I find myself taken aback, as my experience with the blogosphere is somewhat limited.  My experience is primarily as an academic, writing articles for refereed journals and books, as well as working papers, with an intention to make them carefully sourced and referenced.  A blog can consist of nothing more than a rant, and the comments appended to them often worse (and usually anonymous).  I will not however yield to the temptation to follow suit (even if our illustrious moderator would permit it, which he won’t).

Having put up approximately 20 posts on the subject of peak oil, it might be thought that Romm is an expert on the subject. But so far as I know, he has a grand total of one article on oil, his famed, “Mideast Oil Forever” Atlantic Monthly piece (co-authored with Charles Curtis), which is the source of his pride on the subject.

A careful reading of “Mideast Oil Forever” shows that his argument was not so much that prices would soar, but that global dependence on Middle East oil would soar, which has not happened.  My argument was that the forecast of rising Middle East market share was likely to be incorrect, and it was (see Figure), so that economic fundamentals would not imply ever rising prices.

Forecasts of OPEC Market Share from 1996/97

Which is a far cry from saying my forecast was wrong and Joe’s correct.  In my testimony, I specifically stated,

“The reality is that prices may go up in the future.  And Persian Gulf oil production and exports will rise.  However, the most likely scenario, given what we know about oil supply and demand and what we have learned about forecasting in the last 10 to 15 years, is that OPEC is going to be under continued pressure for at least the next 10 years, possibly for much longer, that they will be fighting with each other for market share.  And, it’s going to require some very substantial changes in the world to see prices rising.” (See my opening statement on pp. 127-128.)

Arguably, the price collapse leading to the rise of Hugo Chavez, the September 11 terrorist attacks and the Bush Administration’s decision to invade Iraq, are those ‘substantial changes’.  Certainly, not the soaring Middle East market share predicted by Romm.  (Since he downloaded the transcript of the hearing, it’s not clear how he missed this.)

And I allowed for this in my testimony, specifically commenting in my opening remarks, “But, I’m not saying there won’t be an oil crisis, because an oil crisis is a short-term political event. If there were a civil war in Saudi Arabia today, we would have a big oil crisis.  But, all I’m trying to say is that the crisis is not really related to the level of U.S. oil imports or the level of world oil demand.”  This is, in fact, what happened.

So What Happened?

Joe’s posts on peak oil include references to forecasts of oil prices hitting $175 by 2016 (a Deutsche Bank analyst) and $200 without a miracle (the IEA, as interpreted by Joe). He has also predicted oil will hit $100 by this coming June (which it might), which raises the question of why he wants to bet on $40 oil prices for the next few years, instead of something closer to what he expects….

And I responded to Joe by offering a wager with the price level at $65, whereupon he admitted (thank you) that “I do take Lynch’s point that the oil price is not definitive proof one way or another of the peak oil theory…” and commented that other factors could take the price down, such as a recession, before adding, “Yes, I’m sure many readers would love me to take this bet.  Not gonna happen.”  (Although he thinks that if prices are below $65 without some external event such as a major recession, that would disprove the argument oil production has peaked, which is also arguably incorrect).

So, to be accommodating, I suggested that we have a debate (and he could send a surrogate, if he wasn’t comfortable), adding that we change the bet to production itself, offering him what most peak oilers would accept as very generous terms, namely that non-OPEC production would rise by 2013 instead of decrease.  (Nearly all forecasters, not just peak oilers, are more pessimistic than that.)

Joe’s response was not completely coherent.  He reverted to the earlier bet on prices (as near as I can tell), said that betting on production was “meaningless and uninteresting”.  Perhaps, not being a physicist and lacking a Ph.D. and a blog, I don’t understand why betting on production levels would be meaningless in the context of a peak oil discussion, and some readers can enlighten me.  (Note:  all of Joe’s posts on the subject are in the peak oil category of his website and include the silly bell-curve “You are here” peak oil graphic, so he can’t claim that this isn’t about peak oil.  Well, he can:  obviously, facts shouldn’t get in the way of a good blog, to paraphrase Robert Wuhl’s ‘go with the story’.)

Do You Know Jack, Joe?

Romm’s refusal to debate should actually be taken as a point in his favor, inasmuch as he really doesn’t know much about the subject. Joe exhibits that wonderful quality of ‘expertiness’ (with apologies to Steven Colbert), in which he appears to be an expert, with many posts and comments on peak oil, was an Acting Assistant Secretary of Energy, and has a Ph.D. in physics from M.I.T., a noble institution (and my alma mater), but these are all misleading. I will address the evaluaton of qualifications later, but point in fact, Joe has a grand total of one publication on oil, in a non-referreed journal, and that relies primarily on the US Department of Energy for its information about oil. Nothing in his background suggests he is familiar with oil or oil supply, and his posts on the subject display a marked ignorance.

So, What Are We Left With?

Joe Romm posts a challenge to me on his peak oil website section (but doesn’t inform me of it), and then slams me on the Huffington post, except:

His criticisms of me are misguided, bragging about his prediction that oil prices would rise because of soaring reliance on Middle East oil, which did not happen, and he says I predicted prices would stay low for a lengthy period, when in fact, I acknowledged that oil prices could rise with supply disruptions.

He says he won’t wager on prices, because external events can affect them besides peak oil, then declines a bet on production by demanding a bet on prices.

He closes the page to comments, while stating that I refused the bet, which is untrue.

Others are welcome to clarify my interpretation, by looking at his posts here, specifically numbers 1, 29–31, rest are pretty much wasted space.

So, my suggestion is that if Joe doesn’t believe in peak oil enough to either wager on the subject or debate it publicly, perhaps he should either exclude the subject from his website or admit he is only passing on third-partly information, which he believes in because he ignores all contrary points of view and denounces those who hold them.  Of course, that sounds more like how the Catholic Church responded to Galileo than the pose that a scientist should hold.

Their message– ZIP is “FREE, CLEAN, AND GREEN”–sounds great! Oh yes, and for good measure, ZIP will create oodles of jobs.

So the basic question is this: exactly what do we do before we allow these people and their new product on the electric grid?

We wouldn’t be so gullible to just take their word for it, would we? Yet this is exactly what we are doing today!

And there is more: our politicians are so enamored with ZIP that they tell these promoters that we will not only allow them on the grid, we will FORCE utilities to use ZIP. (Hmmm. Wouldn’t utilities WANT to use ZIP if it was so great?) How are utilities going to be forced to use ZIP? Lobbyists have sold our politicians a clever tool called the Renewable Portfolio Standard (RPS) to do just that.

Yet there is more. Despite the supposed benefits (which a free market would obviously jump on without government involvement), our wise government is going to offer the ZIP promoters billions of dollars of taxpayer money and ratepayer guarantees to support their product.

Remember, all this is without independent proof that ZIP has any real benefits…

Sadly, this astounding state of affairs is how our currently lobbyist-driven system operates.

Policy Proposal for the Environmental Left

The Left looks to government to do good things for the environment. My Pollyanna vision is that complex technical matters should be solved by science. So here is my (government-involved) proposal (with apologies to the libertarian bloggers and readers of MasterResource). It would go something like this…

A. The Zephyr Power promoters would be sincerely thanked for their efforts, and asked to submit their information to a federal energy agency that would be roughly equivalent to the FDA. Let’s call it the EAA (Energy Assessment Agency), which would have some similarities to the former Office of Technology Assessment (OTA). The EAA would do one thing: make a scientific assessment as to whether or not ZIP met the standards of our existing sources of electrical power.

B. “Scientific” means that there would be a comprehensive, independent and transparent evaluation of the merits of such proposals, like ZIP.  It would be up to the promoters to provide whatever information is needed for a proper assessment (just like pharmaceutical companies are required to do for the FDA).

C. All new industrial electrical power sources would be scientifically evaluated in three areas:

       1) technology,

       2) economics, and

       3) environment.

Again, they would be compared to verify that they meet (or exceed) our existing options. (Why would anything be approved that was an inferior choice?)

D. If ZIP passes with flying colors, then (and ONLY then) will it be allowed on the grid, and supported (as appropriate) with public funds.

That’s it!

My proposed reform (call it science-and-reality-based) is a radical departure from the politically (lobbyist) driven approach we now use. The end result (assuming good government) would be profoundly different — not only making real contributions to the energy and environmental issues we have, but in truly benefiting citizens and businesses. Yet our current system is so dysfunctional and corrupt that we are supporting sources that fail all three evaluation areas.

For instance, a key consideration in the Technical part, is the impact of any proposed new source on our existing electrical grid.

Carefully consider this question: “Compared to our other alternatives, name one consequential benefit that wind energy provides to our electrical grid.”

I am aware of some serious grid liabilities of adding wind energy, but zero benefits — but please correct me if I’m wrong. So it’s our choice: throw away hundreds of billions to support lobbyist agendas, or take a scientific approach and get an enormously higher bang for our buck.

The fact that this report appeared in the Guardian, which has published questionable articles on peak oil, is suggestive.

First and foremost, one is tempted to conclude that this story represents poor reporting, bringing to mind an earlier Guardian story claiming that Fatih Birol, the IEA official in charge of the World Energy Outlook, acknowledged peak oil. It turns out that Fatih was misquoted. And while I might be biased, considering Fatih a friend, the nature of the present story is close to ridiculous, rather than misleading. (Sadly for him, Birol is often a lightning rod for any disagreement about energy forecasts.)

This is a long-standing problem with peak oil advocates, many of whom misrepresent comments as agreeing with them.Colin Campbell often refers to those who ‘acknowlege’ peak oil, and Robert Hirsch mistook concerns about the end of so-called ‘easy’ oil as admitting to looming peak.

In a similar vein, Jeremy Leggett (mistakenly) crowed when asked whether he had expected to win a debate vote on the motion that  Peak Oil Is No Longer a Concern. “No way! I thought I’d be lucky to get 10% of the vote,” he said. Of course, what he doesn’t explain is why peak oil’s being a “concern” equates to the idea that peak oil is near or a serious danger. (Someone buy that man a dictionary!)

Shocked to Discover Gambling at this Establishment!

The Guardian’s implication that the oil reserve data are inflated apparently refers to the breathless discovery in the mid-1990s by peak oil advocates like Colin Campbell that Middle East oil reserve data are less than reliable. In fact, in 1981, M. A. Adelman presented a paper to the National Research Council on the decline in oil reserve data. Economists not familiar with the oil industry sometimes mistakenly assume that such dataseries are reliable, but for geologists to make a similar mistake is almost criminal.

And of course, there is the bizarre implication that the predictions can be more than educated guesses (or judgmental forecasts), no matter how scientific the source or methods. The Guardian’s (unnamed) source says:

The 120m figure [for 2030] always was nonsense, but even today’s number is much higher than can be justified and the IEA knows this.

As I have shown repeatedly, forecasts have a useful life of somewhere on the order of 2–3 years, and while the 120 mb/d forecast for 2030 might be wrong, to consider it ‘nonsense’ with such authority shows a degree of credulity one rarely finds in these times.

A second, unnamed source goes on to warn “We have [already] entered the ‘peak oil’ zone. I think that the situation is really bad,” which implies a degree of ignorance that is astounding. At present, there is approximately 5 million barrels per day of shut-in capacity in OPEC, owing to the recession and to competition from non-OPEC countries. Nigeria, Iraq, and Venezuela between them are planning upwards of 5 million barrels per day of new production; both East and West Africa are seeing new production zones being appraised; the Brazilian presalt is likely to rival the North Sea; and this excludes the Bakken Shale, natural gas liquids, etc.

How informed is the reporter? Consider his closing comment: “But as far back as 2004 there have been people making similar warnings. Colin Campbell, a former executive with Total of France told a conference: ‘If the real [oil reserve] figures were to come out there would be panic on the stock markets … in the end that would suit no one.’” In fact, Campbell first predicted that 1989 was the peak (in 1989) and has issued numerous warnings of an imminent peak since then, most of which have already been passed.

The real story is that despite a lot of government obstacles, which postpone oil production to the future, we are running into oil, not running out of oil. The hydrocarbon age in a physical sense is still young.

[Editor note: Ken Green was a Working Group 1 expert reviewer for the United Nations' Intergovernmental Panel on Climate Change (IPCC) in 2001]

For weeks now, we’ve been hearing an odd refrain from the Democrats who are pushing hardest for the Waxman-Markey climate bill. They are determined, it seems, not only to have such a bill drawn up before Copenhagen, but to have it signed into law. At the same time, the EPA is widely expected to issue its endangerment finding for greenhouse gases, triggering what will undoubtedly be a hotly disputed regulatory process.

President Obama, it is reported, wants to sign climate legislation before the critically important Copenhagen climate conference in December. And Senate Majority leader Harry Reid wants the President to sign a climate bill this fall as well.

They both have plenty of company in the “act first, think later” brigade.

A New York Times article shows the sense of urgency:

“I think we’re still a ways away from a final agreement which will lead to a bill,” Sen. Robert Casey (D-Pa.) said during an Aug. 11 teleconference with United Steelworkers President Leo Gerard. “But we have, I believe, at least on the Democratic side, a significant consensus on the urgency of — the need for a climate change bill — the urgency to get it done this year, as well as, I think, a good bit of consensus, even region to region, that the House was able to work out accommodating a lot of different interests in their bill.”

Sen. Arlen Specter of Pennsylvania, another Democrat seen as instrumental in moving the climate bill, said he planned to back Reid and President Obama in advancing the cap-and-trade bill.

At an Aug. 14 conference in Pittsburgh, Specter said he generally would support cloture — or cutting off a Republican-led filibuster — on everything from climate to labor and health care bills.

Senate Majority Whip Dick Durbin (D-Ill.) told Bloomberg Television on Aug. 10 that the U.N. climate conference was one driver for fall or winter action on the climate bill.

“The president has urged us to do this so that we’ll have credibility at Copenhagen,” Durbin said.”

Agriculture Secretary Vilsack, and Commerce Secretary Gary Locke are also on board. As Reuters reports,

“The United States needs to set a very firm and clear example if we are to be successful in getting the other countries to be equally aggressive in addressing climate change,” Locke said.

Vilsack warned against delays for the climate bill.

“How are we going to be able to move other nations in the same direction we want to move on trade issues or on fighting extremists if we can’t deliver on climate change, when the rest of the world is moving forward?” he asked.

What’s fascinating here is the implication of this rush to get legislation signed into law before Copenhagen. Normally, when one is going into negotiations, one wants to have some leverage to use to gain cooperation and compromise from other parties. Thus, one could see the Democrats wanting legislation passed through the Congress, but UNSIGNED by the President, as a negotiating lever for the Copenhagen talks. Similarly, one could see the President telling his EPA administrator to hold off on their endangerment finding, again, to create leverage in Copenhagen. Alternately, if the Senate held off on passing a bill, the Obama negotiating team in Copenhagen could play “good cop/bad cop,” with the House acting as “good cop,” having passed legislation, while the Senate, which has previously derailed climate policy acting as “bad cop,” waiting to see what China and India do.

But instead, the Obama Administration and their Congressional supporters are hell bent in pre-emptive capitulation at Copenhagen, going into negotiations having completely stripped themselves of leverage by having set either a legislative or regulatory process (or both) in motion that, under the U.S. legal system, is likely to be irreversible.

The only way to make sense of the Democratic strategy is to suppose that the Democrats believe that Copenhagen will fail, that China and India will not sign onto meaningful emission-reduction efforts, and that in the post-Copenhagen environment that would ensue, it would be more difficult – if not impossible – to pass a cap-and-trade scheme at all.

Try to imagine a “post-Kyoto world” without a replacement for the (failed) Kyoto Protocol:

1. Neither the public nor the Senate will buy unilateral U.S. action to reduce greenhouse emissions, meaning that the prospects of cap-and-trade in 2010 and beyond grow very dim;
2. As hopes for a Gore-style “wrenching transformation” fade, more mainstream scientists and opinion-makers will become more “practical” toward the issue, meaning that alarmism may give way to sensible assessments of mitigation, adaptation, and geo-engineering; and
3. Exploding emissions from China and India will make developed world emissions less and less important, a fact that will become relevant in future domestic efforts to impose curbs on greenhouse gas emissions.

The end might be in sight for the mighty effort of the environmental left to put a cap on capitalism by capping carbon. What will this mean for the Malthusian worldview? We can only wait and see.

ADDENDUM (9/1/09)
Joe Romm, at Climate Progress, not surprisingly disagrees with my thinking that we’ll have a bill signed by December. According to Joe,

“Now it is officially impossible to imagine a Senate vote before November. And I’d say it’s now at most 50-50 the vote isn’t until December or January, which would put a final bill, conferenced and passed again by both House and Senate, on Obama’s desk maybe in March.”

On the other hand, he seems to agree that holding off on signing such an agreement would help lever China into accepting binding emission-reduction plans, writing:

“Now I’m told by a non-government source who spends a lot of time talking to the Chinese about climate and clean energy that China is prepared to make such an announcement, but probably not until Obama visits the country after the APEC meeting in mid-November. If this is true, then administration and Senate leaders should delayed a final Senate vote until after that.” And

“I see little point in a final Senate vote before China spells out at least some of what it is planning to do.”

While Joe has some valid points in his post, I still think this could play out either way. As Joe and I agree, there’s only one shot at this. The question is, does that shot have to be taken before Copenhagen, or can it be taken afterward?

 The Senate is considering similar legislation in the form of S 949, “The 21st Century Energy Technology and Deployment Act,” but it would go further and also allow indirect subsidies as well, including securitization, indirect credit support, the acquisition or selling of debt or interest in the debt; and secondary market support through lending on the security of debt.  That bill will likely be passed by the Senate Energy Committee this week as part of a larger energy bill titled ”The American Clean Energy Leadership Act.”

Consider subtitle J to be “exhibit B” in the case against Waxman-Markey (“exhibit A” in that case can be found here) and yet another bit of evidence that politicians suffer from short-term-memory syndrome. Few seem to recall that the federal government has tried variations of this idea time and time again and has little to show for all the billions of tax dollars squandered, save for long-forgotten reports documenting said squandering.

But before we get to that, let’s look a bit more closely at what exactly is being proposed.

The clean energy bank, which would go by the name “The Clean Energy Deployment Administration” (CEDA) is being sold to the Left as a means to pump yet more billions of tax dollars into the development of renewable energy. Both the House and Senate versions of the bill, however, include nuclear power and coal in their definitions of “clean energy technologies.” There are no stipulations regarding the mix of projects in the CEDA portfolio in the Senate bill, meaning that the most capital-intensive projects, such as coal-to-liquids and nuclear power, could well get a majority of the banks funds. The House bill, however, prevents any one technology from claiming more than 30 percent of the financial support available.

The suspicion that this is a nuclear subsidy project under the guise of a conventional “green” energy project is given substance by the fact that the House bill says that “conditional commitments” can be given to projects that do not have licenses. And what do you know … new reactor applications will not complete the Nuclear Regulatory Commission licensing process before 2012.  The House bill does require that all necessary licenses and permits are obtained before the loan guarantee agreement can become final.  The Senate version does not contain even this provision.

How much money we are talking about here is unclear. The Senate bill is accompanied by an initial $10 billion disbursement from the Treasury, while the House bill leaves initial appropriations to a subsequent appropriations bill. But that’s not the best metric by which to judge potential costs. The Senates bill grants CEDA the authority to hand-out as many loan guarantees as it wishes, as long as a certain amount of the monetarized risk associated with default (so-called “subsidy costs”) is paid for up-front by borrowers. The OMB will decide what that cost is, but the model employed by the OMB to determine subsidy costs is opaque and poorly understood. 

The upshot is twofold.  First, the Senate bill quite literally puts no limit whatsoever on taxpayer commitments – none!  The bank itself will decide the extent to which the taxpayer will be put at risk.  Second, if the subsidy cost for any of these technologies is under-calculated under either bill, the potential taxpayer exposure is quite literally unlimited. This is no idle worry; both the Congressional Budget Office and the Governmental Accountability Office argue that, in practice, subsidy costs are far more likely to be underestimated by government than overestimated.

Four Arguments Against Pickings Losers Winners

Both bills require that commercial lending for prospective recipients be insufficient as a condition for public support. While that seems reasonable enough (why commit public dollars when private dollars are available?), this stipulation means that taxpayers will only be parking money in projects that no private investor is willing to invest in. This raises a few rather important questions (questions explored more fully, by the way, here).

First, how many meritorious investments are there in the energy universe that are being suboptimally funded by private investors? Unless the economy is in a state of equilibrium (that theoretical state of economic nirvana that will probably never be achieved in the real world), we know that the number is above zero. But that doesn’t mean the number is necessarily very large.

Prior to the recession at least, the near universal complaint among green energy investors was that there were far more dollars chasing green energy investments than there were good green energy investments to soak up those dollars.  Investment in renewable energy and energy efficiency totaled a whopping $155 billion worldwide in 2008 ($30.1 billion in North America alone) – more than the $110 billion invested in conventional energy over that same period.  Although green energy investments worldwide have plunged to $13.3 billion in the first quarter of 2009 (53 percent below the first quarter of 2008), that’s still a fairly arresting total, given pre-boom norms.  The overwhelming majority of those dollars, moreover, come from the private sector.  

The point here is that there is plenty of money being devoted to renewable energy and energy efficiency at present.  It’s not as if that sector of the economy will be starved, absent some new federal clean energy bank. 

Second, how likely is it that this clean energy bank will be able to reliably find the overlooked meritorious investments in the ocean of investment opportunities that lack merit? Keep in mind that the best informed and most motivated economic actors in the private sector have allegedly overlooked those investments, so identifying them is clearly not so easy. Also keep in mind that clean bank officers are unlikely to have as much expertise or incentive as private economic actors in the course of going about this task.  In short, the Congress is entrusting billions of taxpayer dollars to a fund charged with second-guessing the investment decisions of people better qualified and more highly motivated than those charged with doing the second-guessing.

Third, to what extent will politics influence the decision making at the clean energy bank? In an ideal world, none at all; investments would be based on assessments of merit only. But in the hyper-political world of Washington, where politics infects virtually every governmental act of consequence, investments will not be made entirely on merit (see, for instance, ethanol). To the extent that political considerations play a role in deciding whether to support this technology or that, this firm or that, or this region or that, decisions are less likely to be based on merit and thus more likely to prove faulty.

Economists Linda Cohen and Roger Noll find that political considerations are so pervasive that publicly funded energy research and development has historically been a hopeless endeavor.  In their review of the matter published some time ago for the Brookings Institution (tellingly titled The Technology Pork Barrel), they concluded:

The overriding lesson from the case studies is that the goal of economic efficiency – to cure market failures in privately sponsored commercial innovation—is so severely constrained by political forces that an effective, coherent national commercialization R&D program has never been put in place. The internal incentives within government organizations, the absence of a financial bottom-line, and the difficulty of measuring output work together to produce inefficiencies in government.

Fourth and finally, what evidence do we have that underinvestment in energy is a more serious problem than underinvestment in some other sector of the economy? Even if a clean energy bank could identify meritorious projects and fund them accordingly, money dedicated toward that end might be better spent elsewhere. For instance, if proponents of the clean energy bank are correct that a general “credit freeze” has starved meritorious clean energy investments of needed funds, the same complaint could be made for nearly every other sector of the economy.  Given that public funds are not unlimited – even in the age of Obama – we need evidence that the economic gains that might be secured by a clean energy bank are greater than those that might be secured from loans and subsidies to other sectors of the economy.

Conclusion

Hence, while it is likely that a clean energy bank could in theory improve economic efficiency by using federal tax dollars to support suboptimally funded clean energy investments, it is extremely unlikely to do so in practice. Past experience bears this out. There is absolutely no evidence – none! – that public expenditures on non-defense energy R&D has ever produced economic gains on balance.  As Thomas Lee, Ben Ball Jr., and Richard Tabors put it in a review of energy policy for the Harvard Business Press: 

The experience of the 1970s and 1980s taught us that if a technology is commercially viable, then government support is not needed; and if a technology is not commercially viable, no amount of government support will make it so [emphasis in the original].

So what arguments are being forwarded by proponents to convince us that, this time, we can overcome the theoretical difficulties associated with a clean energy bank and the desultory results from previous stabs at this sort of thing? None whatsoever. The public case for the bank is divorced from any real consideration of the nature of the market failures allegedly at issue, any awareness of the dynamics that often lead to government failure to correct the same, any attempt to wrestle with past experience, or for that matter, any grown-up conversation at all.  See, for instance, these utterly vapid arguments for the bank from John Podesta.  All we hear are naked assertions about clean energy technologies being underfunded and off to the races we go with a government program that will right all wrongs and cure all ills because government, after all, has built roads and canals, established the TVA, won WWII, and created the Internet.

There is always the possibility that sheer chance will result in some public dollars going to worthwhile energy enterprises. But blind luck and politics is about the only thing that the bank has going for it.

As was widely predicted, Waxman-Markey has degenerated into little more than a special-interest pork-fest, where the political system is getting ready to give away at least 85% of the valuable emission permits to favored energy constituencies such as electrical utilities, university researchers, low-income households, renewable manufacturers, anti-deforestation programs, and so on. The Obama administration’s pledge to auction off 100% of the emission permits was a joke on the face of it: virtually all emission trading programs feature extensive “grandfathering” of polluters and favored constituencies.

Principled environmentalists have turned their guns on what has emerged. Michael Shellenberger of the Breakthrough Institute, in particular, has explained that it’s not only the trade elements of Waxman-Markey that are bogus, it’s the cap as well. It turns out that under Waxman-Markey’s byzantine provisions, “carbon emissions in regulated sectors of the U.S. economy [are] to rise at business as usual (BAU) rates through 2030.”

Here is his explanation and challenge to we’ll-take-anything environmentalist groups behind Waxman-Markey:

But whether or not you believe the legislation would result in lower emissions, there appears to be universal acknowledgement that various provisions in Waxman-Markey — including but not limited to off-sets and the strategic reserve pool— prevent the “cap” from being binding. Given this, Waxman-Markey cannot be accurately referred to as establishing a “cap” on U.S. emissions, much less a “binding cap.” Probably the most accurate term is “non-binding cap.”  

Waxman-Markey advocates have offered reasons why they believe the high levels of allowable emissions in Waxman-Markey should not be a concern: a) a 17% reduction in emissions targeted in the bill will be easy and inexpensive to meet, thereby obviating the need for firms to purchase offsets in lieu of reducing their own emissions; b) there aren’t enough legitimate offsets available to replace mandated emissions reductions; c) there are other provisions in the legislation, such as renewable energy standards and efficiency standards, that will ensure that targeted reductions are achieved even if the “cap” allows emissions to increase.

While these assertions are debatable, none refute the fact that the “cap” in Waxman-Markey would not legally mandate emissions reductions in regulated sectors of the economy for at least two decades. Instead of capping emissions the legislation sets a “target” of 17 percent reductions by 2020. But a “target” is not a “cap” and the two terms are not interchangeable.

It would also be inaccurate to say that the legislation “would mandate emissions reductions” since firms would be able to increase emissions if they purchased off-sets. And it would be inaccurate to say that the legislation “would reduce emissions” since the reduction of the emissions is by no means guaranteed or even mandated. A more accurate way of describing the legislation as a whole (though not the “cap and trade” provision) might be that it “aims to reduce emissions” or something like that.

Most analysts agree that Waxman-Markey will establish some price on carbon, albeit one that will be highly constrained by free allowances, offsetting allowed above the cap, and the strategic reserve auctions, which explicitly limit how high the carbon price can rise. There is disagreement, however, as to a) what the carbon price would be, and b) how many emissions reductions, if any, these carbon prices would achieve. Whatever your view, these are projections based on various assumptions — the behavior of firms, the future price of low-carbon energy, the potential for efficiency and conservation, the availability of off-sets, etc. They are not guarantees of reductions.

Whatever emissions reductions result from Waxman-Markey will be determined by the various cost-containment mechanisms described above, and the non-cap provisions in the bill, not the “caps” and targets that have dominated most of the debate and press coverage of the bill since it was marked up last month.

I assume that this is something that everyone committed to an accurate description of Waxman Markey would agree with. But in case I’m missing something, I’ve cc’d NRDC and EDF staff, the lead advocates of Waxman-Markey, in case they think there is a more accurate way of describing what we are reading as a non-binding cap that would aim to reduce emissions.

Waxman-Markey  shows one thing clearly: Congress is capable of crafting a bill that is far worse than even the most pessimistic policy analyst could ever envision. There is not only “market failure” but “political failure” in the policy response, requiring the public policy community to balance the two in any policy prescription lest “analytical failure” join the other two.

Impacts of Restrictive Government Policies on Oil and Gas Production

Previous estimates of the impact of a Windfall Profits Tax on domestic oil and gas output have varied by assumptions on cost of production, oil prices in the future, and even the presence and size of secondary impacts from oil and gas production. One “clean” estimate (no secondary impacts) published last year gave probable 20-year impacts of a Windfall Profits Tax in the range of $300-800 billion, depending on the price of oil and how much production is reduced, among other assumptions. Another analysis, with greater scope and ambition, estimated the fiscal impacts of restrictions on oil and gas production at more than $1.7 trillion, including the economic impacts on communities.

Now that a “sort of” Windfall Profits Tax is back on the table, in the form of a $31.5 billion (over ten years) tax increase on oil and gas production, it is useful to figure out what the costs and benefits are from different approaches. Fortunately for us the EIA has done most of the heavy lifting. They have produced 20-year production and price forecasts with and without production incentives. Moreover, they have even taken away from us analysts the arbitrary element of price by providing a “consensus” price forecast for both oil and gas.

The EIA forecasts of “trend” (without restrictions) and “low” (with restrictions) oil and gas output shows that by 2015, about the time current investments in production could be expected to start showing results, show that current administration policies will probably lower oil output by some 700,000 b/d (roughly 10%) and gas output by 4%, 2.3 billion ft³/day. Such reductions in output are virtually locked into place given the time required to bring upstream investments to fruition. Indeed, by the end of President Obama’s current term in office, restrictions put in place by this administration will likely reduce future oil output about 1.32 million b/d (15.4%) and gas by 8.9% (4.6 billion ft³/d) annually.

By 2030, restrictive policies, if carried forward, will have the effect of lowering oil production in the US by just over 3 million b/d (~28%) and gas by 30% (15 billion ft³/d). In case you are wondering: The gas-production reduction number is equivalent to about 25 gas liquefaction trains (LNG), and to replace the production would require about 35-40 LNG receiving terminals in the United States. In other words: About twice as much LNG as is currently produced or planned for in Qatar, the world’s largest source of LNG, would be needed to replace the fall in U.S. domestic gas output. And just think what that will do to the price of LNG!

So, How Much Is This Great Future Going To Cost Us?

Just as the EIA has given us a set of production forecasts to work with, so have they given us some price projections. Moving from current price levels, oil is projected to reach $130/bbl in 2030, certainly a modest projection given some of the more histrionic forecasts of the recent past. Gas movements are not as great, since transport costs are more important for natural gas than for oil. The projected year 2030 Henry Hub price is $8.17/mmbtu.

With no changes in federal tax policy for corporate profits (you have to start somewhere), and with royalty rates staying at current levels (but paid in money, not in kind), federal receipts from upstream oil and gas operations should fall by $118 billion by 2019 ($87 billion if the tax increases on oil gas are fully effective). By 2030 the cumulative reduction in federal take from the oil and gas industry will be more than $780 billion under current administration policies. In fact, the loss of federal revenue in 2020 alone will be more than 10% greater than the total expected take from the administration tax increases over its ten year lifetime. By 2030 the annual loss of federal revenue will fall into the range of $70 billion.

This analysis is extremely conservative in its assumptions. Losses to states, probably in the range of $100 billion through 2030, and the beneficial economic effects of job creation and expanding supply chains in the upstream industry have been ignored here (but not in the ICF study).

Restrict Today, Repent Tomorrow

1998 Photograph of IMF Managing Director Michel Camdessus observing President Suharto of Indonesia signing an IMF agreement.

Even in the EIA’s unrestricted forecast, domestic oil production does not quite get to 60% of projected 2030 demand. So the idea that dressing in the barbed wire of production restrictions could be good for us, even if we are broke and running unsustainable trade deficits, seems to run counter to the common sense of reasonable cost oil supplies for domestic markets. For gas, the justification for additional production restrictions is even more absurd; given that gas is certainly the cleanest transition to high tech energy sources of the future. Restricting its availability not only costs money, about $19 billion through 2019, but also puts our energy supply at the mercy of every neighborhood organization in the country that fears an LNG regasification plant in the county. There are only so many such facilities that we can plant on the Baja “energy farm” in Mexico.

At some point our creditors will also pipe up – suggesting gently or not, that we effect an attitude change about extractive industries given our burgeoning national debt, a great deal of it attributable to restrictions on domestic oil and gas production. Perhaps before we get the full IMF (International Monetary Fund) treatment from China and other creditors demanding a loosening of restrictions on oil and gas output (and perhaps suggesting that the creditors’ companies be the ones to undertake those activities), we should think a little more about funding our own nights out in New York.

“Alaska Gov. Sarah Palin (R) has announced an ambitious plan to produce half of the state’s electricity from renewable sources by 2025. Palin’s plan, which empowers local municipalities to identify and develop the most cost-efficient renewable power sources available to them, won immediate praise from environmental groups, consumer groups, and industry.”

This article is yet more evidence that the inexplicable conservative love affair with Sarah Palin remains unrequited—at least, when it comes to economic policy in general and energy policy in particular. But Republicans, as the kids might say, “She’s just not that into you.” Let’s examine the litany of problems with Plain’s approach to energy.

General Considerations

First, how does Sarah Palin (or anyone else for that matter) know a priori that the best (that is, the most efficient) electricity sector in Alaska is one that will deliver 50 percent of its energy from renewable sources in the year 2025? No analytics whatsoever have been forwarded to back this number up. No reason is offered for rejecting 46 percent, 38 percent, or for that matter, 65 percent or any other figure. The 50 percent goal, put bluntly, simply sounds good to voters (and thus, to politicians), which is a one very good reason to be suspicious of that goal from an economic perspective.

Second, let’s pause a moment on the title of the document at issue; Alaska Energy: A first step toward energy independence. Has it not occurred to Sarah Palin that if energy independence were so wonderful, no one would buy Alaskan oil and gas outside of Alaska? If dependence on energy imports is an economic poison, then Sarah Palin is both a pusher and a prohibitionist.

The point is not that Sarah Palin is being a hypocrite. The point is that the governor of all people should realize that if it’s cheaper to buy energy from a supplier that comes from out-of-state, then it makes sense to buy from that supplier and not from the fellow selling more expensive energy in-state. If that weren’t so, the Alaska state government over which Sarah Palin presides would have only a fraction of the dollars to spend relative to what it has to spend at present.

Third, consider the plan’s goal: “to reduce the cost of energy to all Alaskans through deployment of energy technologies that are vertically integrated, economic, long-term stably priced, and sustainable.” Only one of those four criteria for energy makes any sense. Let’s look at them one at a time.

Vertically integrated power - Why is Alaska so hell-bent on vertically integrated power? While I’m one who thinks that the case for vertical integration in the electricity sector makes a lot of sense, I’m not sure why the state should—or needs to—rule out the provision of vertically de-integrated power. If the electricity in question is otherwise “economic, long-term stably priced, and sustainable,” then what difference does it make if it is supplied by vertically de-integrated power companies or not?

Economic Power – “Economic” power is all well and good, but can’t the private sector be relied upon to gravitate toward lower-cost sources of energy without state mandate? After all, the cheaper it is for plant owners to generate power, the more profit they can make. There is simply no obvious need for the government to lift a finger if economic (in the sense of “low-cost”) energy is the goal . . . a point implicitly made in passing in the report (p. 46 to be exact).

Long-Term, Stably Priced Power - The case for “long-term stably priced” energy is far weaker than one might think. The reason generation costs vary from year to year is related to the cost of fuel. Generators with low and stable fuel costs—say, nuclear power facilities, dams, and wind and solar power plants—have generating costs that don’t vary much. But because they are very capital intensive, the levelized cost of power (roughly defined as [construction costs + operation costs + maintenance costs over the lifetime of the facility] / total energy produced) is generally higher for those facilities than for plants with more variable fuel input costs (coal and natural gas). Question: Are relatively high but stable generating costs economically preferable to relatively low but more variable generating costs? Answer: sometimes they are, sometimes they aren’t.  If buyers were willing to pay a premium for expensive but stable energy supplies, then market agents would supply that energy.  Alas, electricity consumers are seldom interested in such deals.

Even so, “stable prices” are a function of several things beyond the cost of producing the energy in question. It is also a function of the availability of energy and the demand for the same . . . and neither of those two things is answerable to the state. For instance, dry periods mean that hydropower is less available even if the costs of generating that power remain stable (note – it was a dry spell that shut down a vast amount hydroelectric power supply and triggered the events that led to blackouts in California back in 2000-2001). Likewise, a surge in demand as a consequence of economic growth or a drop in the same will have a big impact on energy prices if those prices are freely set in the market place. Hence, “stable prices” are also a call for energy supplies less vulnerable to disruption and generators that can be built on short notice to accommodate demand surges . . . and renewable energy underperforms relative to fossil fuels on both of those fronts.

Sustainable Power - The goal of “sustainable” energy is silly. First, it is vague; must the energy source in question be available forever or just for a long time? Second, it is economically counterproductive. If the oil fields in Prudhoe Bay, for instance, have a production life of only a few decades, that means they are unsustainable sources of supply but that doesn’t mean they are not worth exploiting. If Alaska eschewed “unsustainable” energy, its main industry would disappear overnight. If the rest of the world likewise eschewed unsustainable resource use, it never would have entered in to the Industrial Revolution. If we opted for “sustainable” versus “unsustainable” energy (strictly understood) whenever we had the choice, we never would have left the energy market of 13^th century England.

“The Plan”

With that out of the way, let’s look at the specifics of the document that so enamors Heartland. First, it is the work product of:

“28 Town Hall Meetings across the state, engaging many Alaskans through the process of seeking answers to three fundamental questions: 1) What resources near your community—where you live, work, play, fish, and hunt—could possibly be developed to help lower energy costs? 2) What resources should not be developed? 3) Why not?”

Now, isn’t this what power companies already do? What makes Sarah Palin think that the state could do better? And what makes her think that central planning via town hall meeting is any better than central planning via some other process? Economist Bryan Caplan demonstrates that the public’s working knowledge of the economic issues in play are close to that of a . . .  well, I won’t get nasty.

Nevertheless, armed with the knowledge gleaned from these meetings and supplemented by the usual bureaucratic suspects, the state produced a “resource matrix” for each and every rural community in Alaska and formed “Technology Teams made up of people with expertise and a passion for energy solutions who were asked to identify technologies options and limitations for each identified resource.” The result is the work product of the report: “a focusing tool that will provide each community with a high-level snapshot of the least-cost options for electricity, space heating, and transportation for their community.”

If this sort of process could reliably be expected to produce the requisite information necessary to efficiently plan subsectors of the economy, then the only problem with the old Soviet Union is that state planners there never relied on town hall meetings in the course of constructing their 5, 10, and 15 year economic plans.

Nevertheless, the report released in January that prompted the Heartland story offers a broad overview of the prospects for various energy sources in “non-railbelt” Alaskan communities (meaning those communities outside of the service areas of the six public utilities doing business from Fairbanks to Anchorage and the Kenai Peninsula). Unfortunately, the cost examinations were “conducted at the conceptual level with no site-specific design or scope development.” The upshot is that “The numbers are reported as specific values for convenience, but in actuality contain a high degree of uncertainty as a result of incomplete data, conceptual cost estimates and estimates based on models.” This report—along with an upcoming report to inform regional “non-railbelt” planning and another to lay out an “integrated resource plan” for Alaskans in railbelt communities (where 65 percent of Alaskans live)—is intended to guide the disbursement of targeted state grants for renewable energy facilities and a related restructuring of state utilities to promote Gov. Palin’s renewable energy goals.

The report, however, is nothing to write home about. The main problem is that, with the exception of solar power, the report too often parrots the overambitious claims made by renewable energy proponents.

Palin’s Energy Inventory

Energy Efficiency – The report claims that energy efficiency will reduce the problems associated with “energy security, global warming, and fossil fuel depletion.” Nonsense. History well demonstrates that the more efficiently we use energy, the more energy we will use. That stands to reason; the more efficiently we use energy, the lower the cost of energy-related services at the margin, and reductions in marginal costs lead to increases in demand. This is known to economists as “Jevons Paradox” and it applies to trends in resource efficiency and resource consumption outside of the energy sector as well. It is a myth—albeit a widely shared myth—that energy efficiency on balance leads to reduced energy consumption.

The report then goes on to say that energy efficiency measures are often overlooked in favor of measures that would add supply to the market, an unfortunate phenomenon given that “energy efficiency has the highest return on investment of any energy source” (p. 82). No reference is given to back up that claim, which is just as well because it is screamingly false. RAND economists David Loughran and Jonathan Kulick calculate that $14.7 billion was spent by electric power companies to subsidize ratepayer conservation investments between 1989-1999 (undertaken primarily at the behest of—and under the supervision of—state utility regulators, with more spent since then), but those expenditures reduced mean electricity sales by only 0.2 and 0.4 percent at an average cost of 14–22 cents per kilowatt hour, a cost much greater than the cost of additional electricity during that period.

Wind Energy – Wind energy also gets more boosterism than it deserves. The report tells us, for instance, that capacity factors for wind power plants (defined as the amount of energy that the plant will produce relative to theoretical maximum production capacity under ideal conditions) “of 25%-40% are typical, while values up to 60% have been reported.” While reliable figures are hard to come by, compare those claims with some of the concrete facts available to us from states that have heavily invested in wind power. Prof. Robert Michaels (U. Cal., Fullerton) reports that average California wind generation during on-peak hours (7AM to 10 PM) in July 2006 was 495 megawatts (21 percent of capacity) and 464 megawatts in August of that same year. Similarly, the average output of Texas 2,800 megawatts of wind generators is but 16.8 percent of capacity, most of which occurs off-peak. For system planning purposes, its grid operator set a wind turbine’s “effective capacity” at 10 percent of its nominal amount, a figure later downgraded to 8.7 percent.  Vaclav Smil (U. Manitoba) reports that “annual load factors of wind generation in countries with relatively large capacities (Denmark, Germany, Spain) are just 20%–25%.”  

Biomass – Biomass (burning plant matter or wood for power) likewise gets kid-glove treatment. The report, for instance, concedes that air emissions are a major environmental problem from these facilities, but argues that “community-scale and industrial scale systems for heat or power . . . present less of a threat to health” than “individual user systems” (like, say, fireplaces and wood-burning stoves). That may be, but a review of the literature by Thomas Sundqvist and Patrik Soderholm finds that central station biomass is little better than coal or oil from an environmental perspective.

Geothermal – Geothermal energy gets lots of love in the report, but the authors concede that “geothermal heat needs to be close enough to the surface and in the right geologic setting to make it economically feasible for development. This is a rare occurrence in Alaska.” Nonetheless, the report recommends the creation of “regional geothermal development plans” and a “state drilling program as part of the state energy plan.”

Hydropower - Hydropower likewise receives lots of love, but the report acknowledges that the costs associated with building dams in Alaska is so staggering that it is simply too expensive to build new facilities at present. Yet the authors nonetheless conclude that “The future looks bright for hydropower development in Alaska. Hydropower projects produce power that is reliable, renewable and nonpolluting.” Yeah, and they also produce power that is so expensive that it wouldn’t sell in a competitive market. No matter—renewables we have promised and renewables we shall have!

Coal – Contrast the sunny discussions above with the report’s oddly ambivalent posture regarding coal. Coal gets 7 pages of rather cursory discussion, a rather striking lack of attention given the 17 pages devoted to hydro, 19 pages devoted to wind, and the 15 pages devoted to both biomass and geothermal. Heck, even make-believe “hydrokinetic/tidal power” gets more attention from these authors (14 pages) than does coal.

Those seven pages, however, are revealing. The authors note that Alaska’s coal reserves are a potentially staggering 5.6 trillion tons or more, most of which is high quality, low sulfur coal. Yet they also tell us that “most coal resources in Alaska are in the hypothetical resource class because they have been poorly studied, there are few data points of measurement, and there has been little or no drilling to substantiate resource claims.” Why is that? No idea. What to do about? Apparently nothing. No “regional development plans,” no “state drillings programs”; no policy of any sort is recommended. Given that the report is ostensibly a comprehensive overview of energy resources in Alaska, this relative lack of interest in coal is fairly surprising.

Energy Subsidies – Also surprising is the report’s nonplussed attitude about state policies that actively frustrate efforts to promote energy conservation and efficiency. The main issue in play here is the Power Cost Equalization (PCE) program, a state initiative launched in 1984 to help pay for electricity bills in rural Alaskans where, we are told, power often sells for 3-5 times more than it does in Anchorage, Fairbanks, or Juneau. In 2007, 78,500 Alaskans in 183 communities were assisted with these payments to the tune of several hundred dollars a year. While the report observes that the PCE program reduces the incentive to invest in energy conservation and renewable energy, it concludes that this offers yet one more rationale for countervailing state policies to promote energy efficiency and renewables because such investments will reduce PCE payments!

There are three problems with this claim. First, it does not follow that residential investments in energy efficiency will necessarily reduce PCE payments. If lower marginal operating costs for various energy-related appliances increase energy demand (as it surely will to some extent), it may actually increase state PCE payments! Second, if renewable energy increases fuel costs—as even this report makes clear would likely happen—then rural generating costs will go up, not down, which further increases PCE payments. Third, a better and much cheaper way to promote conservation and renewable energy in rural Alaska would be to get rid of the PCE program—which subsidizes conventional energy and energy consumption—and stop forcing urban Alaskans to pay for the energy used by rural Alaskans.

Meet the New Plan, Same as the Old Plan

The best thing about the report is the frank, if brief, discussion of past state plans and past state reports. Not surprisingly, it turns out that this report is but the latest in a long line of allegedly comprehensive efforts to achieve wonderful, low-cost, renewable energy goods and services courtesy of the state. Over the past 30 years, billions of state dollars have been spent, thousands of pages have been published, an avalanche of claims have been offered, and all sorts of glorious promises have been made. None have had the slightest impact. What makes the authors of this report think that this latest state swing at the energy policy piñata will prove any more fruitful than past swings at the same? Nothing as far as I can tell from this report.

Hence, we return to nub of the matter: Exactly what is in this report (or in the renewable energy subsidies that this report is intended to facilitate) that is responsible for making the conservative heart flutter? If you stripped the report of all references to Alaska, you would be hard-pressed to differentiate it from a report issued by, say, Nancy Pelosi’s office.

To paraphrase a line from an old rock song, something else is going on here. Exactly what isn’t exactly clear.

“Texas is the nation’s leader in wind energy thanks to our long-term commitment to bolstering renewable energy sources and diversifying the state’s energy portfolio.”

- Rick Perry, Texas Governor

“Our representatives [in the Texas Legislature] now have less than six weeks to pass the best of nearly 100 bills that have been introduced on clean power and green jobs. These energy efficiency and renewable energy bills set the stage for rebuilding, repowering and renewing our state’s economy during tough times. They will build a sustainable future for Texas.”

- Sierra Club, Environmental Defense Fund, Public Citizen

As reported by Russell Gold in yesterday’s Wall Street Journal, Texas, which has the strictest renewable energy mandate in the country, is about to increase its quota for the third time. Now the wind capital of the U.S., Texas’s new law would make the state the leader in solar power as well. Expensive and intermittent, wind- and solar-forcing will work only to increase electricity rates for captive consumers and reduce reliability on the grid. Taxpayers are on the hook as well.

In a 2008 study for the Texas Public Policy Foundation, “Texas Wind Energy: Past, Present, Future,” Drew Thornley concluded:

The distinction between wind and wind energy is critical. The wind itself is free, but wind energy is anything but. Cost estimates for wind-energy generation typically include only turbine construction and maintenance. Left out are many of wind energy’s costs—transmission, grid connection and management, and backup generation—that ultimately will be borne by Texas’ electric ratepayers. Direct subsidies, tax breaks, and increased production and ancillary costs associated with wind energy could cost Texas more than $4 billion per year and at least $60 billion through 2025.

How Did the Perverse Happen?

Government goes to those who show up. With utilities financially protected and not wanting to be labeled as anti-”green,” and principled taxpayer, consumer, and free-market groups virtually absent, the interventionists have taken over. Full-time environmental activists and lobbyists for rent-seeking private companies have virtually no opposition–a “Baptists and Bootleggers” scenario in the parlance of political economy.

How has Texas, which consumer choice made the leading oil and gas state, become the second most politicized energy state in the nation (after California)?

The regulatory spiral can be traced back  to Enron, which in 1999 spearheaded a provision in the state electricity restructuring law (Senate Bill 7, signed by governor George W. Bush) establishing a statewide renewable-energy mandate. Enron’s lobbyists had the special interest of Enron Wind Company, which is now part of General Electric, in mind.

It was a double win for the politically connected company. First, as the leading power marketer, and with its eyes on becoming the leading electriicty retailer as well, Enron coveted mandatory open-access of electricity in the state. Secondly, it needed a big market for its money-losing Enron Wind. Cloaking both corporate-welfare goals in the guise of a renewable mandate got media-worshipped environmental groups on board to help push SB 7 across the finish line.

The 1999/2005 Texas Mandates

The Texas Renewable Portfolio Standard was originally (SB7) for  2,000 megawatts of new qualifying capacity, but the 2005 Texas Legislature (SB 20 ) increased the mandate to 5,880 MW by 2015 and a target of 10,000 MW in 2025. Virtually all of this capacity has been wind power; the prospective (third) mandate would tack-on 3,000 of non-wind (read solar) renewable capacity.

The mechanics of the mandate are interesting. All electricity providers in the state–whether competitive retailers, municipal electric utilities, or electric cooperatives–must buy renewables based on the their market share of energy sales or utilize a Renewable Energy Credit trading program managed by the Electric Reliability Council of Texas (ERCOT). Thus, a utility in windy West Texas sells credits to those without access, such as a utility in wind-still South Texas.

SB7, by the way, also mandated that at least 10% of an investor-owned utility’s annual growth in electricity demand be met through energy efficiency programs each year–politicization on the demand side. Expect more increases as well given the current politicized setup.

The Problem in Miniature: Lobbyist Spiel

Three environmental lobbyists working the Texas Legislature penned an Earth Day editorial in the Houston Chronicle, “Enact Energy Laws to Clear Air, Create Jobs. They are:

• KEN KRAMER: director of the Lone Star Chapter of the Sierra Club
• JIM MARSTON: director of the Texas regional offices of Environmental Defense Fund
• TOM “SMITTY” SMITH: director of the Texas office of Public Citizen

Here is their something-for-nothing, everybody-wins, get-on-the-bandwagon editorial:

Texas citizens get it.

More of us than ever are mindful of switching off lights, weatherizing our homes and doing all that we can to save energy. State legislators can get it too. This session, they have an opportunity and responsibility to save us even more money on our electricity bills, create thousands of green jobs and reduce pollution across the state. Our representatives now have less than six weeks to pass the best of nearly 100 bills that have been introduced on clean power and green jobs. These energy efficiency and renewable energy bills set the stage for rebuilding, repowering and renewing our state’s economy during tough times. They will build a sustainable future for Texas.

The energy efficiency bills contain plans for helping Texas families by creating jobs while reducing consumption of electricity in our homes and buildings. When our homes and buildings are well-insulated and our appliances more efficient, we don’t need to burn wasteful and damaging amounts of dirty fossil fuels for electricity.

An additional benefit to creating Texas’ new clean energy economy is that we can clean up our air and address climate change at the same time. As we provide new jobs installing clean energy technologies, we can decrease the public health risks and costs associated with the impacts of burning coal.

Texas citizens began rising to the call for statewide energy efficiency when we voted with our consciences and our pocketbooks, replacing millions of our hot-burning, incandescent light bulbs with more efficient compact fluorescent light bulbs. Clearly, we were up to the challenge then and believe now that all of us can do more to help the Lone Star State.

For example, utilities can set more aggressive energy efficiency goals and put programs into place that will reduce the need to use so much electricity. The bills currently being considered in the Legislature require utilities to expand energy efficiency programs to meet 1 percent of peak electricity demand by the end of 2015 and 2 percent of peak electricity demand by 2020. While these goals may seem modest, meeting them would mean saving 1,176 megawatts of electricity — as much power as could be generated from two coal-fired power plants.

Utilities can also provide home energy audits that tell us how to increase our efficiency. Based on those audits, we can caulk or replace leaky windows, insulate our attics, repair our duct work, and install programmable thermostats, which allow us to preselect when we use our air conditioners, heaters and water heaters.

Cities can also help the energy efficiency cause by providing some up-front financing for energy-saving improvements. In addition, Texas will soon receive $327 million of federal stimulus funds for weatherization through the Texas Department of Housing & Community Affairs with reporting requirements on green job creation, energy savings and pollution reduction through the use of these funds.

These programs are good for Texas families. They’re good for the environment and they’re good for the economy. Study after study — including a report completed in December 2008 by the Public Utility Commission of Texas — shows that Texas can reduce its peak electricity demand and growth in electricity by 23 percent by implementing a variety of energy efficiency measures. The PUC study also found that every dollar spent by Texas on energy efficiency has a three-to-one payback.

But we need action now by Texas legislators to achieve energy efficiency’s full potential to meet our state’s energy challenges. This Legislature can and should continue the important work begun last session, when now-Speaker of the House Joe Straus led energy efficiency legislation.

Energy efficiency is the cheapest, quickest and cleanest way for Texas to meet its power needs. The Texas legislators who are championing these bills this session should be thanked for paving the way for a cleaner, sustainable future. We now call on all of our state legislators to swiftly move these bills out of committees and through floor debates to begin our sustainable future.

What about the costs of government energy-forcing? Instead of enlarging quota requirements, should Texas repeal mandates (these are not infant industries but mature ones that have promised viability for decades)? Blatantly anti-ratepayer, pro-corporate-welfare energy intervention in the post-Enron era deserves a reconsideration. As one study recently opined:

Over the past 10 years, Texas has become a leader in encouraging the development of renewable power. However, the aggressive build-out of wind power in West Texas is projected to
drive up transmission costs [$4.9 billion for starters] for all Texans and create new reliability challenges.

Governor Rick Perry, do you really want Texas to be an Obama energy state? Just because George W. Bush started the mess does not mean you have to complete it.

Where will this case study of political capitalism end?

Is it past time for free-market, consumerist, taxpayer-friendly parties to show up to the “green energy” orgy. Texas lawmakers need counter-education and pressure against the likes of Ken Kramer, Jim Marston, and Smitty Smith.

Actually, you can’t. The United States is still a nation of laws, and without strong political support, the acts of one administration cannot be easily reversed or undone by the next.

But there is more to the story than simple inertia and political head-counts. Each new administration enters with an agenda of positive goals. Spending time and political capital on your predecessor’s agenda can often find its way to the bottom of the to-do list. Moreover, a new president has only a limited circle of advisers. They cannot know everything about what the last guys did (Hayek’s revenge).

So it is that we find ourselves saddled with a whole series of outmoded, inappropriate, and just plain counterproductive energy laws and regulations. What is astonishing is the longevity of policies that prevent the United States from developing and implementing a constructive approach to energy, an approach that could use the totality of our resources to fashion a constructive, efficient and clean energy system.

The Bad Past

The U.S. political class in the 1970s was not one to let a good crisis go to waste. Indeed, this is what was done in the 1970s:

First, Nixon and Ford set the stage with price controls and product allocation rules, including:

• Price controls on oil and gas at the wellhead and at the consumer level
• Encouragement to build small, inefficient oil refineries (the Entitlements Program)

But the Carter Administration really got the ball rolling toward ill-conceived, disincentivizing, counterproductive policies. Some of the greatest hits of that era included:

Nuclear Non-Proliferation Act (1978) – under that benign banner lurked a prohibition on reprocessing the spent fuel from civilian nuclear power reactors (the other 95% of the energy in the fuel rods), leading to the waste storage “problem” that inhibits development of nuclear power to this day;

Natural Gas Policy Act (1978) – established 8 different pricing tiers for gas and set them on a path to converge with oil by the mid-1980s, preventing the emergence of a natural gas market until the 1990s; prohibited the use of natural gas for new electric power plants (except for cogeneration);

Solar Tax Credits (1979) – encouraged significant spending on immature and inefficient solar technologies;

Windfall Profit Tax (1980) – Intended to raise more than $100 billion by taxing the “excess” profits of oil producers in the United States, raised only $40 billion before it was repealed in the late 1980s, but reduced domestic oil and gas production by 6-10 percent over that period;

Energy Security Act (1980) – established the Synthetic Fuels Corporation, a public-private partnership intended to improve the technology of coal and shale liquefaction/extraction and eventual commercialization. This act was repealed in 1986, after spending just $1.2 billion on 3 projects. In one of the supreme ironies of the entire 1970s energy policy frenzy, this $1.2 billion was perhaps the most cost-effective technology funding by the U.S. Government in that period. Though it was not used to produce shale oil or coal-based liquids, the technology to convert heavy, dirty feedstocks to light refined products was used by U.S. refiners to produce a slate of valuable light products from less expensive, heavy crudes, saving U.S. consumers many billions of dollars in crude acquisition costs over the years.

With the coming of the Reagan Administration in 1981 some of these measures were swept away, including price controls, entitlements, and some provisions of the Natural Gas Policy Act. For others, including the Synfuels Corporation, Solar Tax Credits, and Windfall Profit Tax, legislative relief was required, which did not come until late in President Reagan’s second term.

For the domestic oil and gas industry the Malthusian gloom of the Carter years inhibited interest in readily available oil and gas reserves, hiding behind a belief that oil and gas were doomed to run out soon in any event. Jimmy Carter was a fan of Peak Oil Theory before the current decade’s bandwagon was ever conceived.

In the end, the energy policies of that past 30 years that had significant positive effects were mostly of the “first do no harm” variety. Most of those policies were enacted during the 1980s, so as to undo some of the most egregious acts of the 1970s. With the exception of the spectacular unintended consequences of the (relative) pittance in Synfuels Corporation funding, all of the careful mandatory allocations, use restrictions, production restrictions, punitive taxes, price controls and technology development showed either negative impacts on the supply of energy or no discernable effects on energy supply and use.

A number of the Carter era policies have remained part of the US Government’s official approach to energy: restrictions on offshore oil and gas production, “catch-22” type regulation of spent nuclear fuel, reliance on overall manufacturer fuel economy standards rather than prices to encourage conservation of gasoline, and last, but not least, the ethanol tax credit.

The price that we have paid for these interventions – less domestic energy production, more price volatility, aging network infrastructure – far exceeds any of the supposed benefits of such policies. Now we have a new president who wishes to make his name by even more massive intervention in energy markets – since it worked so well the last time. We face grandiose plans that start from the assumption that markets do not work and private firms cannot be trusted to make the “right” types of investments, when, in fact, most of our “remnant” problems result from ignoring rather than following market pricnciples. If the 1970s are any guide we will live with the consequences of our follies for many years.

It is much better to choose wisely than quickly.