In a recent poll, The Economist recently posed the question “should tariffs and subsidies for biofuels be ended?” The vote was overwhelmingly “yes.” Biofuels are subsidized and protected by tariffs in the U.S. and, which The Economist fails to bring up, are also propped up by policy in the EU. First generation biofuels are the most controversial of renewable energy sources (RES) because food crops are used to produce fuels like biodiesel and ethanol. Second generation biofuels use non-food crops, such as corn stalks, and third generation use algae that secrete a fuel; both of these technologies are presently not viable.
Moving away from biofuels specifically and looking at RES policy as a whole, policy has developed along a significantly different track in the U.S. than in the EU. The EU has passed comprehensive climate change legislation known as the 20/20/20 directives. These three directives set EU wide goals of 20 percent of energy consumption to come from RES, a 20 percent increase in energy efficiency, and a 20 percent reduction in carbon emissions. A binding quota (or goal such as Malta’s 10 percent) is outlined in the RES directive for each member state that takes into account current RES infrastructure and other economic factors. Individual state quotas were the result of much compromise; originally the directive compelled all member states (MS) to reach 20 percent.
The reduction in carbon emissions will be met through a cap-and-trade scheme. Licenses that permit carbon emissions were originally issued by the MS, but recently this has become supranational competency.
How member states reach their RES quotas by 2020 is up to them. Some member states have adopted renewable portfolio standards (RPS) (discussed next), but the biggest success story has been the feed-in tariff, a German policy innovation. Under a feed-in tariff system RES producers are guaranteed a premium price on electricity based on the mode of production; solar receives the highest premium because of its high cost. Producers are guaranteed this price for a pre-established amount of time which encourages small entrepreneurs to invest in RES. Electricity transmission operators, who buy electricity from production facilities and transmit it to consumers are required to buy all RES electricity. Many other MS have followed the German example and adopted a feed-in tariff system, such as Spain, and all MS are currently on track to meet their RES quotas.
No federal RES or climate change legislation has been passed in the U.S.
But..
More than half of U.S. states have adopted RPS, alternative portfolio standards (AEPS) or renewable/alternative goals. RPS schemes are the most common. Alternative refers to an expansion of the allowed energy sources that are included in the portfolio, and goals are voluntary. Under RPS/AEPS schemes states compel electricity suppliers to buy a certain amount of electricity produced from RES or alternative sources. California has the most ambitious portfolio aiming to consume 33 percent of electricity from RES by 2020. Information on all 50 states can be found here.
Which policy has been more successful? EU states that have adopted feed-in tariffs rather than RPS have proved the most successful in promoting RES, in particular Germany and Spain. Feed-in tariffs encourage entrepreneurs to invest in RES, while RPS favor incumbent energy companies and the academic literature shows that feed-in tariffs are much more successful in RES uptake.
Since feed-in tariffs have proven their merit, is this the way toward a RES powered future? Feed-in tariffs have a lot in common with the EU’s Common Agricultural Policy (CAP). CAP has the reputation as being the world’s most inefficient agricultural policy; it is much larger than the U.S.’s farm bill and the second largest item on the EU’s budget. But what is often forgotten is what CAP achieved. CAP helped transform a continent that was incapable at feeding its population, into a continent that now produces agricultural surplus. A simple way of saying this is that CAP provided Europe with food security.
Food security has a lot in common with national security. Both are a pure public good which means they are non-excludable and non-rivalrous. It is nearly impossible to exclude a citizen from the benefit that the good yields, and if one citizen consumes the good, it does not reduce the benefit from the good another citizen receives. The most commonly used example is air quality. Public goods have always been a problem in economics and it is pertinent to remember this economics basic when developing RES policy.
Increased RES will provide a public good to the U.S. and EU through increased energy security and reduced air pollution, leaving out the hotly debated climate change argument. While feed-in tariffs could, in theory, achieve 100 percent energy production from RES, the downfalls of CAP must also be looked at.
CAP has created a system of concentrated benefits and diffuse costs causing the farm lobby to become the most powerful interest representation group in Europe. Because feed-in tariffs establish a like system by guaranteeing profits for a certain period of time, rent-seeking will occur. The RES lobby could potentially rival the farm lobby in the near future under such a system. RPS on the other hand attempts to use a “market” solution, but have so far been ineffective, especially in encouraging investment from outside the big energy companies.
So what policy should be adopted? Neither. What is needed is an effective way to price carbon and other pollutants and green house gases (GHG) because they are “public bads.” Whether you agree with climate change or not, carbon, and GHG produce a public bad. RES produces a public good, through energy independence, something the EU and the U.S. should strive for. Public goods need to be protected while public bads need to be punished through public policy. The most effective way to do this would be to tax public bads, like carbon, which would effectively establish a price. This price should be proportional to the public bad it produces and because carbon and GHG are global public bads, international solidarity on the price is needed.
The U.S. should be a strong proponent of establishing a global price on carbon; our export mix has been consistently moving away from heavy industries that produce more carbon. The EU on the other hand, who is the world leader in RES and climate change legislation and sought international solidarity at the Copenhagen Summit, would be hurt more than the U.S. if a price were put on carbon because their export mix is heavier.
Many Americans have been fine with 20 percent of the budget going towards supporting the public good of national security, although this now may change. Why not agree on a price for carbon and GHGs to increase the competitiveness of RES that will in turn increase energy security? Countries that do not adopt the price can be punished through raising a tariff equal to the price of carbon on their goods. Establishing this price will without a doubt be difficult and I do not have the answer. But it is not impossible. Pricing public goods and bads is difficult but necessary because it is something the market does not provide.
Without effective prices, public goods will deteriorate while bads are produced at no cost. This is: Why it is illegal to pollute water sources, the cause of fishery policy, and the reason for clean air legislation. It is time that energy security and self reliance is taken seriously and promoted through an effective, federal, and eventually international (so no country achieves an advantage because of no carbon tax), policy that prices this public bad. If the U.S. and the EU could agree on such a policy the rest of the world would follow suit.
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