Most Renewable Energy Subsidies Suck (But We Don't Have Anything Better)

Alternative Heat/CC BY 2.0

Brian recently wrote about the right wing case for a carbon tax, pointing out that some conservative economists and policy wonks are now arguing for a carbon tax as a preferable alternative to either cap and trade or renewable subsidies. One of the central tenets of their argument, essentially, is that a uniform price on carbon would help the market to find the most effective means to reduce emissions, without the need for policy makers to pick "winners" and/or requiring complicated bureaucracy in the form of cap-and-trade.

Whether that is the whole gist of what's behind these conservative pro-tax rumblings or not (fellow TreeHugger John Laumer thinks it is an effort to push a politically unfeasible solution in the interests of diluting support for cap-and-trade), I was reminded of these arguments when reading about problems with Britain's Renewable Heat Initiative.

Alternative Heat/CC BY 2.0

You see while the rush of solar installations brought on by the UK feed-in tariff have lead to a bitter legal battle over the future of support for the industry, the Renewable Heat Initiative has been quietly pushed as an equally important means to cut carbon and promote cleaner technologies. By providing additional payments based on utilized boiler capacity to users of biomass heaters and other renewable heat technologies, the Government was hoping to stimulate the growth of an emerging industry and help reduce the nation's carbon emissions in the process. And by utilizing a two-tier payment system, whereby an initial proportion of fuel use is subsidized at a much higher level than fuel use above a designated level, the scheme hoped to avoid rewarding owners for burning more fuel simply to claim the subsidy. The problem, according to British satirical magazine Private Eye, is that the scheme fails to stipulate that boilers should be correctly sized:

The problem comes when someone invests in an oversized boiler and their needs are actually satisfied by the first tier of boiler capacity - because then they will always be getting the higher payment (plus an incentive to use the boiler wastefully). Stupidly, the scheme does not require that the boiler be correctly sized for their needs: and unscrupulous firms are already selling oversized boilers specifically for the purpose of abusing the scheme.

Marc Falardeau/CC BY-NC 2.0

The issue with the British scheme could, I presume, be relatively easily fixed by including a clause that stipulates appropriate sized installations in order to claim subsidies. But this highlights a much broader challenge in supporting renewables and other clean technologies—it becomes extremely hard to craft legislation that does not have some unintended consequences. When a government puts its weight behind photovoltaics, it can provide a perverse incentive to invest in a relatively expensive technology, rather than the more cost effective solar hot water heating (or even simple insulation). When a subsidy scheme pays you pretty much the same for energy you use, and energy you export, it encourages inefficient means to use every last kilowatt yourself.

I'm not arguing we should never subsidize emerging technologies. It's a proven fact that the car economy, the electric grid and the internet were all created with massive levels of Government support. But one of the most powerful, effective and—most importantly—fair ways to tackle this issue is to first make the coal industry pay for its economically ruinous impact and remove fossil fuel subsidies so that we can at least start to understand what a level playing field might look like. Whether or not that is politically feasible in a system where corporate money talks remains to be seen, but sometimes you have to worry less about what is feasible and more about what is actually needed.

Until we do see that illusive level playing field, we'll have to take what we can get in terms of encouraging the growth of clean technology. Given that the public overwhelmingly supports clean energy and subsidies for renewables, we may want to collectively invest in wind, solar, and (please!) energy efficiency even when fossil fuels are finally paying their way. But let's try to do so in a manner that is smart, effective and avoids perverse incentives.

Tags: Economics | Heating | Renewable Energy | Solar Power | United Kingdom

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