This is a background post for my pragmatic environmentalists principles listed in the about section of this blog. Jonathan Lesser has coined “Gresham’s Law of Green Energy” that I believe is another principle of a pragmatic environmentalist.
Gresham’s Law is named after Sir Thomas Gresham, a 16th-century British financier who observed that “bad money drives out the good.” Lesser shows that green energy subsidies transfers wealth and does not create wealth. The subsidies or “bad” money take money out of the system that was “good” inasmuch as it was being used productively. In particular he notes that “subsidized renewable resources will drive out competitive generators, lead to higher electric prices, and reduce economic growth”.
He explains his rationale as follows:
“The subsidies paid by ratepayers transfer wealth from existing generators to a chosen few renewable resource owners. One may like to rail against the existing generators — as many politicians have — but the long-run implications of such subsidies will be to destroy competitive wholesale electric markets and drive out existing competitors. This course of action will cost jobs because businesses, forced to pay higher electricity prices, will either relocate, contract, or disappear altogether. It will reduce the disposable income of consumers, who will forever be forced to subsidize renewable resources (just as they must now subsidize corn ethanol producers) — all in the name of ’green energy’.”
This is a particularly important principle for renewable energy benefit analyses, in particular “price suppression” such as that used in NY’s Clean Energy Standard. The idea is that increasing the supply of “cheap” electricity causes market prices to decrease so that consumers benefit. However, Lesser shows that these benefits are temporary and costly in the long run. Subsidizing the construction of renewable generation in a de-regulated state results in resources that manipulates the market to make it less efficient. Moreover, it eventually drives out existing generators and reduces the likelihood that new unsubsidized generating facilities will enter the market. Lesser notes that rather than building a better mousetrap, these policies are using subsidies to artificially and temporarily reduce the price of mousetraps.