What is the Role of the Government in Energy?

By Anonymous

Nearly every case we have read so far has had a substantial role played by the government:

· In Caprica, regulation in fracking

· In EnerNOC, a complex and partially, but not completely, de-regulated energy utilities network

· In Transatomic, subsidies and heavy regulation in nuclear

· In 1366, government subsidies in the US and China creating a critical dynamic

· In Husk, a general political climate impacting the response to electricity theft

If I am to try and categorize these interactions, they generally seem to fall into two categories: regulation and subsidy.

First about regulation: is regulation necessary? Without a doubt oil & gas is the poster-boy of how a few bad apples can bring turmoil to an industry. Better regulation could have potentially eliminated some of that. But on the flip side, oil & gas is also the beneficiary of illogical fracking moratoriums in resource-rich countries such as France. The key, one could theorize, to successful regulation is adequate knowledge. But we see another pull: in democracies politicians want votes more than the “right” answer. Should these tensions be resolved, or is it the necessary pain of the democracy? What roll should lobby groups play? And do these regulations sometimes cause more environmental harm than good?

And the next key governmental intervention in energy is subsidies. Typically they are environmentally-driven subsidies. This brings up some of the same issues: is the government very well suited to know where to best put these subsidies? For example are second-order environmental effects considered (such as environmental impact during manufacturing of solar panels)? On the other hand could these crucial but capital-intensive R&D projects really happen without government intervention?

In class it was said that developed countries can do whatever they want. It is dangerous to assume that developed countries do not suffer from scarcity of funds. The US, as one case in point, is entering into a long difficult period in its health care system that is requiring vast resources from the government. Meanwhile, my partner works for a non-profit in child welfare and has recently had to take a pay cut because of government funding reductions…and her annual salary in the first place was only a fraction of most HBS grad’s annual bonuses. Is it right for government to intervene by form of subsidy in green energy at the expense of these other critical items? Or would it be better to leave green innovation to private institutions, such as Elon Musk is doing with Tesla?

I am of the opinion that the government plays a crucial role, and both regulation and subsidy are necessary to moving toward a better world. But it needs to be well-informed and strategic. But the most important question to me is what role should I play in this as a business leader one day in energy? Should I focus purely on innovation as a tool to make a difference, or do I have a duty to try and work with the government somehow?

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

6 Responses to “What is the Role of the Government in Energy?”

  1. Government intervention in energy markets is an incredibly interesting topic and is certainly filled with external (non-market) influences that can lead to undesirable outcomes (eg subsidizing certain industries due to politics or more powerful lobbying efforts). However, the fact that governments are involved in the sector is an important and unavoidable reality. Energy resources are needed by everyone, but are highly concentrated in limited geographies. This imbalance can lead to significant distortions that favor some groups and hinder others, which can require government intervention both at the domestic and foreign policy levels. More recently, we’ve discovered that the way in which we are extracting and producing the energy is having unintended negative consequences in the environment, which, if not dealt with by government entities, could lead to catastrophic outcomes.

    Unfortunately there is no market force that is concerned with protecting the environment or ensuring access to sufficient energy for people without the means to procure it on their own. We can and should incentivize the free market to foster innovation in energy and reward those who are more efficient at extracting, producing, and distributing it, but government intervention will always be required when the economic incentives of energy markets conflict with the non-economic interests of society. In turn, it is a society’s job to ensure the government is acting in its long-term best interests and is not unfairly favoring one group over another because of undue influence.

  2. Hello Anonymous – You raise very difficult, but important questions. And I feel that if those questions were easy to answer, we would not have a lot of the controversy around the two main points your article addresses – regulation and subsidy. I think government should be involved in both for some of the reasons you mentioned. I will, however, try to address the question you raised about your role in the picture.

    I think that, as you think about entering this field, where business intersects with energy and the environment, you should consider two things:
    1 – Trends: Today energy and environmental issues are still somewhat peripheral. Corporate Social Responsibility as it relates to the environment is something most corporations do to make themselves look good. That will not remain the case for long. Just as with most grave injustices of the past, the injustices against the environment will (and already is) be combated. The trends show that corporations are taking environmental issues more seriously than they did decades – See this EY report – http://www.ey.com/Publication/vwLUAssets/Six_growing_trends_in_corporate_sustainability_2013/$FILE/Six_growing_trends_in_corporate_sustainability_2013.pdf

    2 – Something’s Gotta Give: The world cannot continue to create and consume the way it always has because it is unsustainable. If you consider access to water, natural resources, and weather patterns, you will notice that – it is only a matter of time before these issues start to affect the bottom line more seriously. In some cases, they already have as is shown in this report – http://www.weather.com/news/science/environment/climate-change-related-risks-rising-sharply-major-us-companies-report-20140516
    The free lunch will not last forever.

    I don’t know exactly how you should enter this space, but I think that investigating areas where you will be most effective – business, policy, technology, nonprofit, lobbying, etc – and giving it a shot will do the world a lot of good.

  3. This is a great post — thank you. My sense is that your question — what role do I have as a business person in shaping regulation — is one of the most important for any business leaders seriously interested in making a difference in the environmental arena. It turns out to be one of THE questions we try to go after in Reimagining Capitalism, and it’s a huge, huge question.

    In brief, my own take is that yes, as a business person you very much have responsibility on this front — precisely because, as you suggest, ill informed or badly designed regulation can be a huge problem.

    I see this responsibility as having (at least) two dimensions. The first is a duty to provide the best possible information/advice that you can to local/state/federal regulators. The second is to try to avoid shaping this information/advice in your own interest. This second one is hard, because often we’re not entirely aware how our own interests shape our perceptions — but in general I think many business people have a good sense of the “general good” and can attempt to move towards it. In the case of energy, for example, to my mind this means lobbying for market friendly regulations such as carbon prices/taxes versus targeted technology subsidies. But what a great question — my answer only begins to address it!

  4. Michael Rubenstein Reply October 22, 2014 at 10:51 am

    Following up on Prof. Henderson’s comment, I hope to extend your question regarding the roles of government beyond regulation and subsidy. There is a third, very challenging role which I think is distinct. David Wells alluded to this role in his comment when he says “Unfortunately there is no market force that is concerned with protecting the environment or ensuring access to sufficient energy for people without the means to procure it on their own.” The role I am referring to is the role of capturing the externalities of the private sector for public benefit.

    I do not regard the fact that there is no market force that is concerned with protecting the environment (to the extent that this statement is true) as unfortunate. Instead I would argue that such concern is legitimately outside the concern of market and such force should be applied by a public entity, i.e., the government. Organizations may respond to that force but it is actually confusing and unhelpful both to the public and the shareholders of businesses for businesses to have to manage an internal conflict between fiduciary responsibility and public responsibility themselves.

    Instead, the government should be charged with, not only regulation (which limits the behavior or private entities) and subsidy (which encourages behavior of private entities), but also with capturing externalities (which distributes the benefits of private triumph over public good to the public) to a legitimate extent. I recognize that what constitutes “legitimate extent” is a matter of debate and value judgment, but I regard that as a valid and important public debate, which your question has sparked. When we frame the debate in those terms (how do we value a particular private triumph over a public good), we can then legitimize the role of government within our community and then respond appropriately to the particulars as they arise.

  5. I am in agreement with Michael in that it is necessary for regulation to occur in order for private sector actors to internalize the negative externalities they have created. The deadweight loss to society from a lack of appreciation of negative externalities such as pollution of the environment needs to discouraged as much as the positive externalities created by a reduction in greenhouse gases, and in some instances (think Prius) a lack of noise pollution needs to be encouraged.

    I understand the point that you are making regarding pay cuts in the public sector in order to fund subsidies to promote clean energy. Regarding this, I wonder if there is a platform where the taxes imposed to meet the deadweight loss created by the negative externalities can be transferred almost directly to companies that are producing positive environmental externalities, thus solving the deadweight loss in this market too? This could create a funding structure that would enable cleaner technologies to be explored, along the same lines as a Green Bank.

    Another aspect that I would want to consider is that regulation, including taxes and subsidies, can sometimes be in a nation’s interest regarding defense and economic security. Reading Daniel L’s. post from October 6th ‘the escalation of conflict between Russia and Ukraine has seen Russia cut up to 60% of gas exports up to Europe, leading to significant increases in energy prices and fears concerning security of supply’. A potentially drastic analysis but given that winter is fast approaching, how are the elderly and impoverished meant to pay for heating that will likely be higher in price due to restricted supply? In these instances would it not be better to foster, at least to some level, the ability to produce energy domestically, through subsidising new technology, than to be facing an externality of political disputes?

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