South-Western College Publishing - Economics  
International Subsidies Make Renewable Energy Go ‘Round
Topic Environment and the Economy
Key Words renewable energy, subsidies, solar, hydroelectric power, solar cells, price.
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Reference ID: A164284723

News Story Use of renewable energy is on the rise worldwide; in 2004, it is 13% of total energy consumption, dwarfed by coal-based and oil-based energy consumption, at 25% and 34%, respectively. What accounts for the increase?

While solar, hydroelectric, wind and biomass make up the bulk of renewable energy, it’s solar and wind energy that has experienced the most growth. Solar power have grown by 41% each year for the last three years; wind power has grown 18% annually in that period. Part of it is supply-side based; the technology has improved in wind-based and solar power. For example, wind turbine blades have grown from 5-10 meters long to approximately 50 meters long. This increases kilowatt generation, and reduces cost per kilowatt hour generated from about $2 per kWh to about $0.05 per kWh. That’s a big difference.

Then there’s the demand side: utilities are becoming more interested in renewable energy, and national governments are beginning to set production requirements for renewable energy. One way to do this is to require a certain percentage of energy production to come from a renewable source. In fact, 21 states now have such a requirement. The other way to stimulate production is to subsidize the production of renewables.

In the US, production of renewable energy creates a tax credit of about $0.019 per kWh of energy produced. The only problem with this is that the tax credit isn’t always renewed, so there’s no guarantee that it will be available from one year to the next.

Part of what needs to happen is an increase in technology, say those close to the industry. For wind power to reach 3-4 cents per kWh and become truly competitive with coal, turbine blades have to be 90 meters long, and the weight of the central cell has to fall dramatically from its current weight of 300 tons.

Discussion Questions:
1. Some people argue against government subsidies for renewable energy, saying that it is inefficient and masks the true cost of energy production. Are they correct? Why or why not?
2. Illustrate the impact of a subsidy on total consumption and price of renewable energy (say, wind power). Use a graph of marginal benefits and costs to highlight the difference between social and private marginal costs of renewable energy production.
3. What impact does the increase in technology have on the price of renewable energy? Why?
4. Over time, as total emissions continue to fall, what should happen to the price of a permit?
Multiple Choice/True False Questions:
1. True/False. According to the article, subsidizing renewable energy production is designed to internalize a production externality.

2. According to the article, the supply of renewable energy is ___________ and the demand for renewable energy is __________.
  1. Increasing; increasing.
  2. Increasing; decreasing.
  3. Decreasing; decreasing.
  4. Decreasing; increasing.
3. Which of the following is NOT considered a form of renewable energy?
  1. Solar
  2. Natural gas
  3. Wind
  4. Biomass
Source “Sunlit Uplands,” The Economist, May 31, 2007.
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