A Great Example Of How Not To Reason

A reader called Cecil Hughes responded to one of my recent climate change articles, calling into question whether I'm really an earthling:

"Dear Mr. Knight, Having read your article on climate change I begin to wonder if we are living on the same planet. You may be interested in this article by Mark Lacey which I have recently discovered."

Here is my response to Mr. Hughes:

Thanks for sharing, Cecil. I’ve read it during my lunch. It’s good that you gave this article as an example of one I need to read, because it’s a perfect case that demonstrates how to get an analysis utterly wrong. Here’s why. Mark Lacey says:

“Alternative energy sources to fossil fuels have been around for many years. Wind, solar and tidal power have all been harnessed to a greater or lesser extent by numerous countries around the world. But we think that the transition to renewable energy is set to pick up speed rapidly - renewables are now competitive with fossil fuels in terms of cost. Consumers are demanding that this happen, and are voting with their feet as demand for electric vehicles (EVs), for example, soars."

I’m deeply sceptical that if a full cost-benefit analysis was undertaken, renewable sources of energy really have now reached all-in cost parity with fossil fuels. But if we take the best-case scenario, that the claim is indeed true, then businesses will voluntarily switch to renewable energy for any new venture, and consumers will follow suit by reaping the benefits of lower prices. In the meantime, if that reduces demand for oil, natural gas and coal, prices for fossil fuels will drop, so that they will either become the more economically efficient source of energy again, or renewables will win out, and the greens will be happy.

Either way, the price system associated with supply and demand will be the driver in consumer activity. Both businesses and consumers have an incentive to operate under the law of parsimony, using the fewest and cheapest resources possible – so if it really is true that renewables are now price competitive with fossil fuels in terms of cost, it doesn’t leave governments with much else to do here. The greens can enjoy a market-led efficiency that favours renewables.

But alas, I suspect that’s not the full story – and this highlights why I’m always going on about requiring a full cost-benefit analysis that factors in *all* considerations. Firstly, the article makes no mention of the cost of all business switching from fossil fuels to renewables – which will almost certainly prove cost-ineffective. If renewables really are now price competitive with fossil fuels in terms of cost, then there is incentive for new businesses and future investments to switch to renewables - but that does not mean businesses whose heavy capital investments are currently in fossil fuels will benefit from switching.

Secondly, I strongly suspect in typical sleight-of-hand manipulation from green commentators that the claim that renewables are now price competitive with fossil fuels is really a false economy, because I’ll wager that this analysis totally ignores all the taxpayers’ costs that have been lost in the renewable energy crony capitalist sector, where rent-seeking, lobbying and misallocation of resources is rife.

For example, we read from Mark Lacey that “since 2013 more than $1 trillion has been invested in renewable energy around the world and the industry now provides nearly 10 million jobs.” – and by ‘invested’ they always really mean a lot of that is taxpayer money that has been taken from the public to fund the costs of the renewable energy sector, which therefore does not demonstrate that it is providing value. Value is not demonstrated when money has to be taken from people in order to pay for things. The author makes an inadvertent back-handed hint at this when he says “Of course, renewables have been around for a while, but they have either lacked government support, or proved too expensive, or consumer demand hasn’t been there.” Quite. The taxpayer money that was pumped into these projects was done so precisely because they lacked support and would otherwise be too expensive.

I remember reading a New York Times story that celebrated the fact the solar industry employs far more Americans than wind or coal: 374,000 in solar compared with 100,000 in wind, 160,000 in coal mining and coal-fired power generation, and narrowly behind natural gas, which employs 398,000 workers (in gas production, electricity generation, and petrochemicals). The article writer was trying to insist that this must be a good thing for solar power, because it demonstrates how important solar power is in creating jobs. Alas, anyone who understands economics would not reason this way - they'd instead reason that solar power presently shows itself to be a pretty unresourceful and inefficient part of the energy industry.

And once you then compare number of workers to energy output as a percentage, things look even worse for solar energy. 398,000 natural gas workers amounts to 33.8% of all electricity generated in the United States and 160,000 coal employees amounts to 30.4%, whereas 374,000 solar workers amounts to just 0.9% of total electricity. If you try to break that down to electricity generated per worker, then coal generates 7,745 megawatt hours of electricity per worker, natural gas is 3,812, and solar is a measly 98 megawatt hours of electricity per worker. That is to say, producing the same amount of electricity requires 1 coal worker, 2 natural gas workers and a whopping 79 solar workers.

To put that into perspective, it would be like having three large supermarket chains across the country, producing the same output, but Supermarket A does so with 300,000 workers, Supermarket B does so with 600,000 workers, and Supermarket C doing so with 23.7 million workers, and the state subsidising Supermarket C because it thinks it provides better value than A and B. Solar energy is, at present*, showing itself to be a wasteful and inefficient method of producing energy, but people won't get why until they understand that jobs are a cost of doing something, because they are the price we pay for people's labour.

Finally, the Mark Lacey shows a chart, claiming that solar and onshore wind energy are now competitive with oil & gas:

 

 

 

 

As I’ve said, whenever that’s true – great news!! - businesses will voluntarily switch, and the greens will be happy. But the analysis is more complex than the author suggests. Saying “solar and onshore wind energy are now competitive with oil & gas” is just too simplistic – especially if he’s thinking of an energy revolution. Firstly, solar and wind cannot currently compete with fossil fuels as resources that can power all the businesses in the world economy. So they are not competitive with oil and gas with regard to most of the world’s industry. It’s a bit like saying the paddling pool in my back garden is big enough to provide water-based fun for my kids, therefore all the world’s kids can come and use my pool. It’s just not true – there’s a scaling problem – and similarly, solar and wind may be cost effective in a few cases (although that is still unproven at this stage, see above) but it’s a false comparison to say they are more competitive than coal and gas, because they are not yet wholly competitive with coal and gas in terms of resourcing the world’s industries.

On top of that, of course, is the fact that misallocating value-robbing resources into renewables will very likely impede the innovations that lead to the most efficient technological solutions. Subsidising renewables gives a false impression of their viability, and it disincentivises innovators from investing in proper cost-effective solutions. What’s the point of risking capital investment in innovative market-based solutions that will actually provide value when special handouts from the government to artificially valuable renewable alternatives make the race look about even, when really, minus the taxpayer handouts, renewables fall well short? There’s no point risking your investment in a race to make us greener against an opponent with an unfair advantage. You may be a faster cyclist, but your competitor has lobbied for a government hand out to turn his bike into a motor-powered machine, hiding the fact that he is a lot slower and less fit than you are.

 

That analogy is a bit like what the general public’s impression of the renewables vs. fossil fuel debate – they are seeing a false economy that robs entrepreneurs of as such incentive and motivation to use trade and competition as vehicles for making us markets greener. How ridiculous, not to mention duplicitous, to claim that solar is as efficient as fossil fuels and neglect to mention the massive governmental subsidies/taxpayer surcharges that fund this rentseeking. Is it dishonesty or stupidity? Either way it’s the same result. On the whole, then, your article is a textbook example of how not to reason, and how to wantonly fail in attempting a cost-benefit analysis.

Given that the present day redistributive aim is always to enable the better off to help the worse off, I’ve argued before that the majority of our weight should be put on helping present day poor people, and that we should put very little emphasis on future people who will be a lot better off than we are.  That seems obviously right to me, at least as strongly as the counter-proposition – that we should rob present day poorer people for the future richer people – seems obviously wrong.

 

Alongside that is the logical corollary: live with the costs that come alongside the much greater benefits of our industrial progression, and allow the freedom of exchanges of ideas to carry on uninhibited in solving the problems we face. There is no system we know of that works better – so accepting global warming and adjusting to the changes through the natural mechanism of the price system seems fairly obviously cheaper, more efficient, safer, less risky and less damaging than impeding innovation and slowing down progress with policies of which we hardly understand the costs.