In case you (ahem, Tim) were too lazy to click over and read what I wrote for the Freakonomics blog yesterday, here it is so you can flame me hard (sobbing) and all of the Freakonomics readers won't see how harshly I'm treated back home (sniff).
Q: How is the financial crisis affecting the clean tech sector?
John Whitehead: During the summer of 2008, we were oh-so-achingly close to what economists call the Hotelling switch point. Named after the great economist Harold Hotelling, the switch point occurs when rising nonrenewable energy prices meet falling renewable energy prices and energy users switch from dirty nonrenewable energy (i.e., oil, coal) to cleaner renewable energy (i.e., wind, solar). In theory, nonrenewable energy prices are expected to rise over time as the available reserves begin to run out. Renewable energy prices are expected to fall as the technology available to harness energy from the wind and sun improves and reduces the costs of renewable-energy production. Rising incomes might also increase the demand for clean energy relative to dirty energy, further encouraging the switch.
Historically high prices for oil during the 2000’s were the result of supply and demand forces. War in the Middle East caused speculation that the future supply of oil might be seriously disrupted and the demand for oil delivered in the future increased, driving up prices today. Partially as a result of historically low interest rates, a housing-bubble-fueled increase in economic growth (and the resulting economic growth in China and India) drove up the demand for energy and, again, prices. Other factors were involved, of course, but these are my favorites since they involve historic highs and lows.
At the same time, consumer preferences in the U.S. seemed to become greener with support of two presidential candidates who supported cap-and-trade plans for mitigating climate change. Cap-and-trade will surely lead to even higher nonrenewable energy prices, pushing up the timing of the switch point. President-elect Obama was the greener of the two candidates, and he has promised millions of new “green jobs.” The inevitable renewable energy subsidies will again push up the switch point.
As a result of these reinforcing market and government factors, consumers, firms, and investors were all interested in the prospects for green energy. Green investment talk was booming.
The financial crisis has triggered what many expect to be a nasty global recession in 2009 (the first nine months of the 2008 portion of the recession weren’t really nasty). All of the market-based factors that were contributing to the inevitable (someday) Hotelling switch point are gone. The gap between renewable and nonrenewable prices is widening instead of shrinking.
A good guess is that almost all large, private renewable-energy investments will be put on hold in 2009. In these economic conditions, government subsidies in the form of fiscal policy (i.e., “green jobs”) and renewable energy standards and mandates (e.g., North Carolina state agencies must use 12.5 percent renewables by 2021; my computer may be running off biodiesel by 2015) that would actually cause consumers and firms to switch energy sources and push us closer to the switch point will need to be large and larger.
Hey now! I actually read this at Freakonomics before you posted it. I'm not that lazy.
Posted by: Tim Haab | January 08, 2009 at 09:34 AM
Well, I didn't, so thanks for that. :)
About Hotelling's rule: the price of non-renewables is supposed to rise at least as much as the discount rate. That's pretty much as you would expect, considering that, when it's over, it's over. I thing 2008's price spike was a result of, for the first time in many years, the world being faced with a market for oil that actually clears. Until then, there had been excess capacity if production, keeping the prices artificially low. The fact that prices went up was a result of increased demand and supply constraints in answering that demand.
It also shows (as John pointed and I seem to write on a daily basis, somehow), that we need to put a price on carbon, to reduce the opportunity cost of using alternative sources of energy. It's essential for many reasons, ranging from climate to safety and energy security.
The last paragraph is a stark reminder of the reality: we use the troublesome fossil fuels because they are cheaper. Arguably, this is a market failure.
Posted by: Carlos Ferreira | January 08, 2009 at 10:05 AM