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Synthesis/Regeneration 45   (Winter 2008)

Thinking Economically

The Greatest Market Failure the World Has Seen

by Sonya Hetrick

While Americans concerned about global warming are diligently turning off the water while they brush their teeth, 137,000 million gallons per day are being withdrawn for US generation of thermoelectric-power. [1] While shoppers are stressing out over paper or plastic, US industry emits over 2.7 billion pounds of toxic chemicals into the air each day. [2]

One reason for this preoccupation with energy reduction based on individual acts is that big business has cunningly co-opted the meaning of environmental sustainability rather than accepting responsibility for its culpability in the problem. Their drive is profit. Recognizing the increasing number of Americans who don’t want to support companies that harm the environment, they flood the airwaves with newly-greened corporate images but avoid making any substantial changes in their business practices.

Americans must not allow themselves to be so misled. “Clean coal” is an oxymoron. The harmful impacts of global warming, acid rain, ozone depletion, and chemical toxins on natural ecosystems and human populations have long been acknowledged. Human economic activity is inducing changes in the level of greenhouse gases greater than those associated with the onset and termination of the last ice age. [3] Present-day computational models have basically no way of knowing what kind of massive re-organization of the ocean-atmospheric system could occur, nor the human suffering that could result. Adding in uncertainty and irreversibility, the issue of global climate change becomes more serious, not less. Action to cut back the use of fossil fuels need not await a full cost-benefit analysis.

In order to achieve the 50–80% level of greenhouse gas reductions that scientists believe will be necessary to avert environmental catastrophe, large-scale structural changes are necessary. As concluded in 1987 by the World Commission on Environment and Development and affirmed in 1992 at the Rio Earth Summit, sound incentive structures are key. [4] If humankind is to reach a sustainable future, environmentalists cannot merely issue pleas for voluntary emissions reductions. Polluters will not suddenly decide to account for the social and environmental costs of their business. Rather, considerations for ecological sustainability must be integrated into practical policy and decision-making.

If humankind is to reach a sustainable future, environmentalists cannot merely issue pleas for voluntary emissions reductions.

As a 1992 World Bank study found, current policy incentives, especially within the energy sector, are environmentally destructive, economically inefficient, and trade distorting. [5] Energy is quite heavily subsidized, by $240 billion per year, [6] and over 80% of subsidies flow to oil, coal, and gas. [4, p. 49] The traditional justification for subsidies is to make possible economic growth. But current programs are “ineffective in fueling economic growth or in reducing the vulnerability of the domestic economy to external shocks...[they may even] hamper economic development.” [6, p. 52]

As the Organization for Economic Cooperation and Development (OECD) admits [7], the excessive subsidies for agriculture, energy, transportation, and industrial activities disbursed by OECD member governments have encouraged pollution, exploitation of natural resources, and waste generation. All of non-electrified sub-Saharan Africa could be supplied with energy from small-scale solar facilities, for example, for less than 70% of what OECD countries spend subsidizing fossil fuels each year. [8] By means of such perverse subsidies, governments are undermining the health of the earth with public funds.

… excessive subsidies for agriculture, energy, transportation, and industrial activities have encouraged pollution, exploitation of natural resources, and waste generation.

Nowhere is the need to reform energy policy more critical than in the US. According to the 2005 UN Development Report, the US accounts for a quarter of the world’s greenhouse gas emissions, twice the share produced by the five next-largest industrialized countries combined. [9, Table 22] Most pundits agree that the US will exhaust its oil reserves within the next 20 years, with the rest of the world following shortly thereafter.

The impending depletion of domestic oil implies that the US may soon have no choice but to shoulder the fiscal responsibility of leading the worldwide transition to renewable energy sources. To start guiding business practices and human behavior towards more socially optimal ends, the US must immediately eliminate its subsidies to conventional polluting technologies, which received $21 billion during the mid-1990s. [10, p. 70] This could be achieved through structural reforms such as imposing sunset clauses and financial limits on subsidies, introducing a burden of proof, and conducting regular industry evaluations. The removal of fossil fuel subsidies would lower US CO2 emissions to 16% below 1990 levels by 2010, thereby surpassing its Kyoto target. [10, p. 70] As calculated by the OECD, up to 200 million tons of CO2 would be conserved. [7]

While this environmental gain is significant, much greater emissions reductions will be needed. For there to be hope of mitigating climate change, the full amount currently spent subsidizing fossil fuels must be shifted to renewable energy sources, which currently supply a mere 7% of energy worldwide. [10, p. 92] One recent analysis indicates the urgency of this task. To stabilize CO2 at 550 ppm, if energy demand grows in the middle of the International Panel on Climate Change’s scenario range, the power sector will have to be de-carbonized by at least 60%, and perhaps as much as 75%, by 2050. [11, p. xiii] This would mean having more renewable energy by 2050 than today’s total world energy consumption.

Is this even possible? Unfortunately, most renewable sources suffer from low power densities; meeting current US demand for all energy would require a square of photovoltaic (PV) flat-plate collectors twice the size of New Jersey. [12] Moreover, since renewable sources generate energy only intermittently — when the sun is shining or the wind is blowing — storage systems will have to be developed to reliably deliver electricity.

Yet if renewable sources are given sufficient support, these two problems are not unsolvable. Innovative options exist, but they lack funding. Sunlight is more intense and always available in space, so the same amount of solar power could be collected with an array area 10 times smaller than one on the Earth’s surface; the cost of launching material into orbit has so far been prohibitive. [13, p. 104] Similarly, while electrolyzers and hydrogen fuel cells could be used for energy storage, for large-scale use their costs must be brought down to $200/kW and $50/kW, respectively. [12]

If fossil fuel subsidies are shifted from conventional to renewable energy sources, will prices converge enough for business and industry to find the switch to less-polluting technologies attractive? Considering the huge market imbalance — in 2004, existing renewable electricity capacity (excluding large hydro) totaled only 160 GW worldwide, compared to total installed capacity of 3,800 GW — this may seem unlikely. [14] The average costs of renewable electricity are high; perverse government subsidies and the externalization of environmental costs keep the prices of electricity produced with coal and nuclear technologies artificially low: about 3 and 5 cents per kWh, respectively.

Nevertheless, wind and solar power are the fastest-growing energy sources in the world. [15] Depending on the technology and site, they are already competitive in some applications, and costs for producing commercial heat and grid electricity are falling. According to the International Energy Agency, “under best conditions — optimized system design, site and resource availability — ...[renewable energy] plants can produce electricity at costs ranging from 2–5 cents/kWh.” [14]

Costs will be higher in the first decades. However, as UK Prime Minister Tony Blair declared, investment in carbon-free energy sources is a “major down payment in our future.” [16] It took nearly 30 years for the world to produce its first GW of PV capacity; four years later, by the end of 2003, this total had tripled). [10] In fact, the Task Force on Renewable Energy of the G8 industrial countries has determined that successful promotion of renewables over the period to 2030 will be less expensive than taking a business-as-usual approach, and the IEA has declared that the transition to a more sustainable energy system is “inevitable.”

With rapid innovation to increase conversion efficiencies and reduce costs, the potential of renewables is significant. In 1991, a wind inventory taken by the US Dept. of Energy showed that Texas, North Dakota, and Kansas have enough viable wind energy resources to satisfy all national electricity demands. [17] Wind presents a dual-use technology in that much of this land could still be used for farming, ranching, and forestry.

In 1998, Shell’s UK Director of Corporate Affairs, John Mills, predicted that alternative systems could supply up to 50% of the world’s electricity by 2050. [18] The environmental benefits will be huge; for example, each 1 kW solar PV panel, with an average five hours of sun per day and saving 662 pounds of CO2/kW, conserves 1330 kg of CO2 a year. [12]

As the world’s single biggest user of fossil fuels, the US must take the lead in this effort.

Power from clean air and sunlight is likely to be the only way of meeting energy demand while cutting CO2 emissions by 50–80%. In order to make this even possible, an unprecedented investment in renewable technologies is necessary. As the world’s single biggest user of fossil fuels, the US must take the lead in this effort. Currently, spiking oil prices, fears over national security, and a growing awareness of the dangers of climate change are fueling clean-energy fever, and US environmentalists must capitalize on this momentum. It will require political courage to break polluters’ addiction to fossil fuel subsidies, but the social, economic, and environmental benefits of carbon-free energy — on both the national and the global level — are too great to excuse inaction.

Americans cannot content themselves with individual lifestyle changes like switching to compact fluorescent bulbs, recycling a few more cans and bottles, or buying organic produce when it’s on sale. According to the distinguished economist Sir John Stern, climate change is the “greatest market failure the world has seen.” [11] Therefore, economic incentives and structures must be altered: perverse subsidies corrected and renewable technologies financed. Such policies carry the promise of a sustainable future — one in which businesses can satisfy society’s needs, earn profits, and help prevent global warming all at the same time.

Sonya Hetrick is an economics student at American University who is interested a career in socially responsible investment or economic policy development.


1. Hutson, S., et al. 2004. US Geological Survey: Estimated Use of Water in the United States in 2000. USGS Circular 1268, http://pubs.usgs.gov/circ/2004/circ1268/.

2. Environmental Protection Agency. April 12, 1989. EPA Releases Toxic Inventory Data, Press Release. EPA, http://www.epa.gov/35thanniversary/org/tri/01.htm.

3. Sweet, W. 2006. Kicking the Carbon Habit: Global Warming and the Case for Renewable and Nuclear Energy. New York: Columbia University Press.

4. World Commission on Environment and Development. 1987. Our Common Future. Oxford: Oxford University Press.

5. Shah, A. & Larsen, B. 1992. World energy subsidies and global carbon emissions. Background Paper to the World Development Report. Washington, DC: World Bank.

6. Van Beers, C. & de Moor, A. 2001. Public subsidies and policy failures. Great Britain: Edward Elgar Publishing.

7. Organization for Economic Cooperation and Development. 1997. Reforming Energy and Transport Subsidies: Environmental and Economic Implications. Paris: OECD.

8. Simms, A., Oram, J. & Kjell, P. 2004. The price of power: poverty, climate change, the coming energy crisis and the renewable revolution. New Economics Foundation, http://www.eldis.org/static/DOC15456.htm.

9. United Nations Development Program. 2005 Human Development Report. UN, http://hdr.undp.org/reports/global/2005/.

10. Myers, N. 1998. Perverse subsidies: taxes undercutting our economies and environments alike. Winnipeg, Canada: International Institute for Sustainable Development.

11. Stern, N. October 30, 2006. Stern Review on the economics of climate change. http://www.sternreview.org.uk.

12. Turner, J.A. 1999. A realizable renewable energy future. Science 285(5428): 687. Academic Search Premier, EBSCOhost, via http://www.library.american.edu/.

13. Dessler, A. E. & Parson, E. A. 2006. The Science and Politics of Global Climate Change: A guide to the debate. Cambridge: Cambridge University Press.

14. REN21 Renewable Energy Policy Network. 2005. Renewables 2005 global status report. Washington, DC: Worldwatch Institute. ttp://www.worldwatch.org/brain/media/pdf/pubs/ren21/ren21-2.pdf. International Energy Agency. 1999. “The Evolving Renewable Energy Market.” Paris: IEA.

15. Sawin, J. L. & Prugh, T., Ed. 2004. Mainstreaming renewable energy in the 21st century, Worldwatch Paper 169. Washington, DC: Worldwatch Institute.

16. Blair, T. March 6, 2001. Environment: The next steps. Reuters, cited in Group of Eight Renewable Energy Task Force, G8 Renewable Energy Task Force – Final Report, 2001. http://www.climate.org/PDF/g8_ren_energy.pdf

17. Brown, L. B. 2003. Wind Power Is Set to Become World’s Leading Energy Source. Humanist 63(5). Academic Search Premier, EBSCOhost, via http://www.library.american.edu/.

18. Mills, J. February 26, 1998 & August 1999. Seizing Renewable Energy Opportunities. Cambridge: Renewable Energy Conference, UK Government Office of the East Region.

[2 jan 08]

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