America Should Have An Energy Policy – Yes, But What Kind Of Policy? There is the real danger of choosing a policy on the basis of wrong assumptions. In this case, the cost of failure would be too high

WASHINGTON“America must have an energy policy. It is a disgrace that the US –the largest economy on earth– does not have one” –argue energy sector experts. Indeed, in principle we should have an energy policy. But which one?

Energy uncertainty

We are now in an unprecedented era of energy uncertainty created by a mix of potential, yet dire, threats –global warming caused by burning fossil fuels being the most obvious– coupled with the debunking of earlier certainties. As you may recall, we were supposed to be running out of oil and gas. As it turned out, instead, we have plenty of both. (Remember dire predictions about America having reached and surpassed “peak oil”?)

Add to that mix other predictions that have not materialized. Again, you may recall that solar and wind were deemed to be “off the shelf”, clean, cost-effective alternatives to dirty carbon that is causing global warming. Well, it turns out that they were not. While much progress has taken place, renewables in many instances are still too expensive.

Plenty of oil and gas, but this may be a problem

Bottom line, here in America we have a lot more oil and (especially) natural gas than we thought, and this is good. But, according to most scientists, we are facing the prospect of planetary catastrophe that will be caused precisely by using the fossil fuels that we have.

That said, renewable energy, touted as the silver bullet that would save the planet, while creating an entirely new –and finally benign– economic sector, did not live up to its early promise. Indeed, while getting better, it is still too expensive.

What will Asia do?

If this is not enough to make you confused, we have to add a few other angles. Assuming that we want to diminish our reliance on fossil fuels, we know that our own effort by itself will not change the global picture. We need the largest countries in Asia, especially China, India, Indonesia, Pakistan, to come on board. If they keep burning dirty coal, the end result in terms of increased global warming does not change that much, whatever America will decide to do.

What about energy security?

That said, on a different, but possibly more immediate, level we have to consider energy security. For the time being we rely very heavily on oil and gas. Luckily America now has plenty of gas. We also have much more oil, (think about the Bakken oil fields, in North Dakota), but not enough. Therefore shouldn’t we try to get more crude from Canada, our ally, as opposed to getting it from OPEC?. Have you seen what’s going in Iraq, right now?

Well no, we should not get more high emissions, “heavy oil” from Canada, the global warming crowd screams. Therefore there should be no new pipelines carrying Canada’s crude to Texas refineries. So, better to run the risk of having supplies cut off by a conflict in the Middle East than taking some insurance by diversifying the sources of our oil supplies?

You see how complicated this gets?

What if we shape policies on the basis of wrong assumptions?

The real problem in shaping a comprehensive energy policy is that any major policy choice would have to be based on technology and cost assumptions that may prove to be wrong. And the risk in all this, given the enormous costs associated with any large-scale policy shift, is that if the assumptions are wrong, that’s capital up in smoke.

For example, the global warming crowd wants a public policy in place that favors renewable energy while penalizing carbon. You tax carbon while you mandate the use of renewables. If this were our national policy, such a regulatory environment would send a clear signal to the economy. “Drop oil and gas. Invest in solar and wind. That’s where the future is”.

All very well. Except that renewables are still too costly. And so we may end with clean but very expensive electricity, something that hurts the economy. This is precisely what happened in Germany and Spain. They bet heavily on renewables, and now their manufacturers complain about sky-high electricity costs.

And again, do keep in mind that mandating a rapid switch to renewables makes sense only if we are dead sure that global warming caused by burning fossil fuels is an absolutely certain fact.

Political pressures

To make things even more complicated, there are strong and conflicting political pressures. Energy production is still extremely expensive. Therefore, the various economic sectors that understandably want to protect their markets and/or their attempts to create new ones, are constantly pushing to preserve/improve their positions through public policies that include favorable taxation and regulation.

You see how problematic this gets? While having no policy seems foolish, embracing a policy on the basis of wrong assumptions and/or political pressures may be much worse.

Government: do less

In my opinion, this is what Government, both Federal and States, should do, in fact not do. First of all, do not pick any favorites. No winners and losers mandated by politicians influenced by this or that group. Do not impose any quotas for renewables.

If anything, do the opposite: try to create a truly competitive environment in which new technologies will have a fair chance to prove themselves, on their own economic merit. For instance, if in Arizona and New Mexico, states blessed with a lot of sunshine, solar solutions are better, so be it. Let solar companies come in and provide cost-effective electricity. But you do not want to impose solar plants in Alaska by regulation.

Preserve public health

Regulations should be restricted to the broadly shared imperative of preserving public health. Yes, whatever your opinions on global warming, we still want clean water and clean air. Laws and rules that mandate air pollution standards should be enforced. (I realize that there is now a huge open issue about the EPA’s powers to mandate CO2 emissions reductions that may shut down coal-fired plants. I would be in favor of restricting CO2 and other emissions only to the extent in which they threaten public health).

Support R&D in renewables

In all this, the Federal Government would be wise to strongly support new R&D in renewable energy. While we do not have final answers on global warming and on the future supply of oil and gas, it is obvious that fossil fuels are a finite resource. Therefore, it is smart to encourage more research on renewable energy. At some point we will need it, because we shall have exhausted fossil fuels.

And if more R&D in renewables will allow innovators to come up sooner rather than later with truly cost-effective alternatives to oil and gas, so be it. This welcome breakthrough will end the era of the carbon-based economies, and it will also mitigate the threat of global warming. Wouldn’t that be nice?


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