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Jonathan Lesser: Green energy and economic fabulism: The mirage of subsidy-propelled economic growth and employment
The Inflation Reduction Act (IRA) has expanded the availability of subsidies for green energy, with direct spending estimated to be over $1 trillion the next ten years. In addition to claims that these subsidies will address climate change, a primary justification for this increased spending is the claim that it will increase economic growth and provide millions of new jobs in green industries. The economic reality is far different.
Given rising U.S. deficits, much, if not all, of the tax credits for green energy, especially wind and solar facilities, will be financed with additional debt.
The staggering amounts of money available, more than even was spent by the government during the Great Depression, will have long-lasting and adverse consequences on energy supplies, economic growth, and the well-being of the citizenry. The subsidies will further distort energy markets and raise energy prices. The subsidies will crowd out more productive private investment and reduce the resources available for more efficient energy resources, such as nuclear power. As in Europe, the subsidies will result in higher energy prices that will cause economic and job losses throughout the entire economy. These losses will far exceed the gains provided by the subsidies themselves.
Although policy makers may choose to ignore basic economic principles in favor of political expediency and, in some cases, personal gain, those principles will not ignore them. Eventually, the profligate spending on costly, but low-value green energy will collapse under its own economic weight. The unanswered question is how high an economic and social price the U.S. will pay for this folly before that occurs.
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The deadline for review comments is 25 November 2023.
I like the paper and think it is both thorough and clear. So my suggestions are primarily about ways in which the information might be presented differently to have a bigger impact.
First, a minor point: Pp. 8-9 – some text repeats (the assumptions).
My two suggestions about improving the impact are:
1) figures 1 and 2 are confusing at first glance. It’s not common to have bars in bar charts floating in mid-air. I figured them out, but it required some thought and you want figures to make things easier, not harder, for readers. My only suggestion would be to switch to 2 columns, both of which would incorporate the installed costs and ITC (in different colors) and then one would stack the red bar, the other the maroon bar. That’s probably not ideal – but I think it needs something that doesn’t have floating bars.
2) the calculations (which all seem reasonable) would benefit from some sensitivity testing and presentation in ranges showing the impact of varying assumptions. This does happen in some places (p. 14 with the financing costs) and I think that’s a more persuasive way to do it.
Stuff that might not fit the scope of the paper:
1) Table 1 is great. The # of programs in NY, CA, and TX mentioned on p. 5 are staggering but the impact is lower than it should be in the paper because the numbers are just mentioned once. It would be impactful to find a way to present some of those clusters of programs visually, as in Table 1. That’s probably a lot of work.
2) a more narrow way to tie in the state programs would be to examine where they overlap with the IRA – what is the cumulative subsidy for a wind project in Texas, for example?
Dr Fred Jacobs
I found the draft document to be a rather thorough analysis of the folly of our current approach to try to implement “Green Energy”. I have no specific comments regarding the actual contents, but I do feel that there may be a simpler (or at least complementary) way to make the whole argument. Basically, the economic analysis most organizations use to measure costs is by LCOE or “levelized cost of energy”. Unfortunately, it is heavily distorted as Dr. Lesser has recognized by taxes, incentives and mandates, not to mention ideology. Instead, it may be more useful to discuss it in terms of Energy Return on Energy Invested (EROEI or just EROI). I recently wrote an essay for restricted circulation on this, of which excerpted relevant parts are below for your interest.
An interesting conversation came up with some friends recently, regarding the relative costs to society of various energy production systems. Most of the literature tends to look at the LCOE (Levelized Cost of Energy) when doing these comparisons, and usually conclude that solar or wind is competitive with or cheaper than fossil fuels for generating electricity. However, these types of calculations are problematic as they use current and projected costs (in dollars) of the various components and liabilities that make up a particular system. For example, solar cells have become considerably less expensive over the years but the amount of energy required to actually melt and process polysilicon has not significantly changed. Solar cells in particular, are mostly manufactured in China using state-subsidized coal-based electricity and conscripted labor. If solar cells were manufactured using “green” energy at western labor rates, they would be significantly more expensive. This makes it difficult to compare the real costs of various energy production systems to society. From an environmental viewpoint, sourcing solar power from China doesn’t help the overall goal of achieving a “carbon neutral” world economy. In addition, the LCOE for solar panels themselves is becoming a smaller fraction of the total cost of building, integrating and running a solar farm with direct infrastructure costs increasing due to supply issues, integration and inflation. This further distorts the LCOE comparison exercise.
The distortion that is generated with LCOE calculations is due to the fact that they are predominantly political rather than technical calculations. Dollar costs are heavily affected by government policies and programs which grossly distort the true costs by not accounting for the transferred costs to other parts of the economy. Costs that are additional to LCOE calculations include items such as supporting infrastructure (e.g., backup generation and storage, connection to and expansion of the electrical grid), lifetime (e.g., maintenance and repairs), end-of-life (recycling or disposal), environmental (mining, processing and accompanying abatement) and land use loss. In pursuance of climate change policies, Governments redirect available resources (or forces society to redirect private resources) from other priorities, or are added to the total financial and social debt (which needs to be serviced and eventually recovered). As a typical example, government support (as tax incentives) to the solar industry is about 300 fold more than to the nuclear energy industry (4), making the latter too expensive when using LCOE analyses. Additional costs are levied on society by incurring costs to dissuade fossil fuel projects, making those energy sources more expensive.
Part 1. Calculating the real cost of energy production.
Another way to compare the cost of energy production systems is to look at their cradle-to-grave EROEI’s (usually just EROI) (1), the Energy Return on Energy Invested as measured in WattHours or Joules. That way, it doesn’t matter in a comparative assessment if cheap coal power or expensive renewable power is used to melt and purify the silicon for the solar cells (to continue the last example). This is important as it parses the energy cost for making more energy versus for the energy required to run the rest of the economy and society. When calculated this way, solar farms (along with battery backup and supporting infrastructure) have yielded EROI’s of 2 to 4 (2, 3), depending on geographic location and weather. That means that a solar farm can generate 2 to 4 times as much total energy to the end user (i.e., from sunshine to the electrical plug) than is required to make the whole turn-key energy system (i.e., cradle to grave). Wind farms can similarly generate EROI’s of 2- 5. To put these EROI numbers into perspective, the Roman Empire at its peak was running at an EROI of about 2. This was achieved with draft animal and human (slave) labor. It wasn’t until the beginning of the Industrial Revolution that the most advanced societies (led by Great Britain) had EROI’s of about 10 with coal-fueled steam power. It has been estimated that we need at least an overall EROI of 15 to maintain our current society, with its healthcare, infrastructure, military and everything else we come to expect. Current conventional oil and gas provide EROI’s in the 20-40 range (depending on geography and geology). Hydro dams are so dependent on geography and geology that a ball park EROI calculation is not practical, but is usually above 20. The old-style Nuclear Pressure Water Reactors (PWR’s) come in with EROI’s of about 70, with the next generation of nuclear SMR’s promising EROI’s of greater than 300. It should be noted that there is no international standard method for calculating these EROI numbers, and will differ depending on the organizations which calculate them. It is best to compare their relative values within the individual studies for comparison.
To circle back to solar and wind farms, if we continue to commit to these “green” forms of energy which have EROI’s similar to what the Romans had 2000 years ago, how long would our society last?
Energy Return on Investment https://en.wikipedia.org/wiki/Energy_return_on_investment
“The Unpopular Truth: about Electricity and the Future of Energy” 2022 by Lars Schernikau & William Hayden Smith, and references therein.
“Spain’s Photovoltaic Revolution: The Energy Return on Investment” (SpringerBriefs in Energy, 2013th Edition) by Pedro A. Prieto, and references therein
Federal Financial Interventions and Subsidies in Energy in Fiscal Years 2016–2022 –https://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf
The main criticism I have of the Jonathan Lesser paper is that the summary needs improving especially since it is a long paper and as a result many people will only read the summary. The summary is vague and does not properly reflect an excellent and well researched paper.
The summary needs some firm figures inserted drawn from the body of the text plus some other additions
Para 1 Line 2 states “… $1 trillion over the next ten years”. More detail should be included with a range of figures extracted from pages 9-12 of the main body of the paper
Para 2 Line 1 should include figures from Page 7
Para 3 line 3 ought to include the actual estimated figures for subsidies
Para 3 line 5. I would insert after “nuclear power” the words ” especially small modular reactors”
The summary might also include a summary of the cost for each job created.
There is one typo: Page 4 Para 4 Line 3 the dollar sign is missing the figure should read $27.50
I note that Dr. Lesser’s excellent paper is wholly focused on the US government and energy market. It would helpful if one of your contributors could write a similar paper covering the UK situation. I accept that many of the mistakes made by the US government and the myths perpetrated by them have been repeated here, but a UK focused paper could only serve to bring more pressure to bear on Westminster.
Dr. Lesser makes the obvious, but often unstated, point that new technology cannot be created by government fiat no matter how hard they might wish for it. In my ideal world base load power would be supplied by SMRs and the balancing between a steady supply and variable demand would be handled by gravity batteries (How gravity batteries could change the world – YouTube) None of this is new technology (just a new application of tried and tested technology) and could be created within a relatively short time frame (say five to ten years) if only there was the political will to do it.
In such a world, renewables would become an irrelevant nuisance, useful only in off-grid applications.
Dr John Constable
The Inflation Reduction Act (IRA) is one of the largest public policy interventions in US history, comparable with the New Deal measures, as Jonathan Lesser points out in this highly informative study. An understanding of its character and impacts is of great importance, and what Dr Lesser sets out to do in this piece is to give the reader a sense not only of the scale of the subsidies as received by the various green clients in the form of tax credits (about $1 trillion), but of the total cost of financing these tax expenditures, which comes to $3 trillion or perhaps more. In addition he aims to give a clear indication of the likely negative net effect on employment numbers, as malinvestment encouraged by the IRA crowds out fundamentally economic alternatives.
The paper achieves all these objectives, and with valuable detail where possible. But it is not always possible, and one likely criticism of the paper is not that it is faulty in itself, but that it whets the appetite for a more detailed analysis. Yes, the paper is a contribution to knowledge, but one of its contributions is to show that we know much less about the scale and impacts of the US green schemes that we thought we did. Dr Lesser is hardly to blame for this, but it is nonetheless a dismaying outcome of the paper.
For example, one wonders whether the IRA spending is large enough to increase the cost of Federal borrowing overall? Will it undermine the Federal government’s ability to borrow, if the markets reckon that this is hugely expensive and with no real benefit to the US economy? This would be a very large undertaking. Indeed, one wonders whether the Federal Government has such an analysis to guide its policy.
Similarly, the study concentrates on the quantification of Federal level subsidy costs, and while Dr Lesser notes the existence of many state level subsidies he does not, and perhaps no one could at present offer a full list, or a detailed estimate of their magnitude. That would be desirable, though again a very large scale undertaking.
In summary, the paper shows that enthusiastic endorsements of the IRA, from the Princeton Repeat project for example, are naive and unrealistic, and it gives some preliminary understanding of the damage that this program will do to the United States and its people. This will be enough to persuade those already concerned at intervention on this scale, but it may not be sufficient to unsettle those with dogmatic affiliations (Paul Krugman springs to mind). This paper is an excellent first step, but much more and much more detailed work will be needed.
US energy analyst
Excellent analysis. I learned a lot from reading this report.
- Summary, First Sentence: The Inflation Reduction Act (IRA) has expanded the availability of subsidies for green energy, with direct spending estimated to be over $1 trillion the next ten years. Insert “over” or “for” after trillion.
- Introduction, first paragraph: was not surprising that U.S. energy policy policies Delete “policy.”
- Policies enacted under the Biden Administration have restricted domestic crude oil (and natural gas) production and are reducing access to uranium supplies for nuclear power. FYI: I consult for a large in situ uranium mining company in the USA and this is the first I’ve heard of the Biden admin reducing access to uranium. Hopefully, you have a reference for this assertion later in the document.
- Wind, solar, close-loop biomass,10 and geothermal energy are also eligible for a production tax credit, currently equal to 27.50 per megawatt-hour. Needs a $
- Page 7: Rather, the tax credits on offer will reduced only after GHG emissions from electric generation have decreased 75% below 2022 levels. Needs a “be” before “reduced”.
- Page 13: FYI: Orsted recently cancelled some of their OSW projects.
- Page 14: It should be emphasized that the calculated job-year subsidies represent are annual values. Delete are.
- Page 17: A system of subsidies that cause economic distortions in electric markets and required creating additional subsidies to overcome those distortions economic madness.Needs “is” before “economic.”
- Page18: For any industry or firm, employers will hire employees as long as the additional economic value in greater than … In should be “is.“