Econ-Utopia: Greenbacks for Green Energy
By Jonathan Teller-Elsberg, CPE Staff Economist
With Al Gore on Oprah giving his “inconvenient” PowerPoint presentation, new reports of melting ice sheets and rising sea levels, and the release of the British government’s Stern Review, which is the latest major estimate of the economic costs of climate change, the issue of global warming is becoming a part of mainstream politics and kitchen-table conversations. Since the burning of fossil fuels (oil, natural gas, and coal) is the main source of human-caused warming, the need for alternative forms of energy is clear.
Historically, low prices for fossil fuels have meant that renewable energy systems were rarely economically viable. With improvements in technology and production methods, renewable energy has been closing the gap over time. But one thing has almost always been left out of the equation: the long term, hidden costs of global warming from fossil fuel use. These costs might be financial (the cost of building new homes for people displaced by rising oceans), human (the trauma people experience when their way of life is ruined), or something else (the loss of millions of species of life than cannot survive a hotter planet).
In the language of economics, this is an example of a “negative externality,” a cost that is not included in the market price. As a result, the monetary price is “wrong”—in this case, the monetary price of fossil fuels is too low, and so people use more fossil fuel than they would if they knew the “true cost.”
Lately, some governments have taken the question of energy’s true cost to heart, and created incentive plans called “feed-in tariffs” to promote renewable energy. Germany has been at the forefront with its 2004 law, the “Renewable Energy Sources Act.” The law mandates that electric utilities must pay a guaranteed price to anyone who installs a renewable energy system, and that price is guaranteed for 20 years. The price the utility pays is much higher than the price the utility charges for fossil-fuel derived energy that it supplies.
For example, if you put a small photovoltaic (solar electricity) system on the roof of your home and connected it to the electric grid, the German utility must pay you just over 68 cents per kilowatt-hour (kWh) (calculated at the exchange rate on 12/14/2006). Meanwhile, the price you would pay for electricity you get from the utility would be around 20 cents/kWh.
The German government’s logic is that each bit of electricity that comes from a renewable source instead of a fossil fuel has long-term savings built in, because the renewable energy isn’t contributing to global warming. The law turns those long-term savings into cash up front that citizens can use for investing in green power.
As a result, there has been an explosion of interest in alternative energy in Germany. In 2005, some 635 megawatts (1 megawatt = 1,000 kilowatts) of new solar electric systems were installed—enough power to supply the needs of nearly 60,000 average American homes (and the average German home is almost surely more efficient). Spain, Italy, Greece, South Korea and France have all followed Germany’s lead and established their own feed-in tariff systems.
Starting in 2007, residents of California will enjoy a similar incentive to go green; the state’s feed-in tariff guarantees a five year contract paying 38 cents/kWh for newly installed photovoltaic systems. With all that valuable beachfront property to worry about, it’s no wonder that California is leading the way in the U.S. to avoid catastrophic global warming. But the only hope for sufficiently reducing greenhouse gas emissions to save Malibu is that the rest of the country (and world) follow a similar path to make fossil fuels the economic losers that they ought to be.
Sources and resources:
For a taste of the bad news on global warming, see
- BBC News, “Gravity satellites see ice loss” 10/20/2006; “Climate change fight: can’t wait’” 10/31/2006; and “Sea-level rise: under-estimated’” 12/14/2006
- Gerald Wynn, “Carbon Emissions up One-Quarter Since 1990” 12/8/2006
- Jeremy Lovell, “2006 Set to be 6th Warmest Worldwide: UK Report,” Reuters (via Commondreams.org), 12/14/2006
For Al Gore’s An Inconvenient Truth
- An Inconvenient Truth
- Oprah, “Global Warming 101 with Al Gore” 12/5/2006
- Pew Research Center for People and the Press, “Little Consensus on Global Warming” 7/12/2006
For information on photovoltaics, feed in tariffs, and electricity usage, see
- Wikipedia, “Photovoltaics,” accessed 12/14/2006
- Energy Information Administration, U.S. Department of Energy, “U.S. Household Electricity Report,” Table US-1, “Electricity Consumption by End Use in U.S. Households, 2001,” 7/14/2005 (accessed 12/14/2006
- Craig D. Rose, “Solar energy’s day is dawning: State to embark on its biggest-ever photovoltaic project,” San Diego Union-Tribune, 12/10/2006
For an overview of renewable energy options for homeowners, small businesses, and communities, The Citizen-Powered Energy Handbook by Greg Pahl.
© 2007 Center for Popular Economics
Econ-Atrocities are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.