The 100th birthday of President Ronald earlier this year brought forth a flood of nostalgia. Americans rightfully love their great man. But enviro-revisionism from some slammed Reagan for his reversal of President Jimmy Carter’s energy program. As Joe Romm puts it, Reagan “almost single-handedly ruined America’s leadership in clean energy.”
Such criticism reflects a extremely selective memory and a fundamental misunderstanding of the nation’s energy challenges.
Carter Was Pro-Coal, Nuclear Too
In recent years, true, some of Carter’s energy policies have been rehabilitated in the name of “energy independence” and addressing the alleged human influence on global climate. The implication—not always stated explicitly—is that Carter’s energy plan was primarily about renewable energies. The solar thermal panels he had installed on the White House roof, indeed, epitomized the differences between him and Reagan—who had the panels removed.
But selective memory comes into play, especially in overlooking the Carter-era push to increase coal and nuclear in power generation. This policy arose from his misguided view that the natural gas resource was “simply running out,” which is clearly refuted by the fact that more than three decades later the industry finds itself in a gas glut.
Coal was the energy future for the next decades in Carter’s energy thinking. The Powerplant and Industrial Fuel Use Act of 1978 , for example, restricted gas burning in the named facilities, targeting coal and fuel oil for the “low priority” market to save natural gas for “high priority” homes and commercial establishments. Gas distribution companies, organized as the American Gas Association, supported the law. (1) Exemptions were granted in the law’s early years, however, and it was effectively repealed in 1987. (2)
Running Out of Gas?
Still, the fired 39th president of the United States might be praised for relaxing price controls on natural gas, except that it was done from the obvious economic distortion of artificial shortages–and because he thought higher prices would husband a “depleting” resource.
Given that belief, Carter signed an agreement to pay Canada and Mexico a price of $12/Mcf (adjusted for inflation) for natural gas imports–versus today’s roughly $4/Mcf in depreciated dollars. Carter also insisted that the Alaska Natural Gas Transportation System (yes, ANGTS) was vital to ensure America’s gas supply.
Three and a half decades later, ANGTS it is still unneeded. Had it been built for an estimated $20–40 billion (current dollars), it would have been one of the greatest white elephants of all time. And the color has not improved with age.
His views were supported by various studies that predicted future shortages of oil, and his Secretary of Energy, James Schlesinger, went so far as to say in 1979 that global oil production was unlikely to ever rise above then levels. (This is overlooked by peak oil believers who extol his current concurrence with their thinking.)
Pessimism about oil supply led Carter to create the Synthetic Fuels Corporation, whose goal was to pour billions of dollars in loan guarantees into shale oil and coal gasification projects, little of which was actually spent, fortunately for taxpayers. (3)
Which highlights Carter’s second conceptual mistake, namely in thinking that markets were myopic. Since prices were not high enough to reflect the cost of supposedly crucial supplies like shale oil, which all the models insisted needed to be developed, then the market price was ‘wrong’. Although a lot of good energy economics was performed in the 1970s by the Federal Energy Agency and its successors, most of it was ignored by Carter and Schlesinger.
And the underlying Malthusian bias—or pessimism about resources—was phenomenally wrong, as it continues to be today. The presumption that the energy problems were physical in nature, essentially resource scarcity, rather than due to price regulations and political disruptions of supply, led the Carter Administration (and other governments and countless academics) to believe that global power was shifting to the commodity producers. Sound familiar?
Subsidizing the Highly Uneconomic
The enduring belief that heavy subsidies for uneconomic technologies will make them competitive in the marketplace led him to promote through subsidies the installation of what would now be considered primitive technologies. Research money went into many places, some helpful, others political pork like the fast breeder reactor.
Unfortunately, this idea still has significant currency. In the case of electric cars, the Obama Administration proposed rebate would cost nearly $1 billion if sales reach 100,000 vehicles. (4) This is intended to make the technology more commercially viable, but the need for such massive subsidies is evidence that the technology is not yet mature.
Encouraging consumers to buy wildly uncompetitive technology is not the way to promote technological advance. The proposed increase in spending on research will undoubtedly prove far more effective than higher subsidies. But will budget spending cuts leave this as a priority?
(2) Robert Bradley and Richard Fulmer, Energy: The Master Resource. Dubuque, Iowa: Kendall/Hunt, 2004. p. 136.
(3) Robert Bradley, Oil, Gas, and Government: The U.S. Experience (Lanham, MD: Rowman & Littlefield, 1996), pp. 31, 578–85, 1843.
(4) The direct federal government rebate is $7,500 per car. Other expenditures, such as financial support for battery technologies would add several hundred million to the budget, and the Department of Energy provides a 50% tax break for charging stations purchased by consumers, up to $2,000, although the cost appears to be about $2,200. State tax breaks are often in the range of $2,000 per vehicle.
There is a difference between: incentivizing the early sales of technologies which would become competitive with reasonably higher production volume, to get them into the market; and, incentivizing the sales of technologies which would not become competitive with reasonably higher production volume in an attempt to “drive” the market. US DOE has had some historical difficulty with that difference.
Arguably, there is a role for government in RD&D. There should be no role for the government in deploying “never-to-be-competitive” products by attempting to make the products already competing in the market uncompetitive through market distortions.
There is a rich history in the US of the impact of introducing “not-ready-for-prime-time” products to the market and allowing them to fail quite publicly. Those products that return to succeed in the market usually do so a decade or two or three later.
Thanks for the history lesson–and the reminder about the “clean” coal boondoggle. But the dumb and dim continue to nurture the craven in the present, as evidenced by the way GE has promised to purchase one-half of Obama’s fleet of 100,000 electric cars to be produced by GM, in the process getting billions from the federal “incentive” subsidies designed to entice consumers into thinking those vehicles would be competitive. Of course, since GE has paid no federal taxes for some years, mainly because of its “renewable” investments, the company has a lot of taxpayer revenue (since taxpayers must make up any shortfall to the Treasury when corporations like GE don’t contribute their fair share) to spread around, allowing in this case more incestuous investment in yet another dumb idea.
“The proposed increase in spending on research will undoubtedly prove far more effective than higher subsidies.”
This is as much a waste of money as subsidies. Government is incapable of properly choosing where to place research funding. However, private investors are much more discriminating and assess future potential much more efficiently.
Left on its own, free enterprise will encourage all energy sources with realistic potential. Investors are always looking to be in on the next best product; encouragement by government is meaningless as they more often than not choose buddies and cronies rather than winners.
Subsidies must come from taxes which pushes prices up. A never ending spiral.
Best plan is never to subsidize anything. Technology must sink or swim on its merits not some politico’s idea that something has to be good for us good or bad.
I have always felt that one of Carter’s worst choices for cabinent (exceeding even his Treasury and Fed Reserve appointments before Volker); was James Schlessinger. Schlessinger was Carter with extreme arrogance. Schlessinger (combined with the Democratic Party politics) convinced Carter to stay with price controls on Natural Gas, especially, and Carter even knew better than the oil price controls. Heck, German Social Democrats (Helmut Schmidt) publically went on record in the US that our price controls were a foolish policy (effectively using price controls on domestic production to subsidize imports). I am not nearly as critical of the Fuel Use Act, because I think the market does a poor job in price signals in incentivizing and reflecting the benefits Coal and Nuke base load. Simply stated, you are likely to way under invest as a society in these if you just went off the market. In a free market, unless you have a monopoly, costs in power tend to be driven down to variable costs. So if you invest in high capital cost, very low variable cost Coal and Nuke, and as a result, a surplus of Natural Gas (and #6 Fuel Oil) and those prices drop to near the coal /nuke prices, you would go bankrupt. You will be a hero to your customers while you lose your shirt. The same thing happens when pipeline capacity is over built.