Growing green

Patrick Gibbons

The Las Vegas Sun trotted out some bad economics this week in an attempt to prove that "green energy" creates growth. The Sun wrote:

"[T]here are also compelling economic arguments in favor of going green. An economics professor at the University of California, Berkeley, calculated that the nation's most populous state greatly expanded its economy over a 35-year period by adopting energy-efficiency measures."

According to the study, $45 billion was added to the California payroll and consumers saved more than $56 billion thanks to green energy.  Yes, it is true that if you consume less energy, you will have more to spend on other things. Spending money that would have gone to paying your energy bill on groceries, movie tickets, electronics, etc. generates more demand for other goods and services, and those sectors of the economy grow.

That's a no-brainer, and NPRI has talked about this concept frequently. However, the study makes a fundamental error in reporting the real economic impact.  Most newspapers make the same mistake.

Written by David Roland-Holst, the study appears to have relied on the assumption that compliance costs are either extremely low or non-existent.  In fact, the term "compliance costs" appears nowhere in the 82-page report.

A compliance cost is the cost of following the government's rules. For example, the compliance cost of doing your federal income tax is two to three hours out of your day (if you're organized or lucky) plus $19.95 if you use Turbo Tax. If you make $20 an hour, and it takes you two hours to do your taxes, the compliance cost to pay your taxes would be $59.95 (plus tax).

In terms of environmental regulation, some regulations can have massive market-distorting compliance costs. The federal government's corporate average fuel economy (CAFE) requires automakers selling cars in the U.S. to meet certain fleet-mileage requirements. For American automakers, the result has been the production of shoddy, cheap, tiny, fuel-efficient sedans that, up until recently, few Americans wanted to touch with a 10-foot pole. To meet the requirements, Ford and GM sold those cars at a loss, which means resources were wasted and our economy was hurt as a result.

Environmentalists seem always to be demanding that these requirements be raised, as if they can clap their hands and suddenly, new, fuel-efficient technologies will appear out of thin air with no research or development costs.

The cost of complying with this federal regulation is about $100 billion. Based on California's population, the cost to California consumers would be a little over $10 billion. That is just one of many environmental regulations that have and will continue to take a big bite out of any economic growth that might, theoretically, result from energy-efficient technologies  mandated by government.

To do a thorough analysis of green energy impact, one has to estimate the compliance costs as well as the opportunity costs. Just as energy-efficient technologies allowed consumers to save money on energy and spend that money elsewhere, if there had been no environmental regulations, American companies would have saved money and resources by not having to comply with those regulations. That money could have been spent somewhere else in the economy and created new jobs or lowered costs.

So is California's economy better off because of green energy? Probably not. The compliance costs to meet the regulations are high, and the opportunity costs probably could have produced better wealth-generating opportunities for California's economy.

In general, Nevada should avoid, at all costs, following almost any policy prescription California swallows.