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Obama and the Green Energy Industry – Tips for its Success

Photo Credit : Steve Jurvetson

In his Second Inauguration Speech on January 21st, President Barack Obama addressed some controversial topics, among which was the issue on green energy. He boldly stated the following:

“Some may still deny the overwhelming judgment of science, but none can avoid the devastating impact of raging fires, and crippling drought, and more powerful storms.  The path towards sustainable energy sources will be long and sometimes difficult. But American cannot resist this transition.”

Not many would consider this statement was problematic. Indeed, we have experience record-breaking storms and weather conditions. However, the really problematic part was the following:

“We cannot cede to other nations the technology that will power new jobs and new industries.  We must claim its promise. That’s how we will maintain our economic vitality and our national treasure, our forests and waterways, our crop lands and snow capped peaks.  That is how we will preserve our planet, commanded to our care by God.  That’s what will lend meaning to the creed our fathers once declared.”

Believing that a government can lead green energy industries is dangerous, for steering the market tends to fail more than succeed.

The Demand from the Market is Vital

As much as it sounds obvious, an industry is successful if and only if it is chosen by the market. Demand for good induces supply, thereby forming a market for that good. It is impossible the other way around – supply of good (in this case, the supply of renewable energies led by the government) cannot create demand. The only exception to this rule must be the design industry where new designs can create new demands.

Then, the price of green energy lower than that of competing substitutes is essential in order to be chosen by the customers. For instance, MIT Technology Review wrote last October that the $2.4 billion program designed to jump-start the battery industry has met with horrible market conditions. The article pointed out that while LG Chem was granted $151.4 million to build a plant for supplying battery cells for Chevrolet’s Volt, the plant isn’t producing any batteries yet. It picked “Volt sales [being] lower than originally anticipated” as the reason. The article reemphasizes the importance of low price for the electric vehicles to be popular: “Electric vehicles can cost twice as much as a conventional gas-powered vehicle. Yet battery costs will stay high until they can be made at high volumes.”

Strong Push by the Government Doesn’t Guarantee Technological Advancements

Such reduction in prices is possible only through technological development and innovation. Unfortunately, the massive commitment including huge financial investment by the government does not guarantee the innovation necessary to the green energy industries. The Washington Post’s article titled “A closer look at Obama’s ‘$90 billion for green jobs’” wrote last October that while the price of photovoltaic systems had fallen in half, from $7.20 per watt in 2007 to #3.47 per watt in 2011, and the cost of new wind turbines fell 27 percent from 2008 to 2011, “it is difficult…to sort out how much of the decline was due to the stimulus and how much due to China’s massive foray into wind and solar manufacturing.”

Chung-ho Kim, former President at the Center for Free Enterprise and currently a professor of economics at Yonsei University, said that it is possible that new technologies can be invented through government’s support and investments. “Yet, that possibility is not so high,” he added. “In addition to that, a government tends not to give up on its projects even when they fail, which causes continuous inefficiency.”

Professor Kim picked space technologies as an example of “an industry which all countries spend money on, without any promise of visible profits.” “If an industry has a really high possibility of success and commercialization,” he continued “private investments can do them instead of the government. There is simply no need for government intervention.”

Will there be any commercial viability of technologies made under a government’s lead?

If there really was commercial potential in certain technologies, private investments by private companies must have already started.

Then, let’s now consider a technology that doesn’t have much marketability but is sustained by the government’s subsidies. Is that an appropriate approach to making the technology be used? Investing in unprofitable businesses should be discouraged especially these days when the nation just talked about fiscal cliff and the Fed has done so many of quantitative easing to revitalize the economy.

In fact, what’s more important than the mere amount of deficit spending in times of threatened financial soundness is how much benefit it can bring in the future. Considering that fact, subsidizing such businesses should be a big no.

Finally, there is a case when technologies developed by government subsidies just die out because they are not chosen by the market. For instance, while hybrid vehicles like Toyota’s Prius are selling at a faster clip, battery industry subsidized by the government has a low outcome. The Washington Post reported the reason why the U.S. battery is still struggling is that “hybrid vehicles…tend to use nickel-metal hybrid batteries rather than the newer lithium-ion batteries produced in factories funded by the stimulus” in its article last October. Furthermore, it pointed out that “LG Chem’s battery factory” in Holland, Michigan, “which received…grant from the Department of Energy has recently furloughed its 200 employees.”

What about the “oil subsidies”?

Proponents of government subsidies for green and renewable energies often attack the continuation of the government’s oil subsidies. They usually argue that oil subsidies is one of the biggest reasons oil companies could succeed and still survive in the midst of economic recession.

However, the subsidies spent on the “oil industry” and those used on the alternative energies are different in their characters. Forbes report by Robert Rapier last April analyzes the composition of so-called “oil subsidies” and writes why they are very unlikely to be removed. Rapier writes that most of fossil fuel subsidies are “for the Strategic Petroleum Reserve, which is designed to protect the U.S. from oil shortages,” “tax exemptions for farm fuel” and “$570 million for the Low-Income Home Energy Assistance Program” (LIHEAP). Simply put, the effect the government is aiming to get from petroleum subsidy is different from the effect it wants from the current green energy subsidy.

Then, what can a government do?

There is no need for the government to intervene in the green energy market. When it does, there is more possibility of failure than success. “If the industry needs supports from the government,” Prof. Kim suggested, “it is better and more feasible for the government to buy the energy once the project succeeds.”

About Thomas Kim

Thomas is a sophomore from Korea, studying Mathematical Methods in the Social Sciences (MMSS) and Economics at Northwestern.

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