As oil prices tumble -- now hovering around $65 per barrel -- there is growing concern that some of the momentum that was building for renewable energy may be waning. This situation highlights one of the key constraints that we face in moving to a low-carbon society: uncertainty in fossil-fuel prices depresses investments in alternative energy.
After the oil shock of the 1970s, the prediction was that alternative energy would take off, but this never materialized because oil prices subsequently plummeted, dropping below $20 a barrel for much of the 1990s.
The high this year of $147 per barrel sent shock waves through the global economy, and for the first time in decades, it led to a significant decrease in U.S. consumption of gasoline, an increase in the use of public transportation, and a switch away from large SUVs to fuel-efficient vehicles. Unfortunately, if oil prices stay low these trends may reverse.
So what is the appropriate policy response if we want to ensure that incentives exist to permanently move away from oil and other fossil fuels?
The optimum from the standpoint of the U.S. would be if the price of oil to producers were low, but remained high to consumers. This can only happen if the government imposes a significant tax on fossil fuels to create this wedge. Creating a price-floor below which the price of oil cannot fall would be the best way to create certainty for investment in alternatives and also mitigate the negative regressive affects.
For example, if oil prices fall to $50 the U.S. government should institute a tax of $50 per barrel to keep the price at $100. Instead of going to Saudi Arabia, Iran, Russia, and Venezuela this extra $50 would be in the hands of the government and could be rebated directly back to consumers (in a progressive fashion) as well as to fuel-intensive businesses.
The incentive to conserve and move away from fossil fuels would remain, but the revenue would be going to beneficial purposes instead of funding some of the world's worst regimes. If the price of oil changed the tax would change up or down to reflect it. Economists have been advocating some variant of this policy for decades to no avail. It is time we got serious about energy policy, and maybe, just maybe, the time is right.
Oil: enough energy to melt glaciers!
The hidden cost of coal
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Sean Casten Posted 8:57 am
24 Oct 2008
I think you're way off the mark here. Tampering with fossil fuel price is not only economically goofy, but also has lots of unintended consequences. (Let's not lose sight of the fact that high oil prices also encourage coal-to-liquids, tar sands exploration and lots of other carbon-intensive activities in addition to conservation, efficiency and other good stuff.)
Moreover, economic growth is put in jeopardy by high fuel prices. (And before the peanut gallery chips in with lusty, luddite cheers, let's remember that this means jobs, homes and food for your kids if that engine shuts down.) Putting a policy out that puts environmental protection in direct conflict with economic growth is political suicide for all us good guys.
That said, there is a path through this. The problem with fossil fuels isn't that they're cheap per se, but rather that they don't pay their full cost. Jim Woolsey did a piece with Dick Lugar years ago showing that the money we spend (out of income taxes) to protect mid-east oil supplies is worth something on the order of $20/barrel of oil. Their point in making that observation was that you can't on the one hand say that oil alternatives aren't economic at today's prices while on the other hand subsidize oil to keep it's price down to the point where options aren't viable. Other analyses have shown that the health benefits of coal-fired power (paid for out of income taxes through medicaid, medicare, insurance premiums, etc.) equate to 6 - 10 cents/kWh... and yet coal plants make money at 4 cents, and thus keep cleaner technologies from emerging that would lead to a net societal savings.
So let's remove the subsidy so that fossil fuels pay their full share of the costs they impose. This meets your goal without distorting the economy and keep the politics much cleaner. After all, one could imagine swapping an income tax cut for a gasoline tax to make up the $20/bbl in the name of fiscal conservativism or in the name of environmental stewardship. Better yet, and.
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Jason D Scorse Posted 9:08 am
24 Oct 2008
As for impacts on economic growth I don't think this is true if the revenue generated is used for R&D or rebated to consumers.
Right now we have the worst of all possible worlds- high prices going to terrorist states, tar sands being exploited, and no revenue going to our government for our investment.
I think a price floor for oil would be a good way to create certainty in the markets and permanently shift us away from oil-based fuels. We also need a greenhouse gas tax which would make things like oil shale and tar sands less attractive- on that I agree.
We need to focus on the root causes of problems.
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Sean Casten Posted 9:20 am
24 Oct 2008
But stipulating a floor price makes no more economic sense than those countries that place a ceiling price on energy for no less altruistic reasons. Both massively skew capital allocation into inefficient uses. Focus on getting the externalities priced properly, not on creating a house of cards based on some theory of what the optimal cost ought to be. Neither you, nor I nor the Wizard of Oz himself is smart enough to answer that ought-to question - and so long as we get it wrong (as we are sure to do), we will cause adverse economic effects.
But with the externalities priced in, markets are plenty smart enough to allocate capital responsibly.
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Jason D Scorse Posted 9:44 am
24 Oct 2008
Also, with uncertainties as great as climate change simple cost-benefit analysis doesn't work- we're talking risk reduction strategies in a world of large unknowns. CBA simply cannot handle that.
It's funny that as an economist I'm making these arguments, but I think when we're talking paradigm shifts standard economic analysis, while helpful, is incomplete.
If your solution is what ultimately enacted I can live that- it would be a great improvement, but I guess I'm arguing for something much more fundamental: a societal commitment to begin a permanent move away from a fossil-fuel based economy, starting with oil.
We need to focus on the root causes of problems.
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Jon Rynn Posted 10:39 am
24 Oct 2008
Sean, the Europeans have had huge gas taxes for decades and now they are in much better shape than we are in terms of the structure of their transportation and housing systems. However, politically, it's probably dead as a doorknob in the US, precisely because the USA is so dependent on the automobile now. It's basically a positive feedback loop, pushing the system into a stable gas-dependent society, with no way out.
That's why we probably need to build a rail system and build up the cities before people would be open to high gas prices.
By the way Jason, thanks for not bashing us peak oilers over the -- temporary -- drop in prices. WE'd have to be trading bets back and forth with all of this volatility.
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Wolverine Posted 4:00 am
25 Oct 2008
That statement shows what Sean's main concern is: money. Supporting an economic structure like this one comes at the expense of the natural environment and all life on Earth, even human life. While some humans may have to give up luxurious living in order to simplify our lifestyles so that they don't continue to destroy our planet, the rest of life on Earth will all be much better off.
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amazingdrx Posted 11:12 am
25 Oct 2008
The help for consumers who earn less than 250k per year, could be designed to ameliorate the effect of gas prices due to the price per barrel over 100.
It could kick in for the lowest income level families to cancel 100% of the higher gas price, than be graduated by income to provide less and less help as income goes up. So that over 250k income, consumers would pay full price.
It would serve as economic insurance. It wouldn't stabilize oil prices, but it woould cancel the effect it has on oil alternative investment and on consumers.
The only way to stabilize oil would be to gradually lower it's use, lowering the price, then raise the tax so it is always at 100 as far as the refinery feedstock price.
Without lowering use, it would be impossible to prevent it going over 100 and wrecking the whole plan.
Lowering use can be done with a national and eventually global plan to replace it with electric transportation.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Sean Casten Posted 1:07 pm
25 Oct 2008
Everyone who wants their kids to have a better life than they did (or, for that matter, doesn't have a good way to solve population growth but doesn't wish starvation on the next generation) has a stake in economic growth. Opposition to that activity borders on the amoral, and not because of some silly stereotype about banker CEO bonuses.
Do I wish that there were a way to solve population growth and convince everyone to live within their grandparents' means? Sure. But unless you have a way to make that happen, it is dangerously hubristic to paint economic growth as universally bad, and it's proponents as self-centered.
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GreenMom Posted 2:27 pm
25 Oct 2008
It's got to be done another way. Mass transit, that's good. Push alternative energy as a way to get off Middle Eastern oil. Push green collar jobs. Build the green economy. Raise MPG standards. And so forth.
We need to understand what works politically, and what doesn't. What's the point of pushing pie in the sky ideas that will never happen?
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amazingdrx Posted 11:25 pm
25 Oct 2008
With demand reduction, unrelated to economic disaster, caused by a switch to electric transportation, what would happen to the oil rats?
Why wage war over oil?
Manufacture alternative transportation, then export it. You're right g-mom, no tax would pass no how. Even if it's rebated progressively.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Wolverine Posted 7:52 am
26 Oct 2008
Endless growth is the M.O. of a cancer cell and is not possible. Eventually, the host will die and the growth will end. Human economies, all of which except those of hunter gatherers depend on ecological destruction, have already grown far too much, along with their populations.
And saying people want their kids to have a better life in this context is just saying that they are immoral materialists who want their kids, who they just see as reflections of themselves, to have more needless material crap. Modern humans in first world countries have it too good at the expense of the rest of the planet, and their kids should be taken down several notches materially.
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Jason D Scorse Posted 1:04 pm
26 Oct 2008
Also, let me clear, I don't have all the answers or even half of them- I'm just throwing out ideas that I think make sense but we're all in some ways groping along half blind in a world of great uncertainties- this is why forums where we can air things out are so essential.
Finally, I will NEVER again rail against peak oilers- I don't agree with them but the volatility of these last years has made me a lot humbler about predictions. Plus, we really have no idea about global oil reserves because the Saudis, Iranians, Russians, and Venezuelans are likely lying about what they have.
To be continued.....
We need to focus on the root causes of problems.
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amazingdrx Posted 5:14 pm
26 Oct 2008
Those who learn from history are doomed to watch others repeat it.
Is there any cure for trickle down, free marketeers? Short of euthanasia? Hehey.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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vakibs Posted 10:45 pm
26 Oct 2008
These two reasons should be good enough to fire up all the alarms. We need to go full speed towards a non-fossil-fuel society.
@Sean,
Thinking locally is a sure way to get stuck in a local minimum : this is what we say in optimization theory. Market mechanisms are extremely local (near-term). A price floor on fossil fuels is a way to incorporate global phenomena into the market feedback loop.
Let's think in terms of eco-dollars.
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Sean Casten Posted 11:17 pm
26 Oct 2008
The Ontario government (which is far from unique in this regard) sets power prices based on what the government thinks society ought to pay for electricity to accomodate environmental and economic goals. To the extent that those prices deviate from the true cost as borne by the utilities, general funds are used to top off, effectively hiding the true cost of electricity from consumers (and contributing to high Canadian income taxes). Since their price is usually below the true price, this has the effect of substantially discouraging investments in energy efficiency in Ontario (I've walked away from more than one project in the province due to this issue.) To be sure, what Jason is talking about is the opposite problem, but it is no less economically distorting. Moreover, once a political process is comfortable setting price floors, it is but a small leap to also set price ceilings...
California's dereg experiment set retail rate caps, motivated by Ontario-esque theories of the public interest. Wholesale rates, which were more closely connected to market fundamentals were allowed to float. The meltdown that ensued was in no small part because those who got caught in the middle - forced to buy wholesale but sell retail - were losing money on every transaction. Ergo, the PG&E bankruptcy. I am no apologist for regulated utilities, but am sympathetic to any enterprise that is mandated to lose money by shoddy regulation.
In the US, gasoline taxes are calculated as a percent, such that collections rise with the price (assuming constant volume.) In some European countries (I know the UK used to do this, although I haven't looked closely for a decade or so), the tax is instead set to give a constant price. This provides price stability at the pump, but causes a depletion of government coffers as oil prices rise. Both models create odd tension between the public interest and the price of oil, which would also be caused by any system such as the one Jason suggests. (If the floor is $X and the actual price is <$X, who pockets the difference? How is that $ used and audited? How does the collecting body not develop a vested interest in perpetuating that collection?)
These examples are far from the only ones of government setting price floors or ceilings. (The US agricultural sector is massively distorted by price floors and ceilings, and warrants a whole review in and of itself.) However, the universal result is a distortion of economic activity and massive unintended consequences. I agree with most of what Jason writes on Grist - but this one is economically naive.
(Note though, per my initial post, that there is a compelling case to be made for pricing all externalities into fossil fuels, to get at your underlying issue in an economically appropriate way. My beef is simply putting caps and floors in place that are not connected to fundamentals. We've got plenty of those already!)
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Jason D Scorse Posted 12:54 am
27 Oct 2008
We need to focus on the root causes of problems.
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Wolverine Posted 2:24 am
31 Oct 2008
Second and more important, it's far more immoral to continue destroying the Earth and KILLING other species due to human overpopulation and overconsumption than it is to oppose economic expansion for the purported purpose of lifting people out of poverty. (I'm not questioning your motives here, but when the people with money and power get involved, this will be about increasing their money and power, not about helping the poor.) What the planet needs is a great reduction in human population and a major change in the way modern humans live. Increased wealth will only bring increased consumption.
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Sean Casten Posted 2:38 am
31 Oct 2008
(Conversion efficiency must be understood here in the broadest possible sense - not merely better appliances, but also better generators, better capture of presently wasted energy - from tides to industrial waste heat - as well as those lifestyle changes that reduce energy consumption without compromising standards of living.)
That's not to suggest that it is not also possible to reduce fossil fuel use by lowering the standard of living, but rather that there are a host of opportunities to grow the economy and decrease natural resource use. If you've ever reinsulated a hot water pipe, carpooled to work or shut off the light when you left a room, you've proven this to be true as an individual. By taking steps to eliminate barriers to energy efficiency and remove subsidies to inefficient resource uses, we can do so globally.
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RDMiller Posted 4:08 am
31 Oct 2008
I have read post after post from you where you talk about the need to reduce human population. Why do you even bother to bring up this issue when there is clearly no possible resolution to it... at least for the next 50 years?
Yes, I agree we need a dramatic change in the way people live and impact the Earth. But substantially reduce human population? How do you propose that this takes place?
Richard
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Jason D Scorse Posted 1:50 am
03 Nov 2008
We need to focus on the root causes of problems.
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