Energy Industry Exhibits Classic “Market Failure” – Deregulated Markets Rife With Fraud

Amid Billion Dollar Ripoffs by Corporate Energy Giants, Christie Admin. Prosecutes Alternative Energy

Implications of “Social Costs of Carbon” Ignored Again

Some of the core justifications of the Obama EPA greenhouse gas rule – i.e. “market failure” and “the social costs of carbon” – have gone completely ignored by media and environmental activists alike.

And so was the expose of a multi-billion fraudulent scheme in electric energy auctions.

Yet while these literally earth shattering billion dollar elephants pranced about the room, the Christie administration received media praise for “cracking down on unscrupulous alternative energy suppliers“.

Let’s tackle those issues in that order to tell our three part story.

• Part I – Market Failure

Let’s begin with a few brief theoretical observations.

In economic policy circles, Thomas Piketty’s best selling book “Capital in the Twenty-First Century” is getting enormous attention. The focus of all that attention is almost exclusively on increasing wealth and income disparity and the reemergence of a hereditary oligarchic class, dubbed “The New Gilded Age” by Paul Krugman in his book review.

But Piketty has a lot to say about the practice of economics and the role of government and “free markets” that is being totally ignored.

Simply put: Piketty absolutely destroys the much cherished Neoliberal ideology of the “invisible hand” and the “unfettered free market” leading to optimal social and economic conditions – efficiency and equity – captured in that classic liberal utilitarian phrase: “the greatest happiness for the greatest number”.

Right off the bat, in his introduction, Piketty concludes that

… one should be wary of economic determinism in regard to inequalities  of wealth and income. The history of the distribution of wealth has always been deeply political, and it can not be reduced to purely economic mechanisms. …[…] there is no natural, spontaneous process to prevent destabilizing inegalitarian forces from prevailing permanently.

In other words, there is no such thing as the “free market” or any “invisible hand” – and capitalist markets tend to produce inequality and concentration of wealth and income.

In this regard, Piketty is a muted and moderate echo of his predecessors, men like Karl Polanyi, who – in 1944 – called capitalism a “revolutionary force” that commodifies man and nature and thus destroys society. Polanyi noted that unfettered capitalist markets lead to:

… exploitation of the physical strength of the worker, the destruction of family life, the devastation of neighborhoods, the denudation of forests, the pollution of rivers, the deterioration of craft standards, the disruption of folkways, and the general degradation of existence including housing and arts, as well as the innumerable forms of private and public life that do not affect profits. (“The Great Transformation” @ p.133)

Which point perfectly takes us to the EPA greenhouse gas rule, which was justified – right up front – with this important finding:

These are not theoretical abstractions – for example, I’ve written about how failure to consider market failures (e.g. the social costs of carbon, externalities, public goods) led to the rejection of an off shore wind project, allegedly for failing the “cost test”, see:

• Wind Debate Totally Ignores Environmental Benefits – Climate Change Costs and Environmental Benefits Are Set at Zero
  

This is hard to believe, but, according to the BPU consultant who reviews wind, the costs of climate change and the environmental benefits of wind are – by definition – both set at zero.

The BPU consultant’s defined those benefits as zero by limiting the analysis to “market prices”. That is a fatally flawed approach that lacks credibility.

By definition, market prices do NOT reflect the social, environmental, and public health costs of fossil power sources. Those costs are significant and are described by economists as “externalities”, i.e they are “external” to or not considered in market prices and transactions. Here is how the consultant did that:

Environmental Benefits 

Environmental benefits were not demonstrated because they are based on an estimation of the social benefits of displacing CO2, SO2, and NOx emissions from fossil-fuel generation, rather than a market price. To calculate social benefits, Applicant relies upon sources that estimate the health impacts of SO2 and NOx emissions, and attempts to calculate a social cost on a $/ton basis for these emissions. For the social cost of CO2, Applicant relies on an inter-agency federal government report that estimates the monetized damages associated with an incremental increase in carbon emissions in a given year. The report acknowledges the many uncertainties involved in determining these costs.

The calculation of environmental benefits should be tied directly to market prices because offshore wind is just one alternative way to cut emissions and its “benefit” occurs if, and only if, it is less expensive than the other alternative ways.

That limitation to tie the analysis to actual market prices excludes consideration of the costs of climate change and the benefits of wind. That approach lacks technical credibility (and is an example of ideological “market fundamentalism” which says that prices can never be wrong) and explicitly contradicts federal policy on cost benefit analysis methodology – see:  Social Cost of Carbon for Regulatory Impact Analysis ­ Under Executive Order 12866

But, just like Piketty, Polanyi, and EPA’s “market failure” findings, all that too was ignored.

• Part II – How electricity auctions are rigged to favor industry

This post is getting too long, so I will excerpt a must read story – again ignored by the press corps.

This was ignored, despite the fact that it involved fraud in the setting of energy prices in the PJM power grid, a ripoff of NJ consumers – as well as an aging NJ nuclear facility. Both should be major stories.

David Kay Johnston explains how electric auctions are rife with fraud

• Part III – Christie’s “crackdown”

So, while the multi-billion dollar EPA’ “Social Cost of Carbon” and the PJM energy auction fraud stories were ignored, Gov. Christie got favorable press for  protecting consumers by“cracking down” of alternative energy providers.

Oh well, just another day in fair and balanced professional journalism.