Green jobs reality check

The New York Times:

Silicon Valley’s latest, greatest hopes — clean tech and green tech — also seem to be failing despite big investments from the likes of John Doerr of Kleiner Perkins Caufield & Byers and Vinod Khosla, a former Kleiner partner.

“It is not clear anyone will make money on their green-tech investing. It looks like it was a bubble,” [Napster founder and Facebook investor Sean] Parker said.

The Washington Post:

After losing his way in the old economy, Laurance Anton tried to assure his place in the new one by signing up for green jobs training earlier this year at his local community college.

Anton has been out of work since 2008, when his job as a surveyor vanished with Florida's once-sizzling housing market. After a futile search, at age 56 he reluctantly returned to school to learn the kind of job skills the Obama administration is wagering will soon fuel an employment boom: solar installation, sustainable landscape design, recycling and green demolition.

Anton said the classes, funded with a $2.9 million federal grant to Ocala's workforce development organization, have taught him a lot. He's learned how to apply Ohm's law, how to solder tiny components on circuit boards and how to disassemble rather than demolish a building.

The only problem is that his new skills have not resulted in a single job offer. Officials who run Ocala's green jobs training program say the same is true for three-quarters of their first 100 graduates.

...With nearly 15 million Americans out of work and the unemployment rate hovering above 9 percent for 18 consecutive months, policymakers desperate to stoke job creation have bet heavily on green energy. The Obama administration channeled more than $90 billion from the $814 billion economic stimulus bill into clean energy technology, confident that the investment would grow into the economy's next big thing.

The infusion of money is going to projects such as weatherizing public buildings and constructing advanced battery plants in the industrial Midwest, financing solar electric plants in the Mojave desert and training green energy workers.

But the huge federal investment has run headlong into the stubborn reality that the market for renewable energy products - and workers - remains in its infancy. The administration says that its stimulus investment has saved or created 225,000 jobs in the green energy industry, a pittance in an economy that has shed 7.5 million jobs since the recession took hold in December 2007.

The industry's growth has been undercut by the simple economic fact that fossil fuels remain cheaper than renewables. Both Obama administration officials and green energy executives say that the business needs not just government incentives, but also rules and regulations that force people and business to turn to renewable energy.

Without government mandates dictating how much renewable energy utilities must use to generate electricity, or placing a price on the polluting carbon emitted by fossil fuels, they say, green energy cannot begin to reach its job creation potential.

"We keep getting these stops and starts in the industry. There is no way it can work like this," said Bill Gallagher, president of Solar-Fit, a Florida energy company whose fortunes have fluctuated with government incentives in its 35 years in business.

Like many people who run renewable energy companies, Gallagher said he sees no need to expand his 25-employee firm because the business is simply not there.

...[President] Obama has described the surge of clean energy spending as crucial both to the nation's economic and environmental future.

"Our future as a nation depends on making sure that the jobs and industries of the 21st century take root here in America," Obama said in October. "And there is perhaps no industry with more potential to create jobs now - and growth in the coming years - than clean energy."

But other administration officials acknowledge that it is likely to be years before the spending on green energy produces large numbers of jobs. And they add that only part of the money earmarked for green energy has been spent. They also agree that the government will have to help create demand to support green energy.

..."There is significant job creation potential in clean energy. But it is not revealing itself quickly or clearly," said Jerone Gamble, executive manager of continuing education at the College of Central Florida, and a chief architect of the green jobs training program. "In the time being, we're really selling hope."

Hope, hype and empty promises -- welcome to the green energy future. This is what happens when politicians pick winners and losers instead of markets.

Green jobs update

The Washington Post:

BP will close its solar-panel manufacturing plant in Frederick, the final step in moving its solar business out of the United States to facilities in China, India and other countries.

Just 3 1/2 years ago, in an announcement widely hailed by Maryland officials and promoters of "green jobs," BP unveiled a $70 million plan to double output at the facility and erected a building to house the production lines.

But on Friday the company said it would lay off 320 workers and keep only a hundred people involved in research, sales and project development. BP said laid-off employees would receive full pay and benefits for three months, followed by severance packages and job-placement assistance. The company, unable to sell or lease the building, will tear it down.

"We remain absolutely committed to solar," BP chief executive Tony Hayward said in an interview Friday. But he said BP was "moving to where we can manufacture cheaply."

And these are the jobs the future of our economy supposedly depends upon?

Spain's solar energy mess

Tuesday's New York Times featured an article on the Spanish solar energy industry which should serve as another cautionary tale about public sector involvement in this area. Convinced that solar energy represented a future source of prosperity for Spain's economy, politicians in that country decided to encourage the construction of solar energy plants with lavish taxpayer-funded subsidies. The results were entirely predictable:

When it was announced in the summer of 2007, Spain’s premium payment for solar power was the most generous anywhere — 58 cents per kilowatt-hour — with few strings attached.

In retrospect it was far too high. “Everyone from all over the world was installing in Spain as fast as they could, and every biologist who could add was working in solar,” said Pedro Banda, director general of the Institute of Concentration Photovoltaic Systems, one of the research institutes in Puertollano.

Even inefficient, poorly designed plants could make a profit, and speculation in solar building permits was common.

Although Spain’s long-term goal had been to produce 400 megawatts of electricity from solar panels by 2010, it reached that milestone by the end of 2007.

In 2008 the nation connected 2.5 gigawatts of solar power into its grid, more than quintupling its previous capacity and making it second to Germany, the world leader. But many of the hastily opened plants offered no hope of being cost-competitive with conventional power, being poorly designed or located where sunshine was inadequate, for example.

Subsidies inevitably generate more of whatever is being subsidized. In this case Spain subsidized solar energy and produced lots of new solar energy plants which were inefficient and didn't make economic sense. But how could it have been otherwise? If solar power was a viable source of energy the private sector would have already invested in the industry without any inducement from the Spanish government. In such interventions waste is assured, with the scale being the only unknown factor.

Attempting to place a positive spin on yet another story of wasted government expenditures on green energy, the Times' story concludes by highlighting the jobs that have been created through the public subsidies:

Even with the reduced incentives and local economic downturn, the solar industry gave Puertollano something of a face-lift and, potentially, a new economic future. Research institutes there are developing cutting-edge technologies. Unemployment, though now up around 10 percent, has not returned to the 20 percent figure. The city is home to a number of solar businesses: a new 50-megawatt thermal-solar plant owned by the Spanish energy giant Iberdrola created hundreds of jobs.

Although coal mines still dot the landscape and a petrochemical factory remains one of Puertollano’s largest employers, that new solar plant sits just next door, with more than 100,000 parabolic mirrors in neat rows on about 400 acres of former farmland. Clean and white as a hospital ward, it silently turns sunshine into Spanish electricity.

That's great, but what about all of the jobs which weren't created because the Spanish government funneled money into solar energy instead of leaving it in the pockets of its citizens to spend as they see fit? This unasked question suggests yet another journalist who fails to grasp one of Bastiat's key insights.

Related: I've previously blogged about Spain's solar energy push here.

Lessons from McKinsey: new industry promotion

Ever since reading The Power of Productivity, a book I can't recommend enough, I've been a big fan of the McKinsey Global Institute. Funding studies out of their own pockets, McKinsey's hard-headed analysis serves as a welcome antidote to much of the economic idiocy which poisons the public debate. While their conclusions typically support the case for economic freedom, it should be stressed that they have no obvious partisan or ideological axe to grind. Indeed, The Power of Productivity's author William Lewis is a registered Democrat.

I was therefore happy to discover yesterday that McKinsey has released a new report. Entitled How to Compete and Grow: A Sector Guide to Policy, the publication contains a number of economic lessons which our politicians would do well to heed.

In this blog post I will focus on the report's insights regarding government-led efforts to promote particular industries. The report's conclusions are rather timely as the Obama Administration busies itself using the levers of power in order to assist the "clean/green energy" sector, frequently cited by observers such as Thomas Friedman as the next great engine of economic growth.

President Obama's enthusiasm for clean energy technology isn't terribly surprising. Politicians frequently call for various measures to promote industries seen as sexy or innovative. During the 1990s a number of locales fell all over themselves to promote their high-tech credentials, coming up with names such as Silicon Mountain (Colorado Springs) or the Silicon Dominion (Virginia). A visit to the Maryland Department of Business and Economic Development's website, meanwhile, shows that the first industry mentioned is biotechnology.

As McKinsey points out, however, efforts by government to promote particular sectors of the economy tend to meet with rather disappointing results (click text to enlarge):

This is particularly true, McKinsey notes, for industries which are already established and feature heavy competition. With countries such as Spain, Germany and China already making high-profile moves to become clean energy powerhouses and $500 billion committed worldwide to promote cleantech, this sector certainly qualifies.

Using the semiconductor industry as an example, the report points out that even successful examples of government-led efforts to foster the growth of particular sectors have been of dubious value:

Beyond government's doubtful ability to successfully incubate and promote cutting-edge industries, McKinsey raises another superb point in its report -- they tend to be of relatively little consequence in the context of the broader economy. It's a point well-illustrated by this graph:

As the report states:

Thus, even if government were somehow granted the competence to guide new industries to fruition, it wouldn't even matter very much (except providing ribbon-cutting photo ops for politicians).

In my next blog post I will highlight some additional findings from the McKinsey report, explaining where the real jobs are to be found, why lax labor laws are the American worker's best friend and why politicians should be more focused on encouraging the development of retail stores such as Wal-Mart rather than cleantech.

China comes clean

The New York Times has an article on China's efforts to develop a clean energy industry that could well prompt renewed howls from policymakers about the danger of the U.S. being left behind in developing these supposed jobs of the future. While the silliness of looking to a poor country led by an authoritarian regime for guidance ought to be obvious, a close reading of the piece reveals even more questions about the wisdom of fostering a clean energy industry.

It suggests that China's burgeoning clean energy sector is booming not because it suddenly makes economic sense, but because of government subsidies and special treatment:

Regulators have set mandates for power generation companies to use more renewable energy. Generous subsidies for consumers to install their own solar panels or solar water heaters have produced flurries of activity on rooftops across China.

...Interest rates as low as 2 percent for bank loans — the result of a savings rate of 40 percent and a government policy of steering loans to renewable energy — have also made a big difference.

As in many other industries, China’s low labor costs are an advantage in energy. Although Chinese wages have risen sharply in the last five years, Vestas still pays assembly line workers here only $4,100 a year.

China’s commitment to renewable energy is expensive. Although costs are falling steeply through mass production, wind energy is still 20 to 40 percent more expensive than coal-fired power. Solar power is still at least twice as expensive as coal.

In other words, China's government is devoting precious resources to an energy source which is considerably more expensive than conventional alternatives. Not only that, but this vaunted industry of the future generates jobs which pay terribly.

But for the sake of argument let us concede that clean energy is destined to comprise a significant component of the economy, and that China will play a leading role. So what? Basic economic theory teaches us that if China can build wind turbines or solar panels cheaper and more effective than the U.S. then this specialization will benefit everyone. There is no point in purchasing such equipment simply for the "Made in the USA" label if it is either more expensive or of a lesser quality. Each country should focus on those products it makes best (although even this is an increasingly abstract concept given that fewer and fewer goods are entirely built in one country).

Government policy should be to back off and let the chips fall where they may. If market forces dictate that China becomes a solar panel superpower, then so be it. And if the Chinese government wants to subsidize wind turbines to make them cheaper for U.S. consumers we should thank them for their generosity.

Also see this related post.

Update: Similar thoughts from John Stossel.

Wind and rail

Today's New York Times reports that the wind power industry experienced 39 percent growth last year. I scanned the article looking for any tidbits about new technology or improvements that have brought down costs to make the technology more affordable, but didn't see much in that vein. Instead it seems the growth can be almost entirely attributable to favors being doled out by federal and state governments:

The [American Wind Energy Association] said the growth of wind power was helped by the federal stimulus package that passed a year ago, which extended a tax credit and provided other investment incentives for the industry.

...“The U.S. wind industry shattered all installation records in 2009, and this was directly attributable to the lifeline that was provided by the stimulus package,” said Denise Bode, the trade association’s chief executive.

...Much of the growth is attributable to state laws that mandate that a portion of the local power come from renewable sources.

In other words, taxpayer money in the form of subsidies and various regulations are resulting in the expanded use of a form of energy which is more expensive than other alternatives. We're paying more to accomplish the same amount, all because some politicians are convinced that wind power represents the future. It's the very opposite of economic progress.

Meanwhile, The Wall Street Journal reports on efforts by well-connected corporate interests to obtain billions in taxpayer money to bring high-speed rail from Japan -- one of the most densely-populated countries in the world -- to that tightly-packed megalopolis, Florida. Again, this is being sponsored by politicians who claim they can see the future. I have a vision of the future too -- one that doesn't work and is bankrupt.

Speculation

During the 2008 presidential campaign Barack Obama took aim at oil speculators, which he criticized for driving up energy costs. Now enjoying the levers of power, President Obama is looking to put his words into action:

With the price of gas at the pump at its highest point in well over a year, federal regulators moved Thursday to prevent excessive speculation by financial traders from driving the cost of oil even higher. The effort to adopt new limits on the trading of oil and other energy commodities is a sharp reversal after years when regulators left those markets alone.

The proposal from the Commodity Futures Trading Commission, which oversees oil and energy trading, would introduce new restrictions on what the largest traders can do. Concerned that some firms can amass such large holdings in energy commodities that their trades can have an outsize effect on the price of gasoline, heating oil or natural gas, officials said they would prevent traders "from establishing extraordinarily large positions."

This is foolishness borne of economic ignorance. While speculation -- partly thanks to the rhetoric of politicians -- has something of a negative connotation, it actually plays a very positive role in the economy. At its core speculation is nothing more than investment. It is simply speculating that some type of event will occur, usually in the short-term, and then investing money in order to profit from the event.

One example is speculating that the price of oil will rise and then purchasing it with the hope of selling at a later date after the price increase has taken place. One speculator, Victor Niederhoffer, explained the benefits of making such bets:

Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators. When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.

In short, speculators help provide the market with more information to make smarter decisions. Buying oil, for example, will push the price up and encourage conservation, ensuring more supply exists for the predicted lean times (which the speculator hopes to profit from due to the spike in price which will arise from diminished supplies).

One obvious criticism of speculation is that it could provide false information. What if the speculator is wrong and there is no coming shortage of oil? In that case the spike in prices will never occur and the speculator will lose money on his investment. The prospect of losing money means speculators do not idly place their bets.

The government, however, justifies its current intervention as cracking down on speculators who place such large bets and have such a great impact on the market that their predictions of diminished supplies become a self-fulfilling prophecy:

The agency's plan sets the new trading limits high enough that they would affect only 10 firms, agency officials said. They would not name the traders.

...The proposed limit is designed to avoid a repeat of the experience with Amaranth, a $9 billion hedge fund that imploded in 2006. In a federal lawsuit, the CFTC alleged that Amaranth traders amassed such a large position in natural gas commodities that they were able to manipulate the price. The firm, which has become the poster child for this type of activity, agreed to pay $7.5 million to settle the charges. The agency said on Thursday that its proposed position limits would have constrained much of the hedge fund's activities.

It's interesting that the federal government took such an interest in Amaranth. As wikipedia says:

By 2004-2005, the firm had shifted much of its capital to energy trading. Amaranth’s energy desk was run by a Canadian trader named Brian Hunter who placed "spread trades" in the natural gas market. Hunter had made enormous profits for the company by placing bullish bets on natural gas prices in 2005, the year Hurricane Katrina had severely impacted natural gas and oil production and refining capacity. Hoping for a repeat performance, Amaranth wagered with 8:1 leverage that the price of the March '07 and March '08 futures contracts would increase relative to the price of the April '07 and April '08 contracts (i.e., they were "long" the March contracts and "short" the April contracts).

Unfortunately for Amaranth, they did not. The spread between the March and April 2007 contracts, for example, went from US$2.49 at the end of August 2006 to US$0.58 by the end of September 2006. The decline in the spread was catastrophic for Amaranth, resulting in a loss of US$6.5 billion.

In order words, the government punished Amaranth for its activities by levying a $7.5 million fine after the company had already lost over $6 billion. Which was a greater disincentive for the company making the wrong bet, the government's fine or the punishment meted out by the market?

What therefore see is that the role played by government is at best superfluous, as the market already fiercely deals with those who place bad bets.

Towards the end of the article, meanwhile, we encounter this paragraph:

Whether speculation drives up energy prices has long been in dispute. The CFTC itself issued a report last year saying there is no evidence that financial speculation has unhitched energy costs. Some critics of the new proposal argue that precipitous actions by the CFTC will drive trading away from the United States into less-regulated markets in Europe.

In other words, the actions of the Obama Administration seem to be rooted in both ignorance of how the market works and arrogance that it can do better. It's a terrible combination for good public policy.

Chart of the day

(click to enlarge)

From this very good Wall Street Journal column on the role of subsidies in energy production. Excerpt:

In Germany, renewable energy from projects that qualified for feed-in tariffs between 2004 and 2008 will cost consumers [euro] 122.3 billion (about $175 billion) between 2008 and 2030 -- 46% more than the same amount conventional energy would cost, New Energy Finance predicts. In Spain, renewable energy from projects started under the country's feed-in tariff between 2006 and late 2008 will cost [euro] 53 billion over the Spanish tariff's 25-year life, the firm projects, a 75% premium over the likely cost of the same amount of conventional power.

Government subsidies are a great deal for energy companies, not so much for consumers.

Energy update

Pickens has a new plan.

• Alex Tabarrok posts an interesting chart on oil rigs and the price of crude.

• Coyote Blog makes a number of worthwhile observations, including that rail is actually in far greater usage in the U.S. than Europe.

• Denver Post columnist Vincent Carroll says President Obama is engaged in a green jobs fantasy.

• The New York Times says T. Boone Pickens isn't talking about wind power much anymore. But he's still trying to scare people into supporting his plan.

Chart of the day

Via Mark Perry, who argues that peak oil theory is peak idiocy.

Oil scarcity

Predictions of a collapse in oil supplies are nothing new, as illustrated by this excerpt from The Prize:

There were many in America, at the beginning of the automotive age, who worried that supplies of the "new fuel" were about to give out. The years 1917-20 had been generally disappointing in terms of new discoveries. Leading geologists prophesied gloomily that the limits on U.S. production were near. Post-World War I pressure on supplies reinforced the expectation of shortage among refiners as well. Some refiners could run at only 50 percent of their capacity because crude oil was in short supply, and local retailers around the country kept running out of kerosene and gasoline. Indeed, shortage was so much the dominant view in the industry that Walter Teagle [the CEO] of Standard Oil of New Jersey once remarked that pessimism over crude supplies had become a chronic malady in the oil business.

But the wheel had already begun to turn. The search for new sources of supply was nothing short of frantic, fueled by the expectation of shortage itself and reinforced by the powerfully alluring incentive of rising prices. Oklahoma crude, which had been $1.20 a barrel in 196, rose to $3.36 by 1920 as refiners, who had run short, bid up the price; and a record number of oil wells were drilled.

The technology for finding oil was also about to improve. Up to 1920, geology, as it applied to the oil industry, had meant what was know as "surface geology," the mapping and identification of likely prospects on the basis of the visible landscape. But, by 1920, surface geology had gone almost as far as it could. Many of the visible prospects had been identified. Explorers had to find a way to "see" underground, in order to figure out whether the subsurface structures were the kind that might trap oil. The emerging science of geophysics provided that new way of "seeing."

This is econ 101 at work. When prices go up the incentive increases to develop new sources of fuel, new technology to find that fuel, innovations to make more efficient use of the fuel and even incentives to develop new ways to harness energy (e.g. wind, solar, etc.). We may someday run out of oil, but we will never run out of energy as long as the price mechanism is allowed to work its magic.

Oil refiners

Another reason why government attempts to pick winners in the energy sector doesn't make much sense:

Only a few years ago, a cry went up that the United States needed more oil refineries. The perceived shortage was so acute that George W. Bush, president at the time, even offered disused military bases as sites for building them.

Not only did that never come to pass, but the reverse is now happening. The business of oil refining is mired in a deep crisis, with five refineries having shut down this year, including plants in Delaware, New Jersey, California and New Mexico.

Granted, part of the reason refineries are suffering is because of other misguided government interventions such as the promotion of ethanol (a payoff to agriculture interests) and fuel efficiency standards which make American cars less competitive. But oil refining has always been a tough business, and the government's attempt to predict the future is equally futile whether those making such prognostications are Republicans or Democrats.

Update: And more energy policy nonsense from Thomas Friedman here.

The green job mirage

Ron Bailey quotes a German think-tank report on the broader economic impact of the German government's push to develop clean energy technology:

While employment projections in the renewable sector convey seemingly impressive prospects for gross job growth, they typically obscure the broader implications for economic welfare by omitting any accounting of off-setting impacts. These impacts include, but are not limited to, job losses from crowding out of cheaper forms of conventional energy generation, indirect impacts on upstream industries, additional job losses from the drain on economic activity precipitated by higher electricity prices, private consumers’ overall loss of purchasing power due to higher electricity prices, and diverting funds from other, possibly more beneficial investment.

Proponents of renewable energies often regard the requirement for more workers to produce a given amount of energy as a benefit, failing to recognize that this lowers the output potential of the economy and is hence counterproductive to net job creation. Significant research shows that initial employment benefits from renewable policies soon turn negative as additional costs are incurred. Trade and other assumptions in those studies claiming positive employment turn out to be unsupportable.

In the end, Germany’s PV promotion has become a subsidization regime that, on a per-worker basis, has reached a level that far exceeds average wages, with per worker subsidies as high as 175,000 € (US $ 240,000). …

Although Germany’s promotion of renewable energies is commonly portrayed in the media as setting a “shining example in providing a harvest for the world” (The Guardian 2007), we would instead regard the country’s experience as a cautionary tale of massively expensive environmental and energy policy that is devoid of economic and environmental benefits.

The proposition that we will shift to a more costly "green energy" economy and wind up with more jobs simply defies common sense. Our entire shift towards an increasingly wealthy economy is predicated upon doing more with less -- aka increased efficiency -- not the same with more.

Also see this previous post on Germany's struggles to promote the development of clean energy technology.

Denmark leads the way?

Environmental lawyer Philip Warburg writes a column in today's Boston Globe praising Denmark's energy policies:

New homes in Denmark today are twice as energy-efficient as their pre-embargo counterparts. Waste heat from local power plants is used to heat Denmark’s houses and offices, boosting the energy efficiency of those plants from 40 to 90 percent. And with taxes on new cars and motor fuel among the highest in Europe, alternatives to automobile travel have flourished. In Copenhagen, a third of commuters travel by bike, their trips made safe and convenient by an extensive network of well-marked bike lanes.

This is an example of really bad policy being dressed up as virtue. The third sentence in the paragraph could easily be rewritten as "because of obscene taxes on cars to the tune of 200 percent, Danes have been forced to seek methods of transportation which would otherwise be less preferred." Further, at least Danes have the advantage of being located in a flat country where temperature variations are relatively small, making bicycles a more realistic alternative. Biking in the U.S., where freezing winters and blazing summers are the norm, terrain can vary and the average commute is 16 miles is not very feasibly for most people.

And convenient? Tell me about how convenient it is biking to work in the rain, stopping to pick up a load of groceries on the way home, pick your kid up from soccer practice, etc.

Warburg continues:

All this energy-saving doesn’t seem to interfere with Danish productivity. To the contrary: Danes use less than half as much energy per capita as the average American, yet their gross national income per capita surpasses our own by a resounding 24 percent.

Oh really?

It's also instructive that Warburg relies upon gross national income as a measure of economic welfare instead of other more common statistics such as GDP per capita. GNI takes into account Danish income produced overseas, such as profits from Danish companies which operate in the U.S. (where energy policies are different). But once you look at the GDP stats, you understand his cherry-picking:

According to either source the U.S. is about $10,000 per capita richer than Denmark. It's also worth noting that Denmark is less wealthy than their Swedish, Norwegian and Icelandic cousins. Spin all you like, at the end of the day government-subsidized alternative energy just doesn't make sense.

China's clean energy drive

Evan Osnos writes a fairly laudatory article in The New Yorker on the Chinese government's effort to develop a clean energy industry. He begins by noting the seriousness of China's problem with air pollution:

Last year, the U.S. Embassy installed an air monitor on the roof of one of its buildings, and every hour it posts the results to a Twitter feed, with a score ranging from 1, which is the cleanest air, to 500, the dirtiest. American cities consider anything above 100 to be unhealthy. The rare times in which an American city has scored above 300 have been in the midst of forest fires. In these cases, the government puts out public-health notices warning that the air is “hazardous” and that “everyone should avoid all physical activity outdoors.” As I type this in Beijing, the Embassy’s air monitor says that today’s score is 500.

Yikes. Now, free market economics teaches us that the best solution to externalities such as pollution is to place a tax on them in order to both discourage their occurrence, make alternatives more competitive, and pay for the costs of clean-up. Much later in the article we find out, however, that not only is China failing to tax the production of air pollution appropriately, it's actually encouraging its use:

In the summer of 2005, Edward Cunningham, a Ph.D. student researching energy policy at M.I.T., was travelling in the Chinese countryside when he noticed something peculiar: the government was allowing the price of coal to rise sharply, after decades of controls. “I said, ‘How the hell?’ ” he recalled. “ ‘That can’t be right. Maybe this is just some freak anecdotal evidence.’ ” It was in fact a pivotal change: Manipulating the price of coal had always insured that Chinese utilities would produce ever more electricity, but the unhappy side effect was that utilities needed to build nothing more efficient than the cheapest, dirtiest plants. Coal prices had begun to rise, however, and that would leave power plants no choice but to install cleaner, more efficient equipment.

In other words, while many people are hailing Beijing for its attempts to foster development in the clean energy sector, the government has also played a large hand in creating the problem such initiatives are meant to solve.

Another lesson of free market economics is that government tends to allocate resources inefficiently, in large part because it is more beholden to political considerations than market signals. Basically, the correct incentives are not in place. Thus, it came as no surprise when I ran across this excerpt, near the article's conclusion:

America has a tradition of overestimating its rivals, and China is a convenient choice these days. But, as with Japan’s a generation ago, China’s rapid advances in science and technology obscure some deeper limitations. In 2004, a group of U.S.-based Chinese scientists accused the 863 Program of cronyism, of funnelling money into pet projects and unworthy labs. (A proverb popular among scientists goes, “Pavilions near the water receive the most moonlight.”) When critics published their complaints in a Chinese-language supplement to the journal Nature, the government banned it. Less than two years later, Chen Jin, a star researcher at Shanghai Jiaotong University, who had received more than ten million dollars in grants to produce a Chinese microchip to rival Intel’s, was discovered to have faked his results. It confirmed what many Chinese scientists said among themselves: the Chinese science system was riddled with plagiarism, falsified data, and conflicts of interest.

After the Chen Jin scandal, the 863 Program made changes. It began publishing tenders on the Web, to invite broader participation, and, to cut down on conflicts of interest, it started assigning evaluators randomly. But those measures couldn’t solve a larger problem: the system that allowed China to master the production of wind turbines and batteries does not necessarily equip China to invent the energy technology that nobody has yet imagined. “Add as many mail coaches as you please, you will never get a railroad,” the economist Joseph Schumpeter once wrote. Scale is not a substitute for radical invention, and the Chinese bureaucracy chronically discourages risk. In 1999, the government launched a small-business innovation fund, for instance, but its bureaucratic DNA tells it to place only safe bets. “They are concerned that, given that it’s a public fund, if their failure rate is very high the review will not be very good and the public will say, ‘Hey, you’re wasting money,’ ” Xue Lan, the dean of the school of public policy at Tsinghua University, told me.

While the author goes to praise the Obama Administration for "repairing the legacy of its predecessor" -- which apparently transgressed by reducing funding for clean energy projects -- the article makes clear the limitations and pitfalls associated with public sector involvement in this sector. If government seeks to promote a cleaner environment it can best do so by ensuring that prices set in the marketplace reflect environmental costs and properly taxing externalities. Venture capital and the picking of industry winners and losers, however, is best left to the capitalists.

The economics of green energy

Today's New York Times features an article which basically admits alternative energy doesn't make any sense absent government intervention. To wit:

“The renewable energy industry in the U.S. is an underdeveloped developing industry,” said Michael Peck, director of external affairs for Gamesa USA, a Spanish-owned company that has two wind turbine factories in Pennsylvania. “Manufacturers, developers, utilities, financiers — they don’t see the legislative pieces that they’re all hoping for to help the industry move forward.”

...Within industry and the environmental movement, there are recurring calls for Congress to require the nation to generate 15 percent or 20 percent of its energy through renewable sources by a specific year, say 2020. General Electric, which has 10,000 wind turbines in the United States, says that to encourage growth in the wind industry, the nation should adopt a target of obtaining 12 percent of its energy from renewable sources by 2012.

“The clean energy market is gigantic and growing,” said Phyllis Cuttino, a director of the Pew Charitable Trusts’ Environmental Group. “The U.S. has a rich manufacturing base, a well educated work force and we are an innovation center. But if we don’t have the policies in place to make investment here a sure thing, then we could potentially lose to other countries. Other countries are jumping in. They have policies to take a lot of projects to scale, and that’s what’s missing in the United States.”

Nathaniel Bullard, a solar analyst at the research firm New Energy Finance, added, “In the U.S. there are problems arranging the project financing that is driving growth in countries like Spain.” Spain ranks second behind Germany and ahead of the United States in adding annual solar capacity.

...Rhone Resch, president of the Solar Energy Industries Association, said there would be more such investment in the United States if it had incentives like those in China, Malaysia or South Korea.

“In China, 80 percent of the entire cost of a factory and worker training is paid for by the government,” Mr. Resch said. “Malaysia will give you a 10- or 20-year tax holiday.”

He praised Mr. Obama’s $2.3 billion tax credit program, but said its 30 percent credits were not nearly as generous as China’s.

A few points:

• What each one of these passages reveals is that so-called green energy, which Tom Friedman and others continuously assure us represents the next great industrial sector, cannot survive without government largesse. But if such technologies represent the future, shouldn't greedy capitalists looking to make a buck be rushing to invest their money? The fact they are not speaks volumes.

• This is further evidence of the nexus between big government and big business. Corporations and financiers are eager to increase government involvement to ensure their investments are profitable, even if that means taking tax dollars away from other Americans. Business gets its payoff and government gets its green jobs -- one hand washes the other.

• The article mentions the burgeoning solar capacity of Germany and Spain, but neglects to mention what a waste such investment has been in both countries. Fortunately we can simply return to the blog archives.

Update: More on green energy follies here.

Energy update

The genius of capitalism strikes again:

A new technique that tapped previously inaccessible supplies of natural gas in the United States is spreading to the rest of the world, raising hopes of a huge expansion in global reserves of the cleanest fossil fuel.

Italian and Norwegian oil engineers and geologists have arrived in Texas, Oklahoma and Pennsylvania to learn how to extract gas from layers of a black rock called shale. Companies are leasing huge tracts of land across Europe for exploration. And oil executives are gathering rocks and scrutinizing Asian and North African geological maps in search of other fields.

The global drilling rush is still in its early stages. But energy analysts are already predicting that shale could reduce Europe’s dependence on Russian natural gas. They said they believed that gas reserves in many countries could increase over the next two decades, comparable with the 40 percent increase in the United States in recent years.

“It’s a breakout play that is going to identify gigantic resources around the world,” said Amy Myers Jaffe, an energy expert at Rice University. “That will change the geopolitics of natural gas.”

This proves yet again that capitalism and the free market are the best tools available to harnessing human ingenuity and innovation. This wasn't planned by a government agency or part of a master plan cooked up by some politicians. It's the result of efforts by individuals and companies, motivated by a desire to provide new products and services to consumers and make a profit.

It's developments such as this which are responsible for my deep skepticism towards pronouncements that we are only short years away from running out of conventional energy sources, and must "invest" public funds in alternative forms of energy production. No politician or expert is smarter than the collective wisdom of the market. This truth is borne out time and time again.

A tale of two protests

Living in Washington, DC has its advantages, one of which is the ability to attend various protests and rallies. Today I decided to check out another such event, a Save School Choice protest, held across the street from the U.S. Capitol.

Getting off at the Capitol South metro stop, I made my way across the grounds of the Capitol and stumbled upon yet another rally -- two for the price of one metro ticket. This one, I later discovered, was to kick off the campaign for Senate passage of cap and trade legislation, also known as the Boxer-Kerry bill. Here was the scene:

Grassroots, wearing suits?

As the pictures indicate, the scene was basically a bunch of well-dressed people standing around holding the occasional printed sign. If Nancy Pelosi is really looking for astroturf she can find it in her own backyard.

After only a few minutes I proceeded to the school choice protest, which was audible from the cap and trade rally. Here's what I found:

Yes, that's Marion Barry

Mostly hand-made signs here

A bit larger than the cap and trade crowd, attendees at the school choice rally consisted mainly of kids and parents. There was a constant hum of the the speakers and kids talking amongst themselves, punctuated by occasional chants of "Put kids first!" Remarks from those at the microphone ranged from bland boilerplate (Margaret Spellings) to a style more typically found at a Baptist church (PA State Senator Anthony Williams, who even threw in a Moses reference).

My favorite sign

Talk is cheap

One speaker said something to the effect of "President Obama, we love you, but why won't you support school choice for our children?" One wonders how much longer the love will persist if the president continues to side with the teacher's unions over some of his most enthusiastic supporters.

Video clips from the protest:





I soon decided to call it a day and headed back towards Capitol South, stopping back at the cap and trade rally along the way. It had all the buzz and excitement of a bowl of oatmeal:

Yes, that's John Kerry.

The contrast could hardly be more stark. One protest featured real grassroots protesting against the establishment while the other appeared to be a collection of lobbyists, Capitol Hill staffers, and corporate interests, with the enthusiasm to match. One is backed by powerful unions and one is opposed by the unions. One is supported by the president and one isn't.

Which group has the better chance of prevailing in its fight?

Solar power update

Today's New York Times:

In a rural corner of Nevada reeling from the recession, a bit of salvation seemed to arrive last year. A German developer, Solar Millennium, announced plans to build two large solar farms here that would harness the sun to generate electricity, creating hundreds of jobs.

But then things got messy. The company revealed that its preferred method of cooling the power plants would consume 1.3 billion gallons of water a year, about 20 percent of this desert valley’s available water.

Now Solar Millennium finds itself in the midst of a new-age version of a Western water war. The public is divided, pitting some people who hope to make money selling water rights to the company against others concerned about the project’s impact on the community and the environment.

“I’m worried about my well and the wells of my neighbors,” George Tucker, a retired chemical engineer, said on a blazing afternoon.

Here is an inconvenient truth about renewable energy: It can sometimes demand a huge amount of water. Many of the proposed solutions to the nation’s energy problems, from certain types of solar farms to biofuel refineries to cleaner coal plants, could consume billions of gallons of water every year.

“When push comes to shove, water could become the real throttle on renewable energy,” said Michael E. Webber, an assistant professor at the University of Texas in Austin who studies the relationship between energy and water.

It's interesting to see the environmental movement grapple with the trade-offs inherent in energy policy, and the realization there aren't any magic bullets.

Use of solar power means the destruction of desert habitats, placing the energy source farther away from where it is consumed (thus reducing efficiency) and water usage in environments that typically already suffer from low supplies. Windmills may be clean but the wind doesn't always blow and they require the development of wide open spaces. Prohibiting oil drilling in a small -- and not particularly scenic -- part of the Alaska National Wildlife Refuge means the oil will come from other places where environmental safeguards may not be as strict. Ethanol's problems are well documented.

This isn't to say that solar, wind or any other power source is evil or should be avoided. But we need to move beyond the simplistic debate we currently seem to be engaged in where fossil fuels are automatically deemed bad and alternative energy sources hailed as a pure unalloyed good.

Related post here.

California's contrasting energy fortunes

A few stories out of California in the past month:

Oxy oil discovery could spark new interest in California's energy potential -- Los Angeles Times

A few years ago, Occidental Petroleum Corp. executive Stephen I. Chazen sounded like a cryptologist out of a Dan Brown novel as he told investors that an oil bonanza awaited any outfit that could "crack the code" of California's seismically fractured underground.

Occidental's engineers may have done it.

The Westwood company revealed in July that it had found the equivalent of 150 million to 250 million barrels of oil and natural gas in an undisclosed part of Kern County using techniques that the oil company's executives would rather not talk about. It was California's biggest find in 35 years.

Energy Company Calls Halt to Drilling Project -- The New York Times

A $17 million energy project in California that was supposed to demonstrate the feasibility of extracting vast amounts of heat from the earth’s bedrock has been suspended indefinitely after the drilling essentially snagged on surface rock formations.

The project, run by AltaRock Energy, represents the Obama administration’s first major test of geothermal energy as a significant alternative to fossil fuels. But since drilling began in June, the project has encountered earthquake fears and scheduling delays.

Last month, federal scientists said that the company had fallen far behind schedule because a huge rig hired to drill down about 12,000 feet, or more than two miles, on federal land had not been able to pierce surface formations called caprock. On Wednesday, the Bureau of Land Management approved a request by AltaRock to halt the drilling operation temporarily, said a bureau spokeswoman, Jan Bedrosian.

Disputed Solar Energy Project in California Desert Is Dropped -- The New York Times

A proposed solar energy project in the California desert that caused intense friction between environmentalists and the developers of renewable energy has been shelved.

BrightSource Energy Inc. had planned a 5,130-acre solar power farm in a remote part of the Mojave Desert, on land previously intended for conservation. The company, based in Oakland, Calif., said Thursday that it was instead seeking an alternative site for the project.

The Wildlands Conservancy, a California environmental group, had tried to block the solar development, as had Senator Dianne Feinstein, Democrat of California, who proposed that the area become a national monument.

For all the talk about the promise of alternative energy it does seem awfully problematic while fossil fuels keep chugging along.