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Preventing A Clean-energy Collapse

The New York Times notes that the credit crunch, combined with plummeting oil and gas prices, is choking off investments in clean energy. Even General Electric, which was thigh-deep in the clean-energy market—is hopping out of the pool. That's not too bewildering: Wind farms, after all, are competitive with gas-fired plants only when gas prices hover around $8/thousand cubic feet—and the price has now plunged from $13.58 in July to $6.79 today. It's starting to look like the '80s and '90s all over again, when, after the OPEC shock briefly spurred interest in alternative energy, the price of crude dropped and wind and solar became forgotten topics in the United States.

Back then, Europe became the new epicenter of clean energy, partly because of government policies to promote alternatives. Today, partly thanks to concerns about climate change, more than 30 states now have laws requiring electric utilities to get a certain percentage of their power—say, 10 to 20 percent—from renewable sources over the next decade or so. The catch here, as the Times notes, is that many states are struggling to meet these targets and have been relaxing their goals. Indeed, Ryan Avent had a smart post recently about a structural flaw inherent in these rules:

This is yet another reason that carbon pricing is likely to be more effective than things like renewable energy requirements in generating actual cuts in emissions. You pass a requirement like this—20% of power generated from renewables by 2010—and what you’re likely to end up with is a world where utilities are all keeping an eye on each other to see if anyone is making progress on the goal. If no one is, then the government has essentially had its bluff called. It could fine all firms in 2010, but this would basically mean a legislated increase in energy prices. As such, the government will probably just have to ask the utilities to try harder next time.

That seems to be happening as we speak. (On the other hand, carbon pricing, while important in its own right, isn't the only policy alternative here: I'm also a big fan of certain feed-in laws, about which I'm writing a longer piece so will hold off, but, suffice to say, these laws don't fall prey to the same problems—because they don't really cost utilities anything—and have been a lot more successful in countries like Germany and Denmark at spurring the wind market, even back when gas was cheaper.) At some point, when the global economy starts picking up again, it's likely that gas and oil price will start rising to the point where clean energy becomes viable again. But that's not a certain bet, and at this point, governments are going to have to get far more active if they want the alternative market to stick around.

--Bradford Plumer