By Dr. Arthur Holst, Philadelphia Water Department

Path dependence refers to economic decisions that depend on past decisions rather than current conditions. This happens because a fundamental pre-existing factor in those decisions is the underlying structure supporting their utility. Thus, only outcomes that work with the underlying structure can be effectively implemented.

As the United States moves toward green energy systems, it is important to remember that the infrastructure we build now will ‘lock-in’ future generations to the path or paths we choose.

Path dependence is often associated with market examples such as the standard railway gauge, QWERTY keyboard and use of Microsoft Windows in the 1990’s. But path dependence also has a great impact on public infrastructure. Such cases are distinctly different than market examples, because there is no competition for a prevailing structure.

The government deliberately makes a decision from the beginning to implement one kind of structure precisely to avoid competing paths. When the government spends millions of dollars on gigantic infrastructure projects, the private sector is ‘locked-in’ to the project’s underlying structure if it wants to make any use of that resource.

Thus, the government is taking two big risks. First, they must assume that the project will be used in such a way and to such an extent as predicted. Second, because of limited access to information, they risk the chance that their structure may not be most efficient . If the project is establishing a pivotal piece of infrastructure, any misapprehensions could be disastrous.

When infrastructure is built, but cannot be used the way it was built to be used, the cost is a gigantic loss to the entire society.

Furthermore, whatever green infrastructure is built in the coming years will lock the U.S. economy in to a path-dependent relationship with that infrastructure. The issue with this situation is not in utilizing the capacity of that infrastructure, but in supplying the resources required to support it.

Biofuels are a promising source of green energy. They are produced from a number of resources, but ethanol—one of the leading biofuels—is produced from corn. Ethanol emits much less greenhouse gas and poisonous gas emissions than fossil fuels.

Corn is easy to grow and ethanol is becoming easier to produce as research moves forward, so it would make sense that the U.S. is leaning towards this solution to the brown fuel issue.

Controversy has been raised over the net energy output that ethanol offers, but how would this affect the U.S. in the context of path dependency?

If the U.S. builds infrastructure around this resource as opposed to fossil fuels, we would be locked in to using this infrastructure for the production and distribution of ethanol. We assume that ethanol will be used as much as we predict, and that it is our most efficient option.

If the supply of ethanol increases enough to supply the U.S. economy, then surely it will be utilized. But consider the effects of producing that much ethanol.

Many farms would have to start producing ridiculous amounts of corn for ethanol. Corn requires heavy inputs of fertilizer and water as compared to other biofuel crops. Furthermore, it takes about 207 gallons of water to create one liter of ethanol, while it only takes less than half a gallon of water to produce a liter of gasoline at a petroleum refinery.

The increased production ethanol will definitely overextend stressed water aquifers in many farming areas, and the large increase in runoff from the fertilizer will have dire affects on the safety of our water resources.

Governments cannot see the future. But it is important to weigh all aspects before building a highly path-dependent system. Infrastructure in place is a sunk cost, regardless of how it is used from then onward.

We should not simply focus on being greener when building environmentally-sensitive infrastructure. Efficiency is such a comprehensive term, it must be considered from all sides.

Dr. Arthur Holst is Government Affairs Manager for the Philadelphia Water Department. He can be contacted by sending email to: Arthur.Holst@phila.gov or by calling 215-685-6143.

3/28/2008