mr. Lesser's article delves deeply into the technical details of how electricity markets are supposedly distorted by incentives and standards.  By contrast, his discussion of the clear advantage of wind energy in avoiding environmental costs (no mining, no drilling, no air pollution, no water pollution, no water use, no hazardous waste) is startlingly superficial.  Here is one direct quote: “Renewable energy might reduce air pollution (although no actual evidence of this exists).”  And here is another: “The second argument, that green energy produces no air pollution negative externality, may be true, although the reduction in emissions wrought by green energy sources is far smaller than advertised because of the need for backup generation.”

Wrong and wrong again. Mr. Lesser belittles politicians for not knowing much about economics, but the statement that there is “no evidence” that wind energy reduces air pollution flies in the face of basic physics: a kilowatt-hour of electricity generated by a clean energy source displaces a kilowatt-hour that would otherwise be generated by a dirty source. To be more specific, in 2010, wind generation displaced the emission of over 75,000 tons of sulfur dioxide and nearly 50,000 tons of nitrogen oxides, the air pollutants associated with acid rain and smog.  With respect to backup, his statement is simply false–a raft of studies have found that the additional reserves needed when wind generation is added to a utility system are a small fraction of the amount of wind added, and that the additional reserves needed are slower-response non-spinning reserves, which are inexpensive and non-polluting.  Moreover, when one accounts for the fact that wind often displaces dirtier coal generation in favor of more flexible natural gas generation, the emissions savings of wind are often even larger than the amount directly displaced by wind. An AWEA fact sheet, “20% Wind Energy by 2030: Wind, Backup Power, and Emissions,” and a longer article, “The Facts About Wind Energy and Emissions,” explore this issue in greater depth.

Once one accepts the fact that wind energy displaces pollution from dirty energy sources, the fundamental underpinning of Mr. Lesser's argument begins to unravel.  That pollution turns out to be very costly indeed–a recent study by Dr. Paul Epstein of Harvard Medical School and other environmental and health experts found that accounting for the true cost of coal would add in the neighborhood of 18 cents per kilowatt-hour to its price.  That would make it roughly three times the cost of wind, which Mr. Lesser refers to as “high-cost.”  The National Academies of Sciences reached similar conclusions last year about the major environmental and public health costs imposed by coal and other dirty energy sources. Once these costs are accounted for, it is clear that adding wind energy to the grid makes society better off,  The need to account for such externalities in public policy decisions is a cornerstone of modern economics.

Other issues with Mr. Lesser's thesis:

– Wind is much less expensive than he claims.  A recent report on electric generation options by Lazard, an investment consulting firm, found new wind generation's cost to be in a competitive range with other new power plants.  Recent data from Bloomberg New Energy Finance show that wind turbine costs have fallen even further:

– The only permanent incentives in the U.S. tax code for energy are for fossil fuels.  Some have been around for nearly 100 years.  These cumulative subsidies for fossil fuels total over $100 billion, and today fossil fuels continue to receive several times as much in subsidies as wind.  AWEA's fact sheet “Wind Energy and U.S. Energy Subsidies” provides more background on this issue.

– The U.S. Department of Energy's 20% Wind Energy by 2030 Technical Report, published under the Bush Administration, not only found that there are no technical obstacles to generating 20% of America's electricity from wind by 2030, but it explicitly examined the cost of doing so:

“Incremental Cost of the 20% Wind Scenario

“Costs incurred by the 20% Wind Scenario exceed those of the no-new-wind scenario by about 2%. Although the 20% wind scenario would incur higher initial capital costs, a large portion of those costs would be offset by $155 billion in lower fuel expenditures.  The estimated incremental investment would be $43 billion (net-present-value basis; 2006$). This corresponds to about 0.06 cents/kWh of total generation, or about 50 cents per month for the average household. These monetary costs do not reflect other potential offsetting benefits.”

Gresham's Law is indeed at work here, but it operates differently from Mr. Lesser's contention–dirty energy sources, subsidized both directly and through turning a blind eye to their health and environmental costs, have long been allowed to keep cleaner energy sources out of the market, to society's detriment.