Greens Sending Your Money to Red China

Some time back, we pointed out that it would be better for us taxpayers if the federal bureaucracy wasn't nearly as competent at what it does best, namely, boosting agency budgets regardless of results in the real world.  From time to time, however, we find out about a situation so stupid that we're tempted to consider the possibility that a little competence in the bureaucracy might be no bad thing.

Whenever we find ourselves feeling thus way, we force ourselves to remember that at the top level, what bureaucrats claim to do is driven by their political masters who write the laws and set overall policy.  We can blame bureaucrats for chiseling around the edges and boosting costs any way they can, but the blame for real fiascoes lies with the people who write the laws.

We'll describe two of the worst outcomes of government policy which are defined by law.  Bureaucracy has little to do with these idiocies; the blame lies squarely upon our elected representatives.

Ethanol

There are three basic ways government can encourage the making of a product.  They can subsidize it, they can forbid Americans to buy from lower-cost suppliers, or they can pass laws which require customers to buy the product.

Ethanol is one of a few products which gets all three:

• It's subsidized at more than $7 billion per year.
• We're forbidden to buy imported Brazilian ethanol made from sugar cane, which costs half as much.
• We're forced to buy gasoline which has been adulterated by 10% ethanol, the straight stuff now being prohibited.

We'd rather buy pure gasoline which gives better mileage and doesn't eat away the fuel systems in our cars, but that's against the law.

Turning 15% of our corn crop into 2% of our automobile fuel raises food prices, of course.  The effects on food prices have been so bad that even Al Gore, who normally pushes anything that can be remotely linked to Global Warming aka Climate Change, has said they were a mistake.  Even environmentalist partisans like Treehugger admit:

Al Gore says his support for corn-based ethanol subsidies while serving as vice president was a mistake that had more to do with his desire to cultivate farm votes in the 2000 presidential election than with what was good for the environment.

Better late than never, of course, but there's so much money being made in subsidized ethanol that the subsidies keep rollin' along.  This despite nobody daring even to pretend any longer that they're a good idea!

The ethanol boondoggle is not the fault of bureaucrats at the EPA or the Department of Agriculture.  Bureaucrats don't think that big; the idea of hitting the theft trifecta this way would seem far too dangerous and likely to produce a damaging backlash.  Only elected officials would dare be so greedy, wasteful, foolish, corrupt, and just plain stupid; the paper-pushers handing out your money and forbidding your freedom are just doing what the law requires them to.

Solar Energy

Solar energy subsidies aren't quite as odious as the ethanol scam - governments generally use only two of their market-distorting tools.  Many Western governments including our own give low-cost loans or outright grants to businesses which plan to set up solar electricity generating systems.  That isn't enough, however, because solar power is still about eight times more expensive than coal-based power even when the manufacturers can rent a factory for $1 per year.

The solution is to require power companies to buy solar electricity at a price high enough to ensure a profit for the producer.  These costs are passed on to consumers such as you and me, of course, but solar companies can buy low-cost equipment from other countries.

The requirement to buy high-cost electricity can be quite costly for consumers.  German customers spend an estimated 7.3 billion euros per year in higher electricity prices, and they're beginning to notice.

Reuters reports that solar power generation in Germany is accelerating:

Solar accounts for just two percent of Germany's power production, but the country added a record 8,000 megawatts (MW) of solar modules last year -- equal to the capacity of eight nuclear reactors -- far outpacing Italy, Japan and the United States.

Unfortunately for German taxpayers and job-seekers, most of the solar cells come from China.  Although they hardly existed ten years ago, Chinese companies now control 2/3 of the $39 billion market for photo-voltaic (PV) solar cells.  Solar panel prices dropped 40% last year and many Western manufacturers went out of business.

Creating Green Jobs - in China

The rapidly-falling price of solar panels has hurt the Obama administration's plans to invest taxpayer dollars in encouraging manufacturers to create "Green Jobs."  CNBC quoted a New York Times article which explained how federal grants led to a loss of jobs:

Solyndra, a Silicon Valley solar-panel maker that won half a billion dollars in federal aid to build a state-of-the-art robotic factory, plans to announce on Wednesday that it will shut down an older plant and lay off workers.

The government helped a half-billion dollar plant to make solar panes.  Sales didn't go up as much as the company had expected, however, so the company closed its older, less automated plant.  190 workers lost their jobs.

Chinese manufacturers benefit from lower labor costs, of course, but their competitors face another handicap - higher energy costs.  Although the Chinese are happy to manufacture solar cells and peddle them to anyone offering taxpayer cash, the Chinese government has wisely refrained from any incentives for domestic solar-cell use.

As a result, though China is by far the world's largest manufacturer of them, its use of solar energy is negligible.  The Chinese are content for now to get their electrical power from dirt-cheap coal as they've always done.

This is extremely helpful to their businesses.  Which organizations buy the most electric power?  Manufacturers.  Western factories which would like to  compete with the Chinese pay higher prices for energy because their governments force them to subsidize all those unprofitable solar cells.

Solar manufacturers can't attack the subsidies they get from government forcing customers to over-pay for power, of course, because dropping the requirement that customers buy their overpriced electricity would instantly put them out of business.  Instead of working harder to get their costs down, however, they accuse the Chinese government of giving unfair support to Chinese firms.

Western companies also argue that Beijing's subsidy regime discourages the use of solar panels in China. Unlike Germany, China refuses to introduce tariff incentives that would drive domestic demand for solar energy. Even with its dominant share of solar cell and panel production, and even as the country scrambles to generate more power, analysts estimate China installed less than 500 MW of solar power inside its own borders in 2010.

With no incentive to sell at home, it's no wonder that Chinese companies prefer to export their hardware. Some of China's leading exporters shunned a Chinese government tender for solar projects in the third quarter, saying they could not earn a profit.  [emphasis added]

"The (Chinese) government does not want to be purchasing or installing PV at the current prices. It wants to use the Western market to create volume to drive down the cost and, when the cost is lower, then China will start buying," says Michael Eckhart, president of the trade group American Council on Renewable Energy.

The Chinese government doesn't subsidize solar power because they don't have to pander to environmentalists.  The government doesn't want to raise energy costs for manufacturers - that would make it harder for them to export.  In a textbook illustration of Napoleon's advice to "Never interrupt your enemy when he is making a mistake," they're taking advantage of Western governments' decision to soak their energy consumers and selling solar cells into that artificial market.

Either solar prices will drop enough for solar power to be competitive or they won't.  If prices get down far enough, Chinese companies will be well-positioned to sell into their own market.  In the meantime, they're providing jobs and gaining experience selling something that nobody wants enough to spend their own money on, to unwilling customers victimized by their own governments - a situation which must cause chuckling in the Communist Party boardrooms, no strangers to government victimization themselves.

Gaming the System

The Chinese government doesn't ignore green energy when it makes sense to claim credit for cutting emissions, of course.  In the run-up to the Beijing Olympics, the Chinese government installed two General Electric gas-fired turbines at the Taiyanggong Thermal Power Plant in north-east Beijing.  The plant generates half the carbon of a normal plant and supplies steam to a million homes.

Unfortunately, electricity from GE's turbines costs twice as much as conventional electricity.  This made things difficult for the plant once the "cost is no object" era of the Games ended.

Fortunately for the Chinese, the plant qualified for the UN's Clean Development Mechanism (CDM) by which rich countries offset carbon emissions by paying for carbon cuts in developing ones.  Even with $12 million in annual CDM payments, which are paid to the Chinese by guess who, the plant barely breaks even - but since it's already there, operating it does no harm to anything save your wallet.

Consider how the Chinese work the system:

• They got us to subsidize a high-tech electrical plant which gives them experience operating our very best gas turbines while they figure out their strong and weak points and reverse-engineer them.
• They take advantage of Western governments requiring their citizens to buy over-priced electricity to sell solar panels.  This gives them manufacturing volume which may lead to solar power at competitive prices.  Even if solar never becomes cost effective, they'll still be able to sell solar systems because our subsidies show no signs of ending no matter how illogical they get.

Who's winning the subsidy game, our governments or the Chinese, and why?