THE CASE FOR CLEAN ENERGY
2012
The crisis in the climate system is the biggest market failure we have ever faced. To deal with it, we need to set the market within a robust policy framework so that the price of those products and services that involve emissions of greenhouse gases come to reflect the costs of damage in terms of climate change. A strong and stable approach to carbon pricing corrects market failure and ensures that new low-carbon technologies, such as wind, solar and carbon capture and storage, are able to compete on a level playing field against fossil fuels.
However, these low carbon technologies are obstructed not only by market failure but also by the inability of capital markets to manage the risks attendant with investments in these technologies. There are additional problems with respect to the limitations of networks, particularly public transport and grids. The technological opportunities that are available have yet to be appreciated by governments, firms and consumers.
Given the straitened public finances, it would seem that these market failures would be better addressed through the tax system so as to disincentivise high-carbon activities or through government action so as to regulate against them.
The design and implementation of such policies comes with a time lag, and this entails the danger of locking in emissions in a high-carbon infrastructure.
So, as market failures are addressed and a strong and stable carbon price system is established, there is a need for government to assist low-carbon technologies through direct subsidies. In time, as the costs of development and deployment start to fall, as market failures are corrected and carbon markets become stronger, these subsidies can be reduced and eliminated.
However, the reductions in subsidies for low-carbon energy need to be undertaken as part of a predictable rule-based system. An ad hoc approach brings an uncertainty that undermines the confidence of the private sector and deters badly needed investment in the power sector.
The case against subsidies for low-carbon technologies tends to be made by those who espouse a ‘free’ market approach. In truth, it is the case outlined above that makes markets work properly. Paradoxically, the free market approach prevents the proper functioning of the market. In order to deliver prosperity and wellbeing, markets need to be harnessed within a public policy framework that ensures that markets fulfil their function in providing incentives and promoting entrepreneurship.
As part of a public policy framework, subsidies for low-carbon technologies are crucial to efforts to reduce the emissions of greenhouse gases in a way that is efficient and effective way. Government must demonstrate leadership in designing and implementing energy and climate policies that not only address the problem of climate change but position the economy within the developing markets for cleaner goods and services, supporting creativity and innovation in the power sector and moving the economy in the direction of sustainable growth. Delay, obfuscation and incoherence here inevitably mean higher concentrations of greenhouse gases in the atmosphere and an intensification of the threat to the world as a result of climate change.
The case for clean energy is based on robust economics. It is time to be robust in politics so as to implement the economics of clean energy.