TO SUBSIDISE OR NOT?
17.12.2010
TO SUBSIDISE OR NOT? Launching a product or a service which is not initially economically viable is something which businesses do all the time. In some cases, such as the now-ubiquitous Amazon, sales ramped up rapidly but it was many years before the company began to turn a profit. The business model was new and no-one really knew how long this would take, but investors had enough confidence (or courage) to back it until that point. For more conventional new products, market projections are made, prices are set and there is an expectation that all the development, regulatory and capital costs necessary for the launch will be paid back in a relatively short time before the real profits begin to roll in. If not, the product will be withdrawn. This is the way that business works. Bets are made, and some are lost, but if the ones which work bring in enough money, the business is successful. Governments are different. They rarely make a 'profit' and their income is from a captive market of taxpayers. Elected politicians then spend our money on our behalf for which, of course, we are all very grateful. Actually, removing the tongue from my cheek, it is fair to say that most governments have a fair stab at providing services for the good of their citizens as well as they can, but the inertia and sheer scale of the operation is not conducive to efficiency. But on top of providing infrastructure, healthcare, education and other societal needs to varying extents and with differing degrees of success, governments play a central strategic role in shaping the future patterns of provision. In this context, key sectors at present are energy and transport, both of which are heavily influenced by the defining issue of the early 21st Century (at least in countries not struggling with more immediate problems of food security, poverty or war), climate change. Over time, the world's dependence on oil, coal and gas as primary sources of energy will decline, to be replaced by some other mix of sources. This will be driven by a range of economic factors, particularly rising extraction costs and increasing competition from alternative technologies, whatever they may be. That we might be as fixated by the price of oil in 50 years' time as we are today is pretty much inconceivable. But in the meantime, gas and coal remain the fuels of choice for power generation, and oil is far and away the dominant motive force for transport. Politicians, however, have been persuaded that a move away from fossil fuels over a shorter timescale than market forces alone would permit is an imperative which must be addressed with urgency. Not only that, but they are prescribing the route to follow by backing certain technologies. Although there are various instruments such as, in the UK, the Renewables Obligation, which are designed to reduce the carbon intensity of an organisation's energy use in any way they choose, governments are also subsidising that is, allowing taxpayers to subsidise wind and solar power specifically. The German government was lauded a year or two ago for the large total area of photovoltaic panels installed and Spain enjoyed a similar boom. In both cases, the government found the programmes simply too expensive (or, in the eyes of enthusiasts, very popular) to continue in their original form, and the generous feed-in tariffs were reduced. The UK continues to offer very attractive incentives for both wind and solar power, but with the total sum for small-scale (largely domestic) installations capped. If by doing this policymakers are helping a nascent market to grow big enough for economies of scale to make it economic, then there is a justifiable case for subsidies. However, there is no sign of major cost reductions for either technology at present and photovoltaic cells remain the most expensive means of electricity yet devised and commercialised. Sure, both wind and solar power have their place, but as a major source of power they are both too expensive and suffer from the major disadvantage of being not only intermittent but also uncontrollable. Until there are major advances in high capacity energy storage technology, neither wind nor solar power can meet the needs of modern societies. Current subsidies look more and more like money down the drain and the saving in carbon dioxide emissions is both marginal and expensive. Businesses would not be prepared to invest their own money at this stage, without governments intervening in the market. As for transport, car manufacturers are making continual advances in fuel efficiency, but this is inevitably outweighed by the increasing volume of traffic. Governments, meanwhile, have been attracted by the idea of both hydrogen powered and electric cars. Attractive as both options may seem at first sight, another primary fuel is still needed to produce both hydrogen (itself just a carrier of energy) and electricity. More recently, there has been an increasing realisation that the technical problems of producing, storing and using hydrogen are vast, which means that the primary focus is now on battery power. Technically, this is quite an exciting area, and major strides have been made in performance as battery technology has developed. But, ignoring for the moment problems such as range and time needed for recharging, the key fact is that using electric cars makes not an iota of difference to carbon emissions while most developed countries (with the exceptions of France and Norway) continue to rely on gas and coal to generate most of their electricity. Despite this, the UK government will be subsidising the purchase of all-electric cars by up to £5,000 to encourage buyers. Not that there are expected to be more than a few hundred each year initially; at the present stage of development, they simply cannot meet the general motoring needs of most people. But subsidies will be paid, networks of charging points installed and the government and a few enthusiasts will achieve a warm glow of green satisfaction. While businesses do need encouragement to take the inevitable risks of innovation, this is better done by providing an across-the-board tax incentive, rather than picking winners (something which governments are not good at). Providing a good environment for innovation and development is likely to be more productive in the long run. There are better ways for governments to spend our money than on needless subsidies. This is the last newsletter of 2010. A happy Christmas and a healthy and prosperous New Year to all readers.
The 5 most recent newsletters are listed below. To view all of our newsletters, please visit the newsletter archive by clicking here.
17.12.2010
TO SUBSIDISE OR NOT? Launching a product or a service which is not initially economically viable is something which businesses do all the time. In some cases, such as the now-ubiquitous Amazon, sales ramped up rapidly but it was many years before the company began to turn a profit. The business model was new and no-one really knew how long this would take, but investors had enough confidence (or courage) to back it until that point. For more conventional new products, market projections are made, prices are set and there is an expectation that all the development, regulatory and capital costs necessary for the launch will be paid back in a relatively short time before the real profits begin to roll in. If not, the product will be withdrawn. This is the way that business works. Bets are made, and some are lost, but if the ones which work bring in enough money, the business is successful. Governments are different. They rarely make a 'profit' and their income is from a captive market of taxpayers. Elected politicians then spend our money on our behalf for which, of course, we are all very grateful. Actually, removing the tongue from my cheek, it is fair to say that most governments have a fair stab at providing services for the good of their citizens as well as they can, but the inertia and sheer scale of the operation is not conducive to efficiency. But on top of providing infrastructure, healthcare, education and other societal needs to varying extents and with differing degrees of success, governments play a central strategic role in shaping the future patterns of provision. In this context, key sectors at present are energy and transport, both of which are heavily influenced by the defining issue of the early 21st Century (at least in countries not struggling with more immediate problems of food security, poverty or war), climate change. Over time, the world's dependence on oil, coal and gas as primary sources of energy will decline, to be replaced by some other mix of sources. This will be driven by a range of economic factors, particularly rising extraction costs and increasing competition from alternative technologies, whatever they may be. That we might be as fixated by the price of oil in 50 years' time as we are today is pretty much inconceivable. But in the meantime, gas and coal remain the fuels of choice for power generation, and oil is far and away the dominant motive force for transport. Politicians, however, have been persuaded that a move away from fossil fuels over a shorter timescale than market forces alone would permit is an imperative which must be addressed with urgency. Not only that, but they are prescribing the route to follow by backing certain technologies. Although there are various instruments such as, in the UK, the Renewables Obligation, which are designed to reduce the carbon intensity of an organisation's energy use in any way they choose, governments are also subsidising that is, allowing taxpayers to subsidise wind and solar power specifically. The German government was lauded a year or two ago for the large total area of photovoltaic panels installed and Spain enjoyed a similar boom. In both cases, the government found the programmes simply too expensive (or, in the eyes of enthusiasts, very popular) to continue in their original form, and the generous feed-in tariffs were reduced. The UK continues to offer very attractive incentives for both wind and solar power, but with the total sum for small-scale (largely domestic) installations capped. If by doing this policymakers are helping a nascent market to grow big enough for economies of scale to make it economic, then there is a justifiable case for subsidies. However, there is no sign of major cost reductions for either technology at present and photovoltaic cells remain the most expensive means of electricity yet devised and commercialised. Sure, both wind and solar power have their place, but as a major source of power they are both too expensive and suffer from the major disadvantage of being not only intermittent but also uncontrollable. Until there are major advances in high capacity energy storage technology, neither wind nor solar power can meet the needs of modern societies. Current subsidies look more and more like money down the drain and the saving in carbon dioxide emissions is both marginal and expensive. Businesses would not be prepared to invest their own money at this stage, without governments intervening in the market. As for transport, car manufacturers are making continual advances in fuel efficiency, but this is inevitably outweighed by the increasing volume of traffic. Governments, meanwhile, have been attracted by the idea of both hydrogen powered and electric cars. Attractive as both options may seem at first sight, another primary fuel is still needed to produce both hydrogen (itself just a carrier of energy) and electricity. More recently, there has been an increasing realisation that the technical problems of producing, storing and using hydrogen are vast, which means that the primary focus is now on battery power. Technically, this is quite an exciting area, and major strides have been made in performance as battery technology has developed. But, ignoring for the moment problems such as range and time needed for recharging, the key fact is that using electric cars makes not an iota of difference to carbon emissions while most developed countries (with the exceptions of France and Norway) continue to rely on gas and coal to generate most of their electricity. Despite this, the UK government will be subsidising the purchase of all-electric cars by up to £5,000 to encourage buyers. Not that there are expected to be more than a few hundred each year initially; at the present stage of development, they simply cannot meet the general motoring needs of most people. But subsidies will be paid, networks of charging points installed and the government and a few enthusiasts will achieve a warm glow of green satisfaction. While businesses do need encouragement to take the inevitable risks of innovation, this is better done by providing an across-the-board tax incentive, rather than picking winners (something which governments are not good at). Providing a good environment for innovation and development is likely to be more productive in the long run. There are better ways for governments to spend our money than on needless subsidies. This is the last newsletter of 2010. A happy Christmas and a healthy and prosperous New Year to all readers.
The 5 most recent newsletters are listed below. To view all of our newsletters, please visit the newsletter archive by clicking here.
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10.12.2010
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03.12.2010
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26.11.2010
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19.11.2010
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12.11.2010
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