THE COST OF CHANGE: RENEWABLES VERSUS OIL & GAS

There is an ongoing debate regarding climate change in the Unites States, with both sides entrenched. My personal view is that the climate is warming. Many politicians want to replace oil and gas with renewables in order to prevent global catastrophe from climate change. Reasonable questions to ask are: a) What will be the cost? and b) What is the chance of success?

With the wrong public policies, we could fail to prevent climate change and also end up creating different devastating effects. For this reason, we should think about costs and uncertainty of these public policies.
Estimates of these costs are difficult to find. The University of Chicago has compared renewable energy with oil and gas and created some interesting information, which can be of use for this purpose. http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.30.1.117

Here are the high points of the paper (which you should read for yourself):

  1. Renewable energy sources will never be cost competitive with oil and gas, without subsidies and/or taxes. (This seems pessimistic, but the paper is looking at this over the entire US.)
  2. We have fossil fuels to last for a long, long time. (We cannot count on them running out to drive the change to renewables. And we need them to provide base load energy when the sun is not shining.)
  3. For electricity generation, the average cost in the US of renewables will be twice that of natural gas. Solar electricity is competitive now in the Southwest, not in the rest of the US. Wind is competitive now in some windy locations. Electricity-storage technology to avoid base-load fossil fuel plants was not included in the analysis, as they would have made renewables even more expensive. The per MWh costs of solar and wind projects will increase as they are built in less sunny and/or less windy locations. (I expect this effect will be largely offset by innovations, but the authors of the paper were more pessimistic.)
  4. For replacing oil as a fuel for cars, price of oil would have to be seven times higher than it is now. It may get down to two or three times the price in the future. (The upfront cost also, without subsidy, is still high. The next generation of EV cars from Tesla and GM will be 40% more than a comparable petrol car.)
  5. Carbon tax or cap-and-trade, if adopted in the US, would be undercut by improved fossil fuel technology, so that is not the solution. (The paper does not give a solution.)
  6. ‘Direct compensation’ has to be given to the poorer, developing countries so that they can be encouraged to move to expensive, clean energy too, or it doesn’t matter what the US does.

I wondered what the cost would be in the US of a renewable energy policy to get rid of fossil fuels as soon as possible. The US spends USD 1.5 trillion a year for its energy. So, being optimistic, and assuming the switch to non-fossil fuels before they are economically competitive only doubles the cost, it will cost another USD 1.5 trillion for our own needs. Assuming the US population is about 300 million, that is USD 5,000 more per person per year, or USD 12,000 per household, on average. The total personal US income is USD 14.7 trillion, so costs to each US person would be an extra 10% of income, on average. Real wages have fallen 7% since 1999. The impact of removing another 10% of income would be very painful and have serious economic consequences. For many people, a loss of 10% of incoming wealth would be devastating.

However, replacing fossil fuels with renewables in the US is not sufficient. If we are going to avert a global climate change catastrophe, it will require all the big countries to change and that means to ‘help’ the less developed countries skip the stage of fossil fuel use and go straight to renewables, using ‘direct compensation’, according to policy advocates.

If the US supports half the world’s ‘direct compensation’ (for 3.5 billion people), and those people only use only 1/4 of the energy we use per capita (until they are fully developed), then that is a cost of USD 4.6 trillion a year, or USD 15,400 per US person per year. Thus, the total cost of the ‘direct compensation’ plus additional cost for energy would be USD 20,400 per person or 40% of the average US household income. In recent conversations about this in social media, no advocate mentions this, but without solving the problem in other countries the chance of preventing climate change is zero. Obviously, this sort of wealth reduction would be devastating to the lives of most people.
Which politicians will be the first to explain the actual costs of their clean energy policies to their taxpayers? Can anyone convince people to spend this 40% of their money, for the potential benefit of future generations?

To attempt to justify such hugely expensive environmental policies requires believing four things happen:

First, we have to believe the planet is warming. I believe that there is some evidence of that and it is a reasonable conclusion.

Second, that there will be a global catastrophe due to this warming. That requires models that we can believe. I’m not at all sure that these models are accurate. The only way to prove a model is to have it make a prediction, then see if it was right. The track record of predicting increasing catastrophes in the short term isn’t great, but the models will improve and we will collect more data as time goes on.
Third, that by changing energy use, we can make a difference in time to prevent catastrophe AND that the changes we induce will not also cause a different catastrophe. Sucking up large portions of wealth from developed nations and dropping it into poor nations is a great recipe for catastrophe. Avoiding that catastrophe appears to be beyond the ability of our most extraordinary policy-makers.

Fourth, we have to believe that we can convince all the big, developed nations to tax wealth heavily without obvious short-term benefits to their own voters. That I cannot believe will really happen. It would take epic, historical, global leadership at a time when we cannot agree on very much at all.
Here is my most optimistic estimate of the chance of success of the proposed US renewables policies: (chance of warming = 100%) (chance of models eventually predicting the future = 70%) (chance that we can prevent catastrophe in time without causing a different catastrophe = 20%) (chance of convincing big, developed nations to tax the public heavily without obvious, short-term benefits = 1%). This yields an overall chance of success of 0.14%.

Taking a small amount of public money with a high chance of solving a problem is a worthy cause. For example, helping flood victims get their lives back together. Building more storm tolerant and energy efficient buildings is another.

Taking 10% or 40% of the public’s money (in the form of subsidies, taxes or higher energy costs) and not actually reducing the warming trend would mean that there would be no money to help climate change victims and people in need of many other forms of help. In addition, if the climate catastrophists are right but the other nations do not change, our children will need that money for survival.
These policies are expensive and unfortunately, we are already massively in debt. The US current debt per household is currently almost three years of average household income. It will end up much worse that because our generation will have our old age subsidized by our, fewer, children. That is a problem to be solved that has 100% chance of causing catastrophe and that we have 100% chance of being able to solve, if policy makers focus on it. You do not have to look hard to find many more huge problems that we have high chances of being able to solve at a much lower cost. Perhaps the worst thing about the current renewables policies is that they distract us from problems that can be solved.

Aside from climate change, there has been criticism of the University of Chicago paper’s failure to include externalities about health effects of fossil fuels. At least in the US, air pollution is down 69% in the US since 1970, thanks to the Clean Air act. Under existing policies, for example the move from coal to natural gas and increasingly efficient vehicles, it is reasonable to expect that the air will continue to get cleaner. Renewables have their own health problems (e.g. low frequency windmill noise, disposal of large quantities of battery waste, repurposing of woodlands and farms,) and we will discover new challenges as we use them more, as with any relatively new technology.

Advocates of renewable energy often mention that the oil industry is being subsidized and that keeps renewable energy from being cost competitive. According to clean energy advocates Priceofoil.org, there are 28 subsidies for oil in the US. They total USD 4.5 billion/yr. That amounts to USD 15/yr per person in the US, far too little to make any difference in the public’s energy choices. The biggest three subsidies are the Strategic Oil Reserve, Fuel Tax Exemption for Farmers and the Low-Income Home Energy Assistance program. Together these make up 57% of the subsidies, and there is zero chance, politically, of getting rid of them even if a left-wing government were fully in charge. The government should remove all subsidies, which simply route public money to those people powerful enough to lobby for them, and distort the free market which hurts innovation. There is zero chance of that happening either, unfortunately.

Questioning the renewables policy is the opposite of ignoring the problem. It is easy to say we should simply use renewables and not oil and gas. Advocates for these policies should worry what these policies will cost the average citizen, how they will pay the costs, and also the chance the policies will actually solve the problem. Governments are very good at creating new problems that they say they can cure with even bigger government.

US CO2 emissions have been reducing since 2005. Renewables technology is getting better rapidly. Contrary to the University of Chicago paper, the free market may mitigate the risk of climate change without negative economic effects caused by expensive policies. I think that governments should quit pretending that they know best which energy technology is best. They should work hard to keep the markets as free as possible to encourage competition and innovation. That is our best chance to avoid catastrophes.

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