On June 10, 2015, Gov. David Ige signed House Bill 623 “mandating” 100 percent renewable energy for Hawaii by 2045. The bill was sponsored by state Rep. Chris Lee, the chair of the House Committee on Energy and Environmental Protection, who wrote a Community Voice for Civil Beat the following day. Some familiar themes in his op-ed warrant further scrutiny.

The claim that pursuit of renewable energy saved Hawaii $67 million in 2012, or $150 per household, is presented without justification or citation of a source. The figure appears to be based on the erroneous notion that reducing imports and “keeping the money at home” enhances economic welfare in society. This mistaken notion was debunked in the 18th century by Adam Smith’s “Theory of Moral Sentiments,” and the “Wealth of Nations.” (For more local context, see “Keeping the Money at Home).”

But as Nobel Prize Laureate Paul Krugman likes to say, bad ideas (like self-sufficiency) are like New York cockroaches: You can flush them, but they keep coming back.

Paradise Solar Energy Center in New Jersey on September 26, 2011

State government has made alternative energy into a priority.

Doug Murray/FPL

If innovations in China result in cheaper solar panels such that renewable energy is efficiently substituted for oil, the economy can indeed expand. This has nothing to do with self-sufficiency, it is simply the substitution of one import for another. But when panels are artificially subsidized with tax credits, they are substituted for oil beyond the efficient point, thereby creating unnecessary costs.

A fundamental concept in the economics of public policy is that taxes, subsidies, and other market interventions (like mandates and quotas) tend to shrink the economy by generating welfare losses to society. These losses are known as “excess burden.”

The argument that renewable subsidies create jobs is another red herring.

The term “excess burden” reminds us that this burden is in excess of the direct burden of the policy instrument itself, say a tax. The source of excess burden associated with solar tax credits in Hawaii amounted to $180 million in 2012 alone. In addition, the fiscal costs of losing $240 million in tax revenues were at least $60 million due to the additional excess burden of tax itself, often referred to as “tax friction.” So the total excess burden is conservatively $240 million. (For details, see the “Sustainable Development and the Hawaii Clean Energy Initiative.”)

The argument that renewable subsidies create jobs is another red herring. Subsidies that artificially expand one part of the economy invariably shrink other parts even more.

Sound economic policy involves adjusting market incentives to account for spillover effects, such as pollution, where markets are missing or incomplete. Producers and consumers can be induced to account for pollution associated with burning oil by way of a barrel tax on oil in the neighborhood of $1 per barrel. (The fact that the barrel tax was justified in the name of cutting imports and promoting self-sufficiency proves that sometimes two wrongs do make a right.)

The barrel tax should be even higher if there was a global agreement to limit carbon emissions, but in today’s world, the tax should account for Hawaii’s very small share of damages from global warming. Having corrected for the market distortion created by pollution, there is no further efficiency basis for subsidizing renewables.

The state of Hawaii now contributes about 0.01 percent of global carbon emissions annually. Substituting renewables for oil in the production of electricity will have a negligible impact on global warming, especially since renewable subsidies worldwide have the effect of lowering prices of petrochemicals and increasing consumption in China and developing countries. Efforts to save the planet might be better directed to saving Hawaii’s watersheds and fragile habitats for endangered species.

Hawaii is setting a bad example of how to raise the cost of living consumer-taxpayers face.

But aren’t we setting an example that others will follow? Not really. As another Nobel Laureate Elinor Ostrom instructed, “leading by example” is a sucker play, unless accompanied by meaningful assurances that others will strive for the common good, “and nobody likes to be a sucker.”

Instead, Hawaii is setting a bad example of how to raise the cost of living consumer-taxpayers face. (See the Civil Beat series on the cost of living in Hawaii for other examples.)

However, a close reading of House Bill 623 reveals a long list of reasons why the state need not meet the 100 percent renewable goal. The most troubling of these is the provision that the 100 percent goal does not need to be attained if the tax credits for renewable energy are suspended (see section 2 (d) (7) of the legislation). Perhaps what is really being sustained is a fiscal drain and payoffs to special interests.

Another purpose may be to limit the further entry of natural gas into Hawaii’s energy market. A subsidy for renewables will discriminate against natural gas, as well as oil. And a “commitment” to 100 percent renewability signals a lack of interest in natural gas, even as a bridge fuel. The new legislation will make it difficult to facilitate natural gas infrastructure, including an offshore gasification facility and pipeline for liquid natural gas.

Economic protectionism is never an equal opportunity proposition. It derives from the pursuit of privileges for special interests. The appropriate role of government is not to replace the market, but to facilitate economic cooperation through equality under the law and infrastructure whose benefits exceed costs. In the case of electricity policy, this involves regulations that incentivize reliable energy provided at the least social cost.

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