“New Mexico has one of the highest poverty rate in the country. Higher energy prices are in effect a regressive tax that places low-income households in the state in peril.”
Energy policies that originate from a political or quasi-religious agenda, propelled by climate zealots, misinformation, and obliviousness to basic economic principles, are on trial in the new political environment. Such policies sacrifice the public good to benefit special interests wed to rent-seeking.
While this commentary focuses on New Mexico, its urgings are applicable to other jurisdictions that currently have or are considering government-driven energy policies featuring mandates and subsidies that encourage consumers to transition away from fossil fuels.
Three Hard Truths
Three truths should determine energy policy in New Mexico.
1. No climate benefit. Whatever action the state takes to reduce greenhouse gas (GHG) emissions has a negligible effect on climate change. Even what California does has no measurable effect. The same is true everywhere. As noted by one analyst, “[T]he entire Paris agreement, if implemented immediately and enforced strictly, would reduce global temperatures by 0.17 degrees C by 2100, under assumptions that exaggerate the effects of reduced greenhouse gas emissions.” This is what the climate models calculate.
Any measurable effect on future climate change requires effective, drastic cooperation by both developed and developing countries (think of China and India). Aggravating this problem is the fact that those countries with the most to gain from controlling climate change have the least financial capacity to do so. Wealthy countries have more resources and site-specific technology to adjust to changing climate than developing countries have. Besides, there exists no easy way to induce cooperation from developing countries as long as they view emissions reduction as disrupting their economic growth rates. As a rule, growth-oriented (especially developing) economies will relegate climate change to the back burner. This has been the decades-long experience so far.
Controlling climate change in one country, state, or locality advantages jurisdictions that do not mitigate. Nobel laureate William Nordhaus considers free riding as the main culprit for the lack of progress in climate policy. While free riding is not uncommon, it is especially prevalent for global public goods like the atmosphere. Aggravating this problem are the differences in the benefits individual countries receive from climate control, along with differences in the costs borne, making international cooperation difficult. The failure of both the Kyoto Protocol (1997) and Paris Climate Accord (2015) speak for themselves although hope springs eternal to the climate lobby.
2. Price Inflation New Mexico’s Energy Transition Act (ETA) and electric vehicle (EV) mandates, as well as other state and local actions to shrink GHG emissions, inevitably drive up energy prices to New Mexicans. The ETA, which became law in March 2019 requires, among other things, generation technologies to be 50% renewable by 2030, 80% by 2040, and 100% carbon-free by midcentury. It is understandable why environmentalists support the ETA, but so does New Mexico’s largest electric utility (Public Service of New Mexico or PNM).
The law guarantees that utilities recover their stranded costs from retiring earlier their fossil fuel plants if they comply with the act while environmentalists achieve their paramount goal of transitioning energy away from fossil fuels to wind and solar. The losers from this bootleggers-and-Baptists coalition are energy consumers. The ETA weakens the long-standing authority of the Public Regulation Commission to prohibit utilities from passing through imprudent costs to their customers. This shift toward cost-plus regulation has the undesirable effect of diminishing a utility’s incentive to economize on its operating and capital costs. The ETA has in effect created a “moral hazard” environment: a utility has no financial risk for complying with costs imposed by the law.
One can then portray the ETA as a Faustian bargain whereby PNM has agreed to a clean energy agenda (appeasing the state’s political elites) in return for surety of financial rewards? Of course, the losers are PNM’s customers.
3. Cost-Benefit Failure The third truth follows from the first two: clean energy policies miserably fail a cost-benefit test for New Mexico, especially when subsidies like tax credits for EVs and mandates favoring renewable energy and specific technologies are major features. Consequently, we should expect a decline in the state’s economic growth, in addition to imposing a disparate burden on low-income households (higher energy prices generally are regressive) and hurting energy consumers in general.
Specious Reasoning, Bad Policies
New Mexico’s energy policies relegate cost-benefit analysis, sensible economic principles, and sound public policy to a subordinate if not nonexistent role. One must then ask why New Mexico is so committed to promoting clean energy? More than anything, it seems that these policies descend from the quasi-religious conviction that society needs to drastically reduce GHG emissions or else it will inescapably face future catastrophes (a “chicken little” mentality if you will). We can, hence, brand New Mexico’s energy policies as a “climate first” agenda.
One problem is that the public and politicians may act on the basis of erroneous information from sensational reporting by the press on the severity and immediacy of damages from climate change – for example, likelihood-of-catastrophe inflation because of distorted media coverage of the scientific evidence, which places an excessively high chance on calamitous events and assumes that the science is settled. The media seems to assign more precision to climate models and more accuracy to their predictions than warranted by the evidence; they omit the fact that the worst-case scenarios or disastrous outcomes are not expectations in the statistical sense.
Put differently, while the science says that such scenarios could happen, they have a much lower probability than conveyed by the press, politicians and policymakers to the general public. One can conclude that both the media and climate activists are misusing science for advancing their separate agendas (e.g., selling newspapers and fostering an ideology). The hysteria (“climate change is the greatest crisis our world has ever faced; we can’t spend too much, too soon to mitigate this problem”) triggered by this misinformation has led to misguided and highly costly energy policies throughout the world, including in New Mexico.
One glaring observation stands out: much of the active climate policies arises from what economists call rent-seeking, indicating that special interest groups are the true catalysts for these policies. Their inherent interest encompasses only themselves – not the broader public interest. Their vision of the future entails filling up their pockets or satisfying their dogma – for example, not aggressively tackling climate change is a social injustice. This seems especially true in New Mexico. Yet (in case anyone has forgotten) the job of policymakers is to balance the different interests (including energy consumers) to best serve the public good. What an antiquated idea!
Economists consider most subsidies to be inefficient, most often politically motivated, and enduring too long. Their preference is to have the government reallocate funds for basic research. But political forces have prioritized existing clean technologies with their strong lobbyists more than potentially future ones.
Before adopting an energy policy, as an exercise in democracy the state should entertain the idea of polling its citizen to find out how much they would be willing to pay to have clean energy. I conjecture that it is far less than what the clean energy policies will compel them to pay. A surprising feature of Kamala Harris’s presidential campaign was her silence on climate change; her strategists ostensibly advised her that advocating for an aggressive and costly climate policy is a net loser: whatever benefits Americans may perceive are more than offset by the costs, which include restricting the cars they can buy, higher electricity rates, lower economic growth, lower quality of life, and job losses in some industries.
As stated by one climate expert:
Climate policy has increasingly become a lose-lose for progressive politicians. Mentioning climate policies alienates moderate voters who worry about their tremendous cost. But acknowledging these downsides alienates the young voters who are enthusiastic about green ideals. If you admit net zero could be a bit unrealistic, they feel betrayed.
EV Mandate
It is understandable why the public has become exasperated with the climate fanatics. Behind clean energy policies is the belief that consumers can’t be trusted to behave rationally or in a socially desirable way. The EV mandate, for example, forces consumers to do something that they otherwise would not do. On November 16, 2023, the Governor’s appointed Environmental Improvement Board adopted a stringent clean car rule that requires 82% of all new vehicles delivered to the state to be zero-emission by 2032. By reducing options for vehicle owners, driving will become more expensive in New Mexico. Besides, subsidizing EVs will disproportionately benefit middle- and upper-income households over low-income households.
Perhaps the oddest part of the state’s EV agenda is that it hopes to trim the number of gasoline/diesel-powered vehicles in the state without knowing whether that is what the citizens of New Mexico want. The agenda is saying to New Mexicans that the government knows better what types of vehicles New Mexicans should purchase than they do, ignoring the wishes of the citizenry in the process. Today only about 1 percent of the vehicles in New Mexico are EVs. Car owners are, with good reason, wary of EVs for various reasons, including high upfront costs, limited range, and people’s inherent skepticism of new technologies.
Both for equity and economic efficiency reasons, government inducements, whether to hasten the number of EVs or charging stations are a bad idea. For example, purchasers of EVs are mostly in the high-income category, and that will likely hold for the foreseeable future. What that means is that tax credits and other subsidies will benefit the well-to-do, and will be paid for by people who are less financially well-off. One study noted that up to 90 percent of EV purchase incentives adopted by the federal government have flowed to the richest one-fifth of households.
Do EVs have a promising future? Technological advancements in batteries, other aspects of production, and charging stations will determine consumers’ demand for EVs and manufacturers’ profits from EVs, ultimately deciding the product’s fate. Their success is more likely if government steps out of the way and allows EV providers to address market demands to lure consumers with price reductions and better vehicle performance – not with subsidies and mandates.
Energy Efficiency
Subsidies for energy efficiency (EE), a major piece of the state’s energy policies funded by both utility customers and taxpayers, presume that energy consumers are irrational and uninformed of the benefits from EE. The idea that markets are less than perfect should not infer that intervention in the form of utility subsidies or government mandates benefits society. One of the major errors in government actions in many areas starts with the premise that since markets aren’t perfect, the government should intervene. More often than not, such intervention results in a higher cost to society than the benefits received.
The concept that often gets ignored in public policy debate is “government failure.” The reality is that all markets are “imperfect” in the sense that consumers lack perfect information or don’t always process the information they have rationally. If one relies on that criterion for intervention, then government meddling to refashion consumer behavior could be justified in virtually all markets. For example, some EE advocates point to the lack of access to financing as a reason for underinvestment in EE. They incorrectly widen the definition of market failure beyond its intended meaning. It may very well be that energy consumers prefer investing in other things, like home repair, new cars, or college, rather than EE. And that’s not because of market failure.
Another fact is that academic reviews of EE programs conclude that such programs are not the “low-hanging” fruit that many people believe them to be. They show that utilities grossly overstate energy savings from EE programs because they rely on engineering estimates that fail to account for consumer behavior (the so-called “rebound effect” or price-elasticity effect) in using, say, their higher energy-efficient air conditioners and heating systems more intensively because of lower operating costs. (Incidentally, as I was told, after California mandated low-flow toilets and low-flow showers, people started to flush two or three times and take long showers or baths. I am sure that proponents of the mandate failed to consider these changes in consumer behavior when forecasting the water savings.).
Studies also find “free riders” participating in EE programs. They are individuals who would have purchased lower energy-use appliances or heating and air conditioning systems in the absence of the EE program. It would be wrong to count their energy savings as real benefits, which can show a program as cost-effective when, in fact, it is not. Some studies have shown that participants in utility EE programs are primarily consumers who are wealthier, own their own homes, and are better informed about and attentive to energy costs.
New Mexico at the Crossroads
We are already seeing the effect of clean energy mandates in PNM’s rate filings, which call for increasing electricity rates partly to comply with ETA’s mandates (“the chickens are coming home to roost”). As expected, one study has shown that states with the largest increases in electricity rates in recent years have the most active climate policies, which typically include renewable-energy mandates. Although New Mexico’s electricity rates today are below the national average, it should come as no surprise if they soar above the national average in the near future.
New Mexico is a poor state with one of the highest poverty rate in the country. Most of the states with aggressive climate policies (largely “blue states”) are much wealthier. They can better afford to have their citizens pay higher energy prices and tolerate lower economic growth than a state like New Mexico. Higher energy prices are in effect a regressive tax that places low-income households in the state in peril.
Caution from California, Germany
Good energy policy recognizes that in a clean-energy world (1) there is no free lunch (look no further than the misadventures in California and Germany), (2) all costs are opportunity costs (monies spent on reducing GHG emissions could be allocated to more urgent problems such as reducing poverty and replacing old infrastructure), (3) trade-offs in a world of scarcity are inevitable (renewable energy versus reliable and low-price electricity service), and (4) benefits should exceed the costs. One doesn’t have to dig too far to see that an aggressive climate policy like New Mexico’s, which some politicians and others want to fast-track even more, falls short in meeting these criteria.
As an example, California has traveled down a primrose path. As reported by S&P Global, “electric rates surged 63 percent in the San Diego area, 44 percent in the San Francisco area and 39 percent in the Los Angeles area between 2020 and 2023, far outpacing the still-steep 24 percent rise in U.S. cities on average, according to data from the US Bureau of Labor Statistics.” Another observer described the absurdity of the California energy market this way: “In pursuit of reaching net-zero carbon emissions by 2045, the Newsom administration has given billions in subsidies to the “renewables” industry, at the same time it has relentlessly attacked producers of conventional energy.” California has also experienced electric power reliability problems, attributed by some to the allocation of large sums of money to achieving the state’s stringent clean energy goals. New Mexico may be taking the same inane path of diminished service reliability and swelling electricity rates.
Germany’s “Energiewende” program, which features an ambitious plan for renewable energy, has been described by one analyst as a risk “undermining [Germany’s] long-standing position as a European economic powerhouse and global leader in manufacturing.” Another observer commented that “Energiewende has contributed to a steep drop in Germany’s industrial production and employment.”
Why Energy Politics?
Government controls over GHG emissions directly affect goods and services, such as electricity and transportation, whose costs will likely escalate. If controls include banning or severely restricting fossil fuels like gasoline, the costs could be substantial. We have an abundance of fossil fuels at affordable prices, which explains why over 80% of the world’s energy still comes from fossil fuels. This raises the question of whether we want to, or even can wean ourselves from fossil fuels over the next two or three decades without suffering severe economic consequences. Studies and real-world experiences have shown that a hasty energy transition away from fossil fuels can be highly disruptive and costly both to energy consumers and the general economy.
One expert has succinctly depict the problem of premature renewable dependency:
Although campaigners say solar and wind are cheaper than fossil fuels, this is only true when the sun is shining and the wind is blowing. In reality, these renewables need massive subsidies and redistributive taxes, which have driven up electricity costs in the European Union by 50 percent since 2000, now costing each person an additional $300 annually.
From my experience working on energy policy since the 1970s, to gain political and public acceptance, advocates of a particular energy policy typically overstate the benefits and understate the costs. After all, concealing the costs obviates the need to explain the benefits. Government-driven energy policies inherently place more faith in the implausible benevolence and infallibility of government intervention than in the choices made by consumers and other participants in the marketplace. These policies almost guarantee diminished economic efficiency, lower economic growth, and amplified economic inequality. Sadly, we can expect New Mexico’s clean energy policies to drive the state down this futile, wasteful, unjust road.
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Kenneth W. Costello, regulatory economist and independent consultant, has worked for the National Regulatory Research Institute, the Illinois Commerce Commission, the Argonne National Laboratory, and Commonwealth Edison Company. His specialties are energy and public utility regulation.
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December 18, 2024 at 01:10AM
