Is the (Energy) Price Right?

A look back over the past few decades clearly demonstrates that government meddling in the market and its industrial policy initiatives have made the price of energy more expensive. Proposed EPA rules on power generators, Tier III standards, and the Renewable Fuel Standard (RFS) simply are more confirmation.

The basic drivers of price are supply and demand. The structure of our economy relies on abundant and affordable energy—all forms. When government acts to internalize environmental impacts through regulation, which is a legitimate function, it has tended to overreact, recently because of the Obama Administration’s “off-oil” agenda. As a result, EPA regulations overstate benefits and understate costs. The combination has the effect of making energy more expensive than it needs to be.

The RFS is a perfect example. President Bush and Congress set a course that could not be met. Congress set timetables and volume mandates for a fuel that did not exist and based on a technology that did not exist. Ironically, an assessment of cellulosic technology by the Department of Agriculture in 2005 concluded that commercial technology was probably two decades from being available. That conclusion was simply ignored.

For the last few years, we have witnessed a situation where refiners are required to use something that does not exist and then are penalized for not using what doesn’t exist. And, the price of waiver credits has skyrocketed, leading some refiners to export gasoline instead of keeping it in the US market.

The solution to this problem was simple—suspend or repeal RFS. Instead, EPA keeps trying to adjust the requirements as if it has some special insight into market forces and the ease of going from small demonstration facilities to commercial scale. It doesn’t. A good critique of the RFS comes from AEI’s Mark Perry, “The case against renewable fuel standard subsidies.”

The recent proposal on coal based power plants is another example. The restrictions are so severe that they cannot be met without installing very expensive technology like carbon capture and storage. The end result will be to make electric power costs higher without accomplishing much for the environment. EPA uses two arguments—asthma and greenhouse gas emissions. Both arguments are bogus. Asthma incidence has been going up while air quality has continued to improve. Clearly something else is going on. As for greenhouse gas emissions, US emissions are down and are not projected to return to 2005 level until 2035. Global emissions are going to go up because of the developing world not the US. Indeed, AEI’s Ben Zycher did an analysis that showed that the potential impact on climate 100 years from now from a 50% reduction in CO2 emissions was 0.1 degrees.

Proponents of renewable energy should take a close, clear eyed look at what has happened in the EU, specifically in Germany. Pushing technologies before they have matured to the point of being commercially viable has resulted in Germany having one of the highest electricity prices in Europe and in energy intensive industries making new investments elsewhere. The German experience is not limited to Germany as citizens of Spain, Italy, and the UK for example can attest.

The US has passed environmental laws that have resulted in making greater progress in environmental improvement, especially air quality although it has been at a higher cost than necessary. And, progress will continue. What is needed now is a period of reflection to pursue real regulatory rationalization and efficiency.

In this process of review, the government needs to take an objective and hard-headed look at the climate change issue. The most recent IPCC report on confirms that policy makers have been on the wrong track and have been guided by ideology instead of demonstrated science and objectivity. If the long-term goal is to limit atmospheric concentrations of GHGs, that objective will only be achieved by technology and the patience to let it emerge by creating new knowledge and its adoption by emerging economies. That, unfortunately, is not likely to happen in the prevailing political climate.

 

This article appeared on the National Journal Energy Insiders weblog at http://disqus.com/wokeefe/

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