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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Green New Deal Critics See Red

The Green New Deal, (GND) a catch-all composite of environmental and social welfare programs, led by Member of Congress Alexandra Ocasio-Cortes (D-NY) and Senator Ed Markey (D-MA) calls for “a massive mobilization … on the scale of World War II to transition our energy supply and economy to 100% clean … energy.” By 2030.

The Green Deal, which really at this point seems to be a collection of proposals, is nothing if not audacious. When responding to critics doubting the nation’s ability to pay for all this, GND advocates propose to tax CO2 emissions, impose higher taxes on the wealthy and implement a significant cut in US military expenditures.

Equally ambitious are the GND’s aspirations with respect to social welfare. The broadly articulated goal appears to be an attack on inequality in three major areas: access to health care, affordable housing and job security.

Not surprisingly the reaction to the Green Deal has ranged from rapturous to downright hostile. In terms of CO2 emissions, the electricity and transportation industries are the biggest sources and the easiest targets. The transport sector divides further into cars, trucks, marine shipping and aviation. Energy executives have lately been touting their firm’s ability to ‘go completely green” by 2050. This rather leisurely pace would impose relatively little suffering at least on the part of shareholders and other energy investors. A more expeditious approach on the road to renewables may involve more accelerated write-down of fossil burning plant assets, especially those utilizing coal as a boiler fuel with its greater CO2 emissions intensity. Related: The ‘Shocking Details’ Of The Green New Deal

We view the Green Deal as a broad manifesto, not a legislative program. Its various sponsors believe the time has come to deal seriously, and at a federal level with problems stemming from climate change. They do not believe that a leisurely programmatic stroll towards a 2050 carbon free target date is acceptable. They cite the U.S.’ profound economic mobilization in response to the existential threats of WW II— as evidence of our national ability to respond to a new existential challenge.

We were struck, however, by some of the reasons for incrementalism brought up those within the energy industry’s orbit. First, the electric utility industry executives argue that hasty action would render obsolete perfectly good plants and equipment already paid for by customers. This means simply that a more rapid transition may be more costly. In an industry facing growing competitive threats, this resembles claims made by a now-defunct telephone monopoly. Who needs digital switching when all that installed copper wire will last decades? And then seemingly overnight there was competition.

Technological change is like a game of leapfrog. If the assets in question, like newly installed copper wire at the dawn of the digital age, are being leaped over so to speak then an impairment is possible if not inevitable. The utility’s plea at least is always the same. What are we going to do with this relatively new equipment we no longer need? The markets, being a harsh judge in these matters, would conclude that the assets in question need to be written off—with potential adverse implication for both stock prices and bond ratings.

But the argument for technological “slow-walking” fails on several counts. First, stockholders and bondholders paid for utility equipment to provide services to consumers. And they willingly undertook this risk knowing that the rules might change so to speak. Global climate change first officially reared its head as an issue to consider during President Lyndon Johnson’s administration. Related: The Achilles Heel For EV Makers

Second, one of the most important rules of economic decision-making is to ignore sunk costs. Sunk costs almost by definition appear to be very large. But obsessing about sunk costs is like wearing blinders, it prevents us from seeing potentially attractive alternatives.

Another anti-GND argument is that hasty action would not be in the interests of the existing energy companies, the firms that would supposedly make the investments that would make the economy greener. That means that the introduction of new technology is in the hands of firms that would lose the most by its introduction, back to sunk costs. They want to recover their costs. Imagine if horse-drawn carriage manufacturers carried the day with that argument in 1900. Capitalism, said Schumpeter, is all about creative destruction. Keeping the old order for the benefit of the incumbents is more like welfare capitalism. Other firms without legacy investments might introduce change faster.

What might truly go wrong if key aspects of the Green Deal ultimately become law? What worries us most is the possibility that the government follows the UK’s example when it launched its decarbonization effort. Government ministers and their respective departments dictated technology choices—at least with respect to electricity production. The result? British electricity consumers were saddled with then relatively expensive offshore wind technologies. Prices have declined dramatically since then. But interestingly, this was a Conservative or Tory government imposing its own green agenda on UK electricity consumers.

In sum, the Green New Dealers deserves kudos for attempting to shake up established wisdom and accelerate the process of decarbonization. But the ambiguity of purpose here makes us wonder. The Rooseveltian echoes are clear and no doubt intentional. But which New Deal? The more timid and halting approach of the first or the more administratively muscular so-called second New Deal that gave us Social Security and Works Progress Administration?

By Leonard Hyman and William Tilles for Oilprice.com

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  • samir krey on February 11 2019 said:
    As an economist you should be smart enough to know the difference between the natural progression of technology and methods of production VS a radical government proposition that would essentially destroy entire sectors and put millions of people out of work. The fact that you are even addressing this bill as anything more than the dream of a few socialist is enough to discredit your ability as an economist.
  • Leonard Hyman on February 13 2019 said:
    Re comment from Samir Key:

    The Green New Deal is a resolution placed in the hopper by leaders of a growing wing of the Democratic Party -- not a few socialists. As such it deserves discussion, whether it makes sense or not.

    The problem here is that the markets do not provide a price for an externality , so the government needs to either put that price in the market via a carbon tax or subsidize corrective technologies. I don't see that as forcing technologies unnecessarily -- assuming there really is a natural progression of technology in the first place.

    As for the disruption that may be caused by change, isn't that a major component of capitalism? Why do we put preservation and recovery of the sunk costs of legacy industries ahead of the gains from the new technologies? Is that good economics? Society should help those hurt, but not by protecting industries that are losing their rationale. (For an example, consider how the British protected their coal mining, for decades to the detriment of consumers.)

    We make it clear in our writeup that the Green New Deal also has the potential to saddle us with high cost solutions, just as the British decarbonization efforts did. Maybe that is the forced technology change that we should avoid.

    On the whole, though, we think that we should discuss solutions proposed by politicians, rather than just knock them.
  • Lee James on February 14 2019 said:
    I agree with the authors that Green New Deal deserves a hearing.

    The Deal is long on vision for what we need to accomplish in planet protections and energy, and short on how we get there -- but supposedly that is part of the plan! The details are to be worked out. The main thing is to rev up saving the planet, if'n you think we are the problem -- the apex animal who burns a lot fossil fuel.

    I also agree with the authors that the off-the-books externality of carbon pollution should be priced in our marketplace. "Let the marketplace decide" reigns when we consumers have accurate price signals to guide us. As it is, we dump the aftermath of burning fossil fuel, for free. We have no financial incentive to stop prior to receiving doctor-bills and dirty air and water notices.

    If we have any hope of putting restraints on the Deal's probable command and control solutions by government, it is through enabling a fully functioning energy marketplace. If consumers can see all of the costs, including pollution we'll spend wisely. Citizen-consumers can choose the energy sources and technologies, not government or the influence of big corporations.

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