Save Energy? Raise Prices

It is puzzling that instead of focusing on cutting our energy waste, the most talked about energy “solutions” are invariably about increasing the energy supply.

"To address Russia’s out of control addiction to vodka, Premier Putin launched a massive program today to increase the production of whisky, rum and other alcohols. Whisky will receive a 53 cents per gallon subsidy and will be required to be blended with all vodka."

Absurd as this made-up headline may sound, it is a good description of the American energy policy. We consume and waste too much energy.  Europeans and Japanese consume half as much energy as we do and have shown convincingly that we could cut energy use by at least half without hurting our living standards.  It is puzzling that instead of focusing on cutting our energy waste, the most talked about energy “solutions” are invariably about increasing the energy supply. We have one of the most energy guzzling transportation systems. Here are three examples with  a supply-side theme that aim to bring even more fuel supply to transportation:

1. Corn ethanol and other biofollies: Even as the global population heads for a staggering nine billion, we not only mandate conversion of food into auto fuel, but we also subsidize it! As a result, food has become too expensive. Other victims besides the poor range from birds and wildlife in the American Midwest -- whose Conservation Reserve Program land has fallen to corn ethanol production -- to endangered orangutans in Southeast Asia.
2. Plug-in cars use electricity as auto fuel: More than 80% of pollution in electricity production comes from coal.  Coal is twice as dirty as gasoline. Getting rid of coal is one of the highest global warming priorities. But it ain’t happening for decades to come and we have not even started down that path.  With this backdrop, vehicles that effectively burn coal under the hood have no place on the road.
3. The Pickens Plan: T. Boone Pickens wants you to use natural gas (supplied by his company) in your car.  He was willing to throw in a few windmills in the package to get environmental support, but they seem to have fallen victim to the ongoing credit crunch.

As if we don’t burn enough gasoline in our cars, we also want to throw in food, coal and natural gas in our SUV tanks. Our energy policy is to basically increase the supply because that is what consumers want. When supply increases, consumption finds a way to increase. Consider the auto efficiency (CAFE) standards meant for reducing our gasoline use. History shows that when fuel supply is abundant, so are the CAFE loopholes. For example, electric cars are expected to get a 100 miles-per-gallon superefficient designation. Under the CAFE rules, when a car company sells an electric car, it can also sell a few SUV’s because the standards are met on an average. Talk about a loophole! (An electric car itself pollutes like a 20mpg SUV. Its high mileage rating comes about by ignoring the pollution from electricity.) Increasing the supply of even clean energy like wind or solar can end up having no environmental benefit if it just aids more consumption. Rutgers University has a very efficient cogeneration (combined heat and power) plant that saves large amounts of greenhouse emissions by using waste heat for heating and air conditioning.  There is no money to increase the cogeneration capacity, but the university is spending money on a highly subsidized, sexy but dinky solar array that is not as good as cogeneration in terms of emissions saved per dollar invested. Cogeneration efficiency can not compete with the PR power of a solar array because cogeneration is about reducing waste but solar energy is backed by the supply-side logic.  In the meanwhile, New Jersey keeps importing dirty coal electricity from other states that the cogeneration plant could have replaced with high efficiency clean electricity and heat. Our conservation hopes are tied to cap-and-trade, which will be difficult to get and will be riddled with escape hatches and giveaways for coal and ethanol. Cap-and-trade revenues will likely be frittered on these giveaways and feel-good subsidies for ineffective boutique renewables. Giveaways will come early in the game and escape hatches will come later when the rubber hits the road in the form of a looming emission cap. The right solution is to tie the cap-and-trade with auctions (or almost equivalently, a carbon tax) to sending every collected penny from it back to the people in the form of direct refund (or income tax reduction). The refund will cancel the regressive element of the auction/tax.  We should forget all our favorite subsidies in order to avoid giving away revenues from a regressive tax to rich operators who game the system. We are no good at the subsidy game. Large price hikes are needed to reduce emissions, but people will balk at them unless the money goes back into their pockets.  If the cap-and-trade revenues are diverted for other purposes including our pet energy “solutions”, it will be that much more difficult to lower the cap. Using cap-and-trade revenues to reduce the budget deficit may sound noble, but it is not in the environmental interest. Adapted from a piece published in the July-September issue of the Jersey Sierran.