Wednesday, 31 August 2016

Expensive Doesn't Mean Valuable

More than 8.1 million people worldwide are now employed in the renewable energy industry, according to this report from IRENA. One way to look at it is to say, isn't it wonderful that there's been over 8 million jobs created in that sector? The economist's way to look at it is to say, isn't it hugely costly to pay for all this, therefore does it provide value?

The reason the economic analysis is right and the other analysis wrong is down to the understanding that natural resources are limited, as is human labour, and expenditure on this industry is expenditure that could be going elsewhere. Of course, if the renewable energy industry creates a net value to society then no problem. But does it?

It's unlikely that it does, because to say it does means to say that we are being made as well off as possible by applying those scarce resources in that industry. Think about that for a moment. Prices are not just about signalling the value of resources, they are a coordinated attempt to share by allocating resources most efficiently.

Those who want to use steel for engines must bid against those who want to use it for filing cabinets, ovens and keys. Those who want to use oil for petrol must bid against those who want to use it for weed killer, motorcycle helmets and drinks bottles. Even if the British government created a law to say that petrol, motorcycle helmets and drinks bottles are a basic human right for everyone in the UK, it would not change the fact that resource-allocations are bound by laws of supply and demand.

The market then is not just the billions of mutually beneficial transactions going on everyday across the world; it is the pattern of how people use limited resources that could be used for other things. Because people can make a living providing weed killer, motorcycle helmets, filing cabinets and engines, we know that suppliers have done the bidding for those resources competitively in a way that assents to consumer demand.

This doesn't happen with anything like the same extent with the renewable energy industry - much of the demand was created artificially by government mandates, lobby groups and international protocols. I'm not for one moment saying that the industry doesn't provide things people willingly buy - but it's very likely the case that the 8.1 million jobs and concomitant resources in the renewable energy industry is likely to be quite severe in opportunity costs, where there is significant loss from the potential gain that could have been attained from alternative uses of those resources.

Put it to the test
To show why this probably is the case, you only have to apply the following question to yourself: how often do you voluntarily spend your own money on something in order to make the energy humans use more efficient? The answer, for the vast majority of you, will be - not very often. Don't get me wrong, I'm sure many of you try to buy green-friendly products, and are mindful of recycling. And we all pay green taxes when we consume the world's natural resources.

But the reality is, most people wouldn't voluntarily spend too many extra resources on conjoining themselves to the pursuit of a greener environment. I'm sure many would tell you that's not the case - but economics is more interested in actions than words, and people's buying habits tell you that generally they care more about the consumer surplus attached to their fuel, paper, wood and metal products than they do about investing in renewable energy. To that end, there are bound to be plenty of deadweight losses attached to the renewable energy industry.

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