The Real Reason To Subsidize Solar

by The New Republic | November 21, 2008

In keeping with Arnold Schwarzenegger's oft-stated goal of installing solar panels on a million rooftops, California currently has one of the nation's most generous subsidy programs for residential solar installations. Indeed, the amount California spends subsidizing a kilowatt of solar capacity almost certainly exceeds the value of the resulting reduction in emissions. So does this mean that California is wasting money on its solar subsidies—money they could be using to subsidize more cost-effective methods of curbing greenhouse gases? Not necessarily, according to three economists at Resources for the Future. They argue that California's solar subsidy more than pays for itself, not because of the CO2 emission cuts it spurs, but because it helps drives down the cost of future solar installations.

Some background: It's generally true that as a company builds more and more of a product—chairs, computers, solar photovoltaics—its production methods will become more efficient and per-unit costs will go down. Normally, though, this isn't reason enough for a subsidy. After all, if a new company knows that efficiency—and therefore higher profits—will come with practice, then the company should initially sell its product or service at a loss and recoup the gains later. There's only need for government intervention if there's a market failure, and that only occurs when a company can't keep secret its knowledge about how to do things more efficiently. If information is flowing freely throughout a given industry, then a company can't stake out an advantage over its competitors by taking initial losses that enable it to learn how to do something more efficiently, which means that it will have no incentive to offer its early customers a price break. That means that prices for the first customers who buy that industry's product will be inefficiently high.

It turns out that this is what's happening in the solar-installation industry. Installation companies get a lot more efficient as they gain experience doing installations. But they can't really patent their improved methods for installing solar panels, so no one benefits from offering discounts to early adopters. The California solar subsidy helps overcome this market failure, essentially paying those who install solar-electricity systems for the public benefit they create by helping make those systems cheaper in the future. That suggests that there's a solid economic case for subsidizing certain clean-energy technologies—those that will get cheaper, in non-patentable ways, as they become more widespread—even after there's a price on carbon that levels the playing field between renewables and fossil fuels.

--Rob Inglis, High Country News

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