January 9, 2012

What should energy books convey?

They should spend some time discussing markets.

Market critics need to be reminded of the virtues of markets: they're decentralized and can start working very quickly; they process an enormous amount of information into a simple price signal; with time to work, and with proper regulation they're extremely powerful, increasing supply, reducing consumption and implementing alternatives and substitutes; and they prevent the shortages, hoarding and misallocation of investment that can come from price controls, subsidies and rationing.

Market enthusiasts need to be reminded of the failures and shortcomings of unregulated markets: they don't include externalities like pollution (including climate change) and security concerns ($2T oil wars, anyone); price signals can take time to bring a response (i.e., short-term elasticity can be very low, and capital expenditure and turnover takes time); and poor consumers are affected by ability to pay.

Pigovian taxes (like a carbon, or fuel tax) are a marvelous compromise between the extremes of stifling regulation and the excesses of unbridled big business: they use price signals to direct investment where it needs to go.

Unfortunately, Pigovian taxes effectiveness means that the legacy industries that they would hurt fight against them desperately. They much prefer subsidies, and Cap and Trade's slowness and labyrinthian complexity and susceptibility to manipulation suits them just fine.

We need more democracy, to lessen the power of entrenched minorities that fight change behind the scenes. We need better media (internet?) to fight the misinformation broadcast by these minorities and their allies (Fox news, anyone?).

Markets sometimes seem to not work because market participants don't have good information: if communication about energy does nothing else but convince people that high oil prices are here to stay, and that they should move from short-term non-responses to long-term aggressive adaptation, it will have succeeded.

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