So I’ve been told by CPW that the Green party has a new policy regarding electricity generation. I will discuss it here, and then explain why I’ve titled the post as such – overall, I do think we need an actual Green party who aren’t just redistributionists in green drag …
Here is the breakdown of the new policy:
|Description||A two-step progressive pricing system for electricity. The Electricity Commission would bulk purchase, at wholesale costs, a large tranche of New Zealand’s renewable electricity, and retailers would pass the savings through to all households and businesses.|
|Advantages||All sectors of society benefit from generation assets currently in public hands, without distorting price signals on the margin that make the market function. |
Isolates our predominantly renewable generation from the cost of carbon, which will raise all electricity prices unless we change market configuration.
|Expenditure/ Revenue estimates||The cost of managing the bulk purchase contract is easily borne within the existing budget of the Electricity Commission.|
|Economic impact||Ever increasing electricity prices are a well known drag on productivity and real wages. Lessening the impact of price rises will boost both while still encouraging efficiency gains throughout the economy.|
|Impact on inequality||Applies across-the-board, but has the biggest positive impact on low-income households and households living in energy poverty.|
|Administration||The bulk contract would be managed by the Electricity Commission or its successor, with requirements that the cost savings be passed through by every retailer in New Zealand.|
|Use elsewhere||Japan and California are both jurisdictions that employ progressive pricing. Both are among the most energy efficient regions in the developed world.|
Lets think about this policy a little. What happens is that everyone is offered a set of electricity more cheaply – either because the electricity company is owned by government, or they are a private company that is being forced to sell. For now lets assume that the government doesn’t go all out and try to regulate quantity as well … although by the sounds of things I would put this sort of “socialist calculation” past the Greens.
So how does it work. Start without assuming any reaction by the generator.
[Note: One way to view this assumption is that there is a "magic" voluntary agreement between industry and government, where industry does not then go out and treat consumers differently - compared the later discussed case where they limit sales to households and sell to people they can actually charge the market price too].
Well, anyone who consumes below the threshold (by the sounds of things most households) will now face a lower “marginal” price for power – as electricity consumption is a normal good and the cut in prices acts as an income boost this combination of factors tells us that electricity consumption by households WILL RISE.
Now given that we are assuming no rationing by power companies in the face of this increase in demand and lower price, we have to ask what will happen in the market overall. Two possibilities are:
- The marginal cost curve is flat over the relevant region, implying that consumption by electricity consumers that have to pay the full price is unchanged (the positive income impact would likely lead to more consumption, but I digress).
- The marginal cost curve slopes upward. This implies that total consumption still rises, but by less. Furthermore, the cost faced by high users of power is now higher.
Either way, the Green Party policy leads to an increase in electricity consumption.
Now lets think of a couple of the issues that may come up on the generators side:
- Rationing: If the price is below marginal cost for households, generators will limit supply to households. Given that they can get a greater return from “high use” customers, there will also be relatively more focus on this section of the market.
- Investment: By reducing the rate of return from new investment, there will be a reduction in investment activity in the electricity industry – quite an unintended consequence methinks.
But they use it in Japan and they are energy efficient
That has nothing to do with this and a fair amount to do with “top runner“.
But power is cheaper, yah!!!
Lets think about this.
We have a government owned generator lowering the price of power – which in turn implies that government tax take must be higher. Or we have a private firm being pressured by government, which in turn leads to much lower investment in electricity infrastructure. There is no free lunch here.
If the Green Party wants to help the poor without “distorting prices at the margin” they should just admit they want higher taxes and higher transfers to people on low incomes – this is fine, this is standard redistributionist policy which does have a role in our political discourse.
However, the Greens want to act like they actually care about the environment when doing things, even though this policy will lead to an increase in power consumption. This is a blatant form of “Greenwashing” – and even worse, they are using economic language to try and make it sound legitimate
To quote CPW:
It’s always funny how when it comes down to choosing between the environment and being socialists the “Green” party goes with socialism every time.
So is this why we need a new Green party
Yes. The Greens seem to really just be a left wing party at heart – not a true Green party. For me the essence of a “Green” focus must be on the environment and our scarce capital stock. However, they are willing to sacrifice any focus on this capital stock in order to push through redistributionist or central planning style policies.
We need a Green party that actually concentrates on environmental issues. This is my main problem with the Green party – they just use it for marketing instead of actually looking at the efficient allocation of our scarce capital stock. This saddens me.
Issues of property rights, free rider problems, externalities, and a general willingness to discuss policy regarding these issues should be the focus of a Green party – it shouldn’t be Greenwash to sell a socialist agenda.
Tell you what, if someone actually forms a party that focuses on the issue of our scarce capital stock (instead of focusing on issues of redistribution) – which is a relevant issue for government – and if they write up a manifesto and sign up as a party, I’ll do some free economics analysis for policy (in my personal time, so not associated with Infometrics).
Note: I sound very harsh about the Green party here, and there are people who genuinely care about the environment. However, as long as large sections of the party abuse both environmental policy and economic analysis to sell redistribution I will be harsh to the party overall. It is especially important to me as I do care about environmental and allocative issues a lot, and seeing a party call themselves “Green” while betraying these issues is insulting.
Update: Here are more details. Also I would note that of the 25 articles on their frontpage there are 4 on the environment. Three of which are on mining, with one on UK environmental policies following the election. And get this – there is a post saying oil prices are TOO HIGH (why I think this is a big deal here – actually, this update should go at the end of the post so that it is after the argument).