Economic and legal principles in renewable energy development policy - Solar, Wind and Land: Conflicts in Renewable Energy Development - page 3

Positive externality problems
When the parties directly involved in renewable energy development ignore
the external costs and benefits associated with their projects, market failures
that economists describe as “externality problems” often result. 2 Basic
economics principles teach that some sort of government intervention—a
new legal rule or policy program—is sometimes the best way to mitigate
externality problems and thereby promote greater economic efficiency.
In recent years, policymakers around the world have made great strides in
crafting programs to address the positive externality problems plaguing the
renewable energy sector. Positive externality problems exist in this context
because wind and solar energy development generate significant benefits,
that are distributed diffusely among the planet's billions of inhabitants,
most of whom reside far away from the project site. Such benefits include
reductions in the global consumption rate of fossil fuel energy sources and
consequent reductions in harmful emissions, including carbon dioxide
emissions that may contribute to global warming. Among countries that
are net importers of fossil fuels, increasing the proportion of the national
energy demand supplied through renewable resources can also promote
economic growth, improve trade balances and advance greater economic
stability.
Without some form of government intervention, rationally self-interested
landowners and developers tend not to adequately account for external
benefits in their decisions and thus engage in sub-optimally low levels of
renewable energy development. Consider, for example, a rural landowner
who leases thousands of acres of land to a developer for a commercial wind
farm project. 3 Such lease agreements typically give landowners an estimate
of the monetary compensation they can expect to receive if the developer's
project is completed. Through power purchase agreements or other means,
developers can also approximate how much financial compensation they
will earn in connection with a given project. By weighing the expected
benefits that would accrue directly to them against their own budgetary or
other costs, landowners and developers can make rational, self-interested
decisions about their involvement in the wind farm.
However, as mentioned above, renewable energy projects also generate
numerous other benefits that accrue more generally to thousands or even
billions of other people. In a completely free and open market, these
ancillary benefits are not generally captured by project landowners or devel-
opers. Rational, self-interested landowners and developers are thus likely to
place little or no value on these outside benefits and will instead weigh only
their own potential benefits and costs when making development-related
decisions. Because they rationally choose to ignore these external benefits,
developers and landowners are likely to engage in sub-optimally low
levels of renewable energy development without some form of government
intervention.