The Hawaii Clean Energy Initiative (HCEI): Watt, Me Worry?

by Lee H. Endress, UHERO March 7, 2013

The connection between the emerging field of sustainability science and the economics of sustainable development has motivated a line on interdisciplinary research inspired by the notion of “positive sustainability.” This notion is founded on three principles or pillars: (1) adopting a complex systems approach to modeling and analysis, integrating natural resource systems, the environment, and the economy; (2) pursuing dynamic efficiency, that is, efficiency over both time and space in the management of the resource-environment-economy complex to maximize intertemporal well-being; and (3) enhancing stewardship for the future through intertemporal equity, which is increasingly represented as intergenerational neutrality or impartiality. I argue that the Hawaii Clean Energy Initiative (HCEI) fails to satisfy all three pillars of sustainability, and consequently fails to achieve the "sustainability criterion" put forward by Arrow, Dagupta, Daily et al: that total welfare of all future generations not be diminished. HCEI shrinks the economy, contributes negligibly to reduction of global carbon emissions, and sparks rent seeking activity (pursuit of special privilege and benefits) throughout the State of Hawaii.

The HCEI, introduced in 2008, is a partnership between the State of Hawaii and the U.S. Department of Energy intended to lead Hawaii toward energy independence. How well does the HCEI comport with the three pillars of sustainability mentioned above? Unfortunately for Hawaii residents and their long-term welfare, not very well, despite almost unshakeable political support state-wide. The problem is not clean energy, pursuit of which, in advanced technology forms, is a worthy policy objective. The problem, rather, is the current approach to the initiative itself, with its emphasis on mandates, subsidies, and picking winners. It just doesn’t add up, starting with the HCEI goal: “...achieve 70% clean energy by 2030 with 30% from efficiency measures and 40% coming from locally generated renewable sources.” (After accounting for 30% efficiency, 40% of remaining energy use is 28%, for a total of 58% clean energy, not 70%).

What about alleged benefits of HCEI? Here’s a brief reckoning:

• Strengthen our economy: Very doubtful. Renewable energy mandates and subsidies, coupled with the continuing monopoly power of Hawaii’s electrical utility, especially under the present revenue decoupling scheme, will maintain energy prices high, reduce consumer and taxpayer welfare, and accordingly, shrink (weaken) the economy. This was a key message of Nobel Laureate, Joseph Stiglitz, in his special lecture on sustainability at the University of Hawaii at Manoa in February 2012.
• Increase our energy security: Not likely. Abundance of shale oil and gas is changing the global energy market, including prices and geographic sources. The future should see lower oil and gas prices and less dependence on supply from the Middle East. Even with the current high price of low sulphur fuel oil, current-technology renewable energy is not competitive in Hawaii without subsidy. Is it really better for consumer welfare to have higher, but allegedly stabler prices? Concern about supply disruption seems wildly exaggerated. After all, the mission of the U.S Pacific Fleet, headquartered in Honolulu, is to provide maritime security throughout the Asia-Pacific region, including commercial shipping to the State of Hawaii. And a natural disaster, severe enough to impede fuel delivery, would, in all probability, cause major damage to local energy infrastructure. Less severe disasters might cripple the vulnerable renewable energy sector without preventing maritime delivery of fuel. Security is enhanced, not diminished, by the diversity of energy sources.
• Reduce our carbon footprint: A large, costly shoe for such a small foot. Hawaii currently imports about 40 million barrels of oil per year or about 0.1 million barrels per day. World-wide fossil fuel consumption (oil, coal, natural gas) comes to about 250 million barrels of oil equivalent per day (see annual data from the International Energy Agency or the U.S. Energy Information Administration). Accounting for the carbon intensity of the different fossil fuels, Hawaii’s contribution to global carbon dioxide emissions is on the order of 0.01%. HCEI will not meaningfully prevent climate change nor save the planet.
• Make Hawaii a world model for energy independence: And serve as a model of welfare erosion as well. A common justification for independence among HCEI proponents is “keeping the money at home,” which represents crude, modern day mercantilism (exports are good; imports are bad), an economic policy that was discredited over two centuries ago by Adam Smith (The Wealth of Nations) in favor of international specialization and voluntary exchange (Endress, 2012, Economic Currents, UHERO). Pursuing independence, foregoing the welfare gains from trade, shrinks the economy.
• Create a cleaner, more sustainable environment: Does this alleged benefit measure up to the three sustainability pillars?
• Systems Approach: HCEI is a single-agenda program that downplays its interaction with and impact on the Hawaii’s wider economic-ecological system. Renewables are land-use and water-use intensive. Wasteful over-investment in renewable energy (i.e., subsidies and tax credits) may come, for example, at the expense of optimal watershed protection against invasive species. Marine resources, vital to sustainable tourism in Hawaii, may similarly receive inadequate attention.
• Dynamic Efficiency: Mandates and subsidies are notoriously inefficient, because they reduce consumer and taxpayer welfare. Take the solar tax credit for example. For the fiscal year ending June 2012, Hawaii tax revenue lost due to solar tax credits (i.e., subsidies) amounted to $170 million; the Council on Revenues has adopted forecasts based on the assumption credits will rise to $240 million in the current fiscal year. That’s very likely to be an under-estimate, given the solar-installation frenzy that the commission’s announcement has engendered in anticipation of a possible credit crack-down by the Hawaii State Legislature.

The revenue loss is a direct burden; but the overall loss is even worse. “Excess burden” is the additional welfare loss to Hawaii residents because subsidies distort prices and incentives in the economy, inefficiently drawing resources from other production sectors into the renewable energy sector. (The renewable sector gains at the expense of jobs and income in the rest of the economy.) On top of that is the added excess burden of tax friction: every dollar of tax revenue raised to finance subsidies costs the economy about another 25 cents. (Economists refer to this friction as the social cost of public funds.) And where do most of the solar panels now being installed in Hawaii come from? China, not the United States. Using welfare analysis made standard by economist Arnold Harberger, 1964, Professor Jim Roumasset and I estimate that the total amount of excess burden due to solar tax credits for this fiscal year will come to about $360 million. That’s $1million a day swirling down the state drain. The benefits and costs of other policy manifestations of HCEI should also be analyzed, including the interisland grid, feed-in tariffs and regulatory policies regarding consumer prices.

Intertemporal Equity: HCEI’s implicit rate of time preference is high; political imperatives are favoring the present over the future, despite public relations appeals to the contrary. Rather than allowing renewable technologies to advance with R&D and become commercially viable without subsidy, Hawaii is paying a high price and foregoing other productive investment to lock in current, suboptimal energy technology. When the overall economic-ecological system is considered, Hawaii is making inadequate additions to inclusive wealth and is thus in jeopardy of not meeting the sustainability criterion and stewardship for the future.

HCEI may serve State energy objectives, but it is not in the public interest (i.e., overall consumer/taxpayer welfare. HCEI does not enhance intertemporal well-being and can not help save the planet through meaningful contribution to global carbon reduction. And moral justifications for the HCEI fail to persuade: in what way is the undermining of sustainability in Hawaii, and hence, the intertemporal well-being of Hawaii’s citizens, a moral outcome?

So, what are the alternatives? The British energy economist, Dieter Helm (not a climate change denier), 2012, offers some constructive recommendations for rational energy policies in Europe and the United States: (1) Institute carbon taxes; (2) Increase investment in R&D for advanced renewable technologies; (3) Adopt natural gas as a transition fuel until advanced technology renewables are ready for prime time. The first two recommendations are best pursued at the national level, although Hawaii should have some comparative advantage in R&D for ocean and geothermal energy. As to the third recommendation, the natural gas option should be put on the table in Hawaii for serious study and debate. The current administration in the State of Hawaii seems open to that idea (Governor Abercrombie 2013 State of the State address).

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LINK: WORKING PAPER

Related: Sustainable Development and the Hawaii Clean Energy Initiative: An Economic Assessment

References

• Arrow, K., Dasgupta, P., Goulder, L., Daily, G., Ehrlich, P., Heal, G., Levin, S., Mäler, G-M., Schneider, S., Starrett, D., and Walker, B. 2004. “Are We Consuming Too Much?” The Journal of Economic Perspectives. 18(3): 147-172.
• Endress, L. 2012. “Keeping the Money at Home!” Economic Currents. The Economic Research
• Organization at the University of Hawaii (UHERO). Posted Jan. 23, 2012.
• Harberger, A., 1964. ‘‘Taxation, Resource Allocation, and Welfare,’’ in J. Due (ed.), The Role of Direct and Indirect Taxes in the Federal Revenue System. Princeton University Press. Helm, D. 2012. The Carbon Crunch. Yale University Press.
• Smith, A. 1776. The Wealth of Nations. 1994 Modern Library Edition.