In 2010, renewable energy (hydroelectric, geothermal, wood, wind, solar, biomass, and biofuels) represented 8 percent of total U.S. consumption. Fossil fuels dominated consumption with an 83 percent share. The remaining 9 percent was supplied by nuclear power.

Hydroelectric power was the dominant renewable source followed by wood and biofuels. Biofuels, primarily ethanol, increased production by 18 percent spurred by the mandates in the Energy Independence and Security Act of 2007. Wind power increased output by 28 percent spurred by subsidies, including a 30 percent rebate on investment from the federal government. New electric power capacity increased nearly 14 gigawatts and was comprised primarily of natural gas, coal, and wind generating units.

Renewable Energy as Share of Total Primary Energy Consumption, 2010

Energy prices were mixed in 2010 as some fuel prices rose while others stabilized or fell. Electricity prices held flat, coal prices increased 6.2 percent and oil prices increased 28 percent. Residential natural gas prices fell by 8.7 percent as the United States continued to produce increasingly large volumes of shale gas from the Marcellus, Barnett and other shale gas formations.

While the basic patterns of energy use continued in 2010: dominance of fossil fuels, slow growth in renewable energy’s contribution and generally increasing prices, the more interesting data in the report was in the details. The 2010 energy environment was marked by a number of disasters highlighted by the oil spill in the Gulf of Mexico that led to reversing trends in oil production. While offshore oil production had been growing in most of 2009 and the first half of 2010 relative to the prior year’s monthly output, that trend was halted by the drilling moratorium imposed by the Obama Administration and the subsequent de facto moratorium that continued to hold off permitting new drilling leases.[v] Oil companies are still trying to regain the momentum they had in the offshore Gulf of Mexico before the Macondo well accident.

Also affecting energy production were fewer leases let on federal lands onshore[vi]. The Annual Energy Review reports fossil energy production on lands owned by the federal government including military, Outer Continental Shelf, and public lands. Production of all fossil fuels–coal, oil, and natural gas–on federal lands tumbled in fiscal 2010.[vii] Coal production on federal lands declined by 2.9 percent, oil production’s decline was ten-fold higher at 29 percent, and natural gas production’s decline was even larger at 36 percent.[viii]

This is in sharp contrast to production occuring on non-federal lands. Taking oil production in North Dakota as an example, in 2010, production increased by 42 percent. Since 2005, oil production in North Dakota has been growing at a phenomenal rate of 26 percent a year.

Conclusion

Energy production and consumption increased in 2010 for most fuels, but the story of what could be is really in the details. Production of fossil fuels on federal lands tumbled due to government actions taken that limited production, which is in sharp contrast to the increasing production on lands not owned by the federal government. It would be interesting to see just how much domestic production we could produce if only the federal government would allow it.

The Energy Independence and Security Act

In 2005, during the Bush administration, Congress passed the Renewable Fuel Standard (RFS) as part of the 2005 Energy Policy Act. In 2007, the RFS was amended in the Energy Independence and Security Act. To evaluate these policies, Congress asked the National Academy of Sciences to evaluate the Renewable Fuel Standard (RFS) goals,[iii] the potential environmental benefits and harm from biofuels production, and barriers to achieving the RFS mandate.

The Energy Independence and Security Act mandates 36 billion gallons of biofuels to be produced by 2022, of which 21 billion gallons must come from advanced biofuels by 2022 and the remainder, 15 billion gallons, from corn-based ethanol. Of the 21 billion gallons of advanced biofuels, 16 billion gallons must come from cellulosic biofuel by 2022 and 1 billion gallons must come from biomass-based diesel by 2012.[iv] Because cellulosic biofuel is not yet commercially viable, the Environmental Protection Agency (EPA) “is required to set the cellulosic biofuel standard each year based on the volume projected to be available during the following year.” In 2011, the EPA reduced the mandated level of 250 million gallons of cellulosic biofuel to 6.6 million gallons. EPA’s proposed 2012 standard sets the cellulosic ethanol level at 3.45 to 12.9 million gallons[v], well below the 500 million gallons mandated in the 2007 law.

The NAS Study

The National Academy of Sciences study was authored by a commission of researchers in transportation, economics and environmental studies and is not connected with the government. It is an independent group of specialists and experts that Congress can consult for expertise on issues.[vi] They were tasked to

• Describe the biofuels that were produced in 2010 and expected to be produced and consumed in 2022.
• Discuss the environmental harm and benefits of biofuels production and the barriers to achieving the mandates.
• Review estimates of achieving the mandates on the prices on land, food, feed, and forest products; imports and exports of relevant commodities, and federal revenue and spending.

Their major findings are:

• Without major technological breakthroughs, the cellulosic biofuel mandate of 16 billion gallons in 2022 is unlikely to be met because no commercially viable bio-refineries exist for converting cellulosic biomass to fuels. The 2022 mandate for corn-based ethanol of 15 billion gallons is achievable since the United States had the capacity to produce 14.1 billion gallons from corn grain at the end of 2010. And, the mandate for biodiesel of 1 billion gallons is also achievable since the United States had the capacity to produce 2.7 billion gallons of biodiesel from vegetable oils and animal fats at the end of 2010. In 2010, 13.2 billion gallons of corn-based ethanol and 311 million gallons of biodiesel were produced.
• The RFS may be an ineffective policy for reducing greenhouse gas emissions because the impact of biofuel production on those emissions depends on a wide range of land-use and other management factors. The production of biofuels could result in an increase in greenhouse gas emissions compared to conventional petroleum because manufacturing and transporting the biofuel burns additional fossil fuels. Displacing current crops with biofuel crops could result in other land being converted for farming that carries with it a large one-time greenhouse gas emission increase. Depending on how feedstocks are planted, they can have a negative or positive environment on water quality, soil and biodiversity. And, the use of fertilizers and certain water treatments to grow the feedstocks could harm the local ecosystem.[vii]
• Biofuels would only be cost effective with conventional petroleum in an environment of high oil prices, high carbon prices, technological breakthroughs, or a combination thereof. The study found that they would become economic if oil prices hit $191 per barrel in 2022 (2008 dollars), which is EIA’s high oil price case[1]; a carbon price of $118 to $138 per tonne of carbon dioxide equivalent with an oil price of $111 per barrel, EIA’s reference case oil price; or if government subsidies are high enough. The current subsidy of $1.01 per gallon of cellulosic biofuel blended with fossil fuels is insufficient at the $111 per barrel oil price to make them economic.
• Because additional land (30 to 60 million acres) would be required for cellulosic feedstock production, the mandates are expected to increase competition between land uses and increase land prices and the cost of feed.
• The mandate would increase federal budget outlays due to increased spending on payments, grant, loans, and loan guarantees and foregone revenue from biofuel tax credits, which currently end in 2012 but have historically been renewed. Federal programs that could be affected by increased spending are Agricultural Commodity Payments; Conservation Reserve Program; Nutritional and Other Income Assistance Program; and Grants, Loans, and Loan Guarantees.

• The major barriers to cellulosic biofuel production are the high cost of production and the uncertainty regarding future markets. For example, bio-refineries are only willing to pay  $25 for a ton of corn byproducts used in cellulosic ethanol production, but suppliers (farmers) say they need $92 to break even assuming a world oil price of $111 per barrel and no policy incentives. Likewise, there is a $106-per-ton price gap for switchgrass produced in the Midwest.[viii] Further, if the biofuel is ethanol, infrastructure and blending issues need to be resolved. Currently, gasoline can be a blend of 90 percent petroleum and 10 percent ethanol that would amount to an ethanol demand of about 14 billion gallons, lower than the mandate in 2022. Thus, either the blending level would need to be raised or flex fuel vehicles would need to make a major headway into U.S. auto market sales, raising infrastructure issues for sale of E85, a blend of 85 percent ethanol and 15 percent petroleum. Earlier this year, the EPA upped the blending share for ethanol in gasoline to 15 percent for vehicles of model year 2001 or newer, but the agency is facing law suits that claim it violated the Clean Air Act by approving E15 for use in some vehicles, but not in others.[ix]

The Cost of Producing Biodiesel

Neste oil, the world’s largest renewable diesel firm just upped its production costs for producing biodiesel from feedstocks consisting of oils, greases, and fats. Production costs, excluding feedstock costs, increased 25 percent from its 2009 level.[x] The increased production cost is primarily due to elevated utility costs and the increasing price of hydrogen, which are unlikely to decline. The communications manager of sustainability, oil products and renewables at Neste Oil stated:

“The production costs of our conventional fossil diesel are significantly lower than those of renewable NExBTL diesel. Petro-diesel is a “bulk product” produced at large refineries. NExBTL, on the other hand, is a small-volume specialty product when compared to fossil diesel. This is naturally reflected in the higher cost per unit.”

Obama Administration Investment in Biofuels

The Obama administration is spending up to $510 million in advanced biofuels over the next 3 years to fuel military and commercial ships and jets. Under the agreement, the Department of Energy, the Department of Agriculture and the U.S. Navy will each contribute $170 million to the program, which is to be matched by industry.  The Navy sees this investment as part of the way to meet its portion of the administration’s goal of cutting the federal government’s dependence on fossil fuels by 50 percent by 2020, and it is expected to contribute to President Obama’s goal of cutting foreign oil imports by one-third by 2025.[xi]

Conclusion

Clearly, cellulosic ethanol is not ready for prime time, nor will it be by 2022 without an unexpected major breakthrough, according to the NAS report. Wallace Tyner, co-chair of the NAS panel, a professor of agricultural economics at Purdue University and co-director of the Center for Research on Energy Systems and Policy sums up the study as follows: “Whereas the technology and costs of making ethanol fuel from corn are well known, cellulosic on the other hand is new technology. We don’t know how it works. We don’t know how much it will cost. There are no plants in operation. Here we are in 2011 at 0 gallons and we have to get to 16 billion gallons by 2022.  That’s double or triple how fast ethanol fuel became commercially viable. Everybody in the industry wants to build the fourth or fifth plant. Nobody wants to build the first.”[xii]

Lately, much has been made with the Solyndra bankruptcy. Some people claim that it was an isolated incident, but that is incorrect. Solyndra was a product of policymakers thinking they were smarter than the market. They argued that Solyndra could “work” if the government would provide loan guarantees. With cellulosic ethanol, the Bush administration argued that a guaranteed market through a renewable fuel standard would “work.” In both these cases and in many others, the loan guarantees, the mandates, and the subsidies did not work because the technology is just too expensive even with millions or even billions of dollars in special treatment.

So, it is unlikely that the cellulosic biofuel mandates in the Energy Independence and Security Act will be met. Hopefully, the Administration and Congress will use this as a lesson for the future and not mandate production levels or provide loan guarantees for technologies not commercially viable.

However, a recent study from Iowa State University argues that the growth in ethanol production from 2000 – 2010 has suppressed gasoline prices by an average of 25 cents per gallon and 89 cents per gallon in 2010. The study also warns that if ethanol production were suddenly halted, gasoline prices could rise a shocking 41 to 92 percent.

As we’ll see, these figures are very misleading, because they look at the history of conventional gasoline refinery capacity (in the face of government-supported ethanol output) and assume it wouldn’t have been any different over the last ten years, had the government never supported ethanol. Once we realize the trick involved, the study’s pro-ethanol conclusions fall away.

The Iowa Study’s Claims

The study is heavy on econometrics jargon; quoting portions of it would be virtually useless in conveying to the layperson how the study actually gets its results. The closest to a plain English explanation comes in the authors’ discussion of their final result:

In the scenario in which ethanol is totally eliminated from domestic supply, the system [of equations] specified [earlier in the paper] is used to simulate the gasoline price responses after taking into account (i) the gasoline stocks at the level of 2010, and (ii) the full utilization of the spare capacity of US oil refineries in 2010. Three sets of simulation results are generated under different levels of elasticities (high, medium, and low). The results summarized in Table 4 indicate that if the ethanol supply were eliminated from the domestic gasoline market, wholesale gasoline prices may change by 41%– 92% in the short run depending on the sensitivity of producers and consumers to prices. (“The Impact of Ethanol Production on U.S. and Regional Gasoline Markets: an Update to May 2009,” [.pdf], p. 5.)

As this quotation explains, the study takes as a given that U.S. refining capacity and gasoline stocks start at their actual values for 2010, and then combines them with traditional measures of how gasoline prices move in response to increases in demand, in order to estimate the impact of a sudden disappearance of the entire ethanol industry. Not surprisingly, such an unexpected and massive event would lead to massive spikes (in the short run) of gasoline.

Does the Iowa Study Justify Government Favoritism for Ethanol?

Clearly the groups promoting this study want the reader to draw the inference that the U.S. government’s preferential tax treatment of ethanol is good for U.S. consumers. Yet the study doesn’t prove this at all. The reason conventional gasoline refining capacity is at its current level, is the existence of such a massive program of support for ethanol over the years.

If the U.S. government didn’t give special tax treatment and other mandates to guarantee ethanol a fraction of the market, gasoline would have filled the gap. In other words, government policies have displaced conventional gasoline from the market, and that’s why a sudden removal of all the ethanol would lead to a temporary shock in the gas market. Yet the fact remains that consumers would have been better off, had the government never intervened to support ethanol in the first place.

For an analogy, suppose Chick-fil-A begins running commercials touting the advantages of eating white meat over burgers. In response, the burger joints put out statistics claiming that if all the McDonald’s and Burger King franchises magically disappeared next Tuesday, then there wouldn’t be enough chicken sandwiches to feed Americans at lunchtime. Therefore, the burger joints would conclude, Americans should disregard the Chick-fil-A ads, because clearly there aren’t enough chickens to go around.

Such an argument would be absurd. If American consumers stopped eating burgers and switched to chicken, then McDonald’s and Burger King franchises would close down (or revamp their menus) and be replaced by Chick-fil-A and other such restaurants. The nation’s cattle ranchers would lose business, but the chicken farmers would see growing business. The market would switch over to cater to what consumers wanted.

A similar process would occur if the government treated ethanol the same way it treated gasoline. On a level playing field, it would be unprofitable for refiners to blend billions of gallons of ethanol into their mix, certainly in the long run. The market would gradually adapt to what made economic sense, namely the refining of oil into conventional gasoline. The share of ethanol would shrink, and ultimately consumers and taxpayers would be richer than they otherwise would have been.

While ethanol would have likely penetrated the market without government subsidies, its production would not have reached the levels that were mandated by the government by the Energy Independence and Security Act of 2007.

Explaining the “Regional Effect” of Ethanol Production on Gasoline Prices

The best way to see that the ostensible benefits of ethanol are due to its displacement of traditional gasoline refining, is the regional effect noted by the paper. The authors note in the abstract:

This report…concludes that over the sample period from January 2000 to December 2010, the growth in ethanol production reduced wholesale gasoline prices by $0.25 per gallon on average. The Midwest region experienced the biggest impact, with a $0.39/gallon reduction, while the East Coast had the smallest impact at $0.16/gallon.

The wording in the quotation above is extremely misleading. The reader gets the impression that gasoline prices were zooming upward, only to be held back by the farsighted politicians who fortunately kickstarted an ethanol program.

In particular, since the “Midwest region experienced the biggest impact” of 39 cents per gallon, while the East Coast “had the smallest impact” at only 16 cents, the innocent reader might get the idea that over the period in question (from January 2000 to December 2010), gasoline prices increased more in the East Coast than in the Midwest. After all, the quotation above makes it sound as if ethanol “helped” drivers in the Midwest 23 cents more than it helped drivers on the East Coast.

Yet the data don’t show this at all, as illustrated in the following table (constructed from EIA’s interactive database) of average refiner prices (through retail outlets) of regular gasoline over the period and regions in question:

As the table above demonstrates, motorists in the Midwest got nowhere near the ostensible 23-cent relative advantage from ethanol, compared to the poor saps on the East Coast. In reality, the roughly 4-cent advantage held by the East Coast (in terms of cheaper wholesale gasoline prices) prevailing on January 2000, had been whittled away to basically zero by December 2010. Looking at the data from a different angle, wholesale prices increased about 5 cents per gallon more in the East Coast, than they did in the Midwest, over the period in question. (The two approaches are yielding apparently different numbers—namely 4 cents in the bottom row versus 5 cents in the far-right column—because of rounding. The two approaches actually give the same number.)

When we step back and think about it, the result reported by the Iowa study couldn’t possibly be right—at least not in the way most casual readers would have interpreted it. If the boost in ethanol production really held wholesale gasoline prices in the Midwest down by 39 cents, versus a smaller impact of only 16 cents in the East Coast, then retailers in the East Coast would have wanted to buy Midwest-produced gasoline because of the 23-cent-per-gallon advantage.  Special environmental regulations particular to each region would not have permitted that purchase directly (i.e. East Coast gas stations can’t literally use gasoline currently produced for Midwest specifications), but if the price discrepancy were large enough, it would make sense for the Midwest refiners to cater to the East Coast market. Competition between regions would still tend to suppress the large gaps in wholesale prices implied by the Iowa study results..

As the data in the table above show, the alleged 39-cent versus 16-cent savings of ethanol don’t exist out in the actual price histories. So where do these numbers come from, and why is the “advantage” to the Midwest so much higher than for the East Coast?

As we explained in the previous section, the study generates its estimates by looking at conventional gasoline refining capacity, inventories of gasoline, and other factors for a certain region (or the country as a whole), and then simulating what would happen if the ethanol production in that region (or country) disappeared.

The reason the effect appears so much more dramatic in the Midwest—thus giving rise to the high 39-cent figure, versus the low 16-cent figure on the East Coast—is that there is naturally more ethanol production in the Midwest. Consequently, industry in the Midwest adapted over the period 2000-2010 to the ethanol availability, which only existed because of federal support. That’s why the Iowa study’s technique spits out the “fact” that ethanol production has held down gas prices more in the Midwest than anywhere else in the country, because the conventional oil refining system there has been relatively displaced by the (artificial) growth in the ethanol sector.

One way to see this in the data is to look at the change in refining utilization rates between the Midwest and the East Coast over the period in question:

Utilization of Crude Oil Refinery Operable Capacity

Source: EIA

As the chart shows, since 2005 oil refinery utilization rates have dropped more in the East Coast than in the Midwest. Loosely speaking, when it comes to refining oil into gasoline, the situation in the Midwest is much “tighter” than on the East Coast.

More investigation would be needed to determine exactly how these different paths of adaptation played out. Yet the numbers show the sense in which the Midwest currently has less “room for error” with respect to conventional refining of crude oil. This factor is partly responsible for the Iowa study’s regression results, showing that ethanol “held down” gas prices more in the Midwest than on the East Coast.

To reiterate the most important point: When the Iowa study says ethanol “held down” gas prices, it is very misleading. The actual wholesale prices between the two regions have stayed within 5 cents of each other over the decade. Rather, what happened is that the development of the (federally supported) ethanol sector retarded the development of the rest of the market, either in capacity or its ability to import gasoline produced elsewhere (such as Canada).  We should not conclude that if the government had never supported ethanol, then drivers in the Midwest would currently be paying 39 cents more per gallon.

Conclusion

The recent Iowa State study claiming that ethanol production has suppressed the growth in gasoline prices is very misleading. It takes for granted the current refinery capacity and other infrastructure that industry uses to deliver gasoline to motorists, without realizing that federal policies over the years have distorted the development of these markets. Ethanol only survives in the market place at its current levels because it is propped up by artificial mandates and preferential tax treatment.

The regression analysis of the Iowa study doesn’t accurately capture the timeline that would have occurred had the free market been allowed to operate. Of course a sudden disappearance of all ethanol would cause a bigger price spike in the Midwest than in the East Coast. That’s because the artificial federal support has displaced the development of oil-based gasoline delivery in the Midwest more than in other regions. The fact still remains that ethanol (at its current market share) is very inefficient. Taxpayers and consumers would be richer if the government dropped its support programs for it.

The ethanol program has been disastrous energy, environmental, and economic policy.  Fortunately, Senator Tom Coburn is providing his Senate colleagues with an opportunity to end it.

The ethanol program is the only significant government program that features a trifecta of subsidies:  a mandate to use a specific product (in this case, 36 billion gallons a year of ethanol), a refundable tax credit to those forced to buy and sell it (45 cents per gallon), and a tariff on competing imports that could lower the costs to motorists. In fact, the mandate has been such a lucrative federal program for the ethanol industry that other rent seeking industries, like wind and solar, are working to get the same deal for themselves. Preserving this program will only seek to strengthen the resolve of these and other political capitalists.

After several years and billions of taxpayer dollars, what has been the result of the ethanol program?

Less energy. Ethanol is only about two-thirds as powerful as gasoline (here). Additionally, it takes almost as much energy  to make ethanol than ethanol itself provides (here).  Ethanol also damages engines because it acts both as a solvent (deteriorating rubber and plastic in engine components) and it absorbs water, which tends to complicate the combustion process in many engines (here).

More pollution. In addition to requiring more fuel to go the same distance (directly countering the government’s mileage mandates), ethanol also produces more smog than gasoline on a per unit basis (here) and (here). Moreover, there is some substantial work that suggests that, when all factors are considered, ethanol results in greater GHG emissions (here).

Economic damage. Because the United States now burns its food for fuel, rather than export a significant portion of it as it has typically done, worldwide prices of grain have increased significantly.  Wheat, corn, rice, sugar, and oilseeds have all experienced dramatic price increases since 2005 (here).  These price increases push more people into poverty worldwide, resulting in an increase in avoidable mortality (perhaps as many as 190,000 deaths annually) and morbidity (here). Rather than tap America’s huge oil supplies the government will not let us touch on government lands, we immorally burn our food.

Political corruption. Part of opposition to Senator Coburn’s amendment is rooted in the notion that getting rid of subsidies is tantamount to a tax increase. This is patently absurd. A subsidy cleverly delivered through the tax code – like the blenders’ refundable tax credit for ethanol – is no different in economic or practical terms than a subsidy delivered through a direct grant or other handout. The unfortunate reality is that the code is littered with such subsidies; each one a testament to the power of political corruption rather than belief in the wisdom of consumer choice.

It is essential both to the restoration of fiscal sanity as well as the assertion of individual freedom in economic matters to remove these types of distortions from the tax code. A rigid insistence on a framework that treats the removal of special-interest subsidies (which virtually by definition apply to a very small set of taxpayers) the same as generally applicable tax increases is nonsensical and must be rejected.

We applaud Senator Coburn for his attention to this important matter and sincerely hope that none of his fellow colleagues sacrifice the end of these destructive policies on the altar of procedural nuance.

Obama on Oil Production: Raising Costs Leads to Increased Output?

The single worst component of Obama’s address was his prescription for getting more domestic oil production:

[W]e’re actually pushing the oil industry to take advantage of the opportunities that they’ve already got.  Right now the industry holds tens of millions of acres of leases where they’re not producing a single drop.  They’re just sitting on supplies of American energy that are ready to be tapped.  That’s why part of our plan is to provide new and better incentives that promote rapid, responsible development of these resources.

Well that’s interesting, the President is going to have the federal government provide “new and better incentives” that promote the development of domestic petroleum resources.

He didn’t elaborate in the speech at Georgetown, so let’s try to guess what he has in mind. When the Obama Administration wants to provide incentives to promote the development of “green” technologies, it does things like give those companies direct subsidies or tax breaks, and it threatens to put new taxes on competing technologies.

So by that logic, if Obama tells the Georgetown students he is going to “provide new and better incentives” for the “rapid” development of domestic oil, he must have in mind reducing the fees that the government charges to energy companies, or perhaps he wants to reduce taxes on domestic oil producers?

Actually no, the Obama Administration wants to do the opposite of these things: it wants to raise the fees it charges for leasing federal land to oil development, and it wants to raise the taxes paid by oil companies by $3.5 billion next year alone. Apparently, the way to promote “green” energy is to subsidize it, but the way to promote fossil energy is to impose higher fees and taxes. Funny how that works.

The Administration’s “logic” regarding oil leases is liable to drive one insane. The claim is that oil companies pay billions of dollars to the federal government to obtain the right to drill, and then purposely don’t drill in order to drive up the price of oil. But wouldn’t it be cheaper to not bid on the lands in the first place? And why is the oil industry in favor of expanded access to drill offshore and in ANWR, if their nefarious plot is to keep oil off the market and push up prices?

Obviously the whole thing makes no sense. The reason the oil industry doesn’t extract oil from certain leased land is that oil isn’t distributed evenly across the globe. Companies can’t be sure where it is profitable to set up a major well until they explore the land. The real beneficiaries of stunting U.S. oil production aren’t domestic oil companies, but state-owned oil companies around the world. It’s a good thing Energy Secretary Chu wasn’t in charge of Thomas Edison’s search for a commercially viable light bulb. After the 3,000^th failure, Chu would no doubt have accused Edison of purposely driving up the price of incandescents. (Of course that would be construed as a good thing, in light of climate change rhetoric…)

The Rise of the Technocrats

Speaking of Secretary Chu, apparently he’s one smart fellow. Obama had these kind remarks for his cabinet pick:

I’ve asked Secretary Chu, my Energy Secretary, to work with other agencies, the natural gas industry, states, and environmental experts to improve the safety of this process [of extracting natural gas from shale].  And Chu is the right guy to do this.  He’s got a Nobel Prize in physics.  He actually deserved his Nobel Prize.  (Laughter and applause.)  And this is the kind of thing that he likes to do for fun on the weekend.  (Laughter.)  He goes into his garage and he tinkers around and figures out how to extract natural gas.  (Laughter.)

I’m going to embarrass him further.  (Laughter.)  Last year, when we were trying to fill — figure out how to close the cap, I sent Chu down to sit in the BP offices, and he essentially designed the cap that ultimately worked, and he drew up the specs for it and had BP build it, construct it.  So this is somebody who knows what he’s doing.  (Applause.)  So for those of you who are studying physics, it may actually pay off someday.  (Laughter.)

If Secretary Chu really did invent the cap, he did a good job maintaining his secret identity. Like Obama’s infamous “spread the wealth around” remark to Joe the Plumber, his comments in the above quote reveal his central planning worldview. Got a problem? Just get the right expert and have him solve it. Whether it’s unemployment, climate change, or democracy in the Middle East, we just need to get the smartest guys (and gals) in the room and impose the solution on everybody—with the bill sent to the American taxpayer, of course.

More Nonsense on Biofuels

Obama treated the Georgetown students to some more bad economics on the topic of biofuels:

Now, another substitute for oil that holds tremendous promise is renewable biofuels -– not just ethanol, but biofuels made from things like switchgrass and wood chips and biomass.

…

I’m directing the Navy and the Department of Energy and Agriculture to work with the private sector to create advanced biofuels that can power not just fighter jets, but also trucks and commercial airliners.

So there’s no reason we shouldn’t be using these renewable fuels throughout America.  And that’s why we’re investing in things like fueling stations and research into the next generation of biofuels.  One of the biggest problems we have with alternative energy is not just producing the energy, but also distributing it.  We’ve got gas stations all around the country, so whenever you need gas you know you can fill up — it doesn’t matter where you are.  Well, we’ve got to have that same kind of distribution network when it comes to our renewable energy sources so that when you are converting to a different kind of car that runs on a different kind of energy, you’re going to be able to have that same convenience.  Otherwise, the market won’t work; it won’t grow.

Over the next two years, we’ll help entrepreneurs break ground for four next-generation biorefineries -– each with a capacity of more than 20 million gallons per year.  And going forward, we should look for ways to reform biofuels incentives to make sure that they’re meeting today’s challenges and that they’re also saving taxpayers money.

And thus the boondoggles grow. Federal law already mandates that the U.S. produce 100 million gallons of advanced biofuel in 2010, yet because the technology wasn’t ready, not a single drop was actually blended into commercial gasoline. Now, with the president’s call for subsidizing the distribution network, the Administration gets to hand out money not just to farmers—so they can put food into gas tanks—but to hand it out to (union-connected) infrastructure projects.

It’s worth pointing out that the MPG/BTU adjusted price of ethanol has broken $4 per gallon. Although “E85” looks cheaper at the pump, this is an illusion since cars get worse mileage when ethanol is blended with conventional gasoline. Even as Obama tells the students of his commitment to biofuels, there are discussions afoot to rollback the ethanol tax credit for refiners.

Mandated Energy Efficiency Won’t Work

Just to make sure he distributed the blows to various sectors of America’s economy, Obama also promised further crippling regulations on the struggling auto manufacturers:

[L]ast year, we established a groundbreaking national fuel efficiency standard for cars and trucks.  We did this last year without legislation.  We just got all the parties together and we got them to agree — automakers, autoworkers, environmental groups, industry.

So that means our cars will be getting better gas mileage, saving 1.8 billion barrels of oil over the life of the program — 1.8 billion.  Our consumers will save money from fewer trips to the pump -– $3,000 on average over time you will save because of these higher fuel efficiency standards.  And our automakers will build more innovative products.  Right now, there are even cars rolling off the assembly lines in Detroit with combustion engines — I’m not talking about hybrids — combustion engines that get more than 50 miles per gallon.  So we know how to do it.  We know how to make our cars more efficient.

But going forward, we’re going to continue to work with the automakers, with the autoworkers, with states, to ensure the high-quality, fuel-efficient cars and trucks of tomorrow are built right here in the United States of America.  That’s going to be a top priority for us.  (Applause.)

This summer, we’re going to propose the first-ever fuel efficiency standards for heavy-duty trucks.  And this fall, we’ll announce the next round of fuel standards for cars that builds on what we’ve already done.

These remarks illustrate yet again the central-planning, technocrat mentality of this Administration. Just because something is physically possible doesn’t mean it’s economically efficient. Americans know how to grow oranges in hot-houses in Alaska; that doesn’t mean it makes economic sense to mandate the operation.

Besides driving up costs and making vehicles more dangerous for motorists, there’s the awkward fact that drives for energy efficiency may not reduce total energy consumption. “Jevon’s Paradox,” named after the economist William Stanley Jevons, occurs when people consume more total energy when the relevant price becomes cheaper. For example, if the American vehicle fleet becomes more fuel-efficient, then Americans will tend to drive more miles per vehicle. Thus it’s not even clear that on the narrow criterion of reducing total oil imports, Obama’s proposals make any sense.

Conclusion

In light of the string of economic fallacies contained in President Obama’s remarks on his new blueprint for America’s energy future, we can only hope that most Georgetown students were looking at their smart phones during the address.

The EPA’s decision made in October 2010 to allow a 15 percent blend of ethanol into the gasoline mix for model year 2007 and newer cars seems to be motivated largely by politics since that decision was made before the 2010 election where candidates in Midwestern corn states could tout the decision to voters. A further evidence of the politics involved is witnessed by the House of Representatives voting 286 to 135 to block the EPA from using federal funds to implement the increased ethanol volume in gasoline in the continuing resolution to keep the government funded while the fiscal year 2011 budget is being debated.

Among those opposing the E15 implementation are the

• National Automobile Dealers Association and the Alliance of Automobile Manufacturers who fear that E15 will damage older cars whose owners mistakenly use E15, that service repairmen could misdiagnosis engine problems by not realizing that the wrong fuel was used, and that damage could occur to the engine, catalytic converter, vehicle diagnostic tests, and/or the check engine light.
• Engine Products Group who represent carmakers and manufacturers of small engines for boats, snowmobiles, and lawnmowers who fear damage to their products.
• Food industries who fear that increased corn demand will result in higher prices for food and livestock feed.

EPA’s E15 Ruling

In March 2009, Growth Energy, a coalition of U.S. ethanol supporters, and 54 ethanol manufacturers applied for a waiver to increase the allowable amount of ethanol in gasoline from 10 percent ethanol to 15 percent ethanol. In order to protect the emission control systems of vehicles and engines, the Clean Air Act prohibits the use of fuels or fuel additives that are not substantially similar to those used in certifying vehicles and engines to emission standards. The Clean Air Act, however, allows EPA to grant a waiver of this prohibition for a fuel or fuel additive if it can be demonstrated that vehicles and engines using the fuel additive will continue to meet emission standards over the “full useful life” of the vehicle.

To respond to the request from Growth Energy and ethanol manufacturers and the provisions of the Clean Air Act, the EPA partially granted a waiver to allow gasoline to contain 15 percent ethanol (E15) for use in model year 2001 and newer light-duty motor vehicles (e.g. cars, light trucks, sport utility vehicles and vans). First, on October 13, 2010, EPA granted a partial waiver for E15 for use in model year 2007 and newer light-duty vehicles, followed by another partial waiver to allow E15 in vehicles of model year 2001 to 2006 made on January 21, 2011. According to EPA, their decisions were based on tests conducted by the U.S. Department of Energy (DOE) and other information regarding the potential effect of E15 on vehicle emissions. EPA is now working on regulations that will deal with the conditions of ensuring fuel quality and mitigating misfueling. One way to deal with misfueling is to place labels on the product at the pump to identify it as E15 and to indicate its use for 2001 or newer vehicles. EPA will conduct quarterly reviews to ensure retail stations comply with the labeling requirements at the pumps.

Numerous industries have participated in a legal suit against EPA’s waiver including the Engine Products Group, representing carmakers and manufacturers of smaller engine-powered products, and food industries including the Grocery Manufacturers Association, National Meat Association, National Chicken Council, National Pork Producers Council, Snack Food Association and American Frozen Food Institute. Oil companies and refineries are also parties to the suit. In the lawsuits, the groups claim that the EPA violated the Clean Air Act by approving E15 for use in some vehicles, but not in others.

According to Charles Drevna, President of the National Petrochemical and Refiners Association (NPRA), “This goes beyond the matter of EPA violating federal clean air law by granting partial waivers for E15. EPA’s decision to allow E15 in the marketplace before adequate testing has been conducted disregards the safety of consumers. NPRA’s members are committed to providing safe, reliable fuels to the American people. We stand behind the products our members provide, including the E10 used safely by millions of consumers throughout the country every day.”

Potential Issues Resulting From Increasing Corn-Based Ethanol

Because E15 will require a separate pump and because EPA has not absolved blenders from potential liability from customers, blenders are reluctant to implement it. Automobile manufacturers and blenders both worry about engine damage liability. Some environmental and food-producing groups feel that corn-based ethanol is bad for the environment and raises food prices. The Outdoor Power Equipment Institute and the Specialty Equipment Market Association are worried about E15’s impact on older cars and small engines. EPA did not approve the use of E15 for use in smaller engines, like the ones used in boats, snowmobiles and lawnmowers, and in vehicles of model year 2001 and older.

Burning ethanol can cause toxic air pollutants to be emitted from vehicle tailpipes, especially at higher blend levels such as E15. Because ethanol burns hotter than gasoline, catalytic converters can break down faster. Newer vehicles have oxygen sensors which allow them to adjust combustion and protect the catalysts, but older vehicles may have problems. Fueling older cars with the new blend could result in serious damage to the engines, potentially voiding warranties and raising the number of consumer lawsuits. Corn ethanol advocates have been pushing for a liability waiver for oil companies and retailers that would protect them from lawsuits arising from drivers filling their tanks with the wrong fuel.

The food industry is having problems with the increase in ethanol blend mainly due to price increases. When USDA estimated that 2010 corn production would be 3.4 percent less than in 2009, corn prices went up, putting pressure on the meat and poultry industries and resulting in higher food prices for consumers.  Also, putting more acreage into corn production reduces production of other grains, increasing their prices as well.

According to Joel Brandenberger, President of the National Turkey Federation, “Feed accounts for 70 percent of the total cost of raising a turkey, and corn is the single-largest ingredient in turkey feed.  The spike in corn prices caused by the expansion of corn-based ethanol could be crippling at a time when the turkey industry is just starting to recover.  This dramatic increase in feed prices has led most turkey processors to cut production.  Increasing the ethanol blend to 15 percent would destroy any chance our industry has of recovery in the future.”

The Renewable Fuel Standard (RFS)

In its wisdom, the Congress passed and then-President George W. Bush signed into law the Energy Independence and Security Act of 2007.  That act, among other things, contains a renewable fuel standard that mandates the production of ethanol to the level of 36 billion gallons by 2022, where 15 billion gallons was to be corn-based and the remainder was to come from advanced forms of biofuels, namely cellulosic ethanol. The advanced biofuels contribution, starting at 0.6 billion gallons in 2009 increasing to 1.35 billion gallons in 2011 and 21.0 billion gallons in 2022, however, was found to be unattainable. That forced EPA to issue changes to the original act containing four separate standards that include 1.0 billion gallons of biomass-based diesel by 2012 and 16 billion gallons of cellulosic biofuels by 2022, subject to annual assessments that EPA will set each November for the following year.

The Energy Information Administration represents the Energy Independence and Security Act in its Annual Energy Outlook forecasts, and has found that the original mandates cannot be reached by the targeted dates. As they note, if biofuel quantities are inadequate to meet the initial targets, the legislation provides waivers and the modification of credit volumes associated with each type of biofuel. That is, more advanced forms of biofuels receive a higher credit value compared to corn-based ethanol.

In 2022, only slightly more than 25 billion gallons of biofuels are forecast to be produced–including corn-based ethanol, cellulosic ethanol, biomass-to-liquids, biodiesel, and imported biofuels– 11 billion gallons below the mandate because economic and technological factors prevent cellulosic biofuel production from providing the credits that would be needed to meet the requirement. As oil prices increase and biofuel production costs decline improving their competitiveness, biofuels production eventually surpasses the mandated level in 2022, as seen by the figure below.

Ethanol Subsidies

Various legislation provided tax subsidies for ethanol production since the Energy Tax Act of 1978. For example, the American Jobs Creation Act of 2004 created the Volumetric Ethanol Excise Tax Credit (VEETC) to subsidize the production of ethanol in the United States. VEETC provided a 51-cent per gallon tax credit for ethanol blended into gasoline that was reduced by the 2008 Farm bill to a 45-cent per gallon tax credit. The 2004 bill also provided for a Small Ethanol Producer Tax Credit (SEPTC) of 10 cents per gallon of ethanol produced. The tax credits for blended ethanol with gasoline and for small ethanol producers expired on December 31, 2010.

To encourage domestic production, the American Jobs Creation Act also provided a 54-cent per gallon tariff on ethanol imports that expired at the end of 2010. The Cellulosic Biofuel Producer Tax Credit (CBPTC), which provides producers of cellulosic feedstocks with a $1.01 per gallon credit that includes the VEETC and the SEPTC, was established by the 2008 Farm bill and expires on December 31, 2012.  During its lame duck session, Congress passed a one-year extension on the ethanol subsidies that were to expire at the end of 2010 in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

According to the Energy Information Administration, ethanol subsidies in fiscal year 2007 (the last year the study was done) totaled $3.249 billion in 2007 dollars. On a per unit of production basis, the subsidy cost U.S. taxpayers $5.72 per million Btu, more than 190 times the subsidy for petroleum and natural gas on a per unit basis.

According to the Congressional Budget Office, the cost to U.S. taxpayers of using a biofuel to reduce gasoline consumption by one gallon is $1.78 for ethanol made from corn and $3.00 for cellulosic ethanol. And, the cost to taxpayers of reducing greenhouse gas emissions through the biofuel tax credits are about $750 per metric ton of carbon dioxide equivalent for ethanol and about $275 per metric ton of carbon dioxide equivalent for cellulosic ethanol. CBO cautions, “Those estimates do not reflect any emissions of carbon dioxide that occur when the production of biofuels causes forests or grasslands to be converted to farmland for growing the fuels’ feedstocks. If those emissions were taken into account, such changes in land use would raise the cost of reducing emissions and change the relative costs of reducing emissions through the use of different biofuels–in some cases, by a substantial amount.”

It is likely that ethanol would have penetrated the market even without the subsidies and the mandates because it is added to gasoline to help oxygenate the fuel, allowing it to burn more completely, which ostensibly improves emissions. This is particularly true once methyl tertiary butyl ether (MTBE) was banned by states because of its leakage into ground water. After MTBE, ethanol is the next least expensive oxygenate. However, in the market-based approach, the ethanol volumes would not have reached the levels mandated by the RFS.

The Price of Ethanol

The price of E85, a blend of 85 percent ethanol and 15 percent gasoline used in flex fuel vehicles, on a Btu basis is higher than that of gasoline, which suggests it is inferior in the market compared to gasoline, especially since its price includes subsidies and the RFS mandate. The average national price of E85 is currently $2.98 per gallon, while the national price of gasoline is $3.53 per gallon, resulting in a spread of about 15 percent. While the price of E85 appears to be lower, taking into account that the ethanol component is 34 percent less efficient than gasoline provides an equivalent price of $3.81 per gallon, 8 percent higher than that of gasoline.

Conclusion

The ethanol market is heavily subsidized by a renewable fuel standard and tax credits. Without these incentives, however, the ethanol market would still have penetrated the gasoline blending market because of its properties as an oxygenate fuel, but not to the extent of the RFS mandates. E85 is not price competitive with gasoline on a Btu basis mainly because its ethanol component is 34 percent less efficient than gasoline. Because the gas mileage is poor compared to gasoline and because of the subsidies, the Congressional Budget Office determined that corn-based ethanol has cost consumers an extra $1.78 per gallon of gasoline.

As George Watts, President of the National Chicken Council, said “Rising grain prices driven by the voracious demand for feedstock from the heavily subsidized ethanol industry caused an increase of six percent in the retail price of fresh whole broiler chickens from 2008 to 2010. Channeling even more corn into ethanol will, in time, only drive up the cost of chicken even more.  Consumers will end up paying for the ethanol industry’s demands.  It is time to put an end to government mandates and interference in the market that raise the price of corn.”

Specifically, the impact ethanol has on the issues of liability, auto warranties, food inflation, and the “other economically deleterious effects” of subsidized ethanol.

Just as the U.S. House of Representatives has voted to withhold funding for EPA’s efforts to expand ethanol through e-15, the House of Delegates in the Old Dominion is on record via House Resolution 73 authored by Marshall to “encourage the U.S. Environmental Protection Agency to withdraw its waivers until all pertinent testing on the impacts of e-15 is completed and satisfactory.”

Delegate Marshall, a Republican, now finds himself in company with former President Bill Clinton advising that federal ethanol policy should be reconsidered. The text of Marshall’s resolution – passed by the House of Delegates on February 22, by a bipartisan vote of 69-27 – is as follows:

WHEREAS, the United States domestic biofuels industry, including ethanol and biodiesel, is among the most heavily subsidized industries in America, receiving market guarantees, direct and indirect subsidies, tax incentives, loan guarantees, and protections from imports; and

WHEREAS, the recent extension of the ethanol and biodiesel tax credits by the 111th Congress under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act will cost American taxpayers more than $6.5 billion; and

WHEREAS, there exists a mandated minimum use of ethanol under the Renewable Fuel Standard that provides for 12.6 billion gallons of ethanol in 2011, and thus the marginal increase in ethanol production incentivized by the tax credit is comparatively small at approximately three percent additional production (378,000 million gallons); the effective subsidy for the additional ethanol is approximately $15.45 per gallon; and

WHEREAS, ethanol production in the United States now exceeds the ability of the domestic market to utilize it; the U.S. ethanol industry is now an exporting industry and thus the benefits of the various incentive programs intended for the domestic market now flow to foreign motorists; and

WHEREAS, current U.S. ethanol production levels are projected to consume 39 percent of this year’s corn production according to the U.S. Department of Agriculture’s World Agricultural Supply and Demand Estimates (WASDE) of January 2011; and

WHEREAS the demand for corn for ethanol production negatively impacts animal agriculture in Virginia, including raising the costs of feeding broilers, turkeys, and dairy cows and reducing the profitability of Virginia feeder calves; and

WHEREAS, this excessive use of ethanol has generally led to inflationary pressure in the food sector, leading the U.S. Department of Agriculture to predict “accelerating” food inflation in 2011, especially hitting meat and dairy products through higher livestock feed costs because of ethanol; and

WHEREAS, the U.S. Environmental Protection Agency has granted a partial waiver for the use of blends of e-15, or 15 percent ethanol as compared with the current limit of 10 percent, which if fully implemented across the fuel supply could increase the demand for corn for ethanol production by 50 percent—threatening total use of the nation’s corn supply for fuel, not food; and

WHEREAS, the U.S. Environmental Protection Agency is now a defendant in a lawsuit that claims the waiver was granted prior to the completion of thorough testing to ensure the safety, performance, and environmental impacts of the new fuel for consumers, filed by the Grocery Manufacturers Association, American Frozen Food Institute, American Meat Institute, American Petroleum Institute, National Chicken Council, National Council of Chain Restaurants of the National Retail Federation, National Meat Association, National Pork Producers Council, National Turkey Federation, Snack Food Association, Alliance of Automobile Manufacturers, Association of International Automobile Manufacturers, National Marine Manufacturers Association, Outdoor Power Equipment Institute, International Liquid Terminals Association, Western States Petroleum Association, and National Petrochemical and Refiners Association; and

WHEREAS, a waiver of current standards in favor of e-15 threatens the nation’s small and off-road engines, impacting a variety of sectors, from Virginia’s lawn-care businesses to Virginia’s boaters, hunters, and recreational users of all-terrain vehicles; based on the estimates of AllSAFE, which in comments to the U.S. Environmental Protection Agency voiced concerns on behalf of “250 million Americans that own and operate over 400 million products, including recreational boats and marine engines, chainsaws, lawnmowers, motor vehicles, motorcycles, all-terrain vehicles (ATVs), snowmobiles, generators, and related vehicles and equipment”; and

WHEREAS, a waiver of current standards could force 85 percent of the nation’s nearly 160,000 retail gasoline stations to add new and separate storage tanks at an estimated average cost of $185,000 each totaling approximately $24 billion nationally, leading to higher fuel costs for motorists; and

WHEREAS, most standard auto warranties are nullified by the use of fuels containing higher than a 10 percent blend of ethanol; and WHEREAS, current federal law mandates the use of so-called advanced biofuels, including those made from cellulosic feedstock, though such fuels are not currently commercially available; and

WHEREAS, by 2035 more than half of the ethanol mandated for use in the United States must come from this category of feedstock even though the U.S. Department of Agriculture’s own advisory board, created by Congress in the 2008 farm bill, notes that “after two decades of research without a sustainable technical breakthrough to make cellulosic ethanol competitive, it appears that it is time to re-evaluate the research”; now, therefore, be it

RESOLVED by the House of Delegates, That the Congress of the United States be urged to address the issues of liability, auto warranties, food inflation, and other economically deleterious effects of the current federal ethanol policy and be urged to encourage the U.S. Environmental Protection Agency to withdraw its waivers until all pertinent testing on the impacts of e-15 is completed and satisfactory; and, be it

RESOLVED FURTHER, That the Clerk of the House of Delegates transmit copies of this resolution to the Speaker of the United States House of Representatives, the President of the United States Senate, and the members of the Virginia Congressional Delegation so that they may be apprised of the sense of the Virginia House of Delegates in this matter.

Throwing Money at the “Immature” Technologies

The most obvious example of government interference in energy markets is its explicit use of tax dollars to fund alternative energy sources. As The Hill reports:

The budget calls for $8 billion in investments in clean energy research and development, including $5.4 billion for the Energy Department’s Office of Science and $457 million for solar energy research. Meanwhile, the budget cuts funding for the Energy Department’s fossil energy budget by 45 percent.

“Looking at the budget, it looks like some resources will be advantaged over others,” said Sen. Lisa Murkowski (R-Alaska), the ranking Republican on the committee.

…

“It seems to me that within the administration, you are picking those areas through the budget process that you would like to see advanced,” Murkowski said.

But [Secretary of Energy Steven] Chu stressed that the administration’s “clean energy standard” proposal will be “technology-neutral.” He said the budget reflects an effort by the administration to increase funding for technologies that have not yet matured.

Secretary of Energy, Dr. Steven Chu

“If you look at the history of the United States, there are mature technologies and there aretechnologies that need more help,” Chu said, adding that oil and natural gas are “mature technologies” and solar needs additional research and development. [Bold added.]

Of course, in this context what Secretary Chu means by “mature” is: an energy source able to stand on its own in open competition. Solar and other forms of energy that are dependent on government support are immature in the sense that they would not pass the market test.

Secretary Chu’s terminology is misleading in another respect: It’s not as if scientists dreamed up the idea of harnessing the sun’s energy last summer. No, solar, wind, and other “immature” technologies have been on the government dole for decades. They are not infant industries, but instead are 35-year-olds with no job who still live with their parents.

In order to truly level the playing field and allow entrepreneurs to serve consumers with the best and cheapest energy options, the federal government doesn’t need to give handouts to all technologies. Instead, the government needs to stop trying to steer the energy sector altogether. By all means, cut funding for fossil fuel sources, but cut funding for their competitors as well.

Those who oppose subsidies for “alternative” energies don’t have a vendetta against renewables, nor do they harbor a grudge against the climate. The simple fact is that fossil fuels are currently the most efficient means of delivering energy to American consumers and businesses in a convenient form, in most applications. The government doesn’t need to ratify this fact; it needs to stand back and let market forces decide which technologies are viable, and which are truly immature and therefore should not yet be deployed.

We Told You the EPA Was Hurting Job Creation

The debate over the proposed budget yielded some revealing comments from EPA Administrator Lisa Jackson. Bloomberg reports:

Obama’s budget counters a proposal from Republican lawmakers in the House to slash EPA funding by $3 billion and block the agency from regulating greenhouse gases from industrial polluters such as power plants. The president’s plan calls for about $43 million in new funding for the rules aimed at curbing carbon-dioxide emissions blamed for climate change, according to EPA Administrator Lisa Jackson.

“We need to get started,” Jackson told reporters on a conference call today. “Businesses are waiting right now to make investments, and one of the things they need to know is how we will be addressing carbon pollution going forward.” [Bold added.]

Although she is trying to put a positive spin on the situation, Jackson is implicitly conceding that the threat of new regulations on emissions is stifling investment and its related job creation. As we pointed out in an earlier post, the EPA is not helping the economy, despite the flawed study suggesting otherwise.

Closing Loopholes or Raising Taxes?

For those wishing to see a return to market outcomes in the energy sector, the convoluted federal tax code raises thorny dilemmas. Given that the federal government is going to levy taxes, most free-market economists agree that the ideal system would be a flat rate (perhaps on “consumption” as opposed to “income”) with no deductions or exemptions. By having no “loopholes,” the single bracket rate could be as low as possible, for a desired amount of revenue collection. The low marginal tax rate would then minimize the distortion that the tax code would have on investment, hiring, and other business activities.

Unfortunately, the current federal tax code has graduated brackets and a bewildering array of special exceptions. Businesses have adapted to the current landscape, and if the government “simplifies” the tax code by “closing loopholes”—especially if the move is not tied to a reduction in the tax rates in various brackets—then the government is unambiguously imposing a tax hike. The free-market economist’s goals of a simple tax code, and a low overall tax burden, come into conflict.

Beyond these problems, there is the danger of government abuse, when it can use the tax code in a punitive way to “soak” groups that the public views as having Deep Pockets. Consider the Obama budget’s proposals to extract more revenues from oil and gas companies. Many superficial analyses simply refer to the proposals as “closing loopholes,” but an accounting website shows that the matter is far more nuanced.

Among the reductions in tax breaks for the coal industry are the expensing of exploration and development costs, and the domestic manufacturing deduction and percent depletion for hard mineral fossil fuels. For the oil and gas industry, the budget would repeal the enhanced oil recovery credit, the credit for oil and gas produced from marginal wells, expensing of intangible drilling costs, percentage depletion for oil and natural gas wells, and the domestic manufacturing tax deduction.

Although accounting can sometimes be an art, rather than a science, many of these items—such as depletion of reserves and intangible drilling costs—are legitimate expenses, and ought to be recognized properly by the tax code.

What’s worse, to exempt only the oil and gas industries from eligibility for the domestic manufacturing tax deduction, is clearly a case of using the onerous tax code to punish some firms and reward others. The ostensible purpose of the tax deduction was to give an incentive for firms to “keep jobs in the U.S.” rather than outsourcing them. If the government has now decided that this is no longer a worthy project, then they should end the deduction for all currently eligible firms, not simply the “rich oil companies.”

Conclusion

In general, the Obama Administration’s budget proposal follows the standard pattern of taxing energy sources that work, and subsidizing those that don’t. If the government really wants to get serious about cutting the deficit, creating productive jobs, and protecting Americans from rising energy prices, it should get out of the energy sector altogether. If the government stopped subsidizing some companies, and if it stopped designing arbitrary tax rules to penalize others, then the most efficient energy sources would flourish in an open and competitive marketplace.

Apparently, that’s not all they do.

It seems that the folks at Range Fuels are also pretty adept at converting taxpayer funds into their own personal profit.

In November 2007, with much fanfare, Range Fuels broke ground on a cellulosic ethanol facility in southern Georgia promising to produce one hundred million gallons of ethanol made from wood waste per year by the year 2013.  They also announced they were receiving a $76 million grant from the Department of Energy for their good works.

“Together, the Department of Energy and private sector pioneers, such as Range Fuels, are blending science and technology to advance the President’s goal of reducing our dependence on foreign oil,” said then-President Bush’s Secretary of Energy, Samuel Bodman at the groundbreaking ceremony.

In January 2009, Range Fuels received another $80 million from the federal government, this time in the form of loan guarantees from the Department of Agriculture through something called the Section 9003 Biorefinery Assistance Program.

But last week, according to GPB News (the GPB stands for Georgia Public Broadcasting in case the anti-fossil energy crowd was thinking about blasting the source) reported that Range Fuels is producing one batch of ethanol, shutting the plant down, and laying-off all but four of its employees.

In the same article, Range Fuels technical advisor Bud Klepper states, “This [ethanol] run campaign is to demonstrate that facet of the technology and when we’re done doing that then we’ll shut down.”

Which brings us back to that $76 million DOE grant the company received back in 2007.

It seems that as a condition of the grant, the company only received the first $50 million based upon “the production schedule for the first 20-million-gallons-per-year phase of its Soperton plant” and the other $26 million “will be provided for the construction of the next phase of the project.”

So when Range Fuels technical advisor Bud Klepper (who it turns out is the original founder of the company) also noted in the GPB News article that this first run of ethanol at the Soperton plant was part of an agreement with the federal government, does that also mean they have satisfied the conditions of the grant and will now be entitled to pocket the full $76 million even though they are shutting down the facility?

Wait, this gets better.  To date, the plant has produced mostly methanol, which doesn’t even meet the current definition of cellulosic biofuel.  No fear, however, because the EPA is considering changing the definition of cellulosic biofuel to include methanol and have already counted Range Fuels’ projected methanol production in its 2011 target for cellulosic ethanol.

The clean energy Samaritans at Range Fuels, including former Bush-appointed FERC Chairman Pat Wood III and billionaire venture capitalist Vinod Kholsa, might want to think about revising their “about us” statement to something more suitable like:

“We convert hard-earned taxpayer money that would otherwise be used to pay down the debt (or better still remain in your pocketbooks for you to spend) into just enough ethanol (but mostly methanol) to satisfy the terms of our DOE grant, pocket the dough, shut down the plant, and lay off all of our employees.”

Welcome to the green energy economy, where, like so many other examples, taxpayer money is flushed down the drain while lining some peoples’ pockets.  Let’s hope this time the shutdown is only temporary.

Energy makes modern society possible. It lights the night, heats our homes, powers our entertainment, and most importantly, it helps us conserve the ultimate non-renewable resource—time. Energy amplifies our ability to do work. Machines help autoworkers assemble cars, power tools help construction workers build our homes, gasoline-powered automobiles help us take care of our families, diesel-power trucks distribute fresh produce across the country, and electricity-powered computers give us unprecedented access to information. But the energy that supplies 85 percent of our needs—coal, oil, and natural gas—are under attack. Politicians and special interest groups are proposing various methods to tax these abundant and reliable sources of energy.

The newest attack on oil, natural gas, and coal are proposals to tax carbon dioxide emissions. Noted economist Art Laffer and current U.S. Rep. Bob Inglis (R-S.C.) argued in favor of a carbon tax in a New York Times[1] op-ed. Author, commentator, and syndicated columnist Charles Krauthammer made his case for a large increase in the gas tax in the Weekly Standard .[2] And Fred Smith, the CEO of FedEx, has publicly declared his support for a tax on carbon dioxide emissions.

The arguments boil down to the assertion that carbon taxes are favorable because they are better than cap and trade schemes. This is correct, but it does not mean that we should implement carbon taxes. Carbon tax implementation would run into many of the same problems that have plagued cap and trade. Politicians cannot resist new opportunities to raise tax revenues and dole out our dollars to favored constituencies, especially when the revenues range from hundreds of billions to trillions of dollars. Carbon taxes might hold some allure, but ultimately they are economically destructive. Neither carbon tax nor cap and trade is good for American consumers.

Reasons Why Carbon and Energy Taxes are a Bad Idea:

1. Carbon taxes are taxes on 85 percent of the energy we use. A carbon tax would impose a new tax on the vast majority of our nation’s economic activity. Fossil fuels power our nation and produce 85 percent of the energy we consume in the United States. [3] Nuclear and hydro power produced an additional 11 percent of our energy.[4] The remaining 4 percent comes from other renewables like biofuels, wind, and solar.[5] Carbon taxes may make hydro and nuclear power more attractive, but few sites remain where it is possible to build large hydroelectric dams and new nuclear power plants face major political obstacles.

2. A carbon tax that is perfectly offset by other tax cuts is neither a practical nor a political reality. The history and nature of politics shows that once politicians institute a tax, they will not give it up. Still, some argue in favor of a “tax swap” to reduce income taxes while implementing a new tax on carbon dioxide emissions. Theoretically, this could make sense. However, the argument does not reflect political reality.

The first challenge for promoters of a carbon tax “tax swap” is getting lawmakers to pass a carbon tax. Lawmakers are very wary of imposing easily identifiable taxes across the entire population. Instead, politicians prefer to hide the costs of government programs, while rewarding discrete and identifiable groups. Implementing carbon taxes would result in an identifiable tax increase similar to the unpopular gas tax increases that led to voter displeasure revolts against President George H.W. Bush and President Bill Clinton.

The second challenge for promoters of a “tax swap” is getting Congress to reduce income taxes. Congress could decrease some income taxes, but it is highly unlikely income taxes would be decreased for all income brackets.

Taxpayers will likely fight against a “tax swap” because they understand there is nothing to stop future lawmakers from increasing carbon taxes or returning income taxes to their former levels. Worse, from a taxpayer’s perspective, a carbon tax will give lawmakers another vehicle to raise large amounts of tax revenue.

Some argue that a revenue-neutral “tax swap” would be economically beneficial. There is, however, little evidence politicians are concerned about the economic effectiveness of plans to reduce carbon dioxide emissions. Most economists agree that carbon taxes are a superior to cap and trade.[6] Carbon taxes are more transparent, more understandable, and less subject to political manipulation. Though economists prefer carbon taxes, congressmen strongly prefer cap and trade plans.[7] Lawmakers have floated many cap and trade proposals, but they have not discussed any serious carbon tax proposals.

Lawmakers say they favor economically efficient global warming plans, but their actions demonstrate that the discussion about efforts to reduce greenhouse gas emissions is not about science or economics—it is about politics. Offsetting income taxes with carbon taxes is not a political reality because politicians will not propose such obvious tax increases on all Americans.

3. Politicians like to reward special interest groups with new tax revenues. When politicians have large amounts of tax dollars at their disposal, they tend to spend it on projects that reward special interest groups. A carbon tax would likely generate over $1 trillion in new revenue. Much of this revenue would likely be spent on inefficient “pork” projects.

The proposed cap and trade schemes contain hundreds of billions of dollars for special interests. The recession has spurred additional calls for hundreds of billions of dollars in additional spending to create “green jobs.” For example, the Center for American Progress is calling on Congress to spend $100 billion to create two million “green jobs”[8] and the Apollo Alliance wants Congress to spend $500 billion to create five million “green jobs.”[9] If a carbon tax were in place, lawmakers would almost certainly divert resources to “green job” subsidies or other similar programs, rather than back into taxpayers’ wallets.

4. It is impossible to create an optimal carbon tax. A carbon tax would need to be set at an optimal level that accounts for the economy and climate science. This is an impossible task. One of the greatest insights of the 20^th century was that economically efficient central planning is not possible. Friedrich Hayek and others demonstrated that central planners cannot aggregate all of the information necessary to make economically efficient choices.[10] Their insight remains true today. A planner (or Congress) cannot create an optimal tax because he or she does not have all of the necessary information. With global warming, the lack of perfect information is further compounded by partisan politics and uncertain climate science. This makes it impossible to determine an optimal carbon tax.

The cost of a carbon tax will increase the costs of nearly everything that is produced, manufactured, or transported, including food and gasoline. How one would construct a credible methodology for accurately and precisely measuring and accounting for these effects remains, perhaps intentionally, an unaddressed question.

5. A carbon tax is a regressive tax, but increased wealth transfers will likely make it increasingly progressive. Lower income families spend more of their income on energy than higher income families. The Wall Street Journal explains:

The Congressional Budget Office—Mr. Orszag’s former roost—estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them).[11]

It appears that some of the proponents of carbon taxes are some of those five beltway analysts who believe the tax code is too progressive. They argue in favor of a carbon tax because it will not retard the formation of capital because it applies to everyone. In other words, since it would be spread over the population without regard to income, carbon tax proponents argue it will not reduce the incentives for high-income earners to generate wealth and create new jobs.

This alleged advantage, however, would never last politically because a carbon tax will be a visible and ever-increasing new tax. In response to that reality, lawmakers are likely to execute new, politically popular transfers of wealth—all with an eye on limiting the tax’s effect on lower-income families. Sales taxes, for example, could be uniformly applied across the economy, but in practice, sales taxes vary on certain items, in part, to help lower-income Americans deal with the increased costs imposed by them.

Carbon taxes would likely be accompanied by various rebate schemes to soften the regressive nature of the tax and make it a more progressive tax. This is currently happening with cap and trade proposals. One plan calls for the government to auction all emission permits and give each citizen a $700 check every year.[12] Another option is to only give the rebate checks from auction revenues to lower-income citizens.[13]

If the government imposes a carbon tax, it is very unlikely that the tax will remain uniform. In the end, not only will it hit the poor with a disproportionate burden of a carbon cap, but it will create yet another series of loopholes in the tax code.  As history has shown, such a plan will further distort the market, render the tax code even more complicated, and hide yet another round of handouts to well-connected special interests.

6. A carbon tax set at a wrong level will cause great economic harm. Even the proponents of carbon taxes, such as Yale University Professor William Nordaus, find that once there is deviation from worldwide participation, the costs of achieving environmental global improvements dramatically rise. Nordhaus’ economic model shows that an overly ambitious and/or inefficiently structured policy can swamp the potential benefits of a perfectly calibrated and efficiently targeted plan.[14] For example, Nordhaus’ optimal plan yields net benefits of $3 trillion ($5 trillion in reduced climatic damages and $2 trillion in abatement costs). Yet, other popular proposals have abatement costs that exceed their benefits. The worst is former Vice President Al Gore’s 2007 proposal to reduce carbon dioxide emissions 90 percent by 2050. Nordhaus’ model estimates this plan would make the world more than $21 trillion poorer than if there were no controls on carbon dioxide.[15]

7. Realistically, a carbon tax would lead to lower energy use and lower economic output because low-carbon replacement technologies simply do not exist. Carbon taxes effectively increase the cost of fossil fuels in an effort to make non-fossil fuels more economically attractive. The technologies to significantly reduce greenhouse gas emissions from fossil fuels, however, are decades away and extremely costly.[16] Instead, the only real way to reduce greenhouse gas emissions in the short run is to reduce energy use and economic output.

Consider automobile use and gas prices. People have begun to transition toward fuel-efficient cars, but the real impact of high gasoline prices in 2008 was to reduce vehicle miles traveled. Just as higher fuel prices led to less driving, higher energy prices will lead to reduced energy consumption. That will lead to a corresponding drop in our ability to make economic choices.

Given current technologies, carbon taxes will result in less economic output. The graphic below illustrates that point. The implication is clear—there is a strong correlation between energy use and GDP.

8. Just because a proposal is “budget neutral” for the government does not mean it is “budget neutral” for American families. Carbon taxes or cap and trade programs will transfer wealth from rural areas, where people drive more and use more energy, to more densely populated urban areas.[17] Not coincidentally, many urban and Northeastern politicians favor a cap and trade program or carbon taxes.

Also, carbon taxes will disproportionally harm states that generate the majority of their electricity from coal-fired power plants.[18] These states tend to be more rural states.

9. Domestic carbon taxes, even in the best case, can only produce marginal impacts on climate. In 2006, China surpassed the United States as the world’s largest emitter of carbon dioxide.[19] But the difference in emission growth rates is striking. According to data from the Global Carbon Project, from 2000 through 2007, global total greenhouse gas emissions increased 26 percent. During that same period, China’s carbon dioxide emissions increased 98 percent, India’s increased 36 percent and Russia’s increased 10 percent. Carbon dioxide emissions in the United States increased by three percent from 2000 through 2007.[20] These data are displayed in the graphic below:

As time goes on, the United States will emit a smaller and smaller share of the world’s total greenhouse gas emissions,[21] which makes unilateral efforts— such as a domestic carbon tax—an ineffective way to influence climate. If the United States were to completely cease using fossil fuels, the increase from the rest of the world would replace U.S. emissions in less than eight years.[22] If we reduced the carbon dioxide emissions from the transportation sector to zero, the rest of the world would replace those emissions in less than two years.[23] Increases in worldwide carbon dioxide emissions are driven by developing economies, not the United States.

10. Domestic carbon taxes will force more industries to leave America. Energy costs are a major expenditure for heavy industry. America’s natural gas prices are the highest in the world,[24] even though we have the world’s sixth largest proven natural gas reserves.[25] The high price of natural gas has significantly contributed to the loss of more than three million manufacturing jobs since 2000.[26] Carbon taxes will drive up the cost of natural gas because companies would use it as a substitute for coal in electricity production, which means increased electricity costs for industry and increased natural gas prices. This is especially troublesome for chemical companies, all of which use natural gas not only as an energy source, but also as a feedstock. Higher natural gas prices will force them to pursue options offshore and overseas, reducing American jobs.

11. Domestic carbon taxes cannot address “leakage.” High costs of doing business in America will force jobs and economic activity to leave this country in favor of countries with lower energy prices. China and India have stated they will not impose burdensome climate regulations on their citizens.[27] Because not all countries will implement carbon taxes, industries will take their jobs to countries where taxes do not eat their profits. Despite a huge American economic sacrifice, global emissions will remain the same.

12. Carbon taxes will lead to calls for trade protectionism. Carbon taxes will lead to reduced economic competitiveness. In turn, organized labor will likely call for new barriers to trade. For example, a top priority for the United Steelworkers is a “border adjustment” to penalize the steel imports from countries that do not curb their greenhouse gas emissions.[28] Increased U.S. trade protectionism will almost certainly lead to greater trade protectionism worldwide that will further harm the American economy and all of America’s trading partners.

13. If we are truly concerned about reducing carbon dioxide emissions, the best path forward is increasing humankind’s ability to adapt. Rich countries and societies can adapt more easily to changed circumstances than poor countries. Environmental improvements are more likely to be realized in prosperous societies than in poorer ones.[29] Carbon taxes and cap and trade reduce society’s aggregate wealth, which make environmental improvements more difficult to achieve.

14. Real world experience counsels against a carbon tax. Ken Green, a former supporter of a revenue-neutral carbon tax, changed his mind because of political and economic realities. Mr. Green writes: [30]

I previously felt that a revenue-neutral carbon tax was a good idea, because it would be both effective and could even be economically beneficial. But three developments have caused me to retract my support. First, rising energy costs have already imposed a huge carbon tax with little GHG reduction. This suggests that the elasticity of energy use could be lower than prior estimates, meaning it would be a useless gesture. Second, as implementations of carbon taxes in Europe and Canada have demonstrated, governments simply cannot implement such tax systems without sucking up some of the revenue, and using the rest to benefit crony-capitalists and steer money to favored constituencies. And finally, because using biofuels such as ethanol would let people save on carbon taxes, demand for such fuels will grow, only compounding the environmental and nutritional mischief they cause.

Just because a carbon tax is a bad idea does not mean that cap and trade is better

Nearly all of the above arguments against a carbon tax apply equally to cap and trade schemes. The only real difference is that cap and trade is a stealth tax that brings a large amount of reporting, implementation, and regulatory problems.

The point of cap and trade plans, like carbon taxes, is to increase the price of energy from oil, coal, and natural gas. Lawmakers may say they have plans to rebate some people so that everyone does not suffer, but it is not possible to craft a cap and trade plan that is perfectly offset by rebates. Just because a politician promotes a plan that is “budget neutral” for government does not mean it is “budget neutral” for American families. When politicians redistribute money, there will be winners and losers. The winners will be the politically well-connected groups and the populace as a whole will lose.

Like carbon taxes, it is not possible to set a cap for cap and trade plans at an optimal level. The smartest people in the world could not aggregate enough data quickly enough to discover the optimal level of the cap or a cap and trade scheme or the level of a carbon tax. It would require too much data about American’s preferences and about uncertain climate science. To complicate matters, if the cap set at the wrong level, or if the plan does not include all nations, the inefficiencies will swamp any possible benefits. Most disturbingly, if the United States unilaterally reduces our carbon dioxide emissions, it will not have a real effect on global carbon dioxide concentrations. This means there will be no environmental benefits to the United States unilaterally reducing carbon dioxide emissions.

Cap and trade schemes are very regressive taxes. They will transfer wealth from poorer areas of the country to wealthier areas. Cap and trade will also reduce energy use and thereby reduce economic output. Also, if we drive up costs, cap and trade plans will reduce American economic competitiveness and cause more jobs to flee to foreign countries.

In short, cap and trade and carbon taxes are two different ways to raise energy prices. Both carbon taxes and cap and trade would harm the United States’ economy without making any meaningful differences in global concentrations of carbon dioxide.

Conclusion

Energy is the lifeblood of the economy. Policies that increase the price of energy harm the economy. However, the entire point of policies like carbon taxes and cap and trade is to increase energy prices. These cost increases make the economy less efficient domestically and it makes the United States less economically competitive internationally. Higher energy prices harms America’s ability to grow its economy at home and it means more American jobs will be shipped overseas.

Now is not the time to implement an economically harmful plan like carbon taxes or cap and trade. Americans need an efficient economy to reverse the recession and improve the lives of American workers. Carbon taxes and cap and trade will just make it more difficult to reverse the recession.

[1] Rep. Bob Inglis & Arthur B. Laffer, An Emissions Plan Conservatives Could Warm To, Dec. 27, 2008, http://www.nytimes.com/2008/12/28/opinion/28inglis.html.

[2] Charles Krauthammer, The Net-Zero Gas Tax: A Once in a Generation Chance, Jan. 5, 2009, http://weeklystandard.com/Content/Public/Articles/000/000/015/949rsrgi.asp

[3] Energy Information Administration, U.S. Energy Consumption by Energy Source, http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/table1.html. (May 2008).

[4] Id.

[5] Id.

[6] See e.g. William D. Nordhaus, Life After Kyoto: Alternative Approaches to Global Warming Policies, NBER Working Paper No. 11889, Dec. 9, 2005, http://www.econ.yale.edu/~nordhaus/homepage/kyoto_long_2005.pdf; N. Gregory Mankiw, One Answer to Global Warming: A New Tax, N.Y. Times, Sept. 16, 2007, http://www.nytimes.com/2007/09/16/business/16view.html; Kenneth P. Green et. al., Climate Change: Cap vs. Taxes, American Enterprise Institute Environmental Policy Outlook, June 1, 2007, http://www.aei.org/publications/filter.all,pubID.26286/pub_detail.asp.

[7] The following is some of the cap and trade bills introduced during the 110^th Congress: S. 2191, The Climate Security Act of 2008; S. 1766, the Low Carbon Economy Act, S. 280, the Climate Stewardship and Innovation Act; S. 309, the Global Warming Pollution Reduction Act; S. 485, the Global Warming Reduction Act; H.R. 620, the Climate Stewardship Act; and H.R. 1590, the Safe Climate Act of 2007.

[8] Robert Pollin, et. al, Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy, Sept. 2008, http://www.americanprogress.org/issues/2008/09/pdf/green_recovery.pdf.

[9] Jeffery Ball, Does Green Energy Add 5 Million Jobs? Potent Pitch, but Numbers are Squishy, Wall Street Journal, Nov. 7, 2008, http://online.wsj.com/article/SB122601449992806743.html.

[10] See e.g. Friedrich A. Hayek, The Use of Knowledge in Society, 4 Am. Econ. Rev. 519 (Sept. 1945).

[11] Editorial, Who Pays for Cap and Trade? Wall Street Journal, March 9, 2009.

[12] James K. Boyce & Matthew Riddle, Cap and Dividend: How to Curb Global Warming While Protecting the Incomes of American Families, Political Economy Research Institute (Nov. 2007), http://www.peri.umass.edu/fileadmin/pdf/working_papers/ working_papers_101-150/WP150.pdf.

[13] Robert Greenstein et. al., Designing Climate-Change Legislation that Shields Low-Income Households from Increased Poverty and Hardship, Center on Budget and Policy Priorities (May 9, 2008), http://www.cbpp.org/10-25-07climate.pdf.

[14] Robert P. Murphy, Rolling the DICE: Nordhaus’ Dubious Case for a Carbon Tax, p. 20, June 2008, http://www.instituteforenergyresearch.org/wp-content/uploads/2008/06/2008-06_rolling_the_dice_murphy.pdf.

[15] Id. at 20.

[16] See Kenneth P. Green, Climate Change: Science and Policy, Oct. 27, 2008, http://www.aei.org/publications/filter.all,pubID.28838/pub_detail.asp.

[17] Alaska has the higher per capita energy use, followed by Wyoming, Louisiana, North Dakota and Texas. The states with the lowest energy use per capita are Rhode Island, New York, Massachusetts, California, and New Hampshire. The average Rhode Islander uses only 18% as much energy as an Alaskan and 22% as much energy as someone from Wyoming. See Energy Information Administration, Table R2. Energy Consumption by Source and Total Consumption per Capita, Ranked by State, 2006, Nov. 28, 2008, http://www.eia.doe.gov/emeu/states/hf.jsp?incfile=sep_sum/plain_html/rank_use_per_cap.html.

[18] The states with the most affordable electricity either generate the majority of their electricity from coal-fired power plants or from hydro power. See Energy Information Administration, Table S1. Energy Consumption Estimates by Source and End-Use Sector, 2006, State Energy Consumption Estimates: 1960 through 2006, Nov. 2008, http://www.eia.doe.gov/emeu/states/sep_use/notes/use_print2006.pdf; Energy Information Administration, Table 5.6.B. Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, by State, Year-to-Date through September 2008 and 2007, Dec. 12, 2008, http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html.

[19] See e.g. Netherlands Environmental Assessment Agency, China now no. 1 in CO2 emissions; USA in second position, June 19, 2007, http://www.pbl.nl/en/news/pressreleases/2007/20070619Chinanowno1inCO2emissionsUSAinsecondposition.html.

[20] Calculated using the emission data from the Global Carbon Project. In 2000, China emitted 910,950 GgC, India 316,804 GgC, Russia 391,652 GgC, and the U.S. 1,541,013 GgC. By 2007, China emitted 1,801,932 GgC, India 429,601 GgC, Russia 432,486 GgC, and the U.S. 1,586,213 GgC.

[21] According to the Global Carbon project, in 2007, China emitted 21% of the world’s carbon equivalent and the U.S. emitted 19%.

[22] Calculated using the emission data from the Global Carbon Project. According to these data, the U.S. emitted 1,586,213 GgC in 2007. Without the U.S., the world’s emissions were 5,203,987 GgC in 2000, increasing to 6,884,787 GgC in 2007.

[23] Calculated using the emission data from the Global Carbon Project. According to EPA, the GHG emissions from the transportation sector total 28% of total U.S. emissions. Environmental Protection Agency, Regulating Greenhouse Gas Emissions Under the Clean Air Act; Proposed Rule, 73 Fed. Reg. 44354, 44403 (July, 30, 2008). Twenty eight percent of the U.S.’s 2006 carbon dioxide emissions are 436,141 GgC. From 2005 to 2007, the world’s emissions, with the emissions from the U.S., grew by 476,324 GgC.

[24] Paul N. Cicio, Testimony of Paul N. Cicio, President of Industrial Energy Consumers of America before the House of Representatives, Dec. 6, 2007, http://www.ieca-us.com/documents/IECAHouseTestimony-NaturalGas_12.06.07.pdf.

[25] Energy Information Administration, Annual Energy Review 2007, Table 11.4, http://www.eia.doe.gov/emeu/aer/txt/ptb1104.html.

[26] See Testimony of Paul N. Cicio.

[27] See e.g. Shai Oster, China Asks Rich to Pay for Cleanup, Wall Street Journal, Oct. 30, 2008, http://online.wsj.com/article/SB122530768753281185.html; Nitin Sethi, As Climate Talks Resume, India Accuses UN of Bias, The Times of India, Aug. 21, 2008, http://timesofindia.indiatimes.com/Climate_talks_resume_today_India_accuses_UN_of_bias/articleshow/3386789.cms.

[28] Christa Marshall, Report says climate rules could shut down energy-intensive companies, ClimateWire, Feb. 2, 2009.

[29] Bruce Yandle, Environmental Kuznets Curves: A Review of the Findings, Methods, and Policy Implications, 2004, http://www.perc.org/articles/article207.php.

[30] Kenneth P. Green, Climate Change: Science and Policy, http://www.aei.org/publications/filter.all,pubID.28838/pub_detail.asp.