Policy Documents

Research & Commentary: Energy Inducement Prizes

March 24, 2014

Under the pretext of climate change mitigation, energy portfolio diversification, and energy independence, the federal government and many state governments have implemented costly subsidies and mandate programs that benefit selected energy companies and energy types.

Despite the questionable virtues of such programs, many lawmakers support subsidizing renewable energy and other low-carbon-dioxide emission technologies as a reason to hand taxpayer money to special interests. For example, a Reason Foundation analysis of the U.S. Department of Energy’s Section 1705 Loan Guarantee program found the guarantees were allocated broadly in proportion with the recipients’ lobbying expenditures, despite many showing a severe lack of merit. The study found 22 of the 26 investments were rated as junk grade or lower, with the other four projects rated among the lowest investment grade class. Today, many of those projects have failed or remain incomplete.

As economics and law professors Andrew Morriss, William Bogart, Roger Meiners, and Andrew Dorchak note in The False Promise of Green Energy, governments fail at choosing technologies because they’re insulated from market signals, have short-term vision cycles, and encourage firms to spend more on lobbying than producing to meet market demand.

A better way to spur the development of alternative energy technologies, as proposed by both the authors of False Promise and the Reason Foundation study, is to introduce a cash prize for whatever technology can achieve a specific outcome. That ties the money to the outcome and not a particular firm or technology, thereby preventing crony capitalism and ensuring no financial loss is imposed on taxpayers should such competitors fail, making it risk-free.

Jonathan H. Adler, a professor at Case Western Reserve University School of Law, examined prize programs as a climate policy in a 2011 paper for the Harvard Environmental Law Review, and concluded that, although they’re no panacea, they’re far better than command-and-control regulations or government-sponsored R&D. Without prizes, Adler posits, “the necessary technological breakthroughs are much less likely to materialize.”

The history of U.S. energy production clearly shows technologies are best chosen by market actors pursing their own best interests. If there is a political consensus for developing alternative technologies with specific features, inducement prizes are the best way to encourage such innovation without resorting to crony capitalism or risking taxpayer dollars.

The following documents provide additional information about prize programs.

 

Ten Principles of Energy Policy
http://heartland.org/policy-documents/ten-principles-energy-policy
Heartland Institute President Joseph Bast outlines the ten most important principles for policymakers confronting energy issues, providing guidance to deal with ongoing changes in markets, technology, and policies adopted in other states, supported by a thorough bibliography. 

Stimulating Green Electric Dreams: Lobbying, Cronyism and Section 1705
http://heartland.org/policy-documents/stimulating-green-electric-dreams-lobbying-cronyism-and-section-1705
The Reason Foundation investigates the fiscally unwise but ostensibly virtuous process by which the U.S. Department of Energy systematically made loan guarantees to several failed renewable energy companies, primarily solar. The investigation found the DOE allocated funds in proportion to each entity’s lobbying expenditures, revealing merit was never considered before making poor "investment" decisions using taxpayer dollars. 

Another $6.5 Billion in DOE Loan Guarantees
http://www.cato.org/blog/another-6-billion-energy-loan-guarantees?
Cato Institute Budget Analyst Nicole Kaeding reports on U.S. Department of Energy Secretary Ernest Moniz’s announcement to expand the DOE’s loan-guarantee program to two new nuclear reactors in Georgia even though the project has already received millions of dollars in private loans. 

Cato Handbook on Policy
http://www.cato.org/cato-handbook-policymakers/cato-handbook-policy-6th-edition-2005
The sixth edition of the Cato Handbook on Policy, released in 2005, includes myriad proposals to reduce the size and scope of the federal government. Chapter 45 discusses energy policy and explains how interventionist policies undermine markets, taxpayers, and even the environment. 

Eyes on a Climate Prize: Rewarding Energy Innovation to Achieve Climate Stabilization
http://www3.law.harvard.edu/journals/elr/2011/04/01/eyes-on-a-climate-prize-rewarding-energy-innovation-to-achieve-climate-stabilization/
In a 2011 paper for the Harvard Environmental Law Review, Case Western Reserve University School of Law Professor Jonathan H. Adler examines prize programs as an effective climate change policy. Adler finds prizes are far more cost-effective than traditional incentive programs, and at the very least are a necessary complement to existing programs. Without prizes or “some other enhanced incentive for technological innovation, the necessary technological breakthroughs are much less likely to materialize,” Adler argues. 

IER Expert Testifies on Ohio’s Alternative Energy Standard
http://heartland.org/policy-documents/ier-expert-testifies-ohios-alternative-energy-standard
Testimony prepared by Institute for Energy Research Economist Travis Fisher examines the physical limitations of wind and solar power, arguing they might not be the technologies of the future simply because of a lack of scalability rather than insufficient subsidies. 

Five Things CEOs Are Worried About in 2014
http://blogs.wsj.com/five-things/2014/01/03/5-things-ceos-are-worried-about-in-2014/
Reporting on the five things CEOs are worried about that are outside their control in 2014, the Wall Street Journal lists “Keeping Energy Costs Under Control” as number one. The information was polled from the Wall Street Journal CEO Council, a group of 33 CEOs from some of the nation’s biggest companies. 

Why Is Renewable Energy So Expensive?
http://www.economist.com/blogs/economist-explains/2014/01/economist-explains-0
A brief but explanatory essay in a January 2014 blog post for The Economist states countries with the most renewable power generation also have the highest electricity prices, and government efforts to abate this problem have been unsuccessful. The author notes high electricity prices may force many manufacturers to set up in less “green” countries, which “might mean citizens end up consuming more carbon, through imports.” Such unintended consequences make the construction of more gas-fired power stations a superior strategy for cutting greenhouse gas emissions without raising electricity prices, the author concludes. 

A Global Transition to Renewable Energy Will Take Many Decades
http://www.scientificamerican.com/article.cfm?id=a-global-transition-to-renewable-energy-will-take-many-decades
Writing for Scientific American in January 2014, scientist and policy analyst Vaclav Smil notes, “[in the] U.S. and around the world, each widespread transition from one dominant fuel to another has taken 50 to 60 years.” However, Smil writes, there are plenty of reasons to want to reduce dependence on fossil fuels, beyond greenhouse gas emissions, but current environmental policies “have been dismal.” Smil suggests the best way to foster an energy transition is to “avoid picking energy winners,” because such policies distort all-important investment and price signals and impede economic progress. 

The False Promise of Green Energy
http://www.masterresource.org/2011/02/false-promise-green-energy-cato/
The energy blog Master Resource reviews the Cato Institute’s 2011 book The False Promise of Green Energy, which examines domestic energy production and addresses myths about the feasibility of large-scale renewable-power development. 

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Environment & Climate News Web site at http://news.heartland.org/energy-and-environment, The Heartland Institute’s Web site at http://www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Policy Analyst Taylor Smith at tsmith@heartland.org or 312/377-4000.