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“Gresham’s Law of Green Energy”^†

Politicians continue to promote a mythical “green” economy that will soon emerge. They carry on much like the Spanish conquistadors who searched for the Seven Cities of Cibola, convinced the buildings really were made of gold. Forcing consumers to buy high-cost electricity from subsidized renewable energy producers will not and cannot improve overall economic well-being.

When the entire economic ledger is tallied, the net impact of renewable energy subsidies will be reduced economic growth and fewer jobs overall. In effect, “green” energy mandates are a new version of “Gresham’s Law,” in which subsidized renewable resources will drive out competitive generators, lead to higher electric prices, and reduce economic growth.

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—Jonathan A. Lesser, PhD, in Regulation Magazine (Winter 2010)^‡

While the U. S. economy continues to struggle, politicians, green energy advocates, and energy regulators have adopted a “green jobs” mantra. They espouse the view that policies mandating renewable resources will provide not only environmental benefits, but economic salvation as well.

The most recent example of this phenomenon is in California where, last September, the California Air Resources Board adopted a requirement that the state obtain one-third of its electricity supplies from renewable energy resources by the year 2020. California governor Arnold Schwarzenegger noted approvingly in a press release, “There is a multi-trillion dollar global market for clean energy, and I look forward to seeing even more investment and job creation happen throughout our state with today’s commitment.”

Schwarzenegger is the latest politician to fall under the spell of “green” jobs. Even New Jersey governor Chris Christie, who promised to reverse decades of growth in the burden that state’s government has heaped upon its citizens, signed the Offshore Wind Development Act in August 2010. He praised the act, which calls for at least 1,100 megawatts of wind generation to be developed off the New Jersey coast, saying it will “provide New Jersey with an opportunity to leverage our vast resources and innovative technologies to allow businesses to engage in new and emerging sectors of the energy industry.”

Economists point out that there is no such thing as a freelunch, green or otherwise. Politicians, perhaps because their lunch tabs are always paid by someone else, blithely ignore economists and continue to promote a mythical “green” economy that will soon emerge. They carry on much like the Spanish conquistadors who searched for the Seven Cities of Cibola, convinced the buildings really were made of gold. While ignoring economists may be considered a civic virtue, doing so does not invalidate basic economic principles. Forcing consumers to buy high-cost electricity from subsidized renewable energy producers will not and cannot improve overall economic well-being.

Renewable energy might reduce air pollution (although no actual evidence of this exists). It will certainly create a few construction jobs. And you can bet that government mandates and subsidies for renewable energy will benefit renewable energy developers. But when the entire economic ledger is tallied, the net impact of renewable energy subsidies will be reduced economic growth and fewer jobs overall. In effect, “green” energy mandates like those of California and New Jersey are a new version of “Gresham’s Law,” in which subsidized renewable resources will drive out competitive generators, lead to higher electric prices, and reduce economic growth.

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† Sketch of “Uncle Sam” is from the NY Times, with appreciation.

‡ Click here for Dr. Lesser’s c.v.