Cambridge Physicist David MacKay has written a book on sustainable energy, and is giving it away on his website. Just shy of 400 pages, it’s an extended back-of-the-envelope calculation comparing potential sustainable energy generation capacity to likely consumption.
In case that sounds a bit boring, let me assure you that it isn’t. MacKay’s writing is witty and lucid, if at times a bit sarcastic, and the calculations are kept simple without talking down to the non-scientist. This book tells you everything you could possibly want to know about energy consumption and generation and still manages to be entertaining. If that’s not a coup, I don’t know what is.
Sadly after several hundred excellent pages and as if on cue, when he gets to policy suggestions MacKay runs aground. You see, MacKay thinks the best way forward is government mandates. It should be illegal to produce products that don’t meet said energy-efficiency standards; businesses that have green potential should be heavily subsidized and protected from competition in their infancy. I probably don’t even have to tell you that these are terrible ideas.
Mackay is skeptical of market solutions (like carbon taxes or pollution permits) because he believes that people are irrational, markets won’t reflect true costs and benefits, and (bizarrely) that markets are bad at allocating resources across time. Of course we’re irrational, but we’re not stupid. If a tax were to triple the price of gas at the pump, does anyone actually believe that consumption wouldn’t fall? How about quadrupling the price? Mackay is concerned that, favoring small gains today over large savings tomorrow, consumers won’t invest in energy efficient technology. Again, if you quadruple the price of energy with a carbon tax, does any reasonable person believe that consumers would not take energy efficiency into account when buying appliances? Eventually, demand has to slope down. If you raise the price high enough, people will buy less, if only because they run out of income to spend!
MacKay gives the following example. Bob owns an aparment and rents it to Susan. Susan has no incentive to improve the energy efficiency of the apartment because any appliances she installs would become a permanent part of the home she doesn’t own. Likewise, Bob has no incentive to make the place greener, since he doesn’t pay the energy bills. Ergo, market failure: it doesn’t matter how high energy prices go, neither of them has an incentive to improve the situation.
But things aren’t quite this simple. When I go shopping for an apartment, and I’m sure I’m not an abberation in this respect, the first question on my lips for the previous tenants is: “how much do you spend in utilities?” Again, do we assume that Susan is so incredibly irrational that she doesn’t account for utilities when choosing an apartment? And if energy prices were to rise in such a way that the $1000/month energy-efficient apartment became cheaper (inclusive of utilities) than the $500/month Victorian-era place she’s living in now, do we really think she’d stay put? MacKay asks us to believe that consumers are not only irrational, but completely ignorant of the incentives they face.
As for markets being a bad way to allocate resources over time, have we run out of gold? How about copper? Silver? All of these are in fixed supply, but the price system gives consumers the necessary incentives to conserve at the same time as it gives suppliers the necessary incentives to find more minerals or develop more efficient technologies to extract them. The problem with energy is that it’s a broken market, one in which the true costs are not reflected in the price of oil, for example. A carbon tax is designed to correct precisely this deficiency.
The 20th century gave us a grand lesson in bottom-up versus top-down economic organization: it was called the Soviet Union. Even if you think markets are imperfect, which I by the way do, this does not mean that command and control is the solution. An imperfect market-based solution is still likely to be better than a situation in which government chooses exactly which technology each plant must use to reach its emissions target, exactly which appliances and automobiles consumers will be allowed to purchase, and which firms should be subsidized and protected from competition. No government, and for that matter no individual, is omniscient. The beauty of markets is that they aggregate information impersonally, and provide incentives for people to use this information in ways that improve their lives. We don’t just want to reduce emissions, we want to do so cheaply. Reaching a sustainable rate of carbon emissions is going to cost us in terms of living standards. Carbon taxes and tradable permits provide a way to lessen the pain while still attaining our emissions goals.
Ok, that was a bit of a rant. Perhaps I should cut MacKay a bit of slack. He’s a physicist after all, not an economist or public policy expert. I suppose the real answer here is to let scientists do the science (as MacKay has so excellently done in this book), and leave economists do the economics. Let me close by emphasizing that my critique above applies to only a few pages of an otherwise wonderful book. You should most certainly read it.