Wind And Solar Power: How Persuasive Are The Rationales?
The Resource Depletion, or “Sustainability,” Argument
“Renewable” energy has no uniform definition, but the (assumed) finite physical quantity of conventional energy sources is the essential characteristic differentiating the two in most discussions. In a word, conventional energy sources are depletable. In contrast, sunlight and wind flows replenish themselves, a central component of “sustainability,” perhaps a broader concept than natural replenishment; sustainability has been defined by the EPA as “the satisfaction of basic economic, social, and security needs now and in the future without undermining the natural resource base and environmental quality on which life depends.” (Note 6)
As an aside, the energy content of sunlight and wind is finite, regardless of self-replenishment. These sources contain only so much convertible energy, and they are not always available. Moreover, the same is true for the other resources—materials, land, and so forth—upon which the conversion of renewable energy into electricity depends. In any event, the basic sustainability concept seems to be that without policy intervention, market forces will result in the depletion (or exhaustion) of a finite resource. Accordingly, subsidies and other support for renewable power generation are justified as tools with which to slow such depletion and hasten the development of technologies that would provide alternatives for future generations.
image via Shutterstock
That argument is deeply problematic. Putting aside the issue of whether government as an institution actually has incentives to adopt a time horizon longer than that relevant for the private sector, the profit motive provides incentives for the market to consider the long-run effects of current decisions. The market rate of interest is a price that links the interests of present and future generations. If a resource is being depleted, its expected future price will rise, other things held constant. If that rate of price increase is greater than the market interest rate, then owners of the resource have incentives to reduce production today; by doing so they can sell the resource in the future and in effect earn a rate of return higher than the market rate of interest, thus raising prices today and reducing expected future prices. In equilibrium—again, other factors held constant—expected prices should rise at the market rate of interest. (Note 7) Under market institutions, the market rate of interest ties the interests of the current and future generations by making it profitable currently to conserve some considerable volume of exhaustible resources for future consumption. (Note 8 ) Because of the market rate of interest, market forces will never allow the depletion of a given resource.
Accordingly, the market has powerful incentives to conserve—that is, to shift the consumption of some resources into future periods. That is why, for example, not all crude oil was used up decades ago even though the market price of crude oil always was greater than zero, which is to say that using it would have yielded value. In short, the sustainability argument for policy support for renewable electricity depends crucially on the dual assumptions that the market conserves too little and that government has incentives to improve the allocation of exhaustible resources over time. The underlying rationale of that dual premise is weak, and little persuasive evidence has been presented to support it.
