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Monday, November 14, 2011

Strategic CSR - Solyndra

The Solyndra bankruptcy demonstrates the problems with a political entity applying its agenda to suppress market forces and achieve social goals.

While the goals are valid (driven by scientific analysis of the unsustainable nature of our current economic model), the means used to pursue them are inefficient. Government should be setting macro objectives and then stepping back to allow the market to micro manage resource allocation in the pursuit of those goals. An overview of the current state of the solar panel industry, which is a direct product of these distorted market and social forces, is presented in the article in the url below:

Demand for solar panels doubled last year, driven by soaring growth in Germany and Italy. This was a response to tumbling prices of solar panels, triggered largely by a big increase in polysilicon production capacity. In 2008 and 2009, the average price of a solar panel halved. Yet European subsidies for solar power, which are largely responsible for the industry’s emergence, hardly fell. Hence last year’s surge in demand, especially in Italy, where panel sales increased by 857% . The cost to European electricity users was enormous: they cover the subsidies, which are known as feed-in tariffs, in their bills. So Europe’s regulators have moderated their largesse. France announced a moratorium on its feed-in tariff last December, and Italy and Germany also made their subsidies less generous. Wider economic ills in Europe have given investors further pause, causing European demand for solar panels to plummet. In Germany, annual sales are expected to fall by more than 30%. Despite growth in America and China, global demand for solar sales is expected to grow by less than 10% this year. That leaves the market seriously oversupplied.

In relation to climate change, the government’s role should not be to choose the solution, but to clarify the problem and allow the market the freedom to determine the solution. In particular, it should do this by accounting for the true cost of carbon consumption (resource depletion, environmental degradation, political corruption, etc.) in the price of carbon-based energy sources.

Imposing a tax on carbon is the most effective way to do this. Such a tax ensures a level playing field for the most viable alternative energies (and the most efficient firms) to attract private capital and prosper. Government quotas and subsidies distort market forces in ways that generate inefficient outcomes; a carbon tax ensures a level playing field and comparative market pricing. The former are politically expedient; the latter is a political liability, which is why we will continue to get more government-driven problems, rather than market-based solutions.