“Picking Winners”: Policy Blunder or Necessity? December 12, 2008Posted by Michael Hoexter in Energy Policy, Green Transport, Renewable Energy, Sustainable Thinking.
Tags: Al Gore, California Air Resources Board, Cap and Trade System, Carbon Pricing, carbon tax, Economic Theory, Eisenhower Interstate System, Electric Vehicles, Energy Policy, Feed In Tariffs, Infrastructure Economics, Milton Friedman, Plug In America, Project Better Place, Renewable Energy, Repower America, Who Killed the Electric Car?
Listening to Science Friday on PBS recently, there was an interesting exchange between Dan Sperling, an influential member of the the California Air Resources Board (CARB) and Professor at the University of California at Davis, and Sherry Boschert, Vice President of the EV advocacy group, Plug In America. Sperling has been known to advocate hydrogen fuel cell programs at the California state level, a stance that has historically had the backing of Detroit automakers until very recently. Boschert and Plug-In America have been highly critical of the degree to which CARB has supported hydrogen to the detriment of battery-electric cars (BEVs) or other plug-ins (which includes EREV or PHEVs as well). This is a version of the conflict that became part of the influential documentary “Who Killed the Electric Car”.
While Sperling in this exchange was presenting himself as an advocate of “electric drive transportation”, he mentioned a number of times hydrogen fuel cell vehicles (HFCV), which use an on-board hydrogen fuel cell to generate electricity for an electric motor to drive the wheels (a.k.a. electric drive). Boschert pointed out that HFCV option has been used to delay and stymie efforts to deploy the much “readier” technology of plug-in battery electric vehicles for the last ten years in California and therefore around the nation. The essence of this accusation, also popularized by the “Who Killed..” film, is that policy support and advocacy of HFCV’s blocks the implementation of any clean fuel vehicles short and medium term as HFCV technology is always ten years away from commercialization. Boschert advocates a positive support policy for battery electric vehicles, like an embrace of public charging infrastructure for EVs by municipalities and state governments.
Sperling, though he claimed not to be opposed to supporting government EV programs, said that you didn’t want to “pick winners” in the technology derby to replace petroleum, citing the apparent disaster of corn ethanol. Boschert countered that winners were always being picked, pointing out that HFCVs were funded by government and industry to far higher levels than battery research and battery electric vehicles. She suggested that short of a government sponsored BEV roll-out program that there should be equal research funding for HFCVs and BEVs, though the first option was the preference of Plug-In America.
Efforts NOT to Pick Winners
In California’s debates around a number of pioneering pieces of clean energy and climate legislation and regulation, the notion of “picking winners” comes up on a regular basis as an unquestioned taboo for any measure or program. When in a discussion, someone suggests that policy be used to promote one technology or initiative and someone else in the room opposes that technology or the type of support, the accusation that one would be “picking winners” is thrown at the advocates of a prescriptive policy. While California has many technology specific support programs, there are also important central pieces of climate and energy regulation that are designed not to “pick winners”. The Assembly Bill 32, (AB 32) process which is California’s Global Warming Act of 2006, has almost inevitably gravitated towards a cap and trade system, which as is the Kyoto process, an effort not to pre-determine the price of carbon, nor commit California to a particular set of technological solutions to global warming. Accompanying this process, the CARB is also working on a “Low-Carbon Fuel Standard” (LCFS) which tries to group all reduced-carbon fuels for transport together, including electricity, mandating certain reductions in carbon content occur regardless of which fuel is discussed. Again, no “winning” fuel is picked in the LCFS.
Designers of these policies feel they are reducing government involvement to its intent while removing arbitrary rules and decisions from the process. In theory, the idea of “not picking winners” sounds great but, as in all things, between the conception and the realization reality intrudes.
The Theory: Government as Referee
The economic profession and economic modeling in business settings are right now at a watershed moment, where those individuals and theories which foreshadowed the precipitous downturn of the last few months are given a great deal more credence than the orthodoxy of only a few months ago. In this period of flux, it is reasonable to think that some old assumptions may no longer hold water, at least during the period of crisis if not thereafter.
In the last three decades, economic policy and influential parts of the economics profession have tended to hold up the ideal of an almost entirely unsupervised market, where individual and corporate economic choices in aggregate would dictate the direction of economic life. Expressing a belief in the individual or corporation as consumer and entrepreneur, these supply side or libertarian economic theorists believed that only unregulated market forces arrive at the optimal outcome. By contrast, government is considered by advocates of this approach to be necessarily a hindrance to economic success and growth. This view has remained largely unchallenged in both the Democratic and Republican parties until the recent financial system near-collapse and sharp economic downturn.
While the ideal of self-regulating markets has inhibited efforts at regulation in many areas of the economy, not everybody gave up on regulation even in the heyday of this ideal. In those environments where regulation has been accepted as a necessary evil or even a desirable economic tool, there have been attempts to incorporate the ideal of the market into economic policies. In California, which has a history of state-level energy regulation that has continued through the last few decades, policies that interfere less in the market are considered more desirable than those that dictate to private businesses what should happen. The latter is termed “command and control”, which sounds less desirable than a “market-based” regulation scheme.
In the ideal market-based regulation, legislators, regulators, and the government executive branch develop rules that express a desired social outcome in its broadest, most abstract form and then allow private actors to try to fulfill those desired social aims in any (legal) way they can. In the case of a cap and trade system, the notion is that the intended goal is a set amount of global warming gas emissions that will be reduced in subsequent years. The auction system for pollution permits is the means by which businesses acquire permits to emit a certain amount of greenhouse gases. When there are no more permits, the business can no longer pollute or face harsh fines. As another example, California’s Low Carbon Fuel Standard, the amount of carbon in the fuel is regulated but there is no selection of which fuel is necessarily or potentially that with the lowest carbon content.
So in a market-based regulatory system, once the rules have been set in place, the government acts as a referee, enforcing the rules but otherwise allowing market actors to make their decisions within the constraints of the system. In the case of cap and trade, there are two levels of market mechanisms built in: one is through the bidding on pollution permits and the other is allowing businesses and individuals to figure out by themselves how they are going to reduce their carbon emissions. The competing carbon tax concept is not an “un-market-based” solution though it removes the first level of market mechanisms as compared to cap and trade, instead allowing businesses and individuals to figure out on their own how they are going to avoid emitting carbon and therefore paying more carbon taxes. So cap-and-trade is doubly market-based, while a carbon tax would be a more conventional regulation where government determines a social goal and shapes the market through a disincentive.
The Other Theory: Prescriptive Policies, a.k.a. “Picking Winners”
While there is no hard and fast line between the market-based and a prescriptive policy, there are many policies in the area of energy where government expressedly prohibits or promotes one activity/technology or another. The longstanding US tradition of research funding for particular energy technologies is, in a way “picking winners” though the federal government has tried to spread this funding around to some extent. In the area of lighting, for instance, certain inefficient fixtures (probe-start metal halides) will be prohibited by the US DOE for sale as new fixtures as the first of January. The criticism by Sherry Boschert of hydrogen policy holds true: hydrogen fuel cells have received inordinate funding in comparison to battery technology, an imbalance that historically has had the support of Detroit automakers. Biofuel mandates in combination with the enormous subsidies for corn production and corn ethanol are prescriptive policies.
While to a self-regulating market theorist prescriptive government policies are always inefficient and, adding some rhetorical inflation, “disasters waiting to happen”, defenders of a prescriptive policy would counter that scientists and political leaders reflecting scientific and common wisdom have found that one solution is, along one or more desirable dimensions, better or substantially worse than others. Cigarette smoking was found to cause cancer. You didn’t wait until individual effected people discovered that they were getting sick and dying sooner if they had smoked: government put in laws that make the sale of tobacco more difficult and mandate public warnings of smoking’s hazards. There was a statistical relationship between smoking and cancer which market actors alone could not perceive, especially given the socially reinforcing and addictive nature of smoking. In lighting, probe-start metal halides use more energy than pulse-start metal halides or linear fluorescents for the same light output: this black and white finding by engineers led to an eventual step-wise ban on the sale of probe-start fixtures.
A prescriptive policy then depends on scientific knowledge to determine, before the market can discover the difference, that one course of action is more helpful than another course of action. The trust in scientific knowledge is key for most prescriptive policies, though prescriptive policies could also rest on the consensus of political leadership or polls and perceptions of popular sentiment. It is no wonder that declines in the authority that people attribute to scientists in the US has led to a drift away from prescriptive policies, at least in the public presentation of policy actions. Despite the diminished prestige of science in the US pantheon of values over the past few decades, the US government is the largest funder of scientific research in the world and also, still continues to operationalize that knowledge when it comes to implementing policy.
Beyond Prescription: Government Sponsorship
A “stronger” version of a prescriptive policy is one in which the government not only prescribes a particular solution but pays in part or in full for the realization of that prescription via taxpayer dollars. The proposed economic stimulus packages including the much-discussed Green New Deal ideas, would be government sponsored programs by definition. Bailouts of or support packages for individual firms or industries are government sponsored prescriptions for how the economy should remain or change in the future. Public education is a prescriptive policy that is also government sponsored: not only should children be educated but taxes will provide the means by which they can be educated. Most highly industrialized countries outside of the United States have more government sponsored programs than the US, particularly in the area of social welfare. By contrast, the US government has sponsored a very large, expensive, and technologically sophisticated military relative to other countries.
In the area of energy and transport, a government sponsored program could range from a rebate program for electric vehicle purchase to as large as the building of new power plants like the Hoover Dam or TVA projects or a system of long-distance power transmission lines for renewable energy. These facilities could either be managed by the government as part of a public power authority or be sold off to private investors to manage. Tax credits for oil and gas exploration or renewable energy projects are also a form of government sponsorship as to pay for these credits, taxes need to be levied or programs cut in other areas. In any case, government sponsorship contradicts even more the ideals of advocates of the self-regulating market in the tradition of Friedrich von Hayek and Milton Friedman, as government would have a hand in setting prices or enlarge its role as a provider of services.
Real Dangers of Picking Winners
While in tone this piece would seem to be critical of the categorical rejection of “picking winners’, there are some real dangers in picking winners, especially when the process is itself wrapped in an ideology of doing the opposite, i.e. NOT picking winners. The list below are potential real dangers of picking winners keeping in mind that these are not nearly the exclusive property of this decision making system; other forms of decision making including more market-based ones share some of these drawbacks.
1) Corruption – Picking winners if done non-transparently and without full attention to democratic principles can lead to and/or be the product of corruption. Picking winners involves collaboration between government and industries or professions that can shade into collusion if not pursued in a deliberate fashion with full public justification. Bribes in various direct and indirect forms can influence the selection process.
2) “False” Winners – Picking winners can lead to a self-justifying selection of a technology or system that ends up being of lower quality and service than another option. Corn ethanol, with only hope and little scientific justification, became a false winner.
3) Economic Inefficiency – As per “2”, the government or other authority that is vested with the power to pick the winner could pick a technology or system without regard for the ultimate costs of implementing that technology. Government officials may have no mechanisms that hold them responsible for cost overruns or other inefficiencies. The potential for inefficiency may need to be balanced against the desirability of the goal.
4) Lack of Accountability – related to “1” and “3”, the selection of winners may occur in ways in which those who make the decisions do not experience the effects of those decisions. Government officials, representing the people of the US, may not be able to be held individually responsible in some circumstances.
5) Foreclosure of future technological developments – picking a winner can narrow the market opening or close it entirely for an emerging or future technology that may turn out to be superior. Monopolistic or oligopolistic control of markets can have the same effect.
6) Decision-making without scientific backing – A winning technology or system may be selected without access to or utilization of the best scientific knowledge available; as we shall see below the success of “picking winners” is heavily dependent on high quality science.
7) Decision-making without Socratic wisdom – Decision makers may feel empowered without knowing what they don’t know. Without knowing where and to what degree they are ignorant allows decisions to be made that may ultimately be short-sighted.
8) Arrogant self-justification – in a further development of “7” decision makers may attribute to themselves the cloak of infallibility or may downgrade the wisdom and perspective of those who are outside their coterie. These attitudes may spring from the privilege of being able to make crucial decisions in combination with a wealth of information and resources at their disposal.
9) Economic and Political Despotism – the worst case scenario upon which much criticism of state-led policies are based, is that “picking winners” is the leading edge of authoritarianism. Despite the tendency recently in our politics to dwell on this worst outcome, government initiative in the economy does not NECESSARILY lead to despotism as we have seen with the New Deal, WWII mobilization, the Marshall Plan, the Interstate Highway System, etc.
As we shall see below, these dangers are not necessarily an ultimate condemnation of all efforts to pick winners.
Infrastructure as Prescription
While the ideal of the self-regulating market can be helpful in describing how consumer choice shapes truly competitive markets, a strict adherence to this ideal leaves a gap in our understanding of how energy and transportation infrastructure gets built. Infrastructure is a good or service that underlies basic social functioning as well as the use of other goods and services. “Infra” means “under” and infrastructure does in general support a variety of other structures or institutions that are more visible to us. Elements of infrastructure are usually a means to other ends. In most cases, to build competing pieces of infrastructure is economically inefficient, as the label is usually applied to physically large objects linked together into a large system. There are also only a few actors that have the resources to build infrastructure, most notably governments and some very large corporations that often operate in markets that tend towards monopoly or oligopoly. Infrastructure then tends to be a natural monopoly, either being managed entirely by the government or highly regulated by the government to prevent private companies from exercising monopoly power over consumers. People in advanced industrialized societies have come to view a functioning infrastructure as a (free per use) entitlement or at least a relatively affordable service that operates in the background.
A mixture of social and natural scientific analysis plus educated guesswork by a few leaders in the public and private sectors is involved in planning, proposing and building infrastructure. Likely demand for a new or existing technology is estimated and then plans are made for the necessary infrastructure to be built. Sometimes at some point in this process, a bond measure or other financing instrument is submitted either to a legislative body, a corporate board or stockholders meeting, or to the electorate for approval, thereby engaging in a democratic or deliberative process. As deliberative or democratic as one or another stage of the process may be, many potential competing infrastructure concepts are not placed into a market-like competition, a process for which we have no precedent and would seem to be prohibitively time-consuming and expensive.
Financing can be arranged either through the issuance of bonds or for infrastructure built by the private sector, stock offerings may be employed. In the end, a “prescription” for what the society needs is devised that it is difficult to shape through the iterations of consumer buying behavior that is the ideal case for a competitive market. Once infrastructure is being built, market actors then often devise their own plans to take advantage of the new or improved infrastructure (new housing developments, businesses etc.). The market then accommodates itself to and/or exploits the infrastructure which has been justified based on sound engineering, transport and urban planning principles.
Recently there were two large public transit infrastructure project proposals that won electoral approval in California: a San Diego to Sacramento high speed rail project and an extension of the popular BART system south from San Francisco and Oakland to San Jose. In a society committed to life after petroleum, reducing GHG emissions, and de-congesting the roadways, it made sense to the planners and then to a majority of the voters to provide more electric passenger rail lines for both long distance and local use. In the extension of the BART, one can project that transit-oriented residential and commercial development will be built around the new stops of this16 mile commuter rail extension.
In terms of the current discussion, in each of the California measures, a “winner” proposal was picked by a coalition of political leaders, campaign funders and transit planners and then submitted for approval to the electorate. While there was no market competition between different alternative infrastructures, there were opponents of each of the plans that sometimes backed up their opposition with alternative ideas in various stages of elaboration and detail. Ultimately, it is assumed that if leaders and experts put together a compelling proposal that appears to serve voter/human needs that the infrastructure project will be “good enough”. The process of putting together a marketplace of these ideas and proposals would for both the producers of the proposals and the consumers of these proposals represent many multiples more of effort and money in just the initial stages of the projects. To build infrastructure often requires that an operational concept of “need” be available rather than simply see infrastructure concepts as a competition of “wants” or desires, as is typical in market competition.
It would then seem that in the world of infrastructure projects, a prescriptive approach has advantages over experiments in building a market ideal or competition between proposals. Perhaps through improved cybergovernment initiatives a more interactive proposal generation process could be designed, yet this more democratic approach is not identical to the real-world interactive nature of markets where real products and services are offered and chosen among by consumers. Then, there may very well be something in the nature of infrastructure projects, their uniqueness, site-specificity, high expense and long duration that lends itself to leader-driven and prescriptive decision making, even as certain aspects of that process can take into account the preferences of the end users. The changing whims and trends of markets operate on a different timeframe than persisting on over a period of a decade or more building immense physical objects and systems.
Advantages of Prescription/Picking Winners
Here then are some of the advantages of prescriptive or government sponsored programs:
1) Potential for rapid implementation – There are fewer stops between design and construction start if a winner has been picked. If there is a clearcut winner why take additional steps?
2) Potential to be oriented towards long-term viability – local, more immediate economic concerns can be balanced against any number of different factors that may represent a longer view of social value than voters or consumers can typically calculate at the voting booth or turnstile.
3) Expense of generating multiple proposals short-circuited – In addition to time costs, there are monetary costs to generating multiple ideas for submittal to the public or to regulatory boards.
4) Potential to be based more directly on scientific findings – As considerations of a market-based competition can be, at least in the design, avoided, more elements of scientific understanding that have no bearing on current market concerns can be considered. Scientific findings may at times stand counter to wishes of a consumer market, as with smoking cessation or beyond the current perception of market actors, like global warming.
5) Government can insure higher risks – with some massive earthworks and higher risk technologies government endorsement and insurance is an absolute necessity.
6) Government can use directive policies – Some infrastructure projects require the use of public lands or eminent domain. While there have been questions lately that notions of the public good can play a role in economic life, government and its representation of the popular will or sentiment can more legitimately represent these wishes than private corporations.
7) Integration of varying technologies – a prescription can contain as few or as many elements as needed to fulfill the mission. The interdependence of different technologies and roles can be contained within the infrastructure plan.
8) Multi-factor Systemic approach – diverse factors or organizations can be added or subtracted from a prescription, externalities can be internalized and vice versa.
9) Concrete expressions of intent – The hand of the market or the setting of abstract rules, such as those that limit emissions, do not concretize popular sentiment or support as much as the building of physical objects.
For those who are committed to an economic model that sees good coming only from the interaction of independent economic actors, the above advantages will pale in comparison to the previously listed dangers of picking winners. However, in building infrastructure, there seems to be no way to avoid risking those dangers if we want to arrive at the physical outcomes that increasing numbers of analysts are saying are necessities.
Integrated Energy and Stimulus Plans: Unthinkable without “Picking Winners”
The Repower America plan might be called an “integrated energy and economic stimulus plan”. The similar proposal I have been putting forth over the past year or so, the Renewable Electron Economy, based on the engineering analysis of Ulf Bossel, that we should shift most of our energy demand to electrical devices and use renewable energy as much as possible to generate electricity is another example. In an integrated energy plan, the general types of energy conversion devices are prescribed as are the types of energy extracting or generating devices, so there is an integrated match: if you are proposing an “electron economy”, you want to make sure that there will be a coordinated hand-off between the demand for electricity and its supply. Electricity, as it is difficult to store, requires a more tightly integrated system than the trade in and consumption of the stable molecules that compose fossil fuels.
The call for planning has come from a number of political quarters. T. Boone Pickens, not previously known as advocate of economic planning, has recently promoted that the US develop a plan to get off foreign oil, bemoaning, in passing, the lack of such planning over the past 3 decades. Pickens’ plan serves his economic bets on particular technologies but he has been public-spirited enough to suggest that planning itself was necessary and lacking in our political discourse. Plans can also emerge independent of government involvement: manufacturers of electric cars are now considering creating a standard high voltage quick-charge interface for their cars, so that all quick-charge capable vehicles will be able to use a future standard high-voltage charger. This is analogous to standardizing the size of the aperture of fuel nozzles and gas tank mouths. In getting together on a standard, the manufacturers are picking a winner.
The Repower America plan is largely, in the terminology I use, a renewable electron economy plan. Its ambitious goal of converting the US electrical energy supply entirely over to clean sources within a period of 10 years leaves little room for experimenting with different high-level physical or policy instrument designs. For one, deciding that electricity should be the clean energy carrier of choice is “picking a winner”, though it is based on a growing consensus of engineers, advocates and experts on energy. Furthermore, reflecting a growing consensus, the plan suggests that there are some clear winners in the area of clean generation technology that should immediately receive government and industry support: wind, solar thermal with storage, and geothermal energy, along with sufficient transmission infrastructure to integrate these into the existing grid. Additionally, and in this technology choice is left more open, 28% of energy demand will be reduced through the adoption by end users of energy efficient technologies. Along with the Repower America plan, Al Gore has supported a carbon tax yet, I believe, he has no illusions that this tax alone can drive the building of the infrastructure required to achieve the Repower America goal.
Renewable Energy Payments: Prescribed Markets
One accusation leveled at the now ever more widely implemented feed-in-tariffs a.k.a. Renewable Energy Payments that support renewable energy is that they “pick winners”. This is partially true in the sense of picking a broad category of clean energy technology but not true in the sense of picking individual private firms as winners. A renewable energy payment system, like that proposed by Rep. Jay Inslee or like those now in use in many European countries, sets wholesale prices for renewable generators of a wide variety of types and sizes. The idea is to provide investment security for builders of renewable generators that we know will generate a certain amount of clean electricity: the guaranteed wholesale, generally above current electricity market, price per kWh allows the builders to recover their investment plus a reasonable profit. The system of cost plus reasonable profit is used frequently in the construction industry when large scale one-of-a kind projects are commissioned for a particular buyer.
The designers of renewable energy payment systems counter claims that they are not competitive or market based by pointing out that they displace competition from the deployment of generators to the manufacture of generation technologies. In a feed in tariff system, project developers want to purchase generators that will maximize their profit, so the intended effect will be to drive the cost of renewable generators down. A renewable energy payment system then picks certain technologies as winners but not the actual implementation of those technologies by different manufacturers. Feed in tariffs can be justified in economic terms as a prescription of payments by the consuming public for a positive externality; carbon pricing is a payment by emitters to the public for a negative externality.
A renewable energy payment system could be designed that drives the implementation of a plan like Repower America. In this case payments would reward the building of some of the wind, solar thermal and geothermal generators required by offering higher tariffs for the desired generators. Thus a prescriptive plan can contain within it markets for the technologies prescribed. The infrastructure of the Unified National Smart Grid can provide a framework for multiple smaller markets for building generators and generating electricity.
Exercising Leadership with or without Carbon Pricing
If we know what is “right” in a scientific sense, given a certain goal and the constraints of reality, why not proceed to do it with necessary but deliberate haste in consultation with popular representatives? If we are facing a potentially very deep economic crisis and are largely convinced that infrastructure projects can function as fiscal stimuli, why not charge ahead? The aversion to “picking winners” that we have developed over the preceding three decades would seem to say: “no, find a regulatory framework within which profit-driven economic actors will discover that there is a market for something like this and build something like it”. The focus on carbon pricing schemes as the main motive force in transforming our economy is one more example of our aversion over the last few decades to government and to a lesser extent corporations taking a leadership role. We, luckily or unluckily, may be at a watershed moment where leadership is now desired or even highly prized.
Carbon pricing schemes, whether cap and trade or a carbon tax, attempt to circumvent the process by which government actors and leaders in the economy would take responsibility for building large projects. Instead they could say: “the cap and trade system or carbon tax made me do it”. While having an ingenious policy framework which compels actors to act both in their long-term and short-term good is desirable, it is highly unlikely that such a system will by itself initiate and finance the building of all the Repower America/Renewable Electron Economy infrastructure we will need.
To embark on a path, such as building a Repower America-like clean energy infrastructure, will require leadership, a quality that is much praised but in its actual manifestations is often controversial. To build a Unified National Smart Grid, for instance, will require leaders or a leader, perhaps President-elect Obama, to explain to congress and the American people why we should build this piece of infrastructure now. This also means taking responsibility for both the “upside” of this large project (jobs created, energy independence, climate protection, new technologies) and the “downside” (costs, use in certain areas of eminent domain, appearance of electrical transmission towers). Too often, advocates of complex policy instruments seem to want their policy instrument to remove all of the ambiguities and ambivalences associated with the leadership role.
Likewise, a renewable energy payment (REP) system will require political leaders and electrical grid regulators to commit themselves to support renewable energy generators like wind turbines, solar thermal electric power plants in the desert, and photovoltaic installations on the ground and on rooftops. Not only would the institution of such a system attempt to benefit from the virtuous appearance of clean renewable energy generators but also offer direct financial support to those generators via guaranteed and premium wholesale electrical rates. While many support schemes sidestep the price of renewable energy by using indirect means like tax credits or carbon pricing, the REP systems name the prices and therefore require leadership to be exercised by declaring in public both the benefits and the costs of clean energy.
As recent announcements by President-elect Obama suggest, we have reason to hope that our next President will grasp the opportunity to lead the building of the necessary infrastructure we need to emerge from this economic crisis and to meet the challenges of the 21st century.