By Donella Meadows
–March 14, 1991–
George Bush’s National Energy Strategy is causing heads to shake in disbelief all over the world. It is a strategy for the 1950s, when we thought that energy supplies were infinite, that big cars made us better people, and that the environment was just a pretty scene out the rear window. Worst of all, the Strategy calls upon the “free market,” while it is in fact a package of market interferences. That’s normal for energy policy. What’s unbelievable about this one is that the interferences are in the wrong places, pushing the wrong directions.
Any economics textbook will tell you two reasons why the free market cannot and should not make energy policy. First, the energy market is not free. Second, even if there were a free market, it would not produce an energy policy any nation would want to live with.
Governments, corporations, and cartels constantly fiddle with energy supplies and prices, trying to bend the market to their advantage. Oil companies and then OPEC have manipulated oil supply for decades. Electricity is a regulated monopoly. Nuclear power would not be competitive if its subsidies were taken away.
Price is the signal that allows a market to operate efficiently, but prices of our major energy commodities do not tell consumers the real cost of energy use, nor producers the relative scarcity of resources. Energy prices are distorted not only by governments and monopolies, but, in the case of oil, by speculators. That’s why a 3 percent decrease in oil supply last August was amplified into a doubling of price. A market that has become a casino cannot guide a nation on a steady course to a secure energy future.
Even if all constellations of power from governments to cartels to speculators took their hands off the energy market, the market would not work to the advantage of society. There are a lot of reasons why not:
- A free market assumes that complete information is available to all players — but information is itself a market commodity. For example, if Americans knew the actual costs of and returns to various energy choices, they would buy efficient appliances and cars in a big way. But it is not in the interest of energy suppliers to sell efficiency, so that information isn’t available.
- The market discounts the future. It doesn’t distinguish between renewable and nonrenewable fuels, and it bears no information about the depletion of fossil fuels until reserves are nearly gone. A central necessity of energy policy is to put into place a system based on renewables (hydro, solar, biomass) as fossil fuels run out. That could be done with a depletion tax that funds development of energy alternatives. Our government gets it just backward. We have depletion tax CUTS — handouts to the oil industry as reserves go down.
- The market overshoots and oscillates. It does so because there are long delays in adjustment while new oil wells or power plants are constructed, while car fleets turn over, while boilers live out their lifetimes. During those delays the physical energy system is unresponsive, and prices plummet or go through the roof. Therefore, even in the absence of speculators, market signals are not stable enough to inform decisionmaking.
- Markets are driven by the private values of market players, not the common values of society, such as security or justice. In markets, unlike democracies, some people have a lot more votes than others, therefore markets provide for the needs of the rich few rather than the poor many. Government intervention is essential to establish at least minimal fairness.
- The market knows nothing of the environment. The price of energy should contain the real costs of pollution, oil spills, nuclear waste disposal, but it won’t, unless government requires it. What George Bush means by leaving energy to the free market is that he won’t require environmental costs to be internalized in prices.
A market economy is a wonderful thing, as the East Europeans who are struggling to get one will tell us. But to rely on the market alone is equivalent to stationing a nearsighted, excitable, ignorant, and powerfully self-interested boy at the wheel to steer the ship of state.
We need to base our energy future on a market and a government that keeps that market functioning well and serving collective values. We need an energy policy that includes environmental costs in prices; provides incentives for the development of renewable sources; makes and enforces efficiency standards; gives consumers and producers a clear, honest information stream; and does not distort prices through handouts to favored industries. The Bush National Energy Strategy does none of these things.
When a government persists in a perverse policy it’s usually best to assume incompetence, not conspiracy. But the Bush White House is not incompetent. It is full of economists who know about the market faults I’ve listed here. The Bush Energy Department handed its boss an analysis that said efficiency is, by market measures, the best energy option available. The President, who is an oil man, must be well aware that when he invokes “the market” like a Holy Grail, he really means the vested interests.
His policy condemns us to be jerked around by governments, terrorists, speculators, oil companies, and sheikhdoms. It dooms the environment. It seduces us into needless waste and hurtles us toward depletion. It blinds us to injustice. It perpetuates an antiquated and uncompetitive energy system, for which we will have to pay our fortune and our lives. The American people shouldn’t stand for it. Energy policy is too important to leave to an unfree and unregulated market.
Copyright Sustainability Institute 1991