Since 2019, New Mexico has committed to an active climate policy. It is a member of the U.S. Climate Alliance and has pledged to reduce its greenhouse gas emissions by at least 45 percent by 2030 from 2005 levels. The recent New Mexico Climate Summit also places undue emphasis on reducing greenhouse gas emissions by government mandates.
Nobel laureate Ronald Coase once coined the term “blackboard economics” to describe the difference between what economists consider an ideal state and the outcome based on real-world government actions dominated by self-interest politics, real-world dynamics and high uncertainty. What blackboard economics tells us is especially germane for different climate actions. Climate policy, whether initiated in New Mexico or elsewhere, certainly falls into the space where government action could easily inflict great harm on economies.
With the obstacles and other problems faced by conventional climate policy, such as targeted subsidies for clean energy, attention should refocus on institutions that provide market signals for individuals to accommodate climate change and respond to serious market problems in a cost-beneficial manner. These institutions include adaptation based on the pricing mechanism and other market forces; companies satisfying consumer and investor demands for clean products; and government assistance for basic research (which is inherently underfunded by the private sector) in clean energy technologies and climate engineering that mitigates the sensitivity of climate change to the level of greenhouse gas emissions. Regretfully, each of these so far has taken a back seat to greenhouse gas mitigation policies in New Mexico and elsewhere.
One glaring observation is that the primary motivation for the hurried phase-out of fossil fuel is rent seeking where special interest groups are the true drivers of proposed change. A good example is interest groups, including those in New Mexico, pressuring the government to rely on customer-funded subsidies to foster energy efficiency, distributed generation, electric vehicles and other clean energy technologies.
These actions pose “unfairness” questions for utility customers who do not benefit and, as evidence has shown, subsidies are almost economically inefficient. Regretfully, the evidence confirms that an increasing number of states have been at the forefront of bad policies, including New Mexico, that will lead lower-income people to suffer disproportionally in addition to combating climate change at an excessive cost.
To illustrate, a major action so far to attack climate change at the state level is renewable portfolio standards. More than 30 states mandate a certain percentage of electricity generation come from renewable sources, mainly wind and solar. A study conducted by analysts at the University of Chicago showed these standards are driving up electricity prices (which has a regressive effect) and represent a high-cost alternative to reducing carbon dioxide (CO2) emissions. One result was that electricity prices increase substantially after adoption of these standards.
The estimates indicate that in the seventh year after passage, average retail electricity prices are 11 percent higher, totaling about $30 billion in the renewable-portfolio-standard states. And 12 years later, they are 17 percent higher. Another result was that “the cost per metric ton of CO2 abated exceeds $115 in all specifications and can range up to $530, making it at least several times larger than conventional estimates of the social cost of carbon.” Other studies show that clean energy requirements at the state level have driven up the price of electricity and represent a cost-inefficient alternative to reducing CO2.
Compared with government mandates and other central planning actions, markets are more flexible in adapting to changing and unexpected developments. This lowers the chances for costly mistakes that government often makes in its central-planning endeavors. Especially for climate change, where massive uncertainties over the physical and economic effects prevail, flexibility and adaptability are key factors for sound decision-making.
Kenneth W. Costello, who is a regulatory economist and independent consultant, resides in Santa Fe.