Energy and the Market

Debates about environmental preservation and conservation often center around the role of the sentient market. Adherents of Adam Smith tend to tout the unfettered market as the means to environmental salvation, believing that eventually the price of a good reflects its true costs. Environmentalists scoff at this logic for a multitude of reasons: Some believe that economics is bunk since it's largely based on (what to them appears) untenable assumptions, others criticize free market solutions because of the incredible difficulty in valuing the environment. Still, most environmentalists believe that political will and the action of individuals is necessary to solve our environmental problems, in direct contrasts to economists who put their faith in market self-regulation. Recent events in California, however, provide some strong support that both groups are right, while both are wrong: The free market does provide some measure of environmental protection, even though political will is the most effective tool in the environmental arena. They also show a disturbing trend in American government away from free-market efficiency and into an economics of consumption, a dangerous precedent to be setting in light of the U.S.' next president.

The United States uses more energy per capita than any other country in the world. Though we constitute only 5 percent of the world's population, we use up 23 percent of the energy consumed in the entire world for one year. Energy is the most fundamental foundation of our society: Without it, our lives would quite literally come to a standstill. Underlying this absurdly disproportionate use of energy lies the assumption that we are entitled to unlimited use at affordable prices. California's case this year, for example, provides ample evidence of the power that this assumption holds over our society. California faced unprecedented heat waves this summer and unprecedented cold spells this winter.

As a result, energy demand in the state has sky-rocketed, to the point where the power grid cannot support the demands. The situation is so dire that the state recently instituted an energy emergency, which gives the system's administrator the right to black out houses on a rotating basis for an hour at a time. Added to the fact that the state cannot supply enough power for its residence, the price of power has also risen dramatically. In San Diego, for example, the price of energy tripled this summer.

In response to the "energy crisis", consumer groups are demanding better service, more power plants and refunds. Utility companies claim that they lost $6 billion over the course of the summer, despite raising rates, and would like to be compensated by the government. The governor of California has appealed to the Federal Energy Regulatory Commission (FERC) to put energy price ceilings in place, which they recently did. All this despite the fact that natural gas prices are 10 times what they were last year at this time, and despite the fact that the Federal Government often criticizes countries, like France, that "interfere" with the work of the free market. The FERC justified instituting this system by proclaiming that it was the one way to protect consumers.

Most states look to California as a model for the deregulation of their energy industries. In 1996, with energy reserves of over 30 percent, the state deregulated the industry in the hopes that this would lead to a cleaner, cheaper, more efficient system. With those hopes dashed by events over the course of the last nine months, there are a few vital lessons that must be learned from California's experience.

First, our assumption of unlimited energy at affordable prices is environmentally untenable and unjust in economic terms. Given current technology, the use of that much energy is absolutely unsustainable. Moreover, our use is almost perversely unjust when one considers that rural residents in much of the developing world accumulate cow dung to burn for fuel in their homes while we waste an extremely precious resource.

Second, the free market can actually encourage environmental preservation and conservation through market structure. Had the market been left alone in California and consumers been asked to pay the true cost of their energy, it's possible that the underlying folly of our economy may have been challenged in the most productive manner possible. The resulting situation might very well have led to more efficient technologies or to greater emphasis on conservation. The long-term solution to our energy troubles, after all, won't come from increasing supply simply because our supply for energy is not yet unlimited. The one effective means we have is to lessen our demand. Perhaps, had prices been left alone, this might actually have occurred.

Finally, political will is by far the most effective means for conserving and preserving our environment. The government--in an attempt to protect consumers--showed itself partial not to free-market efficiency but to a consumptive economy. The painful realizations that we would have had to make as a result of the activities of the free market have been anaesthetized by political will in the opposite direction. This political will becomes the most powerful weapon against the Bush administration's incredibly short-sighted and frighteningly irreversible environmental agenda: Our society cannot afford to lessen its impact by misplacing its faith in the market.

Rohan R. Gulrajani '02 is an engineering concentrator in Leverett House. His column appears on alternate Mondays.