Schools Wasting Tax Dollars on Solar

We read every day about a school installing solar panels to save money on electricity, but there is a huge error in this logic from the viewpoint of public good.

The cost of solar electricity is very high and the school is just hiding the true cost by pushing it on to the taxpayers through a back door. The credits and rebates they use are funded through higher electric bills and taxes. There is no free lunch. The Tooth Fairy does not pay this, we do.

There is no magical way to get around the simple truth that PV electricity is expensive and we will fully pay these costs in the long run. Maybe the school saves money, but collectively we pay more.

So the School is ahead by 2 cents a kWh, but we all pay the 20 cent premium for every 2 cents they save. So who’s ahead?

The best move is to fund the schools directly though the front door and cut out the solar middle man who is pocketing most of the public funds.

Dr. Joseph Kalt speaks to Tucson

Dr. Kalt, a native Tucsonan, Ph.D. economist, professor at Harvard, and someone with no vested interest in Solar technologies, recently recommended we focus public spending on making Arizona a desirable place to live in order to attract business. Education, basic infrastructure maintenance, and beautification projects were mentioned as ways to attract the CEOs that bring businesses to the state. Various subsidies and hand-outs to companies were not recommended and studies indicate these are ineffective means to grow the local economy.

So when a Harvard professor, Ph. D. economist, and native Tucsonan does not recommend, for example, subsidies for solar, why do we do it? Why not use the money for education or infrastructure maintenance as he suggests? Is he a wrong?  Is solar different?

I think he's right and we're making the mistake,  I also think that many of the law makers have been fooled by highly paid solar lobbyist. Solar Electric technology clearly fails any reasonable cost-benefit test, and is the worst option, dollar-for-dollar, to reduce CO2 among the major renewables; wind, geothermal, and biomass, yet the ACC continues to push it.

The failure of our system in this case is caused by two key factors. First, the ACC members do not have the technical and economic backgrounds to not be fooled, and second, the lobbyist are smooth enough to fool even fairly well trained lawmakers. But as it is now, the ACC has no hope to sort through truth from fiction and they’ve put us on a course of higher unemployment and long term damage to the state’s economy.

CO2 and Global Warming

The institute for Energy Policy has no expertise in planetary science and accepts the position of "An Open Letter to Congress from U.S. Scientists on Climate Change" dated Dec 4, 2009.

“Observations throughout the world make it clear that climate change is occurring, and rigorous scientific research demonstrates that the greenhouse gases emitted by human activities are the primary driver. These conclusions are based on multiple independent lines of evidence, and contrary assertions are inconsistent with an objective assessment of the vast body of peer-reviewed science. … If we are to avoid the most severe impacts of climate change, emissions of greenhouse gases must be dramatically reduced.”

We can only assume the effects will be extraordinary.

A 'Different' Gas Tax Proposal

Lieberman and Kerry have proposed an additional 15 cent per gallon federal gas tax. Currently, the federal gas tax is 18 cents and states, on average, add another 27 cents, for a total of about 40 to 50 cents per gallon.

By comparison, Europe’s gas tax averages more than $5 per gallon, and today they drive smaller, more efficient cars. The idea of such a large gas tax in the US is politically more difficult, but there is a win-win approach if it can be done.

Taxation is a means for government to raise revenue and to discourage certain behavior. With this in mind, it is unfortunate that we tax income as this, to some degree, discourages labor.

If the government were to put a $1/gallon tax on gas and reduce the payroll tax appropriately, it could be a revenue neutral move that creates 2 useful incentives, that is, to encourage earnings and to discourage imported oil and CO2 production.

Bloom Energy

Bloom Energy has developed a natural gas/air fuel cell. This is an important development if it can be made low cost and reliable. However, most reports covering this technology distort the benefits to the point of making it sound like some type of free energy machine, which it is certainly not.

Fuel cells are great technology because they can convert fuel directly into electricity at very high efficiency (60-80%). This is much better than an automobile engine (20-25%) or a power plant (40-50%). The down side is that the power is direct current (DC) and one needs an inverter to generate the AC power commonly used. This inverter costs about 40-50 cents a watt, so its cost cannot be ignored in a cost benefit analysis, nor the inverter or fuel cell reliability.

Assuming we get past all this and the fuel cell is low cost and reliable, the device becomes an attractive technology for homes or cars. A home can now use natural gas for heating AND electricity generation and may have a lower total bill. The bill should be lower as compared to a central utility burning natural gas for 2 important reasons. First, the fuel cell is converting natural gas to electricity at a higher efficiency. Second, the cost of the transmission lines from the utility to the home are avoided. This is distributed generation at its best. If cost and reliability targets are met, this fuel cell technology should have a very good market and will save a considerable amount of natural gas and utility infrastructure. But here is the down side:

This country only has 10 years of "known" reserves of natural gas and 234 years of coal. A significant investment in fuel cells to power homes and businesses will cause the price of natural gas to rise much faster than it would otherwise. Before long, the total cost to power a home could be higher with this fuel cell than by buying electricity from coal fired plants, since coal is very inexpensive. A homeowner might buy this product today and then regret the decision if the price of natural gas increases dramatically.

The other natural markets for this technology is in transportation or off-grid applications. A natural gas or hybrid vehicle using this fuel cell might achieve a remarkable "MPG." And the fact that the fuel cell produces DC power is no penalty in an electric or hybrid since its main bus is also DC. This technology would play very well with T. Boone Pickens' plan to use wind machines to save natural gas for vehicles, rather than burn it in power plants.

This is a great new technology and should help extend our natural gas resources and make biogas a more viable alternative. Best of luck to Bloom Energy in achieving a low cost and reliable product.

Henry Hazlitt's Wisdom

I started reading "Economics in one lesson" by Henry Hazlitt and found it to be amazing. Can you guess what year he wrote this?

The case against government-guaranteed loans and mortgages to private businesses and persons is almost as strong as, though less obvious than, the case against direct government loans and mortgages. The advocates of government-guaranteed mortgages also forget that what is being lent is ultimately real capital, which is limited in supply, and that they are helping identified B at the expense of some unidentified A. Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief in the long run they do not increase overall national production but encourage malinvestment.

The first publication of this book was in nineteen forty-six and the last in nineteen seventy-nine. The rest of the book is equally 'prophetic' and has many insights that apply well to government subsidies for renewable energy projects. As he pinpoints errors in arguments for government subsidies, his terms are almost verbatim to the current pro-subsidy dialog. I'd swear he wrote this within the last 12 months. He has a great way to make clear the "unseen" results of government policies. This should be required reading for all government leaders! Click on the blog title to go to a website with the entire text of Henry's book.

Here's more great insight:

We remarked at the beginning of this chapter that government “aid” to business is sometimes as much to be feared as government hostility. This applies as much to government subsidies as to government loans. The government never lends or gives anything to business that it does not take away from business. One often hears New Dealers and other statists boast about the way government “bailed business out” with the Reconstruction Finance Corporation, the Home Owners Loan Corporation and other government agencies in 1932 and later. But the government can give no financial help to business that it does not first or finally take from business. The government’s funds all come from taxes. Even the much vaunted “government credit” rests on the assumption that its loans will ultimately be repaid out of the proceeds of taxes. When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business. Under certain emergency circumstances there may be a plausible argument for this, the merits of which we need not examine here. But in the long run it does not sound like a paying proposition from the standpoint of the country as a whole. And experience has shown that it isn’t.

New CAFE Standards

Here is a clear example of the government dictating a politically correct, but economically suboptimal solution to externalities associated with using oil.

Today the DOT’s National Highway Traffic Safety Administration (NHTSA) and EPA, establish increasingly stringent fuel economy standards under NHTSA’s Corporate Average Fuel Economy program and greenhouse gas emission standards under the Clean Air Act for 2012 through 2016 model-year vehicles.

Starting with 2012 model year vehicles, the rules together require automakers to improve fleet-wide fuel economy and reduce fleet-wide greenhouse gas emissions by approximately five percent every year. NHTSA has established fuel economy standards that strengthen each year reaching an estimated 34.1 mpg for the combined industry-wide fleet for model year 2016.

The EPA standards require that by the 2016 model-year, manufacturers must achieve a combined average vehicle emission level of 250 grams of carbon dioxide per mile. The EPA standard would be equivalent to 35.5 miles per gallon if all reductions came from fuel economy improvements.

The government’s stated purpose can be seen in the following statement from the press release:

The rules could potentially save the average buyer of a 2016 model year car $3,000 over the life of the vehicle and, nationally, will conserve about 1.8 billion barrels of oil and reduce nearly a billion tons of greenhouse gas emissions over the lives of the vehicles covered.

The economically optimal way to conserve oil and reduce greenhouse gas pollution is to tax it, but this is less politically acceptable. The political problem is that the tax is visible, but the regulation costs are hidden. Sadly, we will all pay more to meet this oil and CO2 objective with this new CAFE standard than with a direct tax. If everyone could easily assess the hidden costs of this regulation, then the tax would seem cheap and we’d all agree to accept it. But how can we make the hidden cost of the regulation more clear?

The other significant mistake of this policy is that the increased fuel economy results in consumers driving farther and more often so the savings are overstated. A report by the NAS pointed out many such unintended and suboptimal results of the 1975 CAFE standards.

Here is an excerpt from a 2002 AEI-Brookings Joint Center for Regulatory Studies which drew similar conclusions:

In particular, a long-run 3.0 MPG increase in the CAFE standard would impose social welfare losses of $5.556 billion per year and save 5.1 billion gallons of gasoline per year. This amounts to a hidden tax of $1.09 per gallon conserved. An 11 cent per gallon increase in the gasoline tax would save the same amount of fuel at a welfare cost of $275 million per year. The 3.0 MPG increase is thus 20 times more expensive than the gas tax increase. The marginal welfare costs of long-term increases in the CAFE standard amount to $1.26 per gallon and exceed by a factor of five recent estimates of the marginal societal benefits from avoided externalities. Increasing the CAFE standard is therefore neither cost-effective nor cost-beneficial.

Somehow we must find the political will to address our CO2 and oil concerns with cost effective policies (taxes).