‘Carbon-friendly’ utilities may not necessarily be in the public interest
Following the discussion under David’s latest post about Edwards’ position on carbon capture at coal plants, I thought it appropriate to point out a few things about the electric business that are critical to this debate — but not widely appreciated.
An electric utility is a weird amalgam of lots of historic political philosophies — most of which are in direct contradiction to modern ideas, but are difficult to repeal.
According to the modern pro-market ideal, businesses should have profit incentives in competitive markets, so that Adam Smith’s invisible hand will create consumer value. But to an early 20th-century regulator (who wrote the rules under which most modern electric utilities were formed), certain public goods were so important as to mandate government intervention. (One of the best examples is Einstein, who thought that Karl Marx had some really good ideas, in large part because he saw the problems of the world so clearly that he couldn’t conceive of an unregulated market rising to address them. See here.)
This is indicative of an era in which socialism was a live concept rather than historical record, when regulators and academics could debate the pros and cons of central planning without any evidence of the excesses such systems could create. It was also an era when the excesses of the mercantilist Gilded Age were becoming evident, and smart, well-intentioned folks were looking for a better way.
Why does this matter? Because regulated electric monopolies were created in this environment, and they were intended to contain the best of both political philosophies.
They got profit incentives because we “know” that the pursuit of profits enables greater efficiencies than we can ever get out of a bunch of well-intentioned government bureaucrats.
But they also got guaranteed monopolies and regulatory oversight because we “know” that really big, important societal investments can’t be done effectively by an unchecked market.
Both of these pieces of “knowledge” are debatable, but the important thing is that in trying to get the best of both worlds, we got the worst.
Guaranteed monopolies removed any competitive discipline on regulated utilities (critical for Adam Smith’s hand to work, since the pursuit of profits in the absence of competition is just profiteering). Meanwhile, regulatory oversight limiting prices only to a “fair return on capital” to protect against profiteering creates a perverse incentive to invest in things just because they’re expensive — precisely the opposite of how a market is supposed to work.
The consequence — predictable in hindsight — was a massive collapse in economic and energy efficiency. The electric sector had a fuel efficiency of 65 percent in 1910 and runs at just 33 percent today — meaning we burn twice as much fuel as we need to, and emit twice as much carbon in the process.
Still, this is the largest industry in the world, exceeding $400 billion in annual revenues. That’s a lot of money, a lot of jobs and a lot of media access. You cannot overstate the ability of an industry that size to skew public debate.
(This is not to suggest some master plan — simply that when an industry that size has a consistent motivation, that motivation trickles into the public debate, just because everybody in the industry talks about it. For example, we don’t need to imagine a male conspiracy in favor of hot women to get a media bias in favor of same.)
To understand why this matters for carbon sequestration, you need only put yourself in the shoes of a utility CEO. Carbon regulation is coming. Carbon regulation is potentially expensive. Your industry is a big emitter of carbon. Are you happy or sad? Happy, of course. Big, expensive things are how you make your money. Rising costs don’t bother you because your cost recovery is guaranteed. Given the choice, you’d rather build expensive stuff than cheap stuff.
This is counterintuitive if you think that the world is shaped by functioning markets — but it is a perfect storm for carbon sequestration. I can be environmentally responsible, make money, and still not face any threat of competition? What’s not to love?
Indeed, if you look at how the power industry is talking about carbon regulation, it’s primarily about whether or not they’ll get to recover the costs. (Nothing like the debate in Gristmill and elsewhere about the most economically responsible way to control carbon. See here — $ub. req’d.) They expend a tremendous amount of hot air espousing technically adventurous and expensive ways to control carbon (see: sequestration), rather than focusing on economically responsible carbon controls.
This runs a very real risk of becoming a self-fulfilling prophecy given the size of the players involved. When they talk, people listen. Politicians are going to naturally pick up this concept and repeat it, even if it is ecologically and economically irresponsible. Worse, it plays to the Bjorn Lomborgs of the world by “proving” that GHG reduction is really expensive. Not because it is really expensive, but because we’ve limited our vision of the future to those options that are really expensive.
We need not cave in to this line of thinking, but we do need to understand it.