Saturday, December 11, 2010

An Example of Innovation Driven by Regulation

The NY Times has a very interesting article on a Swedish city that has been switching much of its energy use over to renewables from fossil fuels, in this case biogas.  It's a very interesting alternative, since it also serves a role in waste disposal.  The incentive to do this seems to have been a combination of carbon taxes and desire to shield themselves from fluctuations in fossil fuel prices.  This always seemed like the key to the importance of putting a tax on fossil fuels, very large incentives already exist to switch but most of them have to do with uncertainties, which gives people a reason to put off making the switch.  Providing a certain penalty is enough to drive people's cost calculations over the edge, at least in some cases.

What I find most interesting about this however is that it seems to solve what I see as perhaps the biggest hurdle in making a transition away from fossil fuels, the different incentive structures facing urban and rural areas.  In this case, rural areas get incentives because the plant relies on fuel provided by agricultural areas providing a good means of disposal.  Urban areas get the lower cost heating and power generation, which benefits rural areas as well.  Of course there are some problems, it seems unlikely that people's transportation needs can be met through a variety of different fuel options, which is what local initiatives like biogas would provide.  I plan on extending on this thought later, I believe that energy reform in the US will require an upfront acknowledgment of the differing costs of adjustment to rural and urban areas.  The essential frame I see is that if we simply let the market do its thing, then rural areas will find themselves facing very high energy prices with little choice but to pay them.  Urban areas will suffer little damage, plenty of substitutes exist to fossil fuels, especially for transportation, that will easily be deployed in urban settings.  If we adjust in advance through a mix of policies however, we can make the costs of adjustments fall more evenly, with everyone paying something but urban areas making the adjustments well in advance of price spikes, exerting downward pressures on fossil fuel prices limiting the costs incurred by rural areas.  More on this later.

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