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Wasted Energy by Thomas G. Donlan Barron's - December 13, 2003

The best national energy policy would be no energy policy

As the price of oil rises and falls, it drives economists to the edge of sanity and politicians well beyond the edge. How can anyone plan for the future if he can't predict the price of one of the most important resources that drives national progress, national income and national wealth? The simple answer: He can't.

Planning is the problem, not the solution. For 30-odd years, economists and politicians have been flirting with a variety of national energy policies, most of them at least slightly crazy. They have tried inflation, price controls, supply allocations, supply subsidies, demand suppression, taxes, tax credits, deregulation and -- most unforgettably -- declared that the whole enterprise was "the Moral Equivalent of War," an idea appropriately known by its acronym, "MEOW."

Every president since Nixon has tried to impose a national energy policy, with or without a czar, and every president has failed. The reason: A national energy policy is impossible. Only a free market can send useful signals to suppliers and consumers, forcing them to make the difficult choices about their use of resources or to invent unexpected solutions that increase efficiency.

The William & Flora Hewlett Foundation has led a flock of other foundations and would-be policymakers into a three-year enterprise to develop another national energy policy. This effort took the form of the National Commission on Energy Policy -- a somewhat misleading name since the government had nothing to do with it. In contrast to the presidential energy commission of 2001 headed by Vice President Dick Cheney, the 16 members of the foundation's commission were recruited for their diverse views rather than their unanimity. They ranged from a representative of the Natural Resources Defense Council to the chairman of a large electric utility, from a couple of former Energy Department bureaucrats to a former oil company chairman and a former congressman. There were also professors, a union leader, a former CIA director, a former Environmental Protection Agency administrator, the Chairman of Consumers Union and a state senator from Texas.

The idea was to gather members with so many different views that they could do the trade-offs necessary to combine their interests in one package that could be called a national energy policy. The foundations and the commission members thought they might be able to hand a perfect solution on a platter to the administration and the new Congress.

Conflict Unresolved
Many of the commission's goals are at cross-purposes. For example, ensuring adequate supplies of natural gas would reduce the need for developing coal gasification technology, but the commission suggests doing both. Similarly, improving energy efficiency is a laudable goal, but promoting energy supply would cut the price of energy and reduce the incentive to be more efficient.

Its answer seems to be to subsidize a lot of things:

• $17 billion over 10 years for R&D, especially including technology development for renewable fuels.
• $14 billion for subsidies to push currently neglected technologies into the marketplace, such as oil production from tar sands and other unconventional sources of oil, advanced nuclear power using new technology, subsidizing domestic manufacture of hybrid-electric cars and clean diesel vehicles. The commission also would aid construction of an Alaska natural-gas pipeline, but it didn't agree on whether or not to support oil drilling in the Alaska National Wildlife Refuge.
• $5 billion for international cooperation, improving security of foreign oil sources and transport, diplomatic efforts to open more countries to exploration and development, and combating nuclear proliferation.

The controversial fuel economy standards imposed on new car manufacturers would be tightened (although the commission acknowledged that its members could not agree how tight to make them). Similar mandates for energy efficiency in appliances, buildings, industrial equipment should be "modernized," the commission said.

Environmental Mandate
Last but not least, the commission made a proposal for combating emission of greenhouse gases, particularly carbon dioxide. Several commissioners said this agreement to fight global warming was intended to be the fundamental compromise between industry and environmental activists that would make the rest of the package possible.

"We cannot have energy production at prices the consumer can afford unless we deal with global warming," said John Rowe, CEO of Exelon and a co-chairman of the commission.

An irreverent translation: "We recognize that we are not going to get a national energy policy without posturing on global warming. We have to throw bones to that kennel of environmentalists and we are going to have to smile when we do it."

It's doubtful that the commission is throwing a big enough bone. Its proposal for a tradable-permits program is rational, if limiting emissions makes sense at all. The commission was trying to show good will to a world enamored of the Kyoto Protocol, but without endangering American industrial competitiveness in a world where the Kyoto Protocol leaves China and India completely without responsibility for reducing their rapidly-growing emissions of carbon dioxide.

The commission's proposal is to install a mandatory, economy-wide system of permits for emission of carbon dioxide, methane, nitrous oxide, fluorocarbons and sulfur hexafluoride. The permits would be tradable, so that those owning sources that are easy to reduce would be paid to reduce them by those who own sources that are hard to cut back. Permitted emissions per dollar of GDP would be dialed back by 2.4% per year but the government would sell a limited quantity of "safety valve" permits at gradually rising prices. Money from the permits would then pay for the energy subsidies and investments.

Although tradable permits are a good tactic, the strategy is too weak to please anyone who thinks global warming is a problem that can be fixed with emission controls. It would be half as effective as the Kyoto Protocol (had the U.S. signed it), which itself only limits the worldwide rate of growth in emissions.

A compromise also requires a real trade. Environmental activists ought to prove that they are serious about reducing carbon dioxide emissions by going further than the commission did in promoting nuclear energy. Replacing coal-fired electric utilities with nuclear plants ought to be one of their highest priorities, not one of their shibboleths.

Rowe quietly acknowledged the difficulty. Since Exelon has a large number of nuclear plants in its generating portfolio, one of his goals is to get the federal government to live up to its promise to take spent nuclear fuel off the hands of nuclear utilities. The stuff is piling up in pools at every one of the 103 nuclear power plants in the country, and it presents a risk of accident or terrorist incident until it's better secured. Unfortunately, politics and environmental lawsuits have dragged down the effort to build a permanent disposal facility at Yucca Mountain in Nevada.

Rowe said after the formal presentation that he would never be able to recommend construction of a nuclear-power plant to Exelon's board of directors unless there is a safe repository for spent nuclear fuel and until the Nuclear Regulatory Commission licenses advanced nuclear-power technology that the public will accept as safe.

Market Solution
The alternative to a national energy policy is to improve the political stalemate -- that is, not to have a national energy policy. It's actually a good choice: No meaningless limits on carbon dioxide emissions, no controversial oil drilling in Alaska, no federal subsidies for windmills, no forced extension of electricity transmission lines, no grants and tax credits for research into coal gasification, no Alaskan gas pipeline, no subsidy for U.S. manufacture of hybrid electric cars, no extra effort to construct nuclear power plants before their time. Above all, no further interference with supply and demand to hold energy prices down.

A rational energy policy would be more interested in the price of energy while letting the supply take care of itself. When the market says it's time for high prices, all our energy problems will be dealt with faster, better and cheaper than they would be by all the commission's attempts to manage supply and demand.