October 26, 2009

Which is better for energy - regulation or free markets?

I'd prefer free markets. For instance, if you want to reduce carbon emissions quickly and simply, use a simple carbon tax. Or, if you like things that are slower and more complex (and therefore easier to sell politically), go to cap and trade.

Why do I prefer free markets? Because they're easier. If you're going to run things by central planning instead of by free markets, then the central managers have to manage them. Command economies require a lot of good management in a small circle of bureaucrats. That requires a lot of local talent, and a lot of good luck. They have to stay on top of things, and adjust as they go, or things will fall apart.

Two examples.

First, the automobile Corporate Average Fuel Efficiency regulation. It originally contained a light truck loophole, which made sense because light trucks were working vehicles. Gradually, car makers moved to SUV's, because the lower MPG level allowed greater engine power. Detroit stymied an update to the regulations, as Detroit needed SUV's to compete with Asian manufacturers. That meant the growth of absurdly over-powered military vehicles, wasting gasoline and making the roads less safe overall (the occupants of SUVs are safer, but only because greater size means that when they hit a smaller vehicle, that smaller vehicle absorbs most of the kinetic energy, and therefore is much less safe).

Second, China mandated that utilities build wind power, but not that they use it, so they don't spend the extra money for transmission!

Also, China mandated "Buy Chinese", and the domestic manufacturers can't build turbines that can keep running!

Source http://www.forbes.com/2009/07/20/china-wind-power-business-energy-china.html

Just goes to show - you've got to keep on top of regulations...


Wayne Conrad said...
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Wayne Conrad said...

Central planning works better only if people in government are both smart and incorruptible. Free markets work better even though they are often neither.

Does that mean that free markets are panacea? Hardly. It means that no economic system yet demonstrated can do better.