Policy fixes to unleash clean energy, part 4

Thus far, we’ve reviewed the five questions that ought to be answered before addressing any energy policy, identified the key regulatory barriers to clean energy deployment, and reviewed the political obstacles to good energy policy. Let’s now move on to the simplest — but potentially most controversial — question. What principles ought to guide good policy? Controversial because reasonable people may disagree about the relative roles of government and private sector, relative usefulness of incentives vs. penalties to drive human behavior and a host of other matters of political judgment.

But as Judge Smails says, “the most important decision you can make is what do you stand for?” It’s easy for politicians to bash each other for inconsistency, which makes it all the braver for them to clearly articulate their principles. So before we move onto what I think ought to form the basis of our energy policy, I need to articulate my own principles. (For the record, I am pro-Goodness.)

1. First, do no harm. The Clean Air Act needs overhaul, but we ought not make any change that leads to an increase in total pollution. By the same token, let us not pass any policy that will compromise economic growth or U.S. competitiveness in the global economy. This doesn’t mean we do nothing — after all, the status quo is unsustainable. Rather, it means that we insist on creative solutions that don’t create unnecessary conflict between competing policy agenda.
2. Goals, not paths. Economists of a certain stripe are fond of bashing clean energy policy as a handout that distorts market signals. In a very narrow sense, I agree. But this problem is no less ubiquitous amongst dirty energy sources. Our consistent approach to energy policy has been to identify goals, and then incentivize certain paths to get there — too often at the expense of those same goals. Rather than providing a level payment to anyone who reduces CO2 emissions, per ton of pollution released, we provide (unequal) tax credits to solar, wind, biomass, and a handful of other technologies that skew capital investment away from the realization of larger goals and towards the technology du jour. This is not only economically inefficient, but has led to decades of herky-jerky, boom/bust cycles in the clean energy industry that has consistently kept it from attaining any critical mass. (See Joshua Green’s July 2009 article in The Atlantic for a great summary.) So let’s stipulate principle 2: define the goal, incentivize the goal and get out of the way. We are much better off trusting markets to identify the best paths to a given goal than we are trusting markets to set our national goals as it follows the trail of pork we littered along a couple paths.
3. KISS principle. Does anyone think that clean energy is being held back because our tax laws, environmental regulation, or building codes aren’t complicated enough? While it’s always politically easier to pass a new law than to repeal an old one, new additions to a complex system inevitably have unintended consequences. By the same token, new policies (e.g., CO2 regulation) tend to be much more efficient when they start simple and add complexity as warranted than when they start complicated and then try to fix the bits they got wrong. Keep it simple, stupid.
4. Be pro-market, but not pro-business. No one has yet identified a more efficient way to allocate scarce resources than a competitive market. Government does a lousy job of allocating scarce resources, but no more so than businesses in uncompetitive industries do. It’s not the government employees that are bad decision makers, but the inability of any system to come close to the “wisdom of the crowd” in a functioning, competitive market. Unfortunately, our policy environment too often confuses the word “market” with “business.” Markets imply vibrant competition, sleepless nights, and constant innovation. For precisely that reason, they have no natural constituency. There isn’t a business owner out there who wants competition for their customers, but there also isn’t a business owner out there who doesn’t want healthy competition amongst their suppliers. Understand that logic, and craft good policy accordingly. Use market signals to ensure efficient capital allocation, but don’t confuse pro-market with pro-business policies.
5. Don’t confuse carrots and sticks. Both have a place in good policy, but the one is not an inverse of the other. Imposing a $100 fine on anyone who runs a red-light does not make law-abiding drivers $100 richer. For the same reason, a tax on carbon does not put any cash in the pocket of a guy who builds a windmill. It’s also worth noting that penalties and rewards serve very different social purposes. No reasonable person thinks that it would be good policy to provide cash incentives to people who don’t commit felonies. By the same token, it doesn’t make any sense to penalize people who don’t give blood. Energy and CO2 policy is a mix of good and bad — access to energy creates a host of social benefits, even as the provision of that energy imposes environmental externalities. That suggests an energy and environmental policy with an appropriate mix of carrots and sticks — and policy makers with the wisdom to appreciate the difference.

Coming up next: an ideal, politically-unconstrained U.S. energy and environmental policy based on these principles. Secretary Chu, administrator Jackson, and chairman Wellinghoff, you only have to hold your breath a little bit longer!