Energy and Economics: the myth of a “free market”

Whenever the issue of climate change and our global reliance on fossil fuels is brought up, there are almost always conservatively minded people who make the argument that none of the competing zero emission technologies are practical enough or cost effective enough and we should stick with fossil fuels. Some of the common arguments are:

  • They (renewable alternatives) don’t work
  • If they worked we would be using them by now
  • Our government shouldn’t be investing money in something that can’t compete by itself
  • We should not be interfering in the “free market” with government subsidies for renewable technologies

Aside from the obvious rebuttals (e.g. that fossil fuel companies still benefit from more subsidies from the Canadian government than renewable energy does), it is worth exploring the economic argument and specifically the “free market” reference a little bit deeper.

What is a “free market” anyway?

You can have a car that runs or gasoline, or you can have one that runs on diesel. Free Market!

The term “free market” means various things to whoever speaks the term. In some cases, people see the term as meaning “a market without government intervention of any kind”. Usually, this definition is associated with politically neo-conservative and/or hardcore libertarian (anarchist) ideologies.

In this first way of thinking, any government intervention, including to hold monopolies accountable to the prices they charge for essential goods, to increase public awareness of a company’s environmental pollution, to pay for public health services, and taxes in general, are unwelcome interventions. In this way of thinking, capital is free to do as it pleases, but consumers are not really free.

Others, including the famous classical economist Adam Smith, argue that “the term free market does not necessarily refer to a market free from government interference, but rather free from all forms of economic privilege, monopolies and artificial scarcities“.

The second, more classical way of looking at the term “free market” acknowledges that government is not the only potential threat to a free market (one defined by high levels of informed consumer choice). Instead, companies themselves can threaten the existence of a free market. Two particular examples are:

Monopolies, oligopolies and cartels (and price fixing)

Somehow we haven’t incorporated the important warnings this great game gave us into real life

Once a company, or a connected group of companies has over 80 or 90% market share in a particular industry, they have a monopoly. Monopolies and cartels are incompatible with a truly free market defined by informed consumer choice.

Monopolies and cartels alike draw their power from two things:

  • economies of scale (the tendency for a mass produced product to be cheaper than a niche product, preventing niche technologies from competing), and
  • flooding the market (intentionally lowering prices to hit all producers, but due to their larger size, the monopoly or cartel can sustain financial losses for longer than smaller niche producers)

The fossil fuel industry has had a near monopoly on human energy for over 200 years. When James Watt invented the steam engine in 1798, coal (the first fossil fuel) became the dominant energy source, powering factories, steam ships and eventually automobiles.

Because of artificially low prices (due to information asymmetry discussed below), they were able to lower prices each time a competing technology arose to kill the competition, without going under themselves as the extraction of fossil fuels (without environmental and human health “externalities” included) is very cheap.

Information asymmetry

Why did my dad just buy a fossil fueled car when our public schools are teaching me so much about climate change?

Classical free market economics relies on informed consumer choice. Misinforming, hiding, omitting or lying about a particular effect of their product/s (for example, the fact that fossil fuels cause climate change) is a way companies can threaten the existence of a free market.

Even if the company wasn’t originally aware of the harmful effect of their products and wasn’t outright lying to consumers (arguably the oil and gas industry knew about climate change starting in 1977 and hid its existence for decades), they still benefited prior to that from a lack of climate awareness on the behalf of consumers, meaning their choice wasn’t really informed and therefore wasn’t free.

If all the environmental and human health effects of fossil fuels were known in 1798, consumers may have chosen a different path, like continued investment in the already existing technologies of hydroelectric and wind turbines, and a much bigger investment in batteries, and later, hydrogen fuel cells which were invented in 1830 and the more modern alkaline version reinvented in 1932 (water electrolysis to make hydrogen from hydroelectric and wind turbines was known since 1800).

Battery electric cars were built and even commercialized (before cheap oil took over) in the early 1900s, a good 120 years before the Tesla Model 3 and Elon Musk’s carefully calculated showmanship.

But regardless of when they knew about climate change, the oil and gas industry benefited from this lack of public knowledge about the harmful effects of their products. This resulted in low prices, as the costs of mitigating and adapting to climate change, cancer and respiratory ailments from toxic exhausts, and so on were passed on to the public and not factored in to the price of fossil fuels at the pump.

This allowed them to gain a monopoly, which (as we discussed under the earlier heading) is incredibly hard for consumers to break without significant government intervention, even now that the information asymmetry is slowly being resolved and more and more people are aware of climate change and other environmental problems associated with oil and gas.

Circular logic

“Most people use fossil fuels today, therefore fossil fuels have become cheap from economies of scale and government energy subsidies, therefore it is a better technology than alternatives, which is why most people use it”

We are seeing this play out right now. The core problem with this kind of reasoning is its denial of the fact we do not really live in a (classically defined) free market in the energy industry. Instead, oil and gas has a near-monopoly (score 1 against the free market) and engages in lies, omissions and withholds information that is necessary for consumers to make informed choices (score another).

According to a survey, more than half of Canadians want oil and gas demand to decline over the next 10 years, and two thirds want oil and gas demand to decline over the next 30 years. Even in Alberta, more people want oil demand to decline than rise. But why isn’t this reflected in consumer demand? Why hasn’t oil and gas price plummeted? According to laws of supply and demand, it should have already. But the reality is far more complex.

It is hard to change a monopoly, for one. Fossil fueled cars, vehicles, and engines are so cheap due to economies of scale and the infrastructure is so widely available that you have to be a tree hugging hippie to want to take the financial and convenience hit to buy competing technologies. This is changing, slowly.

And people are not fully aware of the alternatives, for another. Just ask the next person you meet about hydrogen and probably the first thing they’ll say is “isn’t that why the Hindenburg blew up”? (Over 100 years ago, the Hindenburg makers used flammable cloth to contain a flammable gas, had open flames and openly smoked near the hydrogen. The oil and gas industry used that disaster well, not like their technology is flammable or has been associated with any disasters or anything).

And you still meet people here and there who are convinced that climate change isn’t real. Is it a free market choice to believe what they want (meaning the 15% of Americans who believe climate change isn’t real and/or humans aren’t causing it are choosing to burn fossil fuels freely and should be commended for being a part of the market based economy), or a failure of our public education system not to ensure everyone is aware of the scientific consensus on climate change?

So to counter arguments that “fossil fuels are the best available technology, proven by the fact that most people use them”, it is important to note that people haven’t really had a choice in this matter, firstly through buying the product with a lack of knowledge about its harms, and then secondly because of the monopoly created as a result.

Where to from here?

Arguably, the best way to look forward is to first look back to where we were before the 1798 invention of the coal fired steam engine.

Before the industrial age began, factories were powered by water wheels (an early form of hydroelectric power), ships by sails (the earliest form of wind power), and humans moved around on their own or on horses. While relying on nature in this way for all our energy needs was inconvenient and hard, it was sustainable in a way that our mega-factories, mega-container-ships and grossly sprawled cities are clearly not.

Since 1798, a lot of neat technologies have been developed. Quantum physics gave rise to the semiconductor, a technology that is core to the now-ubiquitous solar photovoltaic (PV) panels and other solid state technology like thermo-electric generators (TEGs). There have been incremental efficiency and reliability improvements in turbines essential to the operation of hydropower, wind power and geothermal power facilities. Lithium ion batteries have taken off, providing higher reliability and performance than lead acid batteries.

So, the burning question is, how can we now have a balance of sustainability with modern expectations of wealth and convenience we have become accustomed to? Let’s quickly take stock of where the modern (2020) energy industry is headed.

Battery electric vehicles are finally starting to take on significant market share in the key transportation sector, and the costs are reducing to a point they are now competitive with gasoline vehicles (with government rebates applied). However, there are significant risks with relying solely on lithium-ion technology as an OPEC-like cartel is emerging around the relatively scarce lithium resource. Lithium batteries need to be replaced every 2 or 3 years, and use up to 6 kg of lithium per battery pack. Lithium mining in South America in particular has become a water rights issue pitting miners against Indigenous residents of the nearby area (stop me if you have heard this one before).

Jurisdictions around the developed world are starting to incorporate renewable energy rebates and mandates into their electricity grid, reducing the fossil fuels used to charge our battery electric vehicles and power our lives. However, this process is painfully slow. The US still produces most of its electricity from coal, and Canada’s three tiny northern territories (total population under 114,000) consume 177 million liters of diesel a year for electrical generation. This diesel (and other fuels like gasoline and jet fuel) is usually flown in to the isolated communities on jet fuel burning airplanes.

The infrastructure for both battery electric vehicles (BEVs) and hydrogen fuel cell vehicles is slowly developing. BEV charging stations are simpler and cheaper and so they have enjoyed faster uptake, but hydrogen is catching up, thanks to efforts by Shell (yes, that Shell).

95% of global hydrogen is made from fracked natural gas that is steam reformed into hydrogen and carbon dioxide. The remaining 5% is made by the much older (and far more sustainable) technology of water electrolysis. Most hydrogen produced today is not actually used to power vehicles, instead it is often a feedstock for various industrial processes. The drive for hydrogen as a vehicle fuel has largely come from the oil and gas industry that produces most of it, while renewable electrolysis remains buried as a niche market. Will hydrogen become a savior from the short range, slow charge and short lifespan problems of batteries, or will it become the next fossil fuel?

Natural gas pipelines and export terminals are still being built all over the world, resulting in a fracking boom. So far, only France has taken the step of banning fracking altogether. Other countries including Canada continue to support and promote the fracking industry. To keep in line with UN and national mandates, the fracking industry, the government of Alberta and Canada are all planning that Carbon Capture and Storage (CCS) will prevent emission of carbon dioxide and methane (and other greenhouse gases), allowing them to continue fracking indefinitely.

Fracking Into the Future

Diagram of fracking process from https://serc.carleton.edu/NAGTWorkshops/health/case_studies/hydrofracking_w.html clearly indicating the big green arrow of methane leakage

The last point is worth fleshing out a bit. Why, knowing all that we know about the history of fossil fuels in general, and everything we know about the extremely harmful process of hydraulic fracturing (fracking) in particular, are we investing in a technology that promises much of the same as anything else the oil and gas industry has ever done?

The short answer lies in the simple economics we have already discussed. They are here, and they have dominant market share, so they control what happens in the energy industry including our future. This will happen for as long as they have a monopoly that governments and citizens are unwilling to break for fear of looking like they are against the neoconservative definition of “free market” i.e. one without any government intervention.

And yet, when a completely natural event like the coronavirus hits, the oil and gas companies are begging for handouts within weeks. Free market indeed.

Because of their “too big to fail” status, they control governments who are dependent on these industries for jobs and tax revenues (in the case of Alberta and Canadian federal governments) and so these governments, who should be managing a just transition away from all fossil fuels (including the protection of displaced workers), continue to promote the status quo technology.

Have a look at this Natural Resources Canada page (no, this is not a joke) titled “Clean Fossil Fuels”. An excerpt from the section on Carbon Capture and Storage (CCS) is provided below (bold text added by this author):

As Canada has an abundant supply of coal, natural gas, and oil reserves, CanmetENERGY is exploring ways to lessen the environmental impact of fossil fuel combustion technologies, which currently comprise a substantial portion of the Canadian energy supply. One promising option is carbon capture and storage (CCS).

CCS involves capturing CO2 emissions from large point sources and storing them underground in suitable geological formations.

Storage options such as enhanced oil recovery (EOR) and/or enhanced coal-bed methane (ECBM) recovery provide short-term opportunities for storing the captured CO2, while longer term options, such as storage in saline aquifers, are researched and assessed.

Excerpt from https://www.nrcan.gc.ca/our-natural-resources/energy-sources-distribution/clean-fossil-fuels/coal-co2-capture-storage/carbon-capture-storage/4295

It is worth noting here that Enhanced Oil Recovery (EOR) and Enhanced Coal Bed Methane Recovery (ECBM) processes inject CO2 into depleted underground wells to allow more oil and gas to be extracted from them. The short term options for storing CO2, as declared by the elected government of Canada, are ways to extract more oil and gas and emit more CO2.

If your head just exploded from reading that, then you are not alone. It is unfortunately the norm in Canada, like the recent wind farm proposal in the Hecate Strait (near Haida Gwaii) where they asked the Haida First Nation for permission to build a wind farm, but none of the power was planned to go to the island, instead it was being sold to the highest bidder which, if you are familiar with northern BC, is the fracking industry.

Yes you read that right. Wind to power fracking. Using Indigenous traditional territory and natural resources to export power to the exact thing First Nations across Canada have been standing in solidarity against. After outrage from the Haida, BC Hydro dropped the proposal as “uneconomic” and “carrying significant risk”. They omitted more accurate terms like “mindbogglingly stupid idea” and “we should have fired the person who came up with this” from the press release.

So instead of saying “yep, we were wrong about taking oil out of tar sands and fracking for natural gas and poisoning Indigenous people living nearby and we’re sorry, and we want to go in a new direction” the supposedly democratic government of Canada is investing further in a broken suite of oil and gas technologies which, however hard you try and capture all of the fugitive methane and CO2 that leaks out from fracking wells, it will never happen due to the violence of the fracking process.

“Absolutely no way any methane or other contaminants will leak from this high-pressure fracturing of natural rock formations. None. Zip.”

Canada has committed to an 80% reduction in carbon dioxide emissions by 2050. Already, the Canadian government has failed to meet its 2020 GHG emissions reduction commitments. With those commitments made just two years ago, we are clearly off to a good start.

And even those targets that we are failing to meet just 2 years in are weak. UN has declared that all greenhouse gas emissions must stop by 2050 to reach the 1.5C global warming target. Net-zero means that any GHG emissions AT ALL must be balanced by taking CO2 out of the air using direct air capture (an entirely unproven but potentially promising technology). This contradicts with the Canadian government’s position which, like much of the developed world, is essentially “well, we are special”.

Notably, the Canadian government is not investing in direct air capture according to the NRCan “Clean Fossil Fuels” website, instead choosing to myopically focus on how they can make incremental GHG efficiency improvements to existing fossil fueled factories and processes, as they make clear in the first paragraph of the quoted excerpt above.

So how does this research focus on incremental efficiency improvements to fossil fuel combustion fit in to a long term vision for the energy future of Canada and the entire world?

The answer is there is no long term plan, nor is it physically possible to end all GHG emissions and groundwater contamination from fracking processes with or without CO2 capture and storage. Literally “fracturing” a natural rock formation that contains gas under pressure will result in an uncontrolled release and it is not physically possible to capture all of it. Not today, not in 50 years from now.

It is like dynamiting a box of confetti and then trying to develop an advanced technology capable of picking up all the pieces, instead of questioning why use dynamite in the first place if the goal is eventually to pick up all the pieces. The fracking process is not compatible with a clean energy future and should be abolished.

While it is often a fine line deciding whether to make incremental changes or sweeping ones, the science is so clear on this topic that it should not even be up for discussion. Global warming and climate change is not going away unless we Stop. Burning. Fossil. Fuels. To invest, now, in a technology that incrementally improves efficiency of fossil fuel combustion is tantamount to supporting the continued burning of fossil fuels.

Summary

Any economic analyst would look at Canada’s determination to “make fossil fuels clean again” and condemn both the governments of Canada and Alberta for their stupidity, their short sightedness, and their lack of concern for the future economic (as well as environmental) health of the country. Why invest in something with no future? Why invest in a dead end? Do they know something we don’t about the ability for the UN and the world to actually enforce injunctions relating to GHG emissions and just don’t care?

Here’s a rational economic analysis: As the world gets warmer and has more frequent storms due to climate change (fact), the current “voluntary targets” will become UN mandates and be backed by threat of sanctions and becoming an international pariah. Both developing countries and developed ones that are experiencing the increased effects of climate change (which is, on our current trajectory, going to be every nation on Earth) will lash out at major per-capita emitters like Canada and Australia, “wealthy countries” who “could have done a lot more before this was a problem”. Countries who “knew and did nothing” or “didn’t do enough”. Both countries’ long, shameful history of racism will be brought up as further proof that we don’t care about any nonwhite, non-European people. This will, in turn, become crippling economic sanctions that will cause far more pain than if we actually committed to phasing out ALL fossil fuel production today.

Canada is playing a fool’s game by continuing to invest in dirty technologies instead of starting anew with fully renewable technologies while phasing out the fossil fueled technologies entirely. Canada should immediately:

  • phase out all subsidies for fossil fuels
  • revenue-neutrally increase subsidies for renewable alternatives at the same time,
  • mandate by law that all fossil fuel combustion must cease by 2050
  • take all its R&D investment dollars into CCS and mandate that it is ONLY used for direct air capture research, the only technology that is actually useful in reducing global GHG atmospheric content and therefore global warming, and ban public dollars from being spent to incrementally increase the efficiency of dead-end fossil fuel combustion technologies.

But I think we all know that this is not about rationality, or a supposedly meritocratic “free market” in which the best ideas are the ones that win. That is a lie told by neoconservatives when it favors them. Instead, we are stuck with a legacy of a fossil fuel monopoly, created at a time of information asymmetry before we were aware that they were damaging the planet, and now we have a government who is so dependent on these companies for jobs, for tax revenues, that they fear losing re-election if they righteously attack the fossil fuel industry. Canada has sold out and privatized almost all our national assets including oil and gas, reducing its leverage even further.

How then, can alternative technology be expected to compete on its own merits? Without forcible intervention, a monopoly is self-sustaining.

So, for all of those neoconservative “free market”, anti-government-intervention people reading this, consider why is our government is out there propping up a dinousaric, unwanted industry by spending public money researching into technological dead ends like CCS that the fossil fuel industry supports? Giving them publicly funded bailouts when a naturally occurring virus outbreak hits? Continuing to support them with generous public subsidies? Drawing the ire of the entire world by setting lower emissions reductions goals than the UN has (despite being a wealthy country more able to change habits than developing ones), and even then already failing to meet the lower targets it set itself two years ago?

But no, clearly the weak solar PV rebates and $5,000 rebate for your zero emission vehicles are the unnecessary, unwelcome interventions in a free market that was working just fine. (sarcasm)

I would ask neoconservative oil and gas industry supporters to ponder these questions, while they are probably sitting at a desk near a framed picture of Adam Smith, the famous classical economist, or a framed copy of one of his books which they have probably never read.

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