Tyler Cowen's Thoughts on America's Energy Policy

THERE isn't a better skeptic around than Tyler Cowen, so as a supporter of the Waxman-Markey energy bill making its way through Congress, I was intrigued to see his updated list of thoughts on American energy policy. A fun exercise: read the first phrase or so of each bullet point, imagine where Mr Cowen is heading with it, and then read on to figure out how wrong you are. For instance:

Regulatory changes are an essential part of the way forward and that is often underemphasized by environmentalists...

It reflects my priors, I'm sure, but I read this and think he's arguing that the cap part of a cap-and-trade bill is the important part, given that the trade part is unlikely to live up to the economist's ideal, and has already generated a major lobbying free-for-all. But lo:

...who are allergic to the word "deregulation." Yet if we had to build today's energy infrastructure under the 2009 regulatory regime, it would not be possible. NIMBY is a huge obstacle to future progress in this area.

That's a fancy bit of jujitsu. And of course, he's right. Everything from electrical grids, wind farms, denser and walkable developments, and efficient rail lines has and will continue to run into NIMBYist opposition. Navigating the thicket of regulations and legal precedents that empower NIMBYs adds to the cost and viability of many necessary new projects.

But this is rather a narrow view of the regulatory question. One might just as easily accuse many conservatives of an allergy to the word "regulation," even when it is plainly necessary. Meanwhile Republicans are arguing against the energy bill on the grounds of cost, when it should be clear that making it cheaper to build the infrastructure listed above—substitutes for dirtier existing technologies—would reduce the cost of the bill in many ways. No one side has a monopoly on bumbling approaches to regulation.

Mr Cowen seems to appreciate the importance of higher energy prices as a solution to the climate change problem, but he believes that it will take market forces to generate these price increases:

1. We do have an acceptable means forward and it is called oil at $145 a barrel, combined with restrictions on dirty coal as a substitute and a more favorable regulatory treatment of nuclear power and other energy alternatives. We had one plank of that platform as recently as last year, and while it was painful it was not the end of the world.

2. It is worth debating how to get to higher energy prices but the bigger question is how much we are willing to go there at all. "Cheaper energy" is the one issue that had traction for the Republicans last fall at the polls...

8. Energy prices have been rising with economic recovery. I am waiting for the first person to have the stones to argue that rapid and permanent economic growth is the only way (by raising the price of oil at a disproportionate pace) to limit greenhouse gases. You won't find those stones in my pocket (I don't think the argument succeeds), but sooner or later they will turn up. There is a more modest version of the argument which simply notes that in equilibrium politicians are likely trying to lower rather than to raise the price of fossil fuel-based energy.

A few points. Higher oil prices were not the end of the world, but if you ask James Hamilton he'll tell you they were no sack of candy either. It is the case that higher oil prices had a depressing effect on emissions, in two ways—they significantly cut the use of oil in driving, flying, and shipping, and they contributed to the worst recession since the Depression, with the attending drops in dirty power and industrial production. Rather a mixed bag, there.

It's far from clear that high oil prices are the key to long-term emission reductions, however. Dear oil led some nations which use petroleum for power generation to move toward cheaper (and dirtier) coal as a fuel source. Coal's days may be numbered, but by the time the price of coal rises high enough to slow emissions, we will probably have already made much of the earth entirely uninhabitable. The rise in oil prices also led to a push for conversion of fuel sources like Canadian tar sands—which are extremely dirty—into a fuel usable in automobiles.

And while rising oil prices did lead to a short term dip in emissions, they may have ultimately laid the groundwork for more volatility to come. The recession that resulted (in part) from the spike hammered fuel prices, which stopped exploration and production around the world in its tracks, laying the groundwork for another damaging spike. A reliance on high market prices for fuel as a tool for emissions reductions may not work because of the volatility issue.

And of course, if we arrive at high fuel prices via a tax or regulatory limitation, then we encourage substitution away from dirty energy sources without encouraging massive new investment in extraction of dirty fuel sources.

In a different context, Mr Cowen writes:

It is easy to see what won't work. It is much harder to see what might work.

Reliance on high market prices won't work. If one believes that high prices are the key, one has to hope that government can find a way to tax or regulate higher prices. Mr Cowen is justifiably skeptical that a sufficiently high price can be achieved in this manner, and in the end, I suppose that I am, as well. It is harder to see what might work.

But one thing is fairly plain—if Waxman-Markey is a bad bill, then it is a bad bill largely because the minority party has an energy plan that scarcely recognises the threat of climate change as a problem. This guarantees that the vote will be close, which guarantees that Democrats will have to wheel and deal and wheel and deal to get the votes they need—the last Democrat to be converted can name his price. It's a little silly to complain about the imperfect bill Democrats have crafted, when the Republican minority has basically forced them to build a law that every last Democrat can accept.

A little earlier, Cowen answered a question about why he didn't direct more complaints at GOP legislators. He said:

I view their incentive as to make Obama fail, not to find an acceptable compromise that will move the nation forward.

It is easy to see what won't work. It is much harder to see what might work.

This article originally appeared on The Economist.com

Comments

[A Barrel Full]

<i>It's far from clear that high oil prices are the key to long-term emission reductions, however. Dear oil led some nations which use petroleum for power generation to move toward cheaper (and dirtier) coal as a fuel source. </i>

That is if the high oil price is market driven. If it is the result of gasoline taxes, you get the emission reductions without the fuel switch.

2009 Jun 17 06:46 AM

[Ferdinand E. Banks]

If you want to read a brilliant article on America's energy policy, then I suggest that you read the one that I might write this summer - assuming the the Swedish weather remains as rotten as it has been for the last week or two. However one thing that you will not find in that article is that COAL IS ON ITS WAY OUT! Anyone who believes that would believe anything, to include the television audience suddenly coming to the conclusion that less money and a lower standard of living is better than more money and a higher standard of living.

I do not, incidentally, belong to the coal booster club, but I can't see any other outcome where coal use is concerned.The German newspapers were constantly talking about the wonders of wind the last time I looked, but at the same time they are getting ready to greatly increase the output of soft (i.e. dirty) coal in Germany.

2009 Jun 17 08:49 AM

[john s. gordon]

making obama fail is the objective of the republican party politicians.
> jack

2009 Jun 17 09:02 AM

[Chris Butler_]

Wow. One thing about this article is clear. Apparently, many people actually do sit around all day and think about ways to make energy less affordable. So here's my contribution to that effort: let's pay a couple million unemployed people to drill the rest of the earth's oil, pay another couple million unemployed to build and load rockets full of the oil and send it to some far away planet. At that point we have a policy choice: (1) we either pay more unemployed people to ship it back to earth, thereby increasing the cost of bringing oil to market, and thereby driving up its price, or (2) we blow up the far away planet, thereby reducing the supply of oil to nil, which would of course drive the price of oil to infinity. I'm leaning toward (2) if someone can assure me that we can put another couple million unemployed to work to blow up the planet.

2009 Jun 17 09:24 AM

[robert.b.ferguson]

Therer are many and varied faults in this debate. 1. The author assumes that burning fossile fule is the cause of global warming. Water vapor is the most prevalent and powerful of the green house gasses yet no one advocates reducing it's use for irrigation. 2. The eruption of Mount Pinatubo in the phillipines released more polutants and green house gasses than all of human activity in the history of our species. 3. Assuming that we could stop global warming are we sure it would be a good idea? What unintended affects would that cause? Would we delay the next Ice age preventing glaciation and the recharge of our aquafers in the northern hemisphere? 4. Is slowing economic activity in the developed world going to be benneficial? I can promise you that the BRIC will be powering thier recovery with cheap, plentiful fossile fules. Therefore our best policy would combine all of our available resources to make both fossile and alternatives cheap, available and efficient. Why would CA rather go broke and declare bankruptcy than sell oil leases off thier coast and real estate and a license for a new refinery to go with it?

2009 Jun 17 09:57 AM

[mb2]

My head just wants to explode every time I hear or read about this subject. Waxman-Markey should never see the light of day. Why do intelligent people argue that the answer to securing our future energy needs is to make oil more expensive and tax the hell out of anything that emits CO2? You will never convince me that "global warming" (if it were real; and it's not) is something that mankind can control. If politicians sincerely wanted America to be energy independent, they would remove the barriers that keep American exploration companies from tapping into our domestic oil supply. The truth is; they want yet another way to tax the masses. Don't even try to convince me that what is happening in D.C. right now is anything less than a liberal "takeover attempt" of our entire economy! Enough!!!

2009 Jun 17 10:03 AM

[Steve in Greensboro]

Mr Avent wrote: "...But one thing is fairly plain—if Waxman-Markey is a bad bill, then it is a bad bill largely because the minority party has an energy plan that scarcely recognises the threat of climate change as a problem...."

I agree with Mr. Avent that Waxman-Markey is a bad bill. But according to Mr. Avent, the principal reason is the Republicans? How does he get that? The Left controls the Legislative and Executive. The Republicans have no influence over the law being drafted and they can't filibuster it in the Senate.

This is just silly. As the Left passes Waxman-Markey and further damages the U.S. economy as a result, the American voter will know who to blame.

2009 Jun 17 10:47 AM

[La Marque]

Cap and trade is a just plain bad idea. There will be so much fraud and politics with it that it will not accomplish anything good, just bad aftereffects. Just more bureacracy will be created along with more goofy tax and accounting changes. A straight up carbon tax is something that cannot be manipulated, is simple to execute and honest. A carbon tax will have the free market doing what it does best: honing efficiency in all forms of energy.

2009 Jun 17 10:59 AM

[pslater]

You are a supporter of Waxman - Markey? Good grief! The energy bill is NOTHING more than one funding source for a massive and permanent expansion of government at taxpayer expense. I suppose you admire Castro and Marx's economic policies too?

2009 Jun 17 11:32 AM

[robert.b.ferguson]

Taxing carbon emission is a just plain bad idea.


On Jun 17 10:59 AM La Marque wrote:

> Cap and trade is a just plain bad idea. There will be so much fraud
> and politics with it that it will not accomplish anything good, just
> bad aftereffects. Just more bureacracy will be created along with
> more goofy tax and accounting changes. A straight up carbon tax is
> something that cannot be manipulated, is simple to execute and honest.
> A carbon tax will have the free market doing what it does best: honing
> efficiency in all forms of energy.

2009 Jun 17 11:47 AM

[La Marque]

robert.b.fe...;

I understand that nobody wants a carbon tax or cap and trade. That said, a carbon tax is more transparent than cap and trade. The democrats control both houses of congress along with the White House and all their leader have said that we are going to get some kind of carbon tax whether we like it or not. My preference is for transparency rather than obfuscation. The politicians are selling cap and trade as though somebody else is going to pay for it, not the end user of energy.

2009 Jun 17 02:34 PM

[robert.b.ferguson]

I agree with you, however that still doesn't make it a good idea. I also think that if it's passed it will slow any recovery and cause problems for democrats in the mid-term elections. That said the whole idea might not be a "Done deal.".


On Jun 17 02:34 PM La Marque wrote:

> robert.b.fe...;
>
> I understand that nobody wants a carbon tax or cap and trade. That
> said, a carbon tax is more transparent than cap and trade. The democrats
> control both houses of congress along with the White House and all
> their leader have said that we are going to get some kind of carbon
> tax whether we like it or not. My preference is for transparency
> rather than obfuscation. The politicians are selling cap and trade
> as though somebody else is going to pay for it, not the end user
> of energy.

2009 Jun 17 02:39 PM

[La Marque]

robert.b.fe...;
I can agree with you. I hope that you are right about it not being a 'Done Deal..

2009 Jun 17 02:59 PM

[rdd]

Cap-and-trade is just an overly simplistic way to approach a complex set of problems. Coal has many more issues than CO2. Mining it causes environmental damage, burning it causes numerous pollutants, including soot, and disposing of the ash is a large problem unto itself.

If you want to reduce the use of coal, you simply pass stricter standards regarding all three of these issues. You reduce the magnitude of those problems dramatically while raising the cost of coal-fired electricity the same as cap-and-trade would.

Every energy source can be managed that way where we solve real problems with a potentially large side-effect of reducing carbon dioxide emissions that may or may not be a major potential future problem.

The auto industry just got hit by an A-bomb. If they can't figure out how to make cars that people like, are safe, and use much less fuel after government supported restructuring, then there is no hope for that as a solution.

2009 Jun 17 03:23 PM

[Sovestor]

US is doing the right thing, but it may not reap the benefit in the near-term.

2009 Jun 18 03:49 AM

[A Barrel Full]

What people always seem to miss with carbon taxes, is that there is a net gain to society, whereas cap and trade creates additional costs.

The government has to raise taxes somewhere, and taxes on energy consumption are no worse than many, and better than taxing things like Labour. The state gets a revenue source, equal to the loss that taxpayers make.

However, in order to reduce taxes, companies and individuals will become more efficient. Therefore energy intensity will fall, without there being an overall drop in consumption.

I make this argument as a supporter of low taxes.

Those that want $10 oil should ponder this. A gasoline tax is a transfer of wealth from suppliers of crude to the governments of consuming countries.

2009 Jun 18 04:45 AM

[jerrydd]

We are already paying income taxes on oil to the tunes of $1.50/gal for the huge subsidies oil gets either directly or indirectly.

Why shouldn't we tax it and get tax breaks back, help switching to more eff transportation so the real cost of oil in in the price at the pump?

Personally I'm tired of subsidizing big oil, Iran, Russia, oil dictators and terrorists with my income taxes. If we put a oil tax to pay it's full cost on it would cut consumption, dropping the price of oil thus money our enemies make, use to kill, hurt us, others. Thus our enemies would pay most of the tax while we get tax cuts.

I'm amazed by those short sighted supposed conservatives here, in Washington who ignore the facts oil is going up in price whether we tax it or not. The only difference is who gets the money, the US gov to give us tax cuts or our enemies! Which is the patriotic choice? Which are you for?

2009 Jun 18 10:37 AM