A Smart Energy Policy:

An Economist's Rx for Balancing Cheap, Clean, and Secure Energy
by James M. Griffin

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Yale University Press

As Congress prepares to debate the Waxman-Markey energy bill that will fundamentally change the energy landscape of the U.S. economy, Yale University Press just released A Smart Energy Policy: An Economist's Rx for Balancing Cheap, Clean, and Secure Energy by James M. Griffin. The author is an internationally renowned energy economist with almost 40 years of writings and research in the energy sector. Besides serving on the editorial board of three prominent energy journals, he co-authored the leading textbook in the field and has published numerous other books and peer-reviewed journal articles. At Texas A&M's George Bush School of Government, he holds the Bob Bullock Chair in Economics and Public Policy.

This book is particularly timely as the nation comes to grips with climate change and oil security for several reasons. First, it is written in a lively, non-technical manner understandable by the broader public. Second, it provides the reader with a historical perspective within which to judge the current policy debate. For example, as background information, chapter 2 explains the factors leading to the meteoric rise in oil prices preceding the current financial crisis and considers whether these conditions will re-emerge in the future. Likewise, the reader is provided with a clear description and critique of past policy efforts to promote oil security and to tame carbon via the Kyoto Protocol. Recognizing that oil security and climate change will require international cooperation, the book provides a realistic assessment of these difficulties and possible alternative approaches.

A Sampling of Questions Addressed in the Book

  • Why is it necessary to put a bounty (price) on CO2 emissions? (Ch.1)
  • What is cap-and-trade? (Ch.5)
  • Why is a carbon tax better than cap-and-trade? (Ch.5)
  • Why not be energy independent and let the rest of the world fend for themselves? (Ch. 3)
  • What's so bad about the current energy policy? (Ch. 1)

View Book Outline

The book's primary contribution is its prescient implications for the current policy debate that will shape America's energy future for the next 50 years. Before rushing to judgment and adoption of the 940 page Waxman-Markey bill, it is important to pause and carefully weigh the the tradeoffs between cheap, clean, and secure energy. Waxman-Markey's cap-and-trade bill is likely to achieve the goal of clean energy, but it will hardly be cheap, nor will it necessarily be secure. Getting these tradeoffs in the proper balance is, according to Griffin, the key to a smart energy policy and it should not take 940 pages of legislation to accomplish it.

Griffin's book provides a policy framework for weighing these trade-offs and some surprisingly simple policy prescriptions that can be articulated to the American people. Griffin's policy prescriptions call for "getting the prices right" by making the price of fossil fuels reflect their true social costs. This means adopting taxes on carbon and on oil for security purposes. These taxes will serve the dual purposes of resulting in a new playing field on which alternative energy forms can compete and at the same time provide a reasonable balance between cheap, clean, and secure energy. A modest initial carbon tax that gradually rises over time will provide a predictable world in which firm's can plan new energy infrastructure investments and phase-out high CO2 emitting facilities. Americans must get over their phobia about taxes. He proposes a novel idea to avoid the objections to carbon and security taxes—make the tax revenues "revenue neutral" with matching reductions in payroll and income taxes.

Outline of the Book

0   Introduction: An Overview from 30,000 Feet

1   The Three Conflicting Goals of Energy Policy
Americans want it all—cheap, clean, and secure energy. Yet, cheap fossil fuels are hardly clean and in the case of oil, hardly secure. Congressional solutions to right the balance rely on a mish-mash of command and controls along with Congressional Beauty Pageants for alternative energy sources like bio-fuels. The subsidies for bio-fuels are prime examples as they only hide the true cost of these alternatives and put Congress in the position of choosing the best future technologies. These policies are doomed for failure. There is a better, smarter way.

2   The End of Cheap Oil?
The balance between cheap, clean, and secure will depend in part on the future price path for oil. Will recovery from the worldwide recession lead to a resumption of the spiraling price of oil experienced over the period 2004 to summer 2008, when crude oil traded above $140 per barrel. This chapter reviews nine popular explanations for this price spiral including the peak oil theory, China's voracious oil consumption, Wall Street speculation, etc. While a number of these factors coalesced to produce the price spiral, the long term price path can be distilled down to four factors. Griffin believes that a resumption of the price spiral is unlikely. While a good thing for cheap energy, lower oil prices imply greater reliance on Middle East Oil and no diminution of the oil security problem.

3   Oil Security in an Increasingly Insecure World
Morris Adelman once described the world oil market as one big bath tub with the producing countries represented by faucets spouting oil into the bath tub and oil consuming countries represented by a series of bath tub drains withdrawing oil from the bath tub. The bath tub analogy should fundamentally cause nation states to view oil security as a world problem, not an individual country problem. Popular current policy attempts to obtain oil security by petro-nationalistic policies miss the point and only sew seeds of distrust among oil consuming nations. This chapter also examines the viability of programs for oil independence and independence from the importation of Middle East oil. The bath tub analogy leads to some rather heterodox policy prescriptions.

4   Climate Change and the Search for Clean Energy
This chapter is basically a primer on climate change, reviewing the status of the science of climate change, the likely temperature effects of higher CO2 concentrations, the economic damage resulting from such changes, and the costs of various abatement techniques. Policies to slow CO2 concentrations provide benefits primarily to future generations at the expense of current generations paying the costs of carbon abatement. Cost-benefit analysis relying on discounting future costs and benefits forces policy makers to adopt a social rate of discount, which is critical to the timing and intensity of efforts to abate CO2. This chapter explains the reason for the radical differences between the policy conclusions of the Stern Review versus other researchers such as William Nordhaus and Alan Manne. The chapter concludes that the price of CO2 should rise over time at a real rate of interest between three and five percent. In an ideal world, all nations would impose a carbon tax that would escalate upward in inflation-adjusted terms, which would shift the timing of major abatement efforts to the future when new technologies for carbon abatement will be available.

5   Climate Change and the Difficult Search for Institutions and Policies
With some countries actually benefitting from global warming and many developing countries exhibiting little willingness to pay to avoid climate change, achieving a modicum of international cooperation is a very difficult problem. This chapter reviews the very mixed record of achievements of the Kyoto Protocol giving numerous examples of how countries were able to "game" the system with the clean development mechanism. As national leaders prepare to meet in Copenhagen this fall, this chapter offers a candid assessment of the performance of the cap-and-trade mechanism as well as other features of Kyoto. This chapter also looks at other institutional settings for controlling carbon through the equivalent of a "G8 for carbon emitters" who together account for about 75% of the world's CO2 emissions. Because of inherent differences among this group, different countries may choose different policy mechanisms to abate CO2. Forcing the adoption of a common policy does not seem feasible. Yet members of this group may mutually agree to certain goals, without agreeing to use a common policy approach.

6   A Smart Energy Policy
Without a strong and credible commitment from the U.S., international cooperation to deal with global warming and oil security is not workable. We have a unique opportunity to make progress and at the same time strike the proper balance between cheap, clean, and secure energy in the U.S. economy. To make substantial progress, we will need to make major technological advances in a number of areas. Rather than Congress attempting to socially engineer these outcomes, the book proposes to use the market mechanism to winnow out the successful from the unsuccessful technologies. But today, the cheap price of fossil fuels results in a very uneven playing field in which new technologies have great difficulty competing. Indeed, this is why Congress offers subsidies for bio-fuels and tax credits for wind farms. A Smart Energy Policy raises the playing field on which new energy technologies must compete by incorporating into the price of fossil fuels their externally borne costs associated with CO2 and oil security. By making the market prices of fossil fuels reflect their true social costs via a carbon tax and an oil security tax, this will help level the playing field for new technology. A Smart Energy Policy uses government R & D funds to stimulate advances in basic energy research and high cost commercial development projects. But ultimately, each new energy technology must compete on its own merits without the aid of subsidies or tax credits. But on this new playing field, the market, not the government will determine the winners and losers. A Smart Energy Policy will overcome the objection to the "t" (tax) word by using revenues from the taxes to give offsetting reductions in income and payroll taxes.