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Thursday, May 20, 2010

Nuclear Energy Should Be Subsidized?

In a March 5 Los Angeles Times op-ed, “Jump-starting Nuclear Energy,” Greenpeace founder Patrick Moore, who now co-chairs the Clean and Safe Energy Coalition, lauds the Obama administration for its decision to “guarantee loans for two advance-design nuclear plants in Georgia.” Nuclear energy diversifies our energy portfolio and doesn’t pollute the air the way fossil fuels do. We certainly should eliminate barriers to its use.

But that doesn’t mean federal loan guarantees are in order.

Government should not be trying to pick winners and losers in the energy industry. If one company has its loans backed by the government, other companies without guarantees will have trouble borrowing capital. Bureaucrats don’t know and can’t know whether (or in what combination) nuclear energy, biodiesel, ethanol, solar energy, hydroelectricity, fuel cells, or any other alternatives are “best” for meeting our energy needs. This information can only emerge through market competition.

This is not just about energy. We don’t know—once and for all—the best way to build a computer chip. We don’t know the ingredients for the next tasty trend in food. We’re ignorant about a lot of things we would like to know. Markets—and competition—produce the information that allows us to make decisions. But governments distort it by intervening in the capital markets, by doing things like guaranteeing loans to particular firms.

In other words, we do not find the best way to build a computer chip by having the government offer loan guarantees to firms that use particular production processes. We let firms compete for customers, and in a free market without government interference, firms earn profits when they use resources wisely and produce things people want at prices they are willing to pay.

Solving these problems—what to produce and how—requires information embodied in prices. Few of us buy golden faucets, because they’re too expensive. Prices help producers decide whether to use gold or steel, or try to come up with something better. F. A. Hayek called competition a “discovery procedure.” As they compete with one another for profits, firms discover the best way to produce things. The firms that can maximize the difference between the price of what they produce and the cost of producing it will survive and thrive; those that cannot must change or perish.

Energy prices might not reflect the full costs of production and consumption. There are additional costs—the harm caused by air pollution or climate change (if that’s what’s going on)—that producers do not pay but are imposed on the public generally. Therefore they produce too much energy from dirty sources like coal and too little energy from clean sources like nuclear power. It is intuitively appealing, therefore, to have the government simply pick a cleaner energy source and subsidize it. But this is a mistake that leaves too many questions unanswered. It is a mistake for the same reason that it would be a mistake to order all chip manufacturers to use a 32-nanometer process, or subsidize cake makers that use margarine: The government is in no position to know if these are the best processes to produce the desired results. A 32-nanometer process would be expensive overkill for a pocket calculator, and many people prefer cakes made with butter. The market reaches these conclusions by punishing firms that ignore them.

Similarly, we do not know how much more nuclear power to use, how many more plants to build, and at what point we should start using other energy sources instead.

Firms competing in truly free markets will find the best ways to get desired results. Competition forces the answers on them.

What About Externalities?

But what about those costs that aren’t reflected in prices, the ones from so-called externalities like pollution?

In principle there are better alternatives to government interventions that choose winners and losers. While far from ideal, pollution could be taxed or tradable permits to emit certain pollutants could be established. Power companies with dirtier plants would suddenly find themselves at a disadvantage versus other companies with cleaner plants and would have an incentive to shift toward cleaner energy. Pollution-reduction mechanisms we haven’t even imagined could emerge as firms search for ways to reduce their pollution costs. Maybe nuclear power would make huge gains in the resulting competition; maybe it would not. We cannot know, but we can say that the resulting victors in that competition will be the energy providers that found ways to reduce pollution at the lowest cost.

These are superior, more market-oriented alternatives, but their effective implementation rests on similarly implausible assumptions about the policymakers’ knowledge and incentives. They assume we know (or can know) all the relevant external costs of pollution. They further assume we know (or can know) the socially optimal level of emissions that would prevail in the absence of externalities. They also assume that people acting through the political process are immune to the perverse incentives the programs create. At various times and places environmental initiatives have been co-opted by special interests. Thus we should keep in mind that even more market-oriented regulations will be difficult to get right. There’s no real substitute for the free market.

We can take other actions in addition to those designed to internalize the externalities. For example, government-granted advantages for other forms of energy production should be repealed—the special tax treatment for oil exploration, wind, and ethanol should be eliminated. Instead of targeted favors, taxes should be cut across the board. We should remove regulatory barriers that make it hard to start new power plants but easy to keep innovative competitors out. And, importantly, special limited tort liability must not be permitted for nuclear power or anyone else; thus the Price-Anderson Act, which was passed in 1957 to encourage civilian nuclear power, should be repealed.

The government should stop trying to pick winners and let the competitive process sort things out.

Moore argues that the nuclear plants will create jobs, but this is a canard. When the government assumes a company’s risks, it does not create net new economic activity. It merely reallocates it from one line of production to another. Having government-guaranteed loans for a nuclear power company means other businesses go without loans. Without undistorted prices, profits, and losses, there is no way to know whether value has been created or destroyed.

  • Art Carden is a Professor of Economics, author, and co-editor of the Southern Economic Journal.