A Blind Man’s Guide to Energy Policy

The United States has seemingly reached a consensus that energy is a serious problem. Unfortunately, there is no consensus on the solution. Three major constituencies are dominating discussion of the problem, and each approaches the issue from a different viewpoint. The constituency that is worried about climate change sees profligate use of fossil fuel that has dramatically changed our atmosphere. The energy security group sees dangerous reliance on foreign oil held by countries hostile to the United States. The economic vitality group sees high energy prices and market volatility threatening the economy and the U.S. standard of living. These three are certainly not the only constituencies, but they are the three that define the public interest aspects of the current policy debate in the United States, and more important, they are each pushing an agenda that does not mesh with that of the others.

Like the proverbial blind men describing an elephant, the three major constituencies participating in the energy debate have vastly different perceptions of the problem. And just as with the blind men, although each perspective is accurate as far as it goes, it is only by merging the views together that one achieves a complete and useful understanding of the energy problem. We must begin by reviewing the details of the three perspectives.

Environmentalists focus on the scientific consensus that greenhouse gases are contributing to rapid climate change with potentially catastrophic consequences. The recently released International Panel on Climate Change (IPCC) report concludes with 90% certainty that global warming is influenced by anthropogenic activity. Many individual scientists assert that the magnitude of predicted climate changes presented by IPCC is scientifically conservative. Some suggest recent data show that CO2 emissions are rising faster than forecast; other research suggests that temperature change is more sensitive to CO2 emissions than assumed; still others say impacts (e.g. Arctic ice) are more dramatic per degree change than thought. These scientists and their supporters see evidence of impending catastrophes in decreasing water supply, extreme weather, sea level rise, disease-vector migration, ecosystem failure, agricultural declines, air quality degradation, increased wild fires, and a host of other undesirable impacts. This group believes that the world cannot afford to gamble that these predictions are wrong because the consequences of them being right are potentially devastating. Because CO2 is largely cumulative in the atmosphere, early action to reduce emissions will be much more effective than any future measures. This group perceives a desperate need to act this decade in order to avoid what could be a completely unmanageable situation in the future.

To this constituency, climate is first and foremost an ethical and moral issue that transcends short-term economic concerns. They speak of intergenerational equity and the need for physical limits on emissions. Choices that shrink humanity’s CO2 footprint are favored. Many in this group think the problem can be solved with efficiency, conservation, and renewable energy. This constituency encourages all people to make changes in their daily activities to move toward a more sustainable lifestyle. They are willing to accept a decline in the standard of living in the wealthy countries in order to obtain a more environmentally sound world.

The energy security constituency is concerned primarily with the geopolitics of oil and the nearly exclusive use of this fuel for transportation. They see the geopolitics of oil becoming increasingly dire and conflicts in the Middle East being driven by demand for oil. They quip that the Iraq war is the first war in which the United States is paying for both sides because it is the dollars used to pay for Middle East oil that is being to support Islamic fundamentalism. In lighter moments, they ask, “How did our oil get under their sand?” They see oil and gas being used by Russia to exert political power over Europe. They are concerned that Venezuela, which is governed by U.S. critic Hugo Chavez, controls 15% of U.S. oil imports. They see the vulnerability created by having 25% of the world’s oil pass through the Straits of Hormuz. In Africa, they note that conflicts in Nigeria over oil wealth and corruption have disrupted oil supplies. They worry that countries such as China are unwilling to join political action against oil-supplier countries such as Sudan, or worse, nuturing the next Sudan in Chad. They do not want to see the U.S. way of life threatened by countries and factions that are difficult or impossible for us to control.

This security constituency favors ending U.S. vulnerability by ending its “addiction to foreign oil.” This group thinks that there is no domestic source of energy that is bad; their mantra is “energy independence.” They favor rapid increase in domestic corn-based ethanol production, regardless of the consequences for food prices or the farm environment. They oppose importing ethanol from Brazil because it might discourage domestic production. They propose the production of liquid fuel from coal, a very expensive process that produces a fuel that has twice the carbon footprint per unit of energy as does oil. For example, coal interests have proposed legislation in the House that would provide federal financial support to coal-to-liquids manufacturers if the price of oil falls below $40/bbl. They want to expand domestic oil supplies even if this holds no promise for long-term security. They see clear and present danger in world conflict and wish to insulate the United States from this problem. They may even argue that these “expensive” initiatives are cheap in an opportunity cost sense when the real alternative is a defense budget that must pay for Iraq in all its dimensions.

The economic vitality group sees high prices for energy potentially strangling the economy and worries about interference in the market that would make prices even higher. They observe increasing international demand for oil occurring simultaneously with a peaking supply of light sweet crude. They see that higher prices drive new technology and increased production of oil, but this oil is heavier and more expensive to produce and refine. They worry that global demand will increase faster than supply, driving prices higher. With China, a country with little domestic oil, adding more than 200,000 cars per month to its roads, demand for imported oil will rise quickly and so will prices. The economic contingent also worries about disruptions to supply resulting from refinery fires, pipeline leaks, hurricanes, or terrorism. They worry that environmentally motivated standards such as renewable energy portfolio standards will decrease options and increase the cost of energy. They note that the spike in oil prices after Hurricane Katrina was alleviated by lowering environmental standards for gasoline and that California’s extremely rigorous environmental standards for gasoline create scarcities that are a major factor in driving up record prices at the pump.

This constituency wants expanded capacity and favors investing in more oil production, reservoirs, pipelines, and refineries. They would like to drill the North Slope in Alaska for oil and open more federal lands to exploration. They believe that the market should and will control the energy system, but they support federal incentives to investment in new energy supplies. They favor importing ethanol from Brazil without tariffs because this will lower the price. They are afraid of carbon caps because of possible economic side effects. The face-off between Representatives Nancy Pelosi and John Dingell over the proposed schedule for enacting climate change legislation is largely about Dingell’s worries about lost jobs and economic harm.

Sharing insights

As each of these groups tries to sell their vision to the public, they are being forced to confront the narrowness of their vision. Environmentalists are learning that climate change by itself may fail to gather broad enough support to achieve their goals. Although more and more people are becoming aware of the climate problem, many are still unsure of the need for dramatic action. These skeptics do not want to make choices that they think will lead to “shivering in the dark” for a climate problem that is intangible to them. So environmentalists have begun building coalitions with other constituencies. They have found broad support for state-level renewable energy portfolio standards (RPSs), which require a certain percentage of electricity to come from renewable sources, among political factions who want to reduce their state’s risk of an energy supply crisis or to promote economic development within their state. In Nevada, when the climate constituency tried to change the RPS to a low-carbon standard which they found more directly beneficial to their cause, they lost the support of the economic and energy security constituencies who saw no benefit. Environmentalists had to settle for a renewable energy standard in order to build a coalition and get something done. Environmentalists are also being forced to reconsider their objections to nuclear power because many people view it as a potentially large source of greenhouse gas-free energy. An example is Patrick Moore, a founder of Greenpeace, who is now promoting nuclear power as an important part of solving the climate problem. This constituency needs to factor in the fundamental human desire to better their lives and increase their affluence while finding solutions that improve the environment.

The energy security constituency needs to face the reality that complete energy independence is a quixotic quest. They need to broaden their perspective to pursue energy resilience, which can be advanced by reducing energy demand and diversifying supplies as well as by boosting energy production. The United States uses about a quarter of the world’s energy; it imports 30% of all its energy and 50% of its oil. Eliminating imports is clearly out of the question for at least several decades and probably forever. Besides, exporting countries have a powerful motivation to keep selling oil to the United States. As prices rise with growing demand, they will increase exploration and look to new technology to help increase supply. U.S. consumers are going to want that oil, and all countries have an incentive to support global trade in principle.

The security constituency would do better to focus on controlling domestic demand for oil because demand is currently driving the price and making the country vulnerable to supply interruption. The gains in energy security from increased energy efficiency could be dramatically large compared to increasing domestic supply. Given that the United States imports half its oil, a 25% increase in the average fuel efficiency of vehicles could decrease imports by half. Finally, the security advocates have to face global political realities. U.S. allies and trading partners are making it clear that they will not let the United States ignore its responsibility to deal with carbon emissions. If the energy security constituency is willing to build coalitions and accept some responsibility for reducing carbon emissions, it can still be successful in its efforts to increase domestic energy supplies as well as supporting supply diversification and efficiency improvements that will also relieve some of the political pressure associated with being an energy importer.

The economic vitality constituency can learn that changing the energy system to meet climate and security needs could well be an economic stimulus. New industries are already springing up to meet the newly defined energy needs and are generating revenue and jobs. Countries such as Japan and the UK as well as states such as California are implementing policies aimed at making them leaders in new energy technology businesses. In California, venture capitalists were influential supporters of the enactment of AB32, the ambitious carbon cap law that mandates a return to 1990 levels of greenhouse gas emissions by 2020. These business people see opportunity for technology to address the climate problem and create wealth in the process. A study released by the University of California, Berkeley, last year projected that reducing greenhouse gas emissions in California would create 17,000 jobs and add $60 billion to the state gross domestic product by 2020. John Doerr, the venture capitalist who helped to start Google, has said, “Sustainable technologies are the next big thing … the mother of all markets,” and doubled the size of his investments in green technologies.

In early 2007, the executives of six major companies (Aloca, BP, DuPont, Caterpillar, GE, and Duke Energy) spoke out in favor of carbon controls through cap and trade, which they felt could be imposed without economic harm and with economic opportunities if applied uniformly. These executives also see carbon caps coming and want a level playing field and known boundary conditions for business. They think they can make money and do the right thing for climate. The executives of major oil companies are also coming to share this opinion.

Common ground

How can these three constituencies find common solutions in the next decades? Choices in the first half of the 21st century will be affected by the 50-year or greater life spans of many parts of the energy system infrastructure and dominated by the use of existing technology, hopefully supplemented by urgently needed applied research. Long-term, the energy system of the second half of the century will likely be dominated by whatever emerges from the advanced research and development we must begin to do now to develop entirely new technology. The research to support this transformation is absolutely essential, but in the meantime it is imperative to act quickly with the tools at our disposal.

Let us examine two aspects of the energy system, electricity and individual transportation, to see how common ground might be found. All three constituencies can favor reducing demand for electricity through increasing energy efficiency. They can agree on an approach including education, regulation, and the development of policy and financial instruments to encourage conservation. For example, Congress is considering new lighting standards that would eliminate energy-gulping incandescent light bulbs. Estimates show that the shift to fluorescent light bulbs would save $18 billion in electricity costs every year and would reduce demand equivalent to that currently met by 80 coal-fired power plants. States such as New York are calling for more stringent building codes. The California Public Utility Commission has developed mechanisms that reward utilities for promoting energy efficiency.

All three constituencies can support increasing the use of renewable energy to produce electricity, provided that the economic constituency sees an opportunity to make money. Encouragingly, entrepreneurs are entering this market and changing the economic perspective. For example, Silicon Valley entrepreneurs are exploring the use of nanotechnology to produce flexible solar cells that will be easy to manufacture and will lower the cost the cost from $10 to $1 per watt of capacity. About one-third of the states have renewable energy portfolio standards of one kind or another that will create a market for new renewable technologies, and Congress is considering adoption of a national standard.

Nuclear power is perfect from the point of view of energy security and climate, but it has formidable drawbacks. The high cost of new plants has been a barrier, but licensing reform is being implemented that should reduce the construction time and cost of new plants. Nuclear power is also burdened with concern about safety, waste management, and nuclear weapons proliferation. Although these are not central concerns of the three constituencies, they are issues that must be addressed cooperatively. The Bush administration’s Global Nuclear Energy Partnership program is one strategy to handle these concerns through reprocessing of spent fuel and careful management of the international fuel cycle.

Natural gas is the least harmful of all fossil fuels from a climate perspective, producing about half the CO2 per unit of energy as does coal. From the economic perspective, gas-fired electricity has an advantage in that the capital costs of building a gas generator are relatively small. However, this fuel is experiencing more price volatility than is oil or coal, and the largest reserves are in other countries. It is possible that we could face the same geopolitical problems with importing gas as we face with importing oil. Overcoming technical and economic obstacles to producing domestic gas could attract all three constituencies.

Coal produces more CO2 per unit of energy than any other fossil fuel, making it perhaps the worst demon of the climate change constituency. However, coal is domestic and is the most abundant and inexpensive source of energy. If coal use is coupled with cost-effective carbon capture and geologic sequestration of CO2, the use of this resource could be acceptable to all three constituencies. Carbon capture and storage (CCS) would allow use of this source while also addressing climate change and is arguably the most important technology to add to our current mix from the climate point of view. Since there are no direct energy benefits to sequestration, it will be viable only if carbon has value as a tradable allowance or if regulation limits allowable emissions. A strong CCS program would help to provide a lower-cost low-carbon energy system for the economic vitality constituency and remove obstructions to the use of the nation’s plentiful coal as part of an energy security strategy. It is not surprising that a suite of bills dealing with CCS are now moving through Congress with the idea of accelerating this important technology.

Meeting the needs of all three constituencies for individual transportation is quite difficult. The transportation problem has three parts: the vehicle, the fuel, and the vehicle miles traveled. Vehicle efficiency is of interest to all three constituencies, and they can support standards to increase vehicle mileage. It has been more than 30 years since the United States revised the Corporate Average Fuel Economy (CAFE) standards. Now the Senate is working on legislation that would mandate a CAFE average of 35 miles per gallon by 2020 for cars and light trucks and for further improvement of 4 percent per year after that. The constituencies might be willing to support policies similar to those in China, where the sales tax on gas guzzler cars is 20%, but the tax on the most efficient cars is only 1%.

There are two major approaches to the fuel. The first is to use something besides oil to produce liquid fuels for mobility. The energy security constituency favors this approach as a first priority. However, some of these fuels will have little or no efficacy in addressing climate issues and can be quite expensive. These facts have motivated California to study a low-carbon fuel standard, and the European Union is following right behind them. The second is to use electricity instead of liquid fuel. From the climate perspective, this is not useful unless there is a complementary plan to produce the needed electricity without adding carbon to the atmosphere. Thus, meeting the needs of the three constituencies in the electricity sector could have the added benefit of helping to meet their needs in transportation.

Finally, the reduction of vehicle miles traveled (VMT) depends on the availability and attractiveness of public transportation and on land-use planning. The climate constituency generally understands the need to reduce VMT and supports solutions that have people live near where they work and to commute by foot, bicycle, or public transit. The security constituency might note that these choices would reduce demand for oil imports. Either constituency might support policies such as those being considered in the UK to reduce VMT and congestion. The UK may construct a vast national system for monitoring driving and then billing the drivers for amounts from one pence to one pound per mile traveled depending on congestion. The economic constituency is going to be wary of any policy that imposes changes on individual lifestyle. They will be more supportive of efforts to build communities that are environmentally friendly and energy efficient if these communities also provide the attraction of a better quality of life.

Putting the pieces together

Although it is clear that the three constituencies could share common interests in sensible policies to promote efficiency, renewable energy, lower cost nuclear power, more domestic gas, coal with sequestration, new liquid fuels or electric cars, and bold new designs for urban living, it is still a possibility than any one of the constituencies on their own can drive bad choices. The current energy system is dominated by the economic constituency and is responsible for the problems we have now. If the climate constituency alone dominates future choices, we could choose solutions that require long-term financial subsidies and result in market inefficiencies and higher prices. If the security contingent dominates, we might pick solutions that have little effect on the climate problem (corn-based ethanol) or even increase greenhouse gas emissions significantly (coal-to-liquids). Interestingly, investors are now backing off developing coal-to-liquids projects precisely because the associated emissions are causing economic uncertainty. Unless greenhouse gas emissions are curbed, rapid climate change is likely to have a widespread disruptive effect across the globe, particularly in the developing world. Stresses on water supplies, agriculture, fisheries, and the habitability of coastal land could leave millions hungry, homeless, and desperate and perhaps violent. Consider the mayhem that Hurricane Katrina created in the richest country in the world. Adapting to the consequences of climate change will push many poor countries to the edge of despair.

It is important to realize that finding solutions that work for two of these three viewpoints can lead to solving the problems of the third. If carbon reduction is made the organizing principle and the most cost-effective approaches are pursued, the result will also serve the purposes of the security group. The policy will aim to reduce energy demand through efficiency, do the research to make renewable energy less costly and more reliable, make carbon sequestration an economical option so that low-cost coal can be tapped, and perhaps make nuclear power a reasonable alternative. All of these actions will reduce dependence on oil imports and reduce the security risk from climate change. Solving the problem of reducing greenhouse gas emissions economically essentially solves the whole problem.

The case for the climate-plus-economic solution would be even more compelling if the security constituency would expand its focus beyond energy independence to include the risks to security from climate change. The fact that climate change will be a security problem has been highlighted recently in a report conducted by high-level military personnel titled National Security and the Threat of Climate Change and by a congressional action instructing the CIA and DOD to include security risks due to climate change in the next national intelligence estimate. This will include pinpointing the regions at highest risk of humanitarian suffering and assessing the likelihood of wars erupting over diminishing water and other resources and an assessment of the “direct physical threats to the United States posed by extreme weather events such as hurricanes.” Indeed, an understanding of the critical security implications of climate change could be the key to creating the consensus necessary for concerted action on energy policy.

Reaching this general consensus is only a first step. Important decisions will have to be made about the implementation of a carbon cap and trade system, the level of fuel efficiency standards, the details of building codes, R&D priorities, infrastructure investments, the ways to help developing countries, and a host of other details necessary to crafting an effective energy policy. But the nation will never reach the stage of optimizing policy if it fails to find the common thread in the concerns raised by the climate, security, and economic constituencies. This first step of building a foundation of agreement on the overall shape of energy policy is today’s essential task.

In his book The Open Society and Its Enemies, philosopher of science Karl Popper observes that “Instead of posing as prophets, we must become the makers of our fate.” That is exactly what we need to do with energy in the 21st century. We must become the makers of our energy, climate, economic, and security fate. Some of us are beginning to suspect that this challenge will demand new thinking and adaptability on a scale never managed before. Let us hope we have the wisdom and capacity to make one of the largest changes in human society ever required. Identifying the common ground for a broad societal vision of what needs to be done will provide us with a basis for hope.