When Second-Best Will Do

The U.S. Congress is gung-ho on ethanol; the Germans are mad about solar panels, while the Danes have a thing for windmills. And, of course, they’re not alone: Countries around the globe are spending huge sums on subsidies for greener energy.

If you’re suspicious that most of this money is being wasted, go to the head of the class. A recent review paper [Download Here] by David Anthoff (Economic and Social Research Institute in Dublin) and Robert Hahn (Smith School at Oxford) concludes that many policy interventions in the energy-environment arena fail to get the maximum bang for the buck. Some – like ethanol distilled from corn — probably make things worse in environmental terms.

It’s not just a matter of choice of fuels. Dieter Helm, an energy economist at Oxford, suggests [Download Here] that the European’s Commission’s goal of a 20 percent share of energy from renewable energy sources, along with a target of improving energy efficiency by 20 percent by the year 2020, has a nice ring to it, but is not based on sound economic analysis.

So what does all this inefficiency imply for climate policy? First, meeting targets could cost a lot more than many economic models suggest because the rough-and-tumble of politics is sure to get in the way of efficiency. Second, the best should not be allowed to become the enemy of the good; the fact that billions are being wasted in the name of slowing climate change doesn’t mean that the cost of the policy writ large exceeds the benefits. Third, we economists need to do a better job of getting our message across if we are really serious about trying to solve big social problems at the least possible cost.