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Introduction: Additional Material
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Energy is a key to civilization, second only to language. It's role started with
the taming of fire 30,000 years ago. In the oldest cave dwellings, the beginning
of fire marks the boundary between human bones chewed by animals and animal
bones chewed by humans. Fire cooked food, heated homes, hardened pottery, and
cleared land. Wind, water and work animals plowed fields, expanded trade, fought
wars, and powered machinery.
But it was the steam engine that ushered in the era of fossil energy. The first
engines used coal to pump the water out of English coal mines, which made even
more coal available. Next, steam engines opened the door to fossil-powered
transportation. Although the Chinese drilled a deeper oil well 1500 years
earlier, Drake's well in Pennsylvania started the shift from coal oil to rock
oil in 1859. By 1949 coal was no longer king of energy in the US, but it did not
lose its world title until 1965. In the last century, our primary sources of
energy have changed little in spite of Einstein's discovery that energy equaled
mC2 and the subsequent introduction of nuclear power.
This a sketch of man's incessant attempt to solve the primary energy problem:
how to harness enough energy. The success of this project has been astounding,
and although clever people deserve a good deal of credit, it must be admitted
that geology and ancient biology have been extraordinarily kind. Perhaps it is
the blind luck of Texas oil gushers and Saudi crude so sweet you can put it
right in a gas tank that has made people
superstitious about energy. In any
case, there is now a small war simmering between those who claim our good
fortune has run out and those who claim there is some natural law of
technological progress that guarantees our luck will never
end.
Both sides are wrong. There is no metaphysical guarantee of abundant energy, but
it does look like we will be lucky long enough to make it on our own. The
earth's supply of coal and uranium should last another two hundred years, and by
then those ever-tantalizing solar panels should finally work as promised. And
don't worry about coal-fired cars; refining coal to gasoline is cheaper than
using today's oil. On this optimistic note, we move on to the real energy
problem.
The term smog was invented for London in 1905, but the phenomenon peaked with
the coal-powered "fog" of 1952 which killed roughly 12,000 people. Only a few
thousand died during the four-day event, but the death rate was elevated until
spring. People died of pneumonia, bronchitis, tuberculosis and heart failure.
China may be killing a million people a year the same way.
Since the 1950's energy has become dirty in a whole new way. As Henry Kissinger
tells us, "American forces are in Iraq to prevent Iranian imperialism from
dominating the energy supplies of the industrial
democracies." This is nothing new. According to the military, protecting the
world's oil supply routes has been costing us a small fortune for years.
The new energy problem: clean energy
The new energy problem is how to clean up energy production, transportation and
use. This is tough for only one reason: the market cannot be relied on to do the
job. Or rather, the market can be relied on not to do the job, at least not
without serious guidance.
This raises the central question of this volume. Since the market cannot solve
the clean-energy problem on its own, what policy should government adopt? Since
an energy policy is needed, what is a smart energy policy? There are two
opposite approaches. Energy policy can focus on technology, picking winners and
losers, or it can focus on harnessing the market to pick the technologies and
change behavior. Today, US policy is mainly concerned with picking technologies;
hydrogen cars, ethanol, and nuclear reactors top the list. The point of this
book is to demonstrate the power of a more market-oriented approach. This does
not mean turning the market loose, it means harnessing the market.
In principle there is a third way to solve
the clean-energy problem which does not require any energy policy or perhaps
requires only a simple temporary policy. This third way is to make the clean
energy problem disappear. If a clean technology could be found that was cheaper
than any dirty technology, that would solve everything. Although this is
unlikely, people are always hopeful. Perpetual motion machines have been
invented more times by far than any other device. Cold fusion is unsurpassed for
pure fantasy. The hydrogen economy, first proposed in 1902, wins for longevity,
and solar cells for most disappointing. Hot fusion energy is a double winner for
most-high-tech and most-expensive. I've been waiting for fusion energy since I
read in 1961 that it would be commercial in 10 years.
Call me a pessimist, but with no proof whatsoever, I will assume that no silver
bullet will found in the nick of time. There will be no clean electricity
generation that is too cheap to meter (that was supposed to be nuclear power for
those too young to remember), and water will not spontaneously turn into
hydrogen and power our cars.
The root of the problem
Why is adoption of clean technology a problem? Other good technologies are
adopted with no problem at all. Why doesn't the free market handle this?
Economics explains that clean air is a "public good." Energy, like most things
we buy, is a private good, so it is well supplied by private markets. But,
private markets do not supply public goods efficiently, and often not at all.
The London smog illustrates this perfectly. Suppose a London household could
spend $50 to permanently stop its coal pollution. If everyone did this, the
value would be $200 per household. It's a great technology at a bargain price.
But will the market adopt it? No. It is foolish for a household to spend the
$50. If they do, the benefit will be spread over all the other households and
their share of the benefit will be less than a penny. Individually it is not
rational. The air is shared and consequently clean air is a public good, a good
that must be shared simply because of its nature.
If the market can't solve the problem, how did London solve it? Four years after
the 1952 record-breaking smog, local councils in London began passing
regulations both requiring and helping people switch from dirty coal to gas,
oil, smokeless coal or electricity. Twelve years after that, in 1968, England
passed regulations requiring industry to use tall smokestacks. So the short
answer is that the people of London solved the problem by acting cooperatively
through their government. In this case the market failed and the government
succeeded, exactly as economics predicts for public goods.
Energy-independence problems, such as protecting the country from oil price
shocks and reducing the oil income of OPEC and terrorists, are also public goods
problems. A lower world oil price benefits everyone; so does less terrorism.
Again, the market will not solve such problems.
The solution
The clean-energy problem is a tough nut to crack, but not for the
reasons usually given. Conventional wisdom holds that we need to discover new
technologies, invest in conservation, and motivate people to be ecologically
minded. That's true, but it's not the problem. We've done all that before, with
amazing success. The problem is one of vision. Not the vision to see some ideal
future, but the vision to see the past and what is in plain view.
Once upon a time the world embarked on the most amazing energy policy
experiment. It applied a strong market signal for twelve years and then left a
weak one in place for the next 22. For the first five years, the results were
disappointing, but below the surface, things were changing. In the sixth year
the signal was doubled, and by the seventh, conservation took off like a rocket
for three years. After two more years the signal was set quite low. But progress
continued. All told the US held CO2 constant for 15 years, and in spite of the
slow start, over the 34-year period, the world saved 14 years of total world oil
production measured at the 2007 rate. Without this policy, global warming would
have been much worse.
The story is true; the experiment was the 1974–1985 OPEC
price shock. From our point of view, the experiment was an accident, and like
most accidents, it caused some damage that could easily be avoided were we to
deliberately execute a similar
policy. One change would be to not pay OPEC $8 trillion (2007 $) to conduct the
experiment on us. Nonetheless, we performed admirably, and I'm sure we would
again.
A pleasant side effect of the world's conservation response to the
1974-1985 price shock was to pretty well crush OPEC for about fifteen years.
That was not planned, it's just what market signals do when you get them going.
Unfortunately, since conservation was only a response to OPEC's high prices,
once OPEC was crushed and oil prices fell, the conservation efforts began to
dwindle, OPEC regrouped, and we are back in the soup. This time, if our vision
clears, we can see exactly what to do. The world's response last time was pretty
much perfect. It reduced GHGs, brought down world prices, and partially
protected us against future price shocks. Its only failure was that it
gradually lost steam. The past shows us path. This book will
explain the methods, already in plain view, which allow us to follow a similar
path while recapturing OPEC's profits.
Market power
OPEC raises the world price by exercising market power. Because larger suppliers
have more market power, the OPEC cartel gathers together a
number of suppliers to act almost as one. This magnifies the market power of its
members. Surprisingly, buyers (that's us) can do the same thing. A buyers'
cartel would hold the price down, just as the sellers' cartel pushes it up. Just
as OPEC gains power by coordinating its actions, so do
buyers.
Now this idea is not new and in fact Europe, in essence, formed such a
buyers' cartel in the 1980s, which is one reason it took OPEC so
long to recover. All that is required is a tariff (a tax) on imported oil. The
more countries that adopt such a tariff, the stronger the market power of the
buyers' cartel. Since the US is the world's largest buyer by far, and has
not joined the buyers' cartel, the cartel is not very
effective. But it could be.
To repeat and extend the success of the world market during the early
1980s, oil-importing nations should apply the same market signal (a higher
domestic oil price, this time caused by an import tariff), but keep the
signal in place instead of letting it collapse six years after
its peak. Of course, the signal should be applied more gradually and we should
keep the $8 trillion instead of giving it to OPEC. Here's one way it could be
done. Starting with current oil prices of, say, $65 per barrel, impose a tariff
on OPEC of $10 per barrel. Increase this every year so
that the cost of oil to refineries (after paying the tax and tariff) slowly
rises to about $80 per barrel even if the world oil price
falls.
This sounds expensive, which is why we don't do it. We pay too much
attention to sound bites. But look below the surface and you will see that there
is nothing OPEC would hate more than this proposal. That is because we would
capture OPEC's markup, which is worth hundreds of billions of dollars per
year. This money, captured from OPEC by the tariff, can be refunded to Americans
on a per person basis. As long as it is not
refunded on a per-gallon basis, the buyer's cartel will have the same
power that crushed OPEC in 1985 and, this time, that power will not dissipate.
Besides crushing OPEC, the energy conservation this policy induces will do much
to fix the climate. Other policies will still be needed,
but the money captured from OPEC will go a long way toward paying the
climate-change bill.
The cost of fixing climate change
Solving the oil problem could make the coal problem worse. The oil tariff will
make oil more expensive, but will not affect the price of coal. Without a coal
policy, coal will be used as a source of synthetic gasoline, which will nearly
double the CO2 emissions from driving.
Synfuel provides a poor path to energy independence because its provides no
protection from oil price shocks. Its price will go up and down with OPEC prices
just like the price of gasoline produced from domestic oil. Because of this and
because of its damaging impact on global warming, coal use should be discouraged
as heavily as oil use. In fact it should be discouraged in proportion to its
carbon content.
Fortunately, coal is cheap, costing under 1% of GDP (need value??), so even a
sizable surcharge on coal will have little impact on the economy. It would be
best to apply an "unTax" to coal, that is, a tax that is fully refunded. Why a
100% refund does not interfere with the incentive to conserve coal will be
explained in detail in Part 2 of this book.
Recent estimates of the total cost of a climate change remedy
put the price tag at
approximately 1% of GDP. To put this into perspective, DOE expects the cost of
energy as a percentage of GDP to decline from about 7% in 2004 (before the
current oil-price shock) to about 5.3% in 2030. Even in
DOE's high-cost
scenario, the cost of energy would decline to about 6% of GDP. So,
even with DOE's worst-case high energy prices plus the cost of a climate change
fix, with a buyers' cartel we should end up spending less on energy as a percent
of income than we do now.
But keeping costs down requires smart energy policy. This means letting the
market do what the market does best, and the government do what the market
cannot accomplish. This is not a new idea but rather one that has been gaining
steam slowly for a long time. In particular, the government is bad at picking
technologies. When it comes to industrial uses of energy, generating
electricity, making aluminum and such, the market is generally quite efficient.
On long-term consumer choices, such as home insulation and appliance purchases,
it has been shown that many consumers choose poorly. In these cases, specific
government programs can provide energy savings that have negative costs. That
means the cost of the conservation measure is less than the cost of the energy
saved. Smart energy policy will confront OPEC's market power, let high energy
prices do their job, refund those high costs, and help consumers with some
difficult choices. The result will be much like what the world accomplished in
the 1980s but with more staying power.
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http://zfacts.com/p/953.html | 01/18/12 07:26 GMT
Modified: Sun, 30 Mar 2008 19:50:28 GMT
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