April 28, 2009

Winding down alternative energy

An economic analysis shows that the U of C should not purchase wind energy credits.

Since 2006, the University has been purchasing wind energy to partially power the dormitories. The policy began with a two-year contract to purchase wind credits for 10 percent of residential electricity, but in July 2008 the University reduced the purchase to just 5 percent, which costs the University $16,000 a year. The decision to reduce the wind energy credit purchases during the economic downturn demonstrates an important fact that is often forgotten during Earth Week: Protecting the environment is a costly choice that forces us to make trade-offs. We should only protect the environment as much as the discounted future benefits from the protection outweigh the costs.In this month’s Capital Ideas magazine, Chicago Booth professors Gary Becker, Kevin Murphy, and Robert Topel discuss global warming from an economic perspective. Their insights are critical to understanding the U of C’s own policies on sustainability and the efficacy of our decision to unilaterally purchase wind energy credits. The article suggests that unilateral reductions in fossil fuel consumption have little to no impact on fossil fuel consumption, and that the reductions may actually end up harming the environment. With so many other valuable projects that need funding at the University, it’s time to eliminate our wind power purchases altogether.In speaking about a policy of unilateral reduction in fossil fuel consumption in the United States and other developed countries, Becker et al. state, “The big weakness of this kind of policy is that the fossil fuel that would have been consumed by developed countries will flow to other countries that will go ahead and use them anyway. Where there’s a relatively fixed supply of fossil fuel, it’s going to get burned by someone whether we burn it or not.” The reasoning behind their claim is simple: A global demand and market for fossil fuels exists. If one market participant reduces its demand for fossil fuels, it “[pushes] down the price of the fuel and [encourages] others to consume more.” The only way to reduce the total amount of fossil fuels consumed would be to either depress the price of fossil fuels so much that they can no longer be produced competitively or to somehow create a worldwide policy to prevent the consumption of the supply of fossil fuels. (But “[i]t’s hard to imagine what that policy would be,” the authors write.) If the University buys wind power instead of consuming fossil fuels, almost any other market participant will consume what we don’t.The amount of residential electricity sourced from wind power therefore has virtually no impact on fossil fuel consumption or its market. Even if the University were successful in lobbying others through example to unilaterally reduce fossil fuel consumption, this approach would not work for reductions on a national or global scale.Moreover, purchasing wind energy, which contributes to carbon emissions during the construction and maintenance of windmills, can actually end up harming the environment. Murphy, Becker, and Topel conclude that if an alternative fuel “contributes carbon to the atmosphere––even if lower than for fossil fuels––then the policy could actually increase the total amount of carbon released rather than reduce it.” Although $16,000 does not seem like a large amount of money, the recent budget cuts should make us question any spending on a policy with very questionable effectiveness when we have so many more options with demonstrated effectiveness. Some claim that the energy credit purchase is funded by the savings made by switching to fluorescent lights in residence halls. However, the saving is fungible and those savings could easily be spent anywhere else. Funding more research is one option with demonstrated effectiveness. The University’s investment in intellectual inquiry has a tremendous benefit to all of humanity. The University could even invest the money in researching environmental technologies that have some efficacy by accounting for the reality of the market––like carbon sequestration techniques. We could use the $16,000 to keep the Reynolds Club open on Sundays or reduce tuition by a small amount. This may seem like a vain idea when compared to saving the environment, but the ultimate goal of sustainability is to increase the happiness of future generations. If wind energy credits provide little future benefit and can actually impose costs, we shouldn’t feel bad about spending the money now on things with proven benefits. The consideration of these trade-offs was probably the reason the University reduced its purchase from 10 percent to 5 percent. But since purchasing wind power provides little compared to our other options, the decision did not go far enough.When the economy and our endowment recover, we shouldn’t allow our wind power purchases to increase again. There will always be more attractive investments for the University to undertake as a leader in intellectual discovery.

Matt Healey is a fourth-year in the College majoring in economics