Weekly John Locke Foundation research division newsletter focusing on environmental issues.
This newsletter highlights relevant analysis done by the JLF and other think tanks as well as items in the news.
1. "Green" energy’s junk economics exposed, and the response is deafening silence
As has been discussed in previous installments of this newsletter, the subsidized-into-existence renewable energy industry in North Carolina, lead by the North Carolina Sustainable Energy Association (NCSEA), has funded a study which claims that subsidies to their industry have brought about massive returns for the economy including the creation of over 21,000 "job years." Over the past few weeks we at the JLF have honed in on these claims and have examined the study behind them, which was done by a consulting firm called RTI International. In doing so we have published several shorter articles which have exposed the lack of any real understanding of basic economics on the part of the study’s authors and have commissioned a professional peer review done by a team of cost benefit analysis experts from the Beacon Hill Institute at Suffolk University in Mass. Their review team, lead by Suffolk University’s economics department chair David Turek, agrees with our less detailed assessments of the RTI/NCSEA study, namely that it would likely receive a failing grade as a term paper in an econ 101 class.
The RTI International analysis ignores some of the most basic principles of economics. Most importantly the concept of opportunity costs, which is typically discussed in the first chapter of any economics textbook, is completely ignored. As I noted here:
The analysis makes no attempt to discover how much economic growth there would have been and how many jobs would have been created had the $72 million [the total amount of subsidies] stayed in the hands of those who earned… The report implies that $72 million of subsidies go into the renewable energy industry and, along with the private investment, make their way through the economy generating multiplier effects with no opportunity costs in terms of alternative resource uses, growth, and job losses from the spending and investments that would have been made had the subsidies not existed…It’s a free lunch.
As a reminder, the NCSEA/RTI report claims that this $72 million in subsidies, through the magic of something called "multiplier effects," creates well over a billion dollars in economic growth for the state. In fact they make the self-serving and truly hyperbolic claim that for every dollar that is transferred from taxpayers to special interests in the renewable energy sector over $19 of growth is generated in the economy. In economics parlance this is called a multiplier of 19. It should be noted that even hard core apologists for Obama style Keynesian economics like Christina Romer and Paul Krugman only believe the government spending multiplier to be about 1.5. These points are highlighted as part of the yet unresponded to Beacon Hill Institute peer review of the report. But also noted in the Beacon Hill review is the fact that the RTI study, setting aside the outrageously high multiplier effect, isn’t even "good" Keynesian economics, since the Keynesian model argues that the spending and subsidies need to be financed by budget deficits. Of course North Carolina requires a balanced budget so these subsidies are offset with taxes that are higher than they otherwise would be.
Furthermore the Beacon Hill review also points out that the NCSEA/RTI report assumes a peculiar model of business behavior where companies are not maximizing profits or are at the very least not seeing huge opportunities for cost savings that somehow politicians have spotted on their behalf. In particular the report claims that there are nearly $300 million in cost savings that private entrepreneurs have missed or for some reason have purposely passed over. As Professor Tuerck’s team of economists conclude:
The baseline assumption any reasonable economic analysis should make is that private firms maximize profit. If it were the case that cost-savings of this magnitude were available, then private energy firms would have been leaving hundreds of millions of dollars on the table — that is, definitely not maximizing profit — for no apparent reason. If the authors believe they have overturned the fundamental basis for microeconomic theory, they should specify why.
Needless to say, they haven’t.
In an a Daily Journal article last week I summed up the problems and my view of the quality of this report as follows:
The NCSEA-sponsored analysis turns Econ 101 on its head. While the credentials of the study’s authors are not revealed, if in fact they have degrees in economics, they may have a malpractice case against the institutions that granted them. If they do not have economics degrees, then one wonders why they would have been hired to perform this kind of research in the first place.
2. First Ozone Report of 2013
The 2013 ozone season began on April 1 and, as in the past, each week during the ozone — often called smog — season this newsletter will report how many, if any, high ozone days have been experienced throughout the state during the previous week, where they were experienced, and how many have been recorded during the entire season to date. According to current EPA standards a region or county experiences a high ozone day if a monitor in that area registers the amount of ozone in the air as 76 parts per billion (ppb) or greater. The official ozone season will end on October 31. All reported data is preliminary and issued by the North Carolina Division of Air Quality, which is part of the state’s Department of Environment and Natural Resources.
During the period April 1 to April 7 there were no reported high ozone readings on any of the state’s monitors.
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