Since the 1970s, North American and European governments as well as many policy analysts have believed that fossil fuels will gradually be replaced by "softer" sources of energy--mainly renewable energy sources such as windpower, solar power, biomass, geothermal power, speculative hydrogen power technologies and energy conservation. These soft energy sources have been considered more environmentally benign than coal or oil and nearly as attractive economically Soft energy advocates believe that only a moderate amount of government intervention is necessary to increase the use of soft technologies and the efficiency of the economy.
The state and federal campaigns against fossil fuels, however, have not produced the quick victory that advocates predicted. Instead, they have taken on the characteristics of the Vietnam War. For over 25 years now, between $30 and $40 billion has been spent to force soft energy onto consumers(1) in a campaign employing a dizzying array of federal and state taxes, subsidies, preferences and consumption orders.(2)
Indeed, victory over fossil fuels is nowhere in sight. Renewable energy--wind, solar, geothermal and biomass--comprise only 1.5 percent of the energy market,(3) and revolutionary advances in natural gas technology, not soft energy, are fundamentally reshaping the energy industry. Still, soft energy advocates continue to proclaim that an energy revolution is upon us and that just a few more subsidies and mandates are necessary to bring us into the progressive energy promised land.
Soft energy advocates including Amory Lovins and Christopher Flavin justify their call for governmental intervention in energy markets by relying on four arguments. First, they argue that energy markets are riddled with "market failures" that lead to economic inefficiencies. Second, government is said to have subsidized fossil fuels, artificially tilting the market against soft energy Third, such advocates predict that global warming will inevitably force governments to dramatically restrict the use of fossil fuels, making the advent of a soft energy economy a question not of "if" but "when." Finally, soft energy policy experts assume, if implicitly, that they have superior information and insights that market actors simply lack or choose to ignore. Government intervention, they conclude, is the only way to achieve the "best" use of energy
This paper briefly examines the economic and environmental rationales behind the ongoing campaign to promote soft energy Those rationales, while superficially attractive, do not hold up well to scrutiny. There is no compelling reason to believe that soft energy will play any larger role in the 21st century than it does today.
HOW BROKEN ARE THE ENERGY MARKETS?
Remarkably few non-economists understand the exact meaning of the terms "market failure" or "efficiency," despite their promiscuous use in public debate. Harvard University professor Steven Kelman, for instance, interviewed staff members of U.S. congressional committees to determine their understanding of the terms and found that neither Republicans nor Democrats understood either concept.(4) Consequently, the charge of market failure is used with little care or precision and is subject to extensive misuse. Nowhere is that more true than in the energy debate.
Market failures result when the marketplace is unable to secure adequately "public goods," defined as those commodities for which it is difficult to restrict the benefits of trade to those who participate in the transaction. A common example is air pollution. If someone brought suit against a factory's pollution or negotiated a contract with the factory to reduce pollution, the benefits of the suit or contract could not be restricted to the person who filed the charges. The others in the neighborhood, the free riders, would also benefit.(5)
Implicit in the charge of energy market failure, then, is the idea that fossil-fuel markets are characterized by property rights that do not require users to pay for all the costs imposed by their use, and that harmed third parties face public-good problems in organizing a solution. …