Berkeley Economist on Taking Economics Seriously In U.S. Energy Policy

Posted by Jim Gunshinan on September 02, 2010
Berkeley Economist on Taking Economics Seriously In U.S. Energy Policy

“We face a series of energy challenges,” said the speaker, economist Severin Borenstein of the Haas School of Business at U.C. Berkeley. The occasion was the Monday night plenary talk at the biannual meeting of the American Council for an Energy Efficient Economy (ACEEE) on energy use in building, held in late August at Asilomar Conference Grounds in Pacific Grove. Borenstein is often called to speak to groups about the economics of energy when energy prices are high, and he is less popular as a speaker when prices go down. To individuals, high energy prices are a problem, but this doesn’t represent a market failure according to him. Market failures exist when the price of oil does not reflect the real macroeconomic, geopolitical, and environmental costs associated with its purchase and use.


In the United States, we import two-thirds of our oil from other countries, many that are not interested in our mutual wellbeing, and many whose leaders use oil revenue to enrich themselves and oppress their people. We sometimes go to war with these countries. And our dependence on fossil fuels such as oil is degrading our environment.


So what is a government to do? The best choice according to Borenstein, Bill Gates, and others, is to tax “brown” energy, energy that costs us too much environmentally and in the other ways mentioned above. But people want their oil and gas cheap, and there is no political will to initiate carbon taxes right now in the United States or elsewhere. So the second best choice, which is the best choice in these circumstances, is to use information, regulation, and subsidies for green energy and green jobs. The trick is to know in what circumstances to apply what solution, and how to apply that solution.


Information can empower consumers to make better choices, but in some situations limiting consumer choice through regulation and standards is the better choice. Borenstein used the example of baby food. No one wants to choose between baby food certified fit for human consumption and the other kind. And subsidies can be good, but not subsidies that artificially favor one technology over another. Subsidies that attempt to pick a winner would only work if at the stage of research and development some government official could reliably know which technologies will survive the “valley of death” and make it successfully to the market. But government support of certain research and development that could have broad application in the market is good. Borenstein used the example of PV. The technology has matured through its infancy as part of the NASA space program, and through advances in integrated circuit, or “chip” design that took place largely through private companies in Silicon Valley.

Borenstein calls himself cynical. Maybe it is better to call him a realist—a very knowledgeable and articulate realist who people in charge of government energy policy should listen to, even though the winds of popular opinion make it hard for them to do the right thing.

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