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Should the government subsidize Green Jobs?

Posted Mar 15 2010 9:22am

The Economist has a debate between Van Jones and Andrew P. Morriss on the value of subsidizing green jobs .  Mr. Jones is the author of the book, “The Green-Collar Economy”and Mr. Morriss is a professor of law at the University of Illinois.  Some highlights:

Mr. Jones:

The markets for new energy sources are being strangled by government support for old energy sources…Governments spend billions of dollars subsidising Big Oil companies and other polluters. And power grids were designed to service huge, centralised power plants, not to link multiple points of distributed, intermittent renewable sources of energy.  We need deft government action to address these challenges and create the conditions for a multibillion-dollar clean-tech energy boom.

Mr. Morriss

Public choice theory identified a key insight about government in the 1960s and subsequent work has repeatedly demonstrated its truth. Concentrated, organised interest groups (oil companies, solar power companies, etc get benefits from governments at the expense of diverse, dispersed groups (the general public)…

We can spur innovation and investment without the problems Mr Jones’s special-interest approach creates. Professor Jonathan Adler argues in  Eyes on a Climate Prize (working paper) that if Congress provided prizes modelled on the Ansari X Prize for spaceflight, it would avoid many problems of political manipulation because prizes impose costs only when they produce results…Prizes “allow the government to establish a goal without being prescriptive as to how that goal should be met or who is in the best position to meet it.”

In general, I believe that government intervention can improve welfare, but only in limited cases. For instance, building a highway system or high speed trains involve significant capital costs. Further, because the marginal costs are low and these systems likely will be used by a large share of the population, tax funding may be more efficient than compelling individuals to pay high user fees.

However, government intervention has its problems. First, if the U.S. decided to subsidize a certain type of green jobs, these specific jobs would have an advantage even if more efficient green jobs came along that were unsubsidized. Although both the government and the private sector can ‘bet on the wrong horse’ in quickly evolving industries, private business can more quickly change course than the government. Even if the government choosing the right green technology, it may not properly incentivize the marginal improvement needed after the initial invention.

Thus, I propose that there are 3 necessary, but not sufficient requirements for government subsidies:

  1. Clear-cut production method that is likely to change little over time
  2. High fixed costs or network effects that require significant investment
  3. A clear time when the subsidies will expire.

When a technology changes little over time, the government may be able to spur innovation.  Additionally, when network effects are involved, private business may not be able to spur adoption early enough.  To maintain fiscal responsibility, one must also have a clear time when these subsidies will expire.

However, even in cases where there are network effects and a technology seems stable, it may not in fact be.  For instance, a developing country may have decided to invest in land-line phones which were the latest technology for the last 50 years.  Mobile phones soon overtook their land-line brethren and any investments landline telecommunication were likely wasted.

Thus, will the government be able to choose the right green technology to support?  I doubt it.  A better policy would be to simply put a tax on carbon emissions, thus giving all energy producers a stronger incentive to reduce pollution and become greener.

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