What do you call a creature that survives by deriving nutrients at the expense of another organism? We accept two answers: parasites and the green energy industry. While they are generally one and same, at least a parasite can be removed. The sector that reeks with cronyism perpetually sucks away at the taxpayer’s teat, trying to extract every penny from your pocket. By championing climate change and promising feel-good paper pushers to help us transition away from fossil fuels, many of these niche companies will be granted millions of your tax dollars to make politicians look benevolent, cut fancy red ribbon, and eventually shutter their doors without achieving anything touted in their mission statements.
When your body hosts parasites, doctors prescribe antibiotics. When you pay green energy firms millions of dollars to pad executives’ wallets, free-market economists recommend that you stop incentivizing these businesses by handing out dollars from the public purse.
Subsidies’ ‘Virtually Nil’ ROI
It turns out that giving money to a public official’s sister’s husband to launch some vague company that is advertised as green is just tossing money down the drain.
Bjorn Lomberg, director of the Copenhagen Consensus Center, revealed an inconvenient truth in a recent Sky News interview. This realistic environmentalist contended that the world is experiencing “virtually nil” impact from the $240 billion that governments spend every year subsidizing green energy.
He posited that if the wealthiest nations in the world ended their carbon dioxide emissions, “the difference by the end of the century would be about 0.4 degrees temperature increase.”
The primary issue, he explained, is to encourage China, India, and other developing markets to slash their carbon emissions. But Lomberg conceded that they will not to do this. Why? These countries are experiencing the same thing that today’s biggest economies learned a century ago: Cheap and reliable energy lifts you out of poverty.
Is there anything governments can do? The former director of the Danish government’s Environmental Assessment Institute (EAI) does think that countries would get the best bang for their pounds, francs, and yuan by investing in energy research and development. The main hurdle to that, however, is fitting dozens of policymakers, aides, and members of the press into a laboratory for platitudes and pictures.
A host of renewable energy subsidies, which have been instrumental for federal climate policy and a cash cow for many green companies, is about to expire. The production tax credit for wind power will cease at the end of the year. Investment tax credits for residential solar energy will be phased out in three years. Commercial solar credits will tumble to 10% in 2022.
And that might be a good thing.
To stimulate the economy following the great recession, the federal government doled out $80 billion to green energy companies by extending loans, grants, and tax credits. The intention was admirable: spur economic growth while tackling climate change. Unfortunately for taxpayers, basic economics and reality reared their ugly heads in the form of insolvency.
It can be described as the “Obama green energy failure,” when dozens of businesses went bust in just a few months of feeding at the public trough. The most prominent was Solyndra, the maker of cylindrical panels of copper indium gallium selenide (CIGS) thin-film solar cells that became the poster child for the administration. It received a $535 million loan guarantee from Washington and $25 million in tax breaks from California. A couple of years later, Solyndra filed for bankruptcy, and taxpayers were on the hook for $528 million.
It is estimated that as many as 50 green firms have shut down. One of the latest recipients to fold was a Spanish company called Abengoa, betting on a green energy boom that never happened. The Obama administration granted the business $2.7 billion in federal subsidies, in addition to $605 million in grants and tax credits. Abengoa eventually filed for bankruptcy after accumulating $17 billion in debt.
Why Subsidies Never Work
A lot of bureaucrats and politicians are stumped by these trends. Since they are used to throwing money at their own re-election campaigns and securing victory for the next 20 years, such officials think dropping off bags of cash on the doorsteps of Seeing Green Inc. will save the planet and make everyone richer. But that is not how the private sector functions.
Policymakers need to learn that it is not the state’s mandate to pick winners and losers; only the free market can achieve that feat.
The private sector is all about incentives. When private investors park their money in a company, they want to see a return on that investment, so they comb through the books, engage with management, and study market trends. The government, on the other hand, will do what is politically expedient, which might consist of allocating finite resources to companies that have donated to campaigns, outfits located in areas rich with votes, or firms that appease labor unions.
Politicians immediately place businesses that do not receive subsidies at a disadvantage over companies that loiter at the spigot. What’s worse is that this type of activity distorts investment, intensifies malinvestment, and dissipates profit-loss signals. This leads to a moral hazard as well as multiple unintended consequences.
For example, young entrepreneurs and startups may have a more difficult time finding capital because investors typically choose businesses that receive government support since there is a built-in flow of funds. This then stifles innovation.
Despite the left lamenting that the fossil fuel industry receives government privileges, progressives on Capitol Hill do not shriek to the heavens about green energy being afforded the same benefits. Therefore, enterprises with a desire to be environmentally friendly are incentivized to lobby lawmakers and exacerbate the primary problem of big government.
Fuming with Natural Gas
Despite governments everywhere seeming to adopt inefficient or expensive alternative energy sources, such as wind and solar, the market points to another commodity: natural gas. Like gold in the 19th century and oil in the 20th century, the world is cheering on this cheap and abundant resource as countries everywhere phase out relics of the past, like coal. Thanks to the shale revolution, the United States has become energy independent. Not only does it export natural gas across the globe, but also it is reducing its own carbon emissions. Natural gas is what politicians thought the renewables would be by now, but the central planners got it wrong – again! Of course, do not hold your breath that it will prevent them from showering their friends and cronyist greenies with your dollars, euros, and loonies.