In addition to the carbon tax and tariff described in the section on Climate Change, we support: 1) taxes on the local, state, and national environmental impacts of using coal, oil, and natural gas; 2) removing governmental impediments to nuclear energy; 3) expanding the Strategic Petroleum Reserve; 4) approving construction of the Keystone Pipeline, if Canada would still develop the tar sands in the presence of a $50/ton carbon tax; and, 5) federally funded basic research in alternative energy technologies. We oppose CAFE standards for cars and tax credits for specific technologies as inefficient when compared to taxes.
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Energy is a public policy issue because so much of the world’s inexpensive energy supplies are located in unstable and/or hostile nations and because energy consumption has environmental consequences.
We believe that the role of the federal government is to create an environment in which private firms and consumers see the benefits of developing new technologies and of changing their behavior to reflect society’s interests in terms of energy consumption and production.
This may entail government support for basic energy research. It may also entail taxes on energy consumption and production.
Whatever forms of incentives are adopted, they should not be the equivalent of picking technological winners. The government is ill-suited to perform that task well.
Taxes and U.S. Energy Policy
While we support the idea of implementing U.S. energy policy mostly through taxes on energy, we recognize that there is no perfect energy tax.
An Oil Import Fee
Taxing oil imports would discourage oil consumption and encourage domestic production. Unfortunately, it would affect imports from Canada, Mexico and Brazil in the same way it affects imports from Saudi Arabia, Venezuela, Iran, and Russia (in the case of Europe). The geo-political problems with oil are tied to the lack of diversity in the sources of oil supply globally, with so much of it being in the hands of unstable and/or hostile nations. An oil import tariff is a blunt instrument for dealing with this problem. The problems of unstable oil supplies are best dealt with through substantial strategic petroleum reserves under the control of the U.S. and our allies.
Environmentally Based Energy Taxes
We recommend separate taxes on the (non-greenhouse gas) pollutants that are generated from burning fossil fuels for electric power generation and in the mining of coal and to a lesser extent on the extraction of oil and gas. The exact levels of these taxes require a careful weighing of costs and benefits. Clearly, these environmental taxes would tend to have the largest impact on coal and somewhat lower impacts on oil and natural gas, since these are cleaner fuels.
Taxes on coal (and almost all forms of energy production) can be justified based on certain kinds of pollutants, like sulfur oxides, nitrous oxides, particulates, mercury, arsenic, lead, and other metals. The justification for these taxes is different from those on CO2 and other greenhouse gases, because the impacts are mostly at the local, state or national level.
Taxes on burning coal would be most efficiently levied at electric power plants, where the level of pollutants can be measured. This also gives the power plant owner the opportunity to avoid the tax with abatement technology. Taxes on the environmental damages of mining coal should be collected at the mine mouth.
It can be argued that these taxes would adversely affect U.S. competitiveness. Since the level of the taxes is intended to be proportional to the costs imposed on the U.S. of using these fuels, the taxes would be economically efficient and therefore justified, even if they were anti-competitive.
Promotion of Alternative Technologies
The approach, outlined above, seems to us to be a much better way to create an incentive for the development of alternative technologies than picking some to be favored through subsidies or tax credits and loan guarantees. This prevents us from overlooking some promising alternatives and wasting government funds subsidizing the fad of the moment. It marshals the power of the marketplace to achieve social objectives.
We believe that the government has a role in supporting basic research on alternative energy technologies, but that this role stops short of the development stage.
The Irrelevance of Resource Depletion as an Issue
One issue that often comes up when discussing energy policy is the depletable character of oil and other fossil fuels. This is not a legitimate reason for government intervention, since as these resources become more scarce their prices will rise and consumption will be choked off, all without the need for any kind of government intervention. In addition, the actual available resource base for fossil fuels is immense and the world is likely to stop using fossil fuels, because superior technologies will have replaced them, long before we run out of fossil fuels.
The Use of the Strategic Petroleum Reserve
We believe that the Strategic Petroleum Reserve (SPR) should be used whenever world political or military events disrupt supplies and temporarily push prices up. The argument that the oil is meant for strategic purposes and not to stabilize prices makes no sense. When the world oil market is disrupted by world events, the spike in prices is not in our strategic interest, it enriches many forces hostile to American interests and it disrupts our economy and that of our allies. We believe that the proceeds of the sale of this oil should be banked and used to buy oil on the open market when it is relatively cheap. It is possible that the best way to accomplish this objective would be to privatize the SPR. The unique characteristic of the SPR that distinguishes it from other forms of oil storage is its rapid drawdown capability. If these facilities were sold to private owners, it is likely that they would be used speculatively to build up the reserve when prices are low and sell it off when prices are high. Private ownership avoids the problem of the reserve being used for domestic political purposes.
Efficiency standards, like the Corporate Average Fuel Economy (CAFE) standards for motor vehicles, are a second best solution for encouraging energy efficiency. Energy taxes are a more efficient approach. The inefficiency of CAFE standards is easily illustrated by noting that the heightened standards had much less impact on energy use than expected. This was the case because the lower mpg engines lowered the cost of driving per mile, thus increasing the demand for driving, offsetting the benefits of more fuel efficient cars. A tax on gasoline would raise the cost of travel and provide an incentive for more fuel efficient cars.
Providing Good Price Signals to Consumers
The electric power generation market is essentially deregulated. The transmission and distribution markets, are, and likely will continue to be, regulated as public utilities. Unfortunately, consumers of electricity don’t see the prices of electricity from the deregulated power generation markets on a real-time basis. If they did, they would see that the cost of power mid-day during the peak summer air conditioning season is about four times the average price of power. The technology now exists to provide consumers with real time pricing of electricity. Taking this step would be a boon for the solar power industry because, roughly speaking, solar power peaks when electric power prices are at their peaks. It would also encourage consumers to cut back on usage during the peak price periods. Greater use of solar power and energy conservation during peak demand periods would have the additional advantage of reducing the need to increase transmission and distribution capacity at the expense of electric utility rate payers. The point here is not that real time pricing should be adopted because it favors solar, but rather because it better reflects the true economic costs of the power.
It was difficult to decide where to place a discussion of this issue. It touches on energy, environment, employment, and is tangentially related to fiscal policy, defense and the budget deficit. As such it provides an excellent example of why a centrist perspective is necessary. At this point, the issue may be moot because Canada, based on the the rejection of the pipeline by the Biden Administration, may well irrevocably commit itself to other alternatives for exploiting the Athabasca tar sands.
For those not familiar with the issue, the Keystone project is a proposed oil pipeline project that would run from the Athabasca tar sands in western Canada down to the refineries on the Gulf Coast of Texas. The Athabasca tar sands are deposits of oil trapped in sands. They represent oil reserves on a scale second only to those in Saudi Arabia. Until recently the cost of extracting the oil was too high relative to the market price of oil to justify development.
If one ignores the environmental consequences, development of this resource is a public policy “no-brainer.” It diversifies world oil supplies, putting a larger proportion of supplies in a stable, secure and friendly country rather than in the hands of unstable and often antagonistic sources. From an international trade point of view, it will lower world oil prices. From a strategic point of view, lower oil prices mean less money in the hands of Iran, Venezuela, and Russia, who use oil revenues to oppose U.S. interests.
The problem is that development, extraction, transportation and use of the Athabasca tar sands have negative environmental consequences. Some of these are similar to any other kind of oil development, but some of them are specific to the tar sands. In the case of the site-specific environmental costs, we believe these should be left to the Canadians to decide whether the benefits justify the costs. Some of the environmental costs of the project extend to the U.S. and the world as a whole. First, as with any oil pipeline there is a danger of spills and there is some environmental damage just from the existence of the pipeline itself. Second, there is the carbon footprint of the project. Opponents of the project argue that oil from the tar sands is anywhere from 5% to 15% more carbon intensive than an average U.S. oil development project.
Resolving the Issue
How the U.S. should come down on this project depends on a key issue of fact: Will the tar sands be developed in a timely fashion even in the absence of the Keystone pipeline?
If there is no Keystone pipeline, the development of the tar sands may go ahead anyway with the oil being sent to the Pacific Coast of Canada by pipeline and exported by tanker to Asia. If this is the case, the carbon footprint of this project is probably larger than Keystone, since tankers to Asia are much less energy efficient than a pipeline to the Gulf Coast. In addition, the environmental risk to the U.S. Pacific Coast is probably greater, in this case, than the risk to the U.S. from pipeline spills from Keystone, since pipeline spills are easier to prevent and contain than tanker spills. Therefore, if the tar sands project would go ahead anyway, it seems an environmental “no-brainer” that the U.S. should approve the Keystone pipeline.
In fairness, it must be pointed out that if the project will go ahead, with or without Keystone, many of the geo-political arguments in favor of the pipeline are also moot. This is true because most of the benefit comes from the impact of these increased supplies on the world oil market and not from the fact that the U.S. is importing them.
If the tar sands will not be developed in the foreseeable future without the Keystone project, the issue becomes a bit more complicated to resolve. In that case, the geo-political arguments for the overall project are central to the debate. The diversification of world oil supplies away from unstable and unfriendly sources and the positive effects of lowering oil revenues in the hands of those who are antagonistic to U.S. interests provide compelling arguments for the project. On the environmental side, it must be remembered that it is not the average environmental impact of other energy sources that the tar sands compete with, but the marginal source of supply that matters. The marginal source of supply for the U.S. is oil imports. As a consequence, the environmental dangers of pipeline spills must be weighed against those of tanker spills off our shores. As mentioned above, pipeline spills are easier to prevent and contain, so this issue actually favors the pipeline.
The sole substantive argument for opposing the pipeline is that, absent the pipeline, the tar sands would not be developed and that the tar sands have a higher carbon footprint than the marginal supplies of energy that the tar sands would displace in the world energy market. The best way to resolve this issue is to impose a truly global carbon tax. If the tar sands get developed despite the carbon tax, then they are an economically and environmentally superior option. In the absence of such a tax, we have to guess at what the market response to the tax might be and whether that response would include the development of the tar sands. In this context, it is important to remember that even if the carbon footprint of the tar sands is 5% to 15% worse than oil on average, the carbon footprint of coal is significantly higher than that of the tar sands. As a consequence, in the presence of a universal carbon tax, we would expect coal usage to decline and that this would be accomplished, at least in part, by increased use of gas and oil in electric power generation. This suggests that even from this perspective the Keystone pipeline is the superior alternative.
Based on this analysis, we have to conclude that support for the Keystone pipeline project, while not a “no brainer,” is good public policy.