Archive for September 25th, 2008

A Good Case for Government Intervention in Energy

September 25, 2008

The energy crisis is not going to solve itself without government intervention in the form of taxes and incentives. That’s because while the free market can potentially tackle the problem, many experts on climate change have said that it cannot do that soon enough before we are already in a devastating free fall. While many libertarians (or “religious libertarians”- those who stick to extreme libertarianism) opposed climate change precisely because its solution would entail government intervention, now even libertarians realize that the government will have to step in if big change has to be affected soon enough. In an informative and engaging interview with Charlie Rose, Thomas Friedman gives a good example of why the government needs to shape the free market to move to a cleaner future.

He gives the example of someone inventing the first cell phone and bringing it to you. You would be willing to pay 1000$ a piece and buy 10 pieces because it’s going to be enormously useful to you. But naturally as many people invest in this product the way you did, prices will go down and cell phones will become widespread and cheap. Why can’t the same happen for, say, solar power (I am not really a fan of solar power but this is an example)? Why can’t someone bring an expensive solar panel to your house, expect you to buy it and watch as the cost curve goes down? Simply because right now you don’t recognise a real need or advantage for solar power. You don’t really care where you get your electricity from because it’s cheap.

But the reason it’s cheap is because oil has been subsidised. So the oil and gas market has never even been a free market. Friedman asks what would happen if you were asked to pay the full cost of the oil and coal that power your house. This cost would ideally also include the cost of deploying troops to the Middle East to secure oil deposits as well as the cost of maintaining friendly relations with the big oil producers there.

If you really had to pay this cost and if there were no subsidies for oil, then powering your home with oil would become about as expensive as initially powering it with solar power. Then you would be willing to give solar power a shot, after which economics would slowly work its way down the cost curve.

Clearly we will have to get rid of subsidies and perhaps tax oil if alternative energy has to become cheaper. The other thing we can do is wait until desperation, global energy conflict and disastrous climate change make us painfully aware of switching to other sources of energy. By then it would have been too late. That’s why the best option is to start right now and have government shape the energy market that was previously designed for dirty oil. Then market forces will work their magic and we can soon see a landscape of clean alternative energy.