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.

[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.

Last December, California released a draft low carbon fuel standard (LCFS) which calls for a 10.5 percent reduction in the carbon intensity of gasoline and a 10 percent reduction for diesel. Following California’s lead, representatives of 11 Northeastern states recently signed an agreement to pursue a region-wide low-carbon fuel standard.

The proponents of LCFS claim the plan’s goal is to reduce emissions from motor vehicles and home-heating fuels. But as this analysis shows, an LCFS is another tax on transportation. An LCFS increases the price of gasoline and home heating oil, leads to more oil imports from the Middle East, and penalizes oil imports from our largest trading partner and biggest oil supplier—Canada.

What is a Low Carbon Fuel Standard?

For all practical purposes, LCFS is a new tax on gasoline and heating oil. It is new regulation which requires the reduction of carbon dioxide emissions associated with the production (including land use changes), manufacture, transportation and combustion of transportation fuels.

According to the letter of intent signed by 11 states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New York, New Hampshire, New Jersey, Pennsylvania, Rhode Island and Vermont) participating in the Northeastern LCFS scheme, an LCFS is a “market-based, technologically neutral policy to address the carbon content of fuels by requiring reductions in the average lifecycle GHG [greenhouse gas] emissions per unit of useful energy.”

Despite the assertions of LCFS proponents, an LCFS is not market-based— it’s a classic top-down regulation. It is not entirely technology neutral—in practice it obviously penalizes certain fuel-producing technologies. More importantly, it does not address the difficultly and possibly impracticality of accurately calculating “lifecycle GHG emissions.”

Seven Reasons Why LCFS Schemes are Flawed:

1. LCFS are based on the Field of Dreams principle—if you mandate it, it will come. LCFS are expensive, harmful to consumers, and diverts resources away from more productive investments. Breakthroughs in technology occur in the marketplace, not in government committee rooms. Policymakers are free to set standards and goals—such as 10 percent less carbon intensity or a manned missions to Mars—but that does not mean the technology to economically achieve those goal will immediately follow. For example, a couple of years ago, many people thought we could economically have low carbon fuels by merely increasing the biofuel content of gasoline. The majority of the science, however, does not support this belief (see bullet point 4 below).

2. Biofuel production increases the price of food and makes life more difficult for the world’s poor. Biofuels are “a crime against humanity” in the words of Jean Ziegler, the UN special rapporteur on the right to food. Biofuel takes land that has been used for food crops and replaces the food crops with fuel crops. This unnecessarily takes food out of the mouths of the world’s poor. Increased ethanol production has helped increase food prices and has led to great hardships around the world including food riots. Next-generation biofuels are supposed to somewhat relieve this problem by using non-food crops, such as switchgrass or miscanthus, to produce biofuel, but these crops will still compete for arable land and agricultural resources.

• A nationwide LCFS would dramatically increase the price of gasoline. CRA International found that an LCFS of 8 percent by 2015 would cause motor fuel prices to increase by 140 percent in 2015.[1] An LCFS would reduce motor fuel supplies or cause fuel producers to purchase carbon dioxide offsets.
• Many biofuels emit more greenhouse gases than gasoline. According to a recent study published in Science from the Nature Conservancy and the University of Minnesota, many biofuels emit more greenhouse gases than gasoline. The study’s authors stated that many biofuels produce “17 to 420 times more carbon dioxide than the fossil fuels they replace.” Other research has come to similar conclusions. The Energy and Resources Group at the University of Berkeley found that “if indirect emissions [resulting from the production of ethanol] are applied to the ethanol that is already in California’s gasoline, the carbon intensity of California’s gasoline increases by 3% to 33%.” Corn-based ethanol production not only emits more greenhouse gases than gasoline, but it may also be worse for air quality.[2]
• An LCFS discriminates against oil production from oil sands in Canada and favors oil from the Middle East. The U.S. gets more oil from Canada than any other foreign country. Much of Canada’s oil production comes from oil sands. The production of oil from oil sands requires more energy (and carbon dioxide emissions) to produce than production of crude in the Middle East. As a result, an LCFS favors oil from the Middle East and penalizes our friends to the North.
• An LCFS discriminates against coal-to-liquids technology and oil shale technologies. The United States has vast reserves of coal and oil shale. These sources are not yet economically competitive with other sources of oil, but if prices where to return to last summer’s highs, these technologies would be cost-competitive. One possible source of fuel is coal-to-liquids technology. The U.S. has the world’s largest reserves of coal. At current usage rates, we have 200-250 years of demonstrated coal reserves. Coal-to-liquids could give the U.S. much larger reserves of petroleum fuels. The U.S. also has massive reserves of oil locked in oil shale—at least 800 billion recoverable barrels of oil. This is nearly three times as much oil as Saudi Arabia has in reserves. Because we would need more energy to recover these energy sources than it takes to produce light crude, an LCFS discriminates against these domestic resources.
• If the United States implemented and somehow complied with a nationwide LCFS of 10.5 percent today, the American reduction in emissions would be offset by emissions increases from the rest of the world in less than 80 days.[3] Global warming is a global issue. What matters are not just emissions from the United States, but emissions worldwide. Unilateral changes by the United States alone will not have much of an impact, especially when we are talking about very small reductions in one sector. Because developing countries are dramatically increasing their carbon dioxide emissions, the U.S. will emit a smaller and smaller share of the world’s total greenhouse gas emissions.[4] 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, while the U.S. increase was a mere 3 percent.[5] Because of these increases from developing countries, unilateral actions by the U.S., such as implementation of a nationwide LCFS, will have little to no effect on the global climate. Actions taken by California, or 11 Northeastern states will have even less impact.

Conclusion: An LCFS is Another Tax on Transportation

An LCFS, either nationwide or at the state level, would damage economy without having an impact global temperatures. The technology to implement an LCFS does not currently exist. If an LCFS resulted in increased biofuel use, it would be very harmful to the world’s poor. Finally, for those worried about energy security, an LCFS would favor Middle Eastern oil over Canadian and domestic fuels.

[2] The study will soon be published in the Proceedings of the National Academy of Sciences.

[3] Calculated using the emissions data from the Global Carbon Project. According to EPA, the GHG emissions from the transportation sector total 28 percent of total U.S. emissions in 2006. 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. A nationwide LCFS for the entire transportation sector, if it followed California’s example, would reduce transportation emissions by 10.5 percent, or 45,795 GgC per year. From 2006 to 2007, the world’s carbon dioxide emissions (excluding the United States) increased by 213,436 GgC. At this rate of change, the 10.5percent LCFS-forced reduction in U.S. transportation emissions would be replaced in 78.3 days.

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

[5] 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.

GREEN JOBS: Fact or Fiction?

An Assessment of the Literature

January 2009

By Robert Michaels and Robert P. Murphy

Download as PDF

Introduction and Executive Summary
I. Green Recovery, Center for American Progress
II. Job Opportunities for the Green Economy, Political Economy Research Institute
III. Current and Potential Green Jobs in the U.S. Economy, Global Insight
IV. Renewable Energy and Energy Efficiency, American Solar Energy Society

Introduction and Executive Summary

Data compiled and recently released by the National Bureau of Economic Research (NBER) indicates that not only is the U.S. economy currently in recession, it has been for more than an entire year (since December 2007). What started as a financial crisis on Wall Street quickly evolved into a much deeper economic crisis on Main Street, with unemployment now at a 16-year high. What’s worse, the recovery seems elusive, and a prolonged recession cannot be ruled out. Keynesian economics is once more fashionable in the corridors of power in Washington, with plans taking shape for a massive infrastructure program (much of it expected to be “green”) to get the economy moving again.

In this environment, some have seized upon the “Green Economy” as a cure for both the nation’s current economic ills, and as a way to address the issues of global warming and energy security. According to this view, government at all levels can use fiscal and regulatory measures to spur massive new investments in renewable energies and energy efficiency, which will create millions of new “green jobs.” Proponents claim that such programs will not only rescue the economy from recession, but will also put the country on track to a sustainable, low-carbon energy future. The new Administration and the incoming 111th Congress are in apparent agreement with this overall strategy, differing perhaps only in the details.

Unfortunately, it is highly questionable whether a government campaign to spur “green jobs” would have net economic benefits. Indeed, the distortionary impacts of government intrusion into energy markets could prematurely force business to abandon current production technologies for more expensive ones. Furthermore, there would likely be negative economic consequences from forcing higher-cost alternative energy sources upon the economy. These factors would likely increase consumer energy costs and the costs of a wide array of energy-intensive goods, slow GDP growth and ironically may yield no net job gains. More likely, they would result in net job losses.

In the present article we critically examine four recent studies on the alleged benefits of government programs to foster green job creation: the Center for American Progress’ (CAP) Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy [i], the Political Economy Research Institute’s (PERI) Job Opportunities for the Green Economy: A State-by-State Picture of Occupations that Gain From Green Investments [ii], the U.S. Conference of Mayors’ Current and Potential Green Jobs in the U.S. Economy [iii], and finally the American Solar Energy Society’s (ASES) Renewable Energy and Energy Efficiency: Economic Drivers for the 21st Century [iv]. Although each report is unique, a common characteristic is that they all rest on incomplete economic analysis, and consequently greatly overstate the net benefits of their policy recommendations. Below we summarize these general problems, while in subsequent sections we analyze each report in turn.

Mistaking a labor-intensive energy sector as the goal, rather than efficient energy provision.

Energy is the lifeblood of the economy. The primary objective of the energy sector is to supply cost-effective energy to the broader economy, allowing it to grow and increase the standard of living of its citizens. Artificially pumping up employment in the energy sector per se—and thereby driving down productivity, while driving up costs to the broader economy—is counterproductive to overall net job creation and economic growth. It is a sign of increased efficiency if more energy can be produced and delivered with fewer workers, because this expands the overall output potential of the economy. Yet the green jobs studies that we analyze in this report reach the opposite conclusion, and favor energy sources that require more workers to yield a given amount of energy. By analogy, the number of workers in the U.S. devoted to agriculture has steadily declined over the last century, and this is a healthy sign of progress in the U.S. economy. Government efforts to reverse the trend, and force more workers back into agriculture, would not “create jobs” in the long-run, but would simply raise food prices and shrink other sectors.

Counting job creation but ignoring job destruction.

Even if job creation per se is the goal, the studies fail to properly account for the job destruction that their recommendations would entail. For example, the Center for American Progress (CAP) study recommends a $100 billion expenditure to be financed through the sale of carbon allowances under a cap-and-trade program. CAP estimates that this “fiscal stimulus” will result in the creation of two million jobs [v]. Yet the CAP methodology treats the $100 billion as manna from heaven; it does not consider the direct and indirect adverse effects (including job destruction) of imposing higher costs on a wide array of energy-intensive industries and thereby raising prices for consumers.

Double counting of jobs and overly simplistic treatment of the labor market.

The green studies critiqued in this report implicitly assume that there is a limitless pool of idle labor which can fill the new “green” slots created by government spending. Yet to the extent that some of the new green jobs are filled by workers who were previously employed, estimates of job creation are overstated, perhaps significantly so. In addition, the studies do not account for the rise in worker productivity over time. Thus their long-range forecasts of total jobs created by green programs are inflated, even on their own terms.

To its credit, CAP alludes to potential “inflationary labor shortages from job creation” [vi] due to its proposed program, but dismisses the concern as irrelevant for an economy in recession. The thinking is that the workers going into the new green jobs will simply reduce the unemployment rate, rather than siphoning talented people away from other industries. The CAP analysis ignores the fact that other industries, not favored by the green subsidies or mandates, would have been able to draw on the pool of unemployed workers as the economy recovers. With fewer workers seeking jobs, job creation in “non-green” sectors will be lower than it otherwise would have been. Moreover, some of the infrastructure plans will require a long time to implement and then reach completion. Their implementation over time could contribute to “inflationary labor shortages” once the current recession has passed.

Ignoring the role of the private sector.

Nowhere in CAP or the other three studies is there a discussion of the role of the private sector in their proposed green jobs programs. No consideration appears to have been given to the fact that government cannot direct the labor and capital markets more efficiently than market wage and interest rates. In fact, history is replete with evidence that government lacks this ability. The syn-fuels program of the late 1970s is a classic example of labor and capital being pulled, at government’s direction, into lower-value uses than the industries into which market forces would have channeled them. The studies also omit any discussion of cutting the marginal tax rates on labor and capital to increase incentives to work and invest. Arguably this is the most effective, and only sustainable way to revive economic growth.

How much government support of “green” markets is enough? Are the programs sustainable?

The studies propose potentially massive government intervention in energy markets, both with respect to electricity generation and transportation fuels. It is important to consider the current levels of subsidies before considering further market intervention in the energy markets. In FY 2007, total federal energy subsidies were estimated by the U.S. Department of Energy’s Energy Information Administration (DOE EIA) [vii] at $16.6 billion, spread across more than a dozen energy sources as seen in the figures at the right and below.

On an absolute dollar basis, renewables receive over twice the level of subsidies compared with conventional energy sources. And on a dollar per Btu or MWh basis, the level of subsidy of renewable energy is orders of magnitude (more than 100 times) greater than levels for conventional energy.

Government picking of winners and losers, a classic example of unsound energy policy.

All sources of commercially viable energy have a role in supplying the energy required by U.S. consumers and the nation’s economy. In fact, at some point in the future—especially if oil prices return to their previous levels—it may be efficient for the United States to obtain a significantly larger share of its electricity and transportation needs from renewable energy sources. However, the programs proposed in the studies reviewed in this paper would require, at some level, government officials to make choices as to which technology areas to further support/subsidize (solar, wind, ethanol, etc.). It is very unlikely that government-directed programs picking winners and losers would yield a more efficient energy mix than what would be determined in the market absent massive government intervention. On what basis will government officials make the decisions as to what technologies to support, and given the existing levels of subsidies, would the additional levels of support be sustainable in the future?

Similar reasoning applies to assessments of efficiency measures that “pay for themselves.” If adding new insulation, or installing a solar panel, really would save more money than the initial cost (including interest), then it is unclear why governments need to further subsidize the improvements. Presumably private business and households do not need to be aided in the process of furthering their self interest.

Assuming that potential benefits from new technologies will only occur through government programs.

Another major issue with the studies is to conflate the benefits of new technologies and energy efficiency, with the benefits of government programs in these areas. For example, the American Solar Energy Society (ASES) report estimates that by 2030, the state of Ohio could see two million jobs related to energy efficiency [viii]. Such figures lead it to conclude that “if we fail to invest in RE&EE [renewable energy and energy efficiency], the United States runs the risk of losing ground to international RE&EE programs and industries.” [ix] But if the “we” refers to taxpayers, rather than private investors, the ASES argument is unsound. After all, many industries will provide millions of jobs for Ohio in the year 2030, and this happy outcome doesn’t require government funding or oversight.

Having summarized some of the major shortcomings common to the four studies, we now proceed to an analysis of each

I. Green Recovery, by Pollin et al., Center for American Progress (CAP)

Both of Pollin’s papers, Center for American Progress and Political Economy Research Institute (CAP and PERI), are built around a policy that will allocate $100 billion from the federal government among six “green economy” strategies: retrofits to buildings, expansion of mass transit, building a “smart” electric grid that allows better management of production and consumption, expanding wind power, expanding solar power, and promoting research in “next generation” biofuels [x]. In this section we discuss the CAP study, while in Section II we address the PERI study.

A. No Free Lunch on Emission Allowances: Study Fails to Incorporate the Costs of the Proposed Program

CAP sees a need for only two annual deficit payouts of $100 billion. It expects that in two years the federal government will be auctioning permits required to emit greenhouse gases, and that the program will produce $75 to $200 billion in annual revenue [xi]. If so, as the reasoning goes, the government can invest it in the green program with no adverse effects as business will pay for the permits. In reality the requirement to purchase the permits amounts to a new tax that must be borne by someone. Either output prices will rise or the profits that can be reinvested in businesses will fall. Either way, some of the demand for the economy’s output will vanish. The CAP study touts the benefits of a “multiplier,” whereby federal spending of $100 billion leads to spillover benefits, increasing the total economic expansion beyond the initial injection. Yet CAP fails to acknowledge that this multiplier effect also works in reverse. If carbon-intensive industries must pay an additional $100 billion to the federal government to purchase emission permits, then ultimately this implicit tax hike will contract economic output beyond this figure, because workers in the penalized industries now have less money to spend on local goods and services such as restaurants, etc. The government doesn’t create wealth simply by taking $100 billion from one group of firms and handing it over to a different group of businesses.

B. Flawed Measurements of Green and Other Jobs

The CAP study generates its main results through three steps: (1) estimating the direct effects of the spending on workers and goods, (2) using an input-output table which estimates the “indirect” effect on employment due to purchases made by the direct recipients, and (3) estimating “induced” jobs that come from later rounds of re-spending through a “multiplier” process. CAP’s readers will be unable to trace the path of the calculations in (1) and (2) because it does not present the complex underlying model, instead promising full details in a forthcoming study [xii]. Because CAP has no explicit model to generate induced jobs, the authors searched the economic literature for multiplier values. Faced with a range of possible values (some negative), they arbitrarily chose to estimate them as 1/3 of the total direct and indirect jobs, asserting that the choice was “conservative.” [xiii]

Despite the appearance of sophistication, the CAP analysis generates spurious numbers because of the improper underlying assumptions. In subsection A above, we have already discussed the problem with the “multiplier” approach: it counts the positive spillover effects on job growth from an exogenous increase in spending, but the analysis doesn’t use the same approach to account for the destruction of economic activity from the tax hike (or deficit increase) needed to fund the original injection of federal dollars. The CAP analysis neglects the adverse economic impacts that its recommended cap-and-trade system would yield, particularly for energy-intensive goods and services.

Finally, the input-output model implicitly assumes an infinitely elastic supply of unemployed workers. The CAP analysis counts up all of the jobs created directly and indirectly as a result of the green jobs program, but it does not account for the fact that at least some of those workers (and the money they in turn spend) will be siphoned from other industries. To the extent that some of the workers in the new, green positions simply will have moved from previous jobs, obviously there is no increase in total “spending” in the economy. In fact such cases present net losses to total output, because the government intervention directs those workers from higher-valued occupations into lower-valued ones. (If the opposite were true, then it wouldn’t take federal programs to move the workers.)

C. CAP’s Unrealistic Model of Labor Markets

CAP’s basic model of unemployment is very unrealistic. Unemployment is almost everywhere a transitional stage in which a person moves between a job that he or she no longer has (possibly because of a voluntary separation) and an open vacancy. CAP instead envisions a large number of unemployed who have for some reason lost their jobs and would take any that were available, if only someone (here the government) spent enough money to fund the positions. As an example, CAP notes that employment of construction workers dropped by 800,000 between July 2006 and July 2008 [xiv]. The report calculates that its green program will generate 2 million year-long jobs, and if they are the right types, the 800,000 construction workers will fill some of them, along with 1.2 million others. The study sees no costs of job transfer because recent data tell us that 8 million people will still be unemployed. This might be the case if the unemployed were a large stagnant pool, but they are not.

Workers change jobs and enter or leave the labor market at surprisingly high rates, and employers originate and close job slots with similar speed. In a typical quarter between 2000 and 2005, over 9 percent of U.S. workers changed employers, entered unemployment, or left the labor force. Another 9 percent were hired from other employers, left unemployment upon finding jobs, or entered the labor force from outside [xv]. Construction workers are more mobile than average. The same quarterly data show that for every 100 construction job slots in existence, approximately 14 new ones open up and another 14 are “destroyed” as projects are completed [xvi]. The project-specific nature of much construction work is one factor responsible for their above-average unemployment rates. Implementing CAP’s green policy will not change this characteristic of the construction industry—workers will simply be retrofitting older buildings instead of building new ones.

The unemployed themselves are a heterogeneous group. In 2007, 7.1 million were unemployed at any one time on average. One million of them were on temporary layoffs with high probabilities of returning to their old jobs [xvii]. Another 2.8 million were either entering the job market for the first time or returning from spells out of the labor force when they were not seeking work. Moreover, 1.1 million were between 16 and 19 years old, many surely living with families and hardly in hardship [xviii]. For the workforce as a whole, in October 2008 the median spell of unemployment was 10.6 weeks, during which many received unemployment compensation [xix]. The unemployment rate fluctuates with general economic conditions. In October 2007 it was 6.5 percent for construction workers (all workers average 4.4 percent) but the subprime crisis and drop in housing construction and deteriorating national economic conditions had brought it up to 10.7 percent in October 2008 [xx]. As of the latter month, the median spell of unemployment for construction workers was 8.8 weeks, two weeks less than the national average [xxi].

In short, the CAP study would have us believe that there is a large, stagnant pool of unemployed workers, who can be tapped to fill new green job slots without reducing output in other industries. But in reality, “the unemployed” is a constantly changing group, and government-created job openings will certainly hamper the private sector’s ability to direct job seekers into the most productive outlets.

D. Domestic Content

Economists disagree on many things, but the one area of consensus is that free trade raises living standards for all countries. Yet the CAP study contends that its green program is additionally desirable because a high proportion of the payouts will be spent on domestically produced goods, whose manufacture increases domestic employment:

The green investment program relies much more on products and services made within the U.S. economy and less on imports compared to spending either within the oil industry or on household consumption. These direct and indirect effects on job creation are the most sig¬nificant reason why the green investment stimulus program creates more jobs than a household-consumption stimulus. [CAP, p. 11]

Even on its own terms the CAP analysis doesn’t consider that with a massive new stimulus of $100 billion from the federal government, the green sector may see some of its costs rise, and will turn more and more to foreign imports for some of its key components. There is already a growing volume of international trade in renewables hardware, and the CAP program would amplify the trend [xxii]. There is of course nothing wrong with the renewables industries drawing on the cheapest inputs available, but the trend undercuts one of CAP’s arguments.

To repeat, the goal of energy producers is not to “create American jobs” but to provide energy to consumers at the lowest prices possible. If the energy industry uses some of its earnings to make foreign purchases, this is to contain costs and keep energy prices lower than they otherwise would be.

II. Job Opportunities for the Green Economy, by Pollin and Wicks-Lim (PERI)

As noted in Section I above, both of Pollin’s papers (CAP and PERI) are built around a policy that will allocate $100 billion from the federal government among six “green economy” strategies: retrofits to buildings, expansion of mass transit, building a “smart” electric grid that allows better management of production and consumption, expanding wind power, expanding solar power, and promoting research in “next generation” biofuels [xxiii]. In the previous section, we discussed various shortcomings in the CAP analysis, touting the alleged benefits of this program. In the present section, we focus on an issue unique to the PERI study.

The job-creation strategies recommended in CAP and PERI can only work if a sufficient number of workers with the requisite skills are available. The PERI study seeks to demonstrate that the relevant workers really are available to fill the millions of newly-created green positions. The PERI authors use input-output tables and occupational statistics to choose ten “representative jobs.” For example, wind farms require sheet metal workers, biofuels require chemists, and both require industrial truck drivers. PERI then examines the availability of people qualified for these jobs in each of 12 states. Using data on the numbers in each state employed in each type of job, the study concludes that the requisite skills to carry out its program are currently available.

Although it is less clear in PERI, the CAP study makes clear that “job creation” means that the chosen policy will reduce unemployment rather than take already-employed workers from their positions. If so, the data employed in PERI are thoroughly inappropriate. To see if the newly created jobs can be filled, instead of counting the employed the PERI study should have determined how many qualified people are unemployed. If there are 1,000 machinists in the state and 95 percent of them are employed, there are only 50 people who matter for (net) job creation. If an employed person changes to a green employer and no unemployed are available, his or her previous output is lost – one job has been created and another lost. PERI presents no data on whether the state’s unemployed population have characteristics that would allow them to quickly fill new jobs, many of which appear to require dedicated education or substantial training.

The PERI study fails to note that the skilled workers who are important to its findings generally have lower unemployment rates than the average for the labor force as a whole. In October 2008 the national unemployment rate was 6.1 percent, but “Managerial, Professional, and Technical” workers had an overall unemployment rate of 3.0 percent [xxiv]. The highest occupational unemployment rate was 10.1 percent for construction workers, a consequence of the past year’s collapse of homebuilding. In general, however, the “good jobs” are those with low turnover that have smaller numbers of unemployed. This means that federal efforts to create high-paying jobs will likely fill many of the new positions from the pool of already-employed workers, rather than drawing entirely from the ranks of unemployed workers.

III. U.S. Conference of Mayors, Current and Potential Green Jobs in the U.S. Economy,by Global Insight

A. How to Categorize Green Jobs?

This study and the next (ASES) attempt to estimate long-term employment in growing markets for renewable power and energy efficiency. While PERI and CAP looked at the effects of a single spending injection, these studies examine the jobs created by longer lasting green policies. Any estimates will depend on which particular workers and products are classed as green, and there are no clear boundaries between green and non-green. This arbitrariness allows researchers to choose boundaries that might give their readers quite different impressions about markets. It appears that these two studies are seriously biased toward a vision of large markets with high potentials for growth.

The Conference of Mayors study estimates that there are 751,000 green jobs today. As an example of the problem in defining the boundary between green jobs and ones of a different color, consider the choices of industries and job types to include in “renewable power generation,” an activity that bridges several standardized federal classifications. The study’s authors used a proprietary database to estimate 127,000 jobs in this area—a figure that appears quite high, but one that readers without access to the data cannot analyze. We can, however, conclude that the researchers probably created an overly high figure on several grounds. First, unlike most other studies, this one defined large hydroelectric and nuclear facilities as renewable alongside the more usual wind, biomass, geothermal and solar resources [xxv]. In 2006, nuclear units provided 19.3 percent of the nation’s power and hydroelectric facilities produced 7.1 percent. In contrast, the narrower class of renewables produced only 2.4 percent of the nation’s power [xxvi]. As defined in the study, “renewable” power output is twelve times greater than that of generators customarily defined as renewable by most environmental advocates. If so, considerably fewer than 127,000 workers currently hold jobs associated with non-hydro and non-nuclear renewables.

Other data in the study are also hard to interpret. The study claims that over half of those employed in green jobs (in the combined renewable and efficiency areas) held engineering, legal, research and consulting positions, a seemingly high figure that apparently does not include managers and supervisors. Lacking access to Global Insight’s database, we cannot further check their calculations or comment on the reasonableness of such numbers.

B. Productivity and Employment

As best can be determined, none of the four studies attempts to account for growth in worker productivity. This means that if output of a certain industry doubles, these studies assume that employment will do likewise. In reality, workers everywhere in the economy become more productive with the passage of time – their formal education continues to increase, they accumulate experience on the job, and they have more productive technologies to work with. Adjusting for expected productivity increases dramatically lowers the employment potential calculated in studies like these. A consensus estimate is that worker productivity in the U.S. has increased on average by 2 percent per year since 1970 [xxvii]. The compound growth of productivity means that a worker in 2038 will be the equivalent of 1.81 workers in 2008. If productivity does not increase, the Council of Mayors study projects a growth in green jobs from 750,000 today to 4.2 million in 2038. If we adjust for productivity growth, the planned 2038 outputs of renewable power, retrofits, etc. will require only 2.3 million workers rather than the 4.2 million that the study forecasts.

C. Renewable Generation: Performance and Potential

After broadly defining the renewable industry, the Council of Mayors study goes on to paint a picture of expanding markets that can only grow further. In reality, with the single exception of wind, U.S. power production from renewables has stagnated for the past fifteen years. Table 1 below shows that the total output of wood burning, waste burning, geothermal and solar power plants fell from 73.0 billion kilowatt hours (twh) in 1994 to 69.8 in 2007 [xxviii].

U.S. Power Generated by (non-Hydro) Renewables, 1994 and 2007

Source: U.S. Energy Information Administration, Electric Power Monthly (Aug. 2008) Net Generation by Other Renewables: Total, at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1_a.html

The seemingly impressive growth figures that appear in the Council of Mayors study reflect careful choices of data rather than meaningful trends. For example, on page 7 the study enthuses about a 23% increase in solar output between 2000 and 2007, which equates to 2.95 percent per year. Electricity generated from solar sources (photovoltaic plus thermal) equaled .0145 percent of total power, which grew at 1.28 percent per year in the same period. If its noted recent rates of growth persist, solar will produce 1 percent of the nation’s power supply by the year 2261 [xxix].

The failure of all renewables (other than wind) to expand from 1994 to 2007 occurred in the face of increasing political pressures to build renewables for the mitigation of climate change, including laws in over half the states that require utilities to invest in renewables. Indeed, the growth of wind power is largely an artifact of its favorable tax treatment rather than its economic viability. Wind turbines receive a federal production tax credit, currently 2 cents per kilowatt-hour, accelerated depreciation and additional benefits in some states. Investment in wind turbines has dropped by 75 percent or more in periods when a federal production tax credit lapsed [xxx]. After massive infusions of research and development funding, renewables remain the economic choice only in special situations. Renewables have environmental impacts of their own, and residents in numerous localities are coming to resist them as they already resist the siting of conventional powerplants near them. The growth of a renewables industry is far from guaranteed, and there are no known official projections that match the expected growth figures in the Council of Mayors study.

The document contains other misleading statements about the performance of renewables. With the exceptions of geothermal and hydro power, renewables are intermittent, e.g. solar units only produce when the sun is shining and wind units when the wind is blowing. Reliability requires additional investments in a full scale power grid and conventional generation. Thus the claim on page 6 that “wind generation in 2007 was enough to power more than 2.9 million homes” is misleading. Even though the total power generated by wind was equal to the total power used by 2.9 million households, it is not true that wind alone could have powered them, because of its intermittent nature.

IV. American Solar Energy Society, Renewable Energy and Energy Efficiency: Economic Drivers for the 21^st Century (ASES)

A. Definitional Differences

With no standardized definitions of the renewable and energy efficiency industries, authors of reports like these have a wide range of plausible choices. The Conference of Mayors calculated 751,000 jobs in the two industries today [xxxi]. ASES chose a far more expansive definition, and also provided figures on both direct jobs and indirect ones created by the input purchases of directly funded employers. It estimated 193,550 direct workers in renewable energy, 50 percent more than the Council of Mayors assumed under its own expansive definition of renewables. Both include workers in retrofits and directly related manufactures, e.g. insulation, in their definitions of the efficiency industry. ASES, however, includes jobs in the building of cars that exceed federal fuel economy standards by 10 percent or more, as well as appliances, computers and HVAC equipment that meets Energy Star or similar standards. Definitions like these yield a total of 3.5 million direct jobs in efficiency today, and 8.0 million direct and indirect [xxxii]. To see the arbitrariness, note that ASES’ estimate of today’s total jobs in the efficiency industry is 2.7 times the number of efficiency jobs the Council of Mayors projects for 2038 [xxxiii].

Unllike the Council of Mayors, ASES provides three growth scenarios but does not state their assumptions in detail. There is a “base case” in which laws and technology change little from today, a “moderate scenario” and an “advanced scenario” with legal and technological innovations that strongly favor renewables [xxxiv]. The base case brings forth 16.3 million direct and indirect jobs by 2030, and the advanced scenario 40.1 million. Like all of the other studies, it does not net out any employment lost as opportunities in the conventional power industry vanish and as industries that produce energy-intensive goods shrink due to higher energy costs rippling through the economy. Extrapolating from available data, the study estimates that renewables and efficiency will directly employ 17.4 million workers in 2030 in the advanced scenario [xxxv]. In a projected labor force of 180 million, fully 10 percent will be directly employed in renewables and efficiency.

B. The Implications of Job Creation

The larger the percentage of the workforce engaged in producing renewable power and efficiency, the smaller will be the output of other goods. The ASES study appears to argue that growth in renewable and efficiency workers is in itself desirable, but it is hard to see why if this shrinks the workforce available to produce other valuable goods and services. ASES and the Council of Mayors say nothing about where these workers will come from and how the change will affect the well-being of consumers.

The fact that building and operating renewable power generators requires more labor time than for conventional generators is a signal that the nation should not rush toward renewables in the haste that so many are urging today. If a megawatt of solar capacity requires four times the workers as a megawatt of coal-fired power, building the solar plant makes the nation poorer, other things equal [xxxvi]. The public is worse off because it sacrifices the outputs that those workers could have produced had they been employed elsewhere. The people purchasing the solar power enjoy a lower standard of living than was necessary.

Solar power is expensive, but may have environmental virtues that conventional power does not. The way to make a case for it is to compare its environmental attributes and its cost, which will be higher if more workers are required to build it. All of these studies implicitly argue in favor of renewables and efficiency improvements because building them creates job slots that conventional power does not. But this confuses mere job creation per se with the more important goal of creating high value-added jobs that efficiently use scarce labor resources to produce the most valuable output possible. Other things equal, it is a vice, not a virtue, if one production technique requires more labor hours to produce the same amount of energy. Indeed, it is precisely because of their higher costs that alternative sources currently do not pass the market test, and cannot compete without government assistance.

[ii] Robert Pollin and Jeannette Wicks-Lim, Job Opportunities for the Green Economy: A State-by-State Picture of Occupations that Gain from Green Investments, Political Economy Research Institute, University of Massachusetts, Amherst, June 2008. Cited in text as “PERI.”

[iii] U.S. Conference of Mayors, Current and Potential Green Jobs in the U.S. Economy, prepared by Global Insight, Oct. 2008. Cited as “Conference of Mayors.”

[iv] American Solar Energy Society, Renewable Energy and Energy Efficiency: Economic Drivers for the 21^st Century, prepared by Management Information Services, Inc., 2007. Cited as “ASES.”

[v] CAP p. 3.

[vi] CAP p. 12.

[vii] EIA, “Federal Financial Interventions and Subsidies in Energy Markets 2007” (April 2008), Table ES5, page xvi, available at: http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html.

[viii] ASES p. 46.

[ix] ASES p. 51.

[x] PERI p. 3.

[xi] CAP p. 15. He provides no citations for the dollar amounts.

[xii] CAP p. 20.

[xiii] CAP p. 22.

[xiv] CAP pp. 12-13.

[xv] Steven Davis et al, “The Flow Approach to Labor Markets: New Data Services and Micro-Macro Links,” Journal of Economic Perspectives 20 (Sum. 2006) 3-26, p. 6.

[xvi] Ibid p. 8.

[xvii] Lawrence Katz and Bruce Meyer, “Unemployment Insurance, Recall Expectations, and Unemployment Outcomes,”Quarterly Journal of Economics 105 (Nov., 1990), 973-1002.

[xviii] U.S. Bureau of Labor Statistics, Current Population Survey Table A-27 (Nov. 2008), at http://www.bls.gov/cps/cpsaat27.pdf.

[xix] U.S. Bureau of Labor Statistics, Economic News Release, Table A-9 (Nov. 2008), at http://www.bls.gov/news.release/empsit.t09.htm.

[xx] U.S. Bureau of Labor Statistics, Economic News Release, Table A-10 (Nov. 2008), at http://www.bls.gov/news.release/empsit.t10.htm.

[xxi] U.S. Bureau of Labor Statistics, Current Population Survey Table A-37 (Nov. 2008), at http://www.bls.gov/web/cpseea37.pdf.

[xxii] International trade in renewable hardware is large and increasing. General Electric is the only important US producer of wind turbines, and its share of the domestic market fell from 59 to 44 percent between 2005 and 2007. U.S. Department of Energy, Annual Report on U.S. Wind Power Installation, Cost, and Performance Trends 2007 at 10. China is rapidly increasing its production of photovoltaics for both domestic use and exports.

[xxiii] PERI p. 3.

[xxiv] Engineers, architects, and legal occupations (all important in some job creation studies) were slightly higher, at 3.7 percent. U.S. Bureau of Labor Statistics, Current Population Survey, Table A-30, at http://www.bls.gov/web/cpseea30.pdf.

[xxv] Conference of Mayors, p. 5.

[xxvi] U.S. Energy Information Administration, Electric Power Annual 2007. http://www.eia.doe.gov/cneaf/electricity/epa/epat1p1.html.

[xxvii] See U.S. Energy Information Administration, Outlook for Labor Productivity Growth 2004, at http://www.eia.doe.gov/oiaf/archive/aeo04/issues.html.

[xxviii] U.S. Energy Information Administration, Electric Power Monthly (Aug.. 2008) Net Generation by Other Renewables: Total, at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1_a.html.

[xxix] Even at their 2006 – 2007 growth rates (Solar 19.23%, All power 2.33%), solar becomes 1 percent of total power generated in 2033. Data are from U.S. Energy Information Administration, Electric Power Monthly (Aug. 2008), Net Generation by Energy Source: Total (All Sectors) at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html and Net Generation by Other Renewables: Total (All Sectors) at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1_a.html.

[xxx] Ryan Wiser et al, Using the Federal Production Tax Credit to Build a Durable Market for Wind Power in the United States, Lawrence Berkeley National Laboratory LBNL-63583 (2007) at 3. http://eetd.lbl.gov/ea/emp/reports/63583.pdf.

[xxxi] Conference of Mayors, p. 5.

[xxxii] ASES p. 31.

[xxxiii] The Council of Mayors number (at 17) is the total (4.2 million) less renewable power generation (1.2 million).

[xxxiv] ASES p. 39.

[xxxv] ASES does not split its projections into direct and indirect jobs. Today, however, they estimate direct jobs at 43 percent of the total. ASES p. 31.

[xxxvi] These are the numbers assumed by Daniel Kammen et al, Putting Renewables to Work: How Many Jobs Can the Clean Energy Industry Generate?” University of California Berkeley Renewable and Appropriate Energy Laboratory, 2004 at 10. http://rael.berkeley.edu/files/2004/Kammen-Renewable-Jobs-2004.pdf.

Synopsis (104KB)

Complete Analysis (60KB)

The following comparison of Barack Obama’s and John McCain’s energy and environmental plans comes from the statements of their plans on their official web sites. The text first indicates what the respective plans say on each topic, and then provides IER’s analysis of each topic within the program.

Table of Contents

CAFE
Advanced Vehicle R&D
Electricity Grid
Energy Efficiency
Biofuels
Energy Tech
Energy Independence
Global Warming
• Synopsis
• Nuclear Power
• Windfall Profits Tax
• Renewable Electricity
• Clean Coal Technology
• Domestic Oil Production
• Alaskan Gas Pipeline
• SPR/Tax Holiday
• Energy Speculation

Nuclear Power

Obama: Acknowledges that nuclear power is needed to meet greenhouse gas emissions reduction goals. Says it is necessary to address the security of nuclear fuel and waste, waste storage, and proliferation before expansion of nuclear power can be considered. Does not believe that Yucca Mountain is a suitable site for waste storage. Will lead Federal efforts to look for safe, long-term disposal solutions based on objective, scientific analysis. Will develop requirements to ensure that the waste stored at current reactor sites is contained using the most advanced dry cask storage technology available [1].

McCain: Wants to construct 45 new nuclear power plants by 2030 with an ultimate goal of constructing 100 new plants. Does not want to be dependent on foreign suppliers for nuclear reactors or plant components, supporting their construction in the U.S. [2] Supports Yucca Mountain and research into nuclear-waste reprocessing [3].

Analysis: Analyses of climate change proposals by EIA, EPA, NAM/ACCF and others have shown that nuclear power is needed to meet greenhouse gas emission reduction goals [4]. Nuclear power currently generates about 20% of the electricity in the U.S. [5] but over 75% of the electricity in France [6]. DOE has been working on Yucca Mountain as the waste disposal facility since 1987 but the process has been slowed because of opposition, and recently it was disclosed that it will not be opened before 2025. The Carter Administration banned reprocessing of waste, a “recycling” process. To require, as Senator Obama proposes, that waste storage and other issues be resolved before expansion of nuclear power can occur, would essentially remove the nuclear option from the generation mix in the near and mid-term period when technology options for mitigating greenhouse gas emissions are limited.
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Windfall Profits Tax

Obama: Will require oil companies to take a reasonable share of their windfall profits and use it to provide a rebate to help pay for higher energy costs to U.S. consumers. The rebate would be $500 per individual and $1000 per married couple and would be paid for through 5 years of the “tax” on oil companies [7].

McCain: Does not support a windfall profits tax, which “will hinder investment in exploration and new production.”[8]

Analysis: President Carter enacted a windfall profits tax in 1980. The Congressional Research Service indicated that the tax, which was repealed by President Reagan in 1988, lowered domestic energy production by 1.2% to 4.8%, resulting in increased foreign oil imports [9]. According to the Energy Information Administration, the major oil companies already pay a substantial amount of taxes, which in 2006, totaled $90 billion [10].
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Renewable Electricity

Obama: Ensure that 10% of our electricity comes from renewable sources by 2012, and 25% by 2025. Extend the Federal production tax credit for 5 years to encourage the production of renewable energy [11].

McCain: Encourages the market for alternative, low carbon fuels such as wind, hydro, and solar. He believes in an even-handed system of tax credits that will remain in place until the market transforms sufficiently so that renewable energy no longer merits taxpayers’ dollars [12]. Does not believe in a Federal Renewable Portfolio Standard; believes targets for renewables are best adopted at the state level [13].

Analysis: The production tax credit for wind and other renewables has been extended 6 times, and most recently by the “bailout” bill [14]. Twenty-five states and the District of Columbia currently have renewable portfolio standards, but they differ widely on what they consider a renewable to be and the dates for the targets to be met [15]. Only Texas has met its targets for renewable generation [16]. There are areas, particularly in the south, which do not have good wind resources and would have a harder time meeting Federal targets [17]. Their utilities would have to purchase credits to make up for the shortfall in renewable capacity [18]. The “Renewable Portfolio Standard” is a semantic device, as it is not a standard so much as it is a mandate. By compelling utilities to produce or purchase a certain percentage of their electricity from renewable sources, laws and/or regulations may be requiring consumers ultimately to purchase more expensive energy than they would otherwise choose to do in a free market. Making energy more expensive deliberately is a matter that deserves more public debate. Moreover, making energy more expensive in the U.S. affects American competitiveness in trade and other matters.
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Clean Coal Technology

Obama: Will provide incentives to accelerate private sector investment in commercial scale zero-carbon coal facilities, by instructing DOE to enter into public private partnerships to develop 5 “first-of-a-kind” commercial scale coal-fired plants with carbon capture and sequestration [19].

McCain: Will commit $2 billion annually to advancing clean coal technologies. When commercialized will also export them to developing world economies to promote an international green economy [20].

Analysis: Coal produces almost 50 percent of U.S. electricity [21]. Climate change studies by Government and private agencies have shown that since carbon capture and sequestration (CCS) technology is not currently commercially available, most of today’s coal generating plants would need to be replaced by non-carbon or lower-carbon emitting technologies to meet greenhouse gas targets. This will come at a major expense to the U.S. economy [22]. DOE had been funding a Future Gen clean coal project, but has withdrawn support due to the huge increases in cost. Instead, DOE plans to support only the CCS portion of future projects [23]. The U.S. has the largest supplies of coal in the world. Any comprehensive energy policy must include coal given its predominant role in our electrical supply system.
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Domestic Oil Production

Obama: Wants oil companies to drill in the 68 million acres that they have leased but from which they are not producing energy. Promotes energy production in Bakken Shale in Montana and North Dakota, and in the National Petroleum Reserve-Alaska [24]. Contends companies could produce 4.8 million barrels more per day domestic oil if oil companies were currently producing on all currently-leased areas [25]. Supported limited Outer Continental Shelf (OCS) energy production in formerly-banned areas as part of a broader energy package including concessions for renewable technologies [26]. Opposes energy production in the Alaska National Wildlife Refuge (ANWR) [27].

McCain: Wants to expand domestic oil exploration and production to the previously banned areas of the OCS to lessen U.S. imports of foreign oil, increase U.S. domestic supplies, and reduce the U.S. Federal Trade deficit [28]. Does not support drilling in ANWR at this time [29].

Analysis: Until the U.S. Congress allowed the OCS moratoria to expire at the end of September, American oil leasing had been prohibited on most of the OCS in the lower 48 states since 1982. The moratoria had limited energy exploration and production to a mere 3% of America’s offshore OCS lands. This made the U.S. the only developed nation in the World to restrict access to its offshore energy resources. The Minerals Management Service (MMS) estimates that the outer continental shelf contains 86 billion barrels of oil and 420 trillion cubic feet of natural gas, both conservative estimates since bans on offshore leasing have made it illegal to explore [30]. It is now necessary to ensure that Congress does not reinstate the moratoria as they are threatening to do and that the leases are not tied up in legal disputes.

While neither candidate currently advocates exploration in ANWR, U.S. Geological Survey (USGS) estimates that the “1002 Area” contains a mean expected value of 10.4 billion barrels of technically recoverable oil [31]. The 1002 Area is not designated as wilderness; there are no trees, deepwater lakes, or mountain peaks. The 1002 area could produce about one million barrels of oil per day, which is about 20 percent of our daily domestic production and would make ANWR the single largest producing field in North America [32]. It would also extend the life of the Trans Alaskan Pipeline, which is currently operating at 1/3 of its original capacity. ANWR would generate large amounts of revenue for the federal government from royalties, as well as corporate income taxes. For example, a recent Congressional Research Service Report found that developing ANWR would produce $191 billion in new federal revenues from corporate income taxes and royalties [33].

Additionally, the United States has significant quantities of energy potential in its onshore federal lands that are not leased, as well as in its oil shale deposits, the world’s largest. Unlike other energy sources which require subsidies and/or mandates, the use of government resources to meet our energy needs not only creates jobs, but also enormous quantities of revenue.

The claim that oil companies are deliberately withholding production on 68 million acres has been debunked and is no longer taken seriously by energy analysts [34]. Oil companies do not know exactly where profitable deposits of oil and natural gas will be found until they actually drill, and so naturally at any given time, a portion of leased land will not be in production. If the oil companies were truly withholding 4.8 million barrels per day, that would imply they were ignoring $140 billion in gross revenues per year (assuming a price of $80 per barrel). It would also be curious that oil companies were lobbying for the ability to pay for additional leases on previously banned lands, if they had already paid for access to more oil and gas than they wanted to sell.
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Alaskan Gas Pipeline

Obama: Wants to work with stakeholders to facilitate construction of this natural gas pipeline [35].

McCain: Believes in promoting and expanding the use of our domestic supplies of natural gas, including building the infrastructure needed to transport it [36].

Analysis: Natural gas currently supplies 23 percent of our energy needs [37]. Besides heating many U.S. homes, it is used for electricity production and in industrial processes. It is the least carbon-intensive of the fossil fuels. The Energy Information Administration predicts that natural gas use will grow [38], and many studies have shown that natural gas is needed as a transitional fuel under scenarios to reduce greenhouse gases [39]. Alaska has 35 trillion cubic feet of known quantities of natural gas and experts expect the potential is much greater. These supplies of natural gas could be used in the lower 48 states if construction of the pipeline were undertaken.
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SPR or tax holiday

Obama: Supports releasing 70 million barrels of oil from the government’s Strategic Petroleum Reserve (SPR) to increase oil supplies and reduce gasoline prices [40]. The light oil released from the SPR would be replaced later with heavier oil [41].

McCain: Opposes the use of the SPR to reduce gasoline prices, believing it should be used in the event of an emergency cutoff of imports. Instead, he suggested reducing gasoline prices by temporarily suspending the 18-cents-per-gallon Federal gasoline tax [42].

Analysis: The SPR was developed in 1975 as a response to the 1973 oil embargo against the West. The U.S., in conjunction with other OECD nations, keeps spare stocks of oil in case oil is used as an economic weapon. The President has the authority to release crude from the SPR in time of a national emergency. President Bush has done so in the aftermath of Hurricanes Katrina and Ike, when offshore production facilities and refineries were temporarily closed for repair, replacing the crude once the facilities were operational. Both the SPR withdrawal and temporary Federal tax holiday would have, at best, short-run benefits, and they would come at the cost of reduced security against another oil embargo (for the SPR drawdown) and an increased Federal budget deficit (for the tax holiday). We believe that a better solution than either of these proposals is adding new domestic supplies from the more than 96% of government owned lands and waters currently not leased for energy. This achieves the goal of price relief for consumers, because increased supplies lead to lower oil prices, and it turns the two negatives of the Obama and McCain plans into positives: That is, increasing domestic production reduces U.S. vulnerability to foreign embargoes, and it also would provide extra revenue for the Treasury.
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Energy Speculation

Obama: Plans to enact legislation to close loopholes in Commodity Futures Trading Commission regulations and increase market transparency [43].

McCain: Wants to reform the laws and regulations governing the oil futures market and provide oversight [44].

Analysis: Studies by the Commodity Futures Trading Commission showed that there was no evidence that speculators were responsible for high oil prices [45]. Also, if the price of oil were above the levels that fundamentals of supply and demand could support, there would be growing inventories, which there were not. Successful speculators actually make oil prices less volatile, by buying when prices are low and selling when prices are high (or ”shorting” when prices are high and then covering when prices are low). Major producers and consumers of oil use futures markets to “hedge” themselves against future volatility by locking in a fixed “futures price” of oil. Large investment funds provide liquidity to the commodities futures markets, and allow producers and physical consumers (such as airlines and refiners) to concentrate on their core businesses.

Government restrictions on investment in the oil futures market would only hurt consumers by making the oil market less efficient. New regulations will do nothing to ease oil prices in the long term [46]. Additional supplies help temper any speculation, also. Since President Bush announced the lifting of the presidential moratorium on July 14, 2008, oil prices have fallen by almost 50%. Congress’ decision to allow the OCS energy moratorium to expire October 1, 2008 has further sent a message to markets about American willingness to produce its own energy.
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CAFE

Obama: Will increase fuel economy standards 4 percent per year, going beyond the 35 mpg requirement in 2020 mandated by the Energy Independence and Security Act of 2007 [47].

McCain: Will enforce existing CAFE standards by increasing the penalties for not complying with the standards, which many auto manufacturers currently pay and add to the price of their cars [48].

Analysis: Like all markets, automakers will supply the market with vehicles that consumers demand. In the past, consumers preferred increased horsepower and larger vehicles rather than more fuel efficient and smaller vehicles. In the past, consumers have preferred more sport utility vehicles and light trucks, than smaller vehicles. Higher oil and gasoline prices have moved the car purchasing market to more fuel efficient vehicles, though some consumers still prefer the safety features in the heavier vehicles. The issue related to increasing the CAFE standard beyond the current legislated level is whether technologies exist to meet a higher standard. Also of note, by restricting consumer choice CAFE standards have lead to more deaths and injuries than otherwise because CAFE forces carmakers to build smaller cars than consumers would prefer. CAFE may save gasoline, but it costs lives [49].
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R&D and Tax Credits for Advanced Transportation Vehicles

Obama: Wants to mandate that all new vehicles are flex-fuel vehicles. Spend U.S. tax dollars on advanced vehicle technology; put 1 million plug-in electric vehicles on the road by 2015. Provide a $7,000 tax credit for the purchase of advanced technology vehicles and conversion tax credits. Convert the White House fleet to plug-ins within one year of becoming President. Make half of all cars purchased by the Federal Government be plug-in hybrids or all-electric by 2012. Provide $4 billion in retooling tax credits and loan guarantees for domestic auto plants and plant manufacturers so that new fuel-efficient cars are built in the U.S. rather than overseas [50].

McCain: Supports flex-fuel vehicles and wants automakers to make a more rapid switch to flex-fuel vehicles than their current commitment. Proposes a $300 million prize to improve battery technology for full commercial development. Provides a $5,000 tax credit for purchase of a zero emission car and a graduated tax credit for other vehicles based on their carbon emission levels [51].

Analysis: Studies regarding tax credits show that they have limited ability to spur change compared to their cost to the U.S. Treasury and the American taxpayer. The Energy Information Administration, for example, evaluated the impact of tax credits on the energy system on both a cost and carbon emission basis finding their cost per unit high and their benefit to lowering carbon emissions and energy consumption low [52]. IER believes that prizes for technology development should be privately funded, not taxpayer funded. Prizes should be awarded by private foundations and they would receive the patent rights for their nonprofit.
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Electricity Grid

Obama: Will spend U.S. tax dollars on smart metering, distributed storage and other advanced technologies. Will establish a Grid Modernization Commission to facilitate adoption of Smart Grid practices. Will instruct the Secretary of Energy to: 1.) establish a Smart Grid Matching Grant Program to provide a subsidy of one-fourth of qualifying investments; 2.) conduct programs to deploy advanced technologies for managing peak load reductions and energy efficiency savings; and 3.) establish demonstration projects [53].

McCain: Wants to upgrade the national grid to meet the electricity demands of the 21st century, including a capacity to charge electric vehicles. Promotes deployment of SmartMeter technologies that provide consumers with real-time energy consumption usage to encourage cost-efficient use of power [54].

Analysis: The candidates appear to be silent on the issue of grid instability related to delays, lawsuits and red tape associated with upgrading the grid and building sufficient power capacity to ensure grid stability. In a technology driven modern economy, this is a foundation of economic strength. A recent USDA study of rural community electric demands pointed out a need to double capacity in rural areas by 2020 [55]. The North American Electricity Reliability Council reports that the capacity margins (the amount of electricity necessary to maintain the reliability of the electrical grid) are low and could drop below target capacity margins as soon as 2009 in many areas of the country [56]. The Independent Service Operators throughout the nation predict looming shortfalls in production and transmission capability in urban areas, and new demands from non-dispatchable sources (intermittent sources like new wind and solar projects) only complicate that. Moreover, there is little discussion by the candidates about the inherent conflicts of siting new alternative energy sources.
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Energy Efficiency

Obama: Reduce electricity demand 15 percent from DOE’s projected levels by 2020 by setting demand reduction targets for utilities and more stringent building and appliance standards.

Establish a goal to make all new buildings carbon neutral by 2030. Establish a goal to improve new building efficiency by 50 percent and existing building efficiency by 25 percent. Overhaul the process for setting appliance efficiency standards to eliminate the missed deadlines by the Department of Energy for setting updated appliance efficiency standards. Achieve a 40 percent increase in efficiency in all new federal buildings within 5 years and ensure all new federal buildings are zero-emissions by 2025. Invest in cost-effective retrofits to achieve a 25 percent increase in efficiency of existing federal buildings within 5 years. Provide resources to achieve a 15 percent reduction in federal energy consumption by 2015. Work with states to flip the profit model for the utility sector so that shareholder profit is based on reliability and performance as opposed to total production. Commit to weatherize one million low-income homes each year for the next decade [57].

McCain: Will make greening of the Federal Government a priority by applying a higher efficiency standard to new buildings leased or purchased or retrofitting existing buildings [58].

Analysis: Both candidates support compelling the federal government to use less energy in its operations, strategies that may pay dividends for the largest consumer of energy in the nation. But these strategies will come at a cost. Already, some Federal buildings are kept uncomfortably hot in the summer, and uncomfortably cool in the winter to save energy. The imposition of demand reduction targets for the nation may result in significant additional economic burdens on consumers of energy which would affect consumer prices as well as the prices of the goods and service produced in the U.S. which must compete with other nations’ goods.
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Biofuels, Mandates, & Subsidies

Obama: Will require at least 60 billion gallons of advanced biofuels by 2030. Will spend federal tax dollars, provide tax incentives and government contracts into developing the most promising technologies and their infrastructure. Will mandate all new vehicles are flex-fuel [59].

McCain: Believes alcohol-based fuels hold great promise as both an alternative to gasoline and as a means of expanding consumers’ choices. But, believes a level playing field is needed and will eliminate mandates, subsidies, tariffs, and price supports that focus exclusively on corn-based ethanol and prevent the development of market-based solutions that would provide better solutions [60].

Analysis: The Energy Independence and Security Act of 2007 (EISA) requires 36 billion gallons of biofuels by 2022–15 billion gallons of corn-based ethanol and 21 billion gallons of advanced biofuels [61]. Currently there are no commercially-available advanced biofuels on the market. Based on the lower mandates in the Energy Policy Act of 2005, EIA’s Annual Energy Outlook 2007 [62] showed that economic levels of biofuels were projected to be 7.6 percent (or 14.6 billion gallons) of the 192 billion gallon gasoline market in 2030. Their Annual Energy Outlook 2008 [63], which incorporated the EISA mandate by requiring that the provisions of EISA be met, reached 32.5 billion gallons in 2022, slightly below the target due to the application of waivers and modification of credit volumes resulting from inadequate quantities of biofuels to meet the initial targets.

That forecast was also dependent on the commercial availability of cellulosic ethanol, which is not commercially viable today. Currently there are multiple mandates and subsidies that encourage the sale of ethanol. For example, in many areas of the country retailers are required to sell gasoline that is 10 percent ethanol to meet clean air regulations.

Also there is a 51 cents per gallon of ethanol subsidy for ethanol [64]. Without these subsidies and mandates, the ethanol industry would not have developed as much. This is especially true because there is less energy is a gallon of ethanol than in a gallon of gasoline, it is more expensive to produce ethanol than gasoline, and there are other negative factors such as its impact on water and land usage and food prices. Mandating 60 billion gallons by 2030, 67 percent higher than the current mandate in just 8 additional years is making an already difficult task harder, and could have even more dramatic impacts on food prices and water and land usage issue.

Government mandates of any kind distort markets, and ethanol is no exception. The ethanol mandate is already leading to higher food prices [65]. Higher food prices have led to food riots around the world [66]. Increasing food prices are making life more difficult for the world’s poor, leading UN Special Rapporteur for the Right to Food, Jean Ziegler, to call using food crops to produce ethanol “a crime against humanity.”[67]

Not only are there serious human costs to the current ethanol mandates, but there are large environmental costs as well. Recent studies published in Nature argue that biofuel production releases 17 to 420 times more carbon dioxide than the fossil fuels they replace.”[68] Increased carbon dioxide emissions are not the only environmental harm biofuel production promotes. Biofuel production has also led to converting millions of acres of rainforest into biofuel plantations [69].

Besides the human and environmental products ethanol mandates produce, it is difficult to comprehend how it is possible to mandate the use of a product in the future that cannot presently be produced commercially, such as cellulosic ethanol. The U.S. has the world’s largest oil shale deposits, from which DOE estimates 800 billion barrels are recoverable. Currently it is not produced commercially, and no candidate has supported a mandate for its production by a date certain. The purpose of this comparison is to demonstrate that mandates are by definition, the government picking winners and losers as opposed to freely motivated individuals operating in a free market.
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Energy Technology Development

Obama: Wants to spend $150 billion over 10 years to accelerate the commercialization of plug-in hybrids, promote development of commercial scale renewable energy, encourage energy efficiency, invest in low emission coal plants, advance the next generation of biofuels and infrastructure, and begin transition to a new digital electricity grid [70].

McCain: Will spend $2 billion annually to advancing clean coal technology. Will establish a permanent tax credit equal to 10 percent of wages spent on R&D, which will simplify the tax code, provide an incentive to innovation, make the U.S. more competitive with other countries, and remove the uncertainty facing businesses in their R&D decisions. Faces a level playing field for mandates, subsidies, tariffs, and price supports that promote the development of market-based solutions [71].

Analysis: Markets work better than government-directed programs to finding solutions to problems. This is because government programs are driven by political considerations not economic effectiveness like markets. Since 1978, the DOE has spent over $75 billion on research and development into various energy sources, and our energy problems are more acute than ever [72]. Far larger amounts have been dedicated to energy programs through the tax system, to the same end. During the same period of time, the amount of acreage made available for leasing for energy production to the private sector has plunged dramatically, with the ultimate result of less domestic production of oil and gas.

Meanwhile, permitting of electrical transmission lines, energy pipelines and energy facilities has grown more difficult and time consuming, and in capital intensive industries such as energy, time equals money, which the consumer of energy eventually pays. Even today, large subsidies for alternative energy generation exist on the one hand, while on the other hand, government laws and regulations have led to delays in the deployment of new wind farms or solar energy production facilities. Neither candidate has addressed the schizophrenic nature of the government’s policies upon energy production, transmission and use in the U.S.
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Energy Independence

Obama: Wants to save more oil than we currently import from the Middle East and Venezuela combined within ten years [73].

McCain: Wants to achieve strategic energy independence by 2025. Will continue to import oil from our North American neighbors, Canada and Mexico [74].

Analysis: Imports of oil from the Middle East and Venezuela were 3.53 million barrels per day in 2007 or 26 percent of our total oil imports of 13.47 million barrels per day [75]. The U.S. has sufficient domestic energy resources to replace these imported sources, as about 97% of offshore government lands and 94% of onshore government lands have not been leased for energy production [76]. Furthermore, our oil shale resources have not been touched, with over 800 billion barrels of recoverable shale oil that can be made commercially available with the properly structured Government leasing program. To meet the goals, the candidates will need to remove the red tape from Government restricting and/or delaying the use of these resources [77]. Government actions have for several decades led to severe reductions in the quantity and quality of government lands leased for energy production [78]. By letting energy exploration occur on much less lands, the government has been effectively stockpiling energy at a time when energy prices have hurt the American economy. Allowing more energy production is proven to make a significant difference in energy supplies, as the Energy Information Administration recently reported [79]. When more wells are drilled, more supplies are found. The candidates have not directly addressed this simple fact in a fashion that the American people can understand.
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Global Warming

Obama: Implement a cap and trade program to reduce greenhouse gas emissions 80 percent below 1990 levels by 2050. Require all emission credits to be auctioned. Use $15 billion per year of the auctioned receipts to subsidize the development of clean energy and energy efficiency improvements. Use remaining receipts as rebates and other transition relief for families and communities. Engage with the U.N. Framework Convention on Climate Change and make the U.S. a leader on climate change. Establish a Low Carbon Fuel Standard that requires fuel suppliers in 2010 to begin to reduce the carbon content in their fuel by 5 percent within 5 years and 10 percent within 10 years [80].

McCain: Implement a cap and trade system to reduce greenhouse gas emissions 66 percent below 1990 levels by 2050. Emission permits will eventually be auctioned to support the development of advanced technologies and reduce impacts on low-income American families. Will reform federal government research funding and infrastructure to emphasize the commercialization of low-carbon technologies. Will provide leadership for effective international efforts through actively engaging to lead United Nations Negotiations [81].

Analysis: Under a cap-and-trade system, there is a limit set on total greenhouse gas emissions. Each regulated entity is required to hold an allowance (essentially an entitlement) for the total amount of greenhouse gases they are allowed to emit. Allowances are distributed to emitters by some criterion (e.g. historic emissions), auctioned, or by some combination of the two. Entities are allowed to buy and sell allowances, creating a market price for them. Several cap-and-trade bills have been proposed in Congress, but none has passed to date. Many studies have been done on the various proposals. The studies show that mandates limiting GHG emissions will impose very large costs on the economy in terms of lost GDP, and higher costs to consumers, particularly in the cost of electricity [82].

Because the major growth in greenhouse gases are in developing countries like China, India, and the Middle East, U.S. emission reductions are likely to have little impact on global emissions. For example, if the U.S. were to eliminate all carbon dioxide emissions by 2030, world-wide CO2 emissions would still increase by about 30 percent [83]. In addition, many economists argue that an appropriately calibrated, explicit tax on carbon could achieve the same long-run emissions reductions as a cap-and-trade program, but with less scope for corruption and with lower total compliance costs [84]. (IER does not endorse a carbon tax, [85] but it would be more straightforward than the “stealth tax” of the cap-and-trade approach endorsed by both presidential candidates).
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Citations

1. http://my.barackobama.com/page/content/newenergy
2. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
3. http://www.iht.com/articles/ap/2008/08/09/america/Energy-Next-President-Highlights.php
4. Energy Information Administration, Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html, Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf, and American Council for Capital Formation/National Association of Manufacturers Study of the Economic Impact of the Lieberman-Warner Climate Security Act, http://www.accf.org/nam.html
5. Energy Information Administration, Annual Energy Review 2007, http://www.eia.doe.gov/emeu/aer/contents.html.
6. Energy Information Administration, International Energy Annual, http://www.eia.doe.gov/iea/.
7. http://my.barackobama.com/page/content/newenergy
8. http://www.johnmccain.com/Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
9. Congressional Research Service, Energy Tax Policy: History and Current Issues, http://assets.opencrs.com/rpts/RL33578_20080917.pdf
10. EIA, Financial Reporting System, http://www.eia.doe.gov/emeu/perfpro/btab02.html
11. http://my.barackobama.com/page/content/newenergy
12. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
13. http://news.cnet.com/8301-11128_3-10031450-54.html
14. Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html.
15. Energy Information Administration, Annual Energy Outlook 2008, page 27, http://www.eia.doe.gov/oiaf/aeo/index.html
16. “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Robert J. Michaels, April 2008 Electricity Journal.
17. For example, see this map showing the potential for wind generation http://www.windpoweringamerica.gov/wind_maps.asp and this map showing the potential for solar generation: http://www.nrel.gov/gis/images/us_csp_annual_may2004.jpg.
18. Democrats Challenge Each Other In Battle Over Energy Bill, Ian Talley, Dow Jones Newswires, September 11, 2007.
19. http://my.barackobama.com/page/content/newenergy
20. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
21. Energy Information Administration, Annual Energy Review 2007, http://www.eia.doe.gov/emeu/aer/contents.html.
22. Energy Information Administration, Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html, Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf, and American Council for Capital Formation/National Association of Manufacturers Study of the Economic Impact of the Lieberman-Warner Climate Security Act, http://www.accf.org/nam.html.
23. http://www.energy.gov/news/5912.htm, http://www.fossil.energy.gov/news/techlines/2008/08030-CO2_Capture_Projects_Selected.html
24. http://my.barackobama.com/page/content/newenergy
25. http://thepage.time.com/obama-response-to-mccain-ad/
26. Comparing McCain, Obama energy plans, International Herald Tribune, http://www.iht.com/articles/ap/2008/08/09/america/Energy-Next-President-Highlights.php
27. Institute for 21st Century Energy, U.S. Chamber of Commerce, Washington D.C., http://www.energyxxi.org/NR/rdonlyres/eam4biljadknpedoyypgej2y2lf2df2y5mob4f5hyhzfs7ah577l26gskcrcphj5fy2dq4jaflz4ofushfcv2fwgwgb/PresidentialEnergyPositions20080618.pdf
28. http://www.johnmccain.com/Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
29. Institute for 21st Century Energy, U.S. Chamber of Commerce, Washington D.C., http://www.energyxxi.org/NR/rdonlyres/eam4biljadknpedoyypgej2y2lf2df2y5mob4f5hyhzfs7ah577l26gskcrcphj5fy2dq4jaflz4ofushfcv2fwgwgb/PresidentialEnergyPositions20080618.pdf
30. Offshore Energy & Minerals Management (OEMM), The Minerals Management Service, http://www.mms.gov/offshore/, July 7, 2008.
31. U.S. Geological Survey, http://pubs.usgs.gov/fs/fs-0028-01/
32. http://tonto.eia.doe.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_m.htm
33. http://www.usembassy.at/en/download/pdf/anwr_revenue.pdf
34. http://www.instituteforenergyresearch.org/2008/08/15/bogus-lease-claims-in-use-it-or-lose-it-proposal-stymie-real-energy-security/
35. http://my.barackobama.com/page/content/newenergy
36. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
37. Energy Information Administration, Annual Energy Review 2007, http://www.eia.doe.gov/emeu/aer/contents.html.
38. Energy Information Administration, Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/index.html
39. Energy Information Administration, Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html, Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf, and American Council for Capital Formation/National Association of Manufacturers Study of the Economic Impact of the Lieberman-Warner Climate Security Act, http://www.accf.org/nam.html.
40. Comparing McCain, Obama energy plans, International Herald Tribune, http://www.iht.com/articles/ap/2008/08/09/america/Energy-Next-President-Highlights.php
41. http://my.barackobama.com/page/content/newenergy
42. Comparing McCain, Obama energy plans, International Herald Tribune, http://www.iht.com/articles/ap/2008/08/09/america/Energy-Next-President-Highlights.php
43. http://my.barackobama.com/page/content/newenergy
44. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
45. Interim Report on Crude Oil, Interagency Task Force on Commodity Markets, July 2008, http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/itfinterimreportoncrudeoil0708.pdf, and http://www.marketwatch.com/news/story/cftc-report-undercuts-claim-investors/story.aspx?guid={06B5DBFD-CC90-41A2-A3C0-6F18A3DBC03A}&dist=hppr
46. http://www.instituteforenergyresearch.org/wp-content/uploads/2008/06/oil_speculators.pdf
47. http://my.barackobama.com/page/content/newenergy
48. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
49. See e.g., Sam Kazman, CAFE is Bad for Your Helath, Wall Street Journal (Nov. 13, 2005) http://cei.org/gencon/019,04970.cfm .
50. http://my.barackobama.com/page/content/newenergy
51. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
52. Energy Information Administration, Analysis of the Climate Change Technology Initiative, April 1999, and Analysis of the Climate Change Technology Initiative: Fiscal Year 2001, April 2000.
53. http://my.barackobama.com/page/content/newenergy
54. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
55. http://www.nreca.org/PublicPolicy/issuespotlight/20081013.htm
56. North American Electricity Reliability Council, 2007 Long-Term Reliability Assessment (Nov. 16, 2007) http://www.nerc.com/files/LTRA2007.pdf.
57. http://my.barackobama.com/page/content/newenergy
58. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
59. http://my.barackobama.com/page/content/newenergy
60. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
61. Energy Information Administration, Assumptions to the Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html
62. Energy Information Administration, Annual Energy Outlook 2007, http://www.eia.doe.gov/oiaf/archive/aeo07/index.html
63. Energy information Administration, Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/index.html
64. Energy Information Administration, Assumptions to the Annual Energy Outlook 2008, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html
65. http://web.worldbank.org/WBSITE/EXTERNAL/EXTSITETOOLS/0,,contentMDK:21845834~pagePK:98400~piPK:98424~theSitePK:95474,00.html
66. CNN, Riots, instability spread as food prices skyrocket, Apr. 14, 2008, http://www.cnn.com/2008/WORLD/americas/04/14/world.food.crisis/index.html?eref=rss_topstories.
67. CNN, Riots, instability spread as food prices skyrocket, Apr. 14, 2008, http://www.cnn.com/2008/WORLD/americas/04/14/world.food.crisis/index.html?eref=rss_topstories.
68. The Nature Conservancy, Climate Change and Energy: The True Cost of Biofuel, http://www.nature.org/initiatives/climatechange/features/art23819.html.
69. Mongabay.com, Why is oil palm replacing tropical rainforests?, http://news.mongabay.com/2006/0425-oil_palm.html.
70. http://my.barackobama.com/page/content/newenergy
71. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
72. Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/chap3.pdf
73. http://my.barackobama.com/page/content/newenergy
74. http://www.johnmccain.com//Informing/Issues/17671aa4-2fe8-4008-859f-0ef1468e96f4.htm
75. http://tonto.eia.doe.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbblpd_a.htm
76. http://www.instituteforenergyresearch.org/2008/07/16/who-benefits-from-federal-lease-hoarding/
77. See, for example, http://www.eenews.net/eenewspm/2008/10/17/2
78. http://www.instituteforenergyresearch.org/wp-content/uploads/2008/10/OCSacresleased.jpg, and http://www.instituteforenergyresearch.org/wp-content/uploads/2008/10/FederalLeaseOfferingsAcreageaLeased60-2006.pdf
79. http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/advanced_summary/current/adsum.pdf
80. http://my.barackobama.com/page/content/newenergy
81. http://www.johnmccain.com/Informing/Issues/da151a1c-733a-4dc1-9cd3-f9ca5caba1de.htm
82. Energy Information Administration, Energy Market and Economic Impacts of S.2191, the Lieberman-Warner Climate Security Act of 2007, http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html, Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008, http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf, and American Council for Capital Formation/National Association of Manufacturers Study of the Economic Impact of the Lieberman-Warner Climate Security Act, http://www.accf.org/nam.html.
83. Energy Information Administration, International Energy Outlook 2007, http://www.eia.doe.gov/oiaf/archive/ieo07/index.html
84. See for example Chapter 8, “The Many Advantages of Carbon Taxes,” in the prepublication proofs of Yale economist William Nordhaus’ book, A Question of Balance: Weighing the Options on Global Warming Policies (New Haven: Yale University Press, 2008), available at: http://nordhaus.econ.yale.edu/Balance_2nd_proofs.pdf.
85. See IER’s critique of Nordhaus’ case at: http://www.instituteforenergyresearch.org/2008/06/05/ier-economist-murphy-takes-on-nordhaus-case-for-a-carbon-tax/.

Titusville, Pennsylvania. While historical records indicate that naturally occurring seeps of petroleum were collected and used for a variety of purposes as early as the 1600s, Colonel Edwin Drake was the first to devise a mechanical system to drill into underground reservoirs and secure sufficient quantities of petroleum to make it commercially marketable.
Source: http://www.eia.doe.gov/neic/infosheets/petroleumproductsconsumption.html

What was the first commercially marketed use of petroleum in the U.S.?

Medicine.  Early settlers of northwestern Pennsylvania skimmed petroleum from streams and used it medicinally.  Impressed by the apparent benefits of petroleum as a medicine, about 1849, Samuel Kier, a shipper and merchant, began bottling the petroleum he collected from salt wells on his father’s land and marketed it as a cure for all sorts of human and animal ailments.
Source: http://www.pabook.libraries.psu.edu/palitmap/bios/Kier__Samuel_Martin.html

How much crude oil is supplied to U.S. refineries each day?

In 2007, total refinery input of crude oil averaged 15 million barrels per day.
Source: Energy Information Administration, Annual Energy Review2007, Table 5.8, page 139.

How much of the crude oil/petroleum America uses annually comes from foreign sources?

In 2007, approximately 65% of the crude oil/petroleum used in the U.S. was imported.
Source: Energy Information Administration, Annual Energy Review 2007, Table 5.1, page 125.
Please note that the 65% number is for gross imports. If net imports were used as the numerator, the percentage would be 58%.

How much of the crude oil/petroleum America uses annually is produced within the U.S.?

In 2007, approximately 35% of the crude oil/petroleum used in the U.S. was produced domestically.
Source: Energy Information Administration, Annual Energy Review 2007, Table 5.1, page 125.

The following are the top U.S. producers of crude oil.  Which state produces the most?

The top crude oil-producing state in the U.S. is Texas, followed in order by Alaska, California, Louisiana, and Oklahoma.
Source: http://tonto.eia.doe.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_a.htm

How many barrels of oil does the world consume every day?

In 2007, the world consumed 85.8 million barrels of oil every day.  That is about 42,000 gallons per second!
Source: Energy Information Administration, Short-term Energy Outlook Sept. 2008, Table 3a.

How many refineries are there in the U.S.?

There are currently 149 U.S. refineries owned by 54 companies in 33 states, with total crude oil processing capacity at roughly 17 million barrels per day.
Source: Energy Information Administration, Annual Energy Review 2007, Table 5.9, page 141 and http://tonto.eia.doe.gov/state/state_energy_profiles.cfm?sid=HI

When was the last U.S. oil refinery built?

The last new U.S. refinery was constructed in 1976.
Source: Andrew P. Morriss, Engage, Vol. 8, No. 3, pp. 4-13

How much of the gasoline consumed in the U.S. is produced by U.S. refineries?

U.S. refineries produce 90% of the gasoline Americans consume. The remaining 10% of finished gasoline and gasoline additives is imported.
Source: Energy Information Administration, Short Term Energy Outlook Sept. 2008, Table 4a.

Refineries are owned by large, integrated oil companies as well as independent companies.  What percentage of refinery capacity does the largest U.S. refiner control?

The largest U.S. refiner controls just 13% of U.S. refining capacity.
Source: http://en.wikipedia.org/wiki/List_of_oil_refineries#United_States, and Energy Information Administration, Annual Energy Review 2007, Table 5.9, page 141.

A barrel of crude oil equals 42 gallons.  How many gallons of gasoline result from refining a barrel of crude oil?

On average, about 20 gallons of gasoline can be produced from a barrel of crude oil.  Gasoline represents about 47% of the yield from a refined barrel of crude.
Source: http://www.eia.doe.gov/kids/energyfacts/sources/non-renewable/oil.html#How%20used

What is the most significant factor affecting the price of gasoline?

The cost of crude oil is the single greatest factor affecting the price of a gallon of gasoline.  The Energy Information Administration estimates that, in August 2008, the national average retail price of a gallon of gasoline was $3.78 and the cost of crude oil represented 73% of that price.  Taxes constituted another 11%, distribution and marketing 10%, and refining 6%.
Source: http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp

What portion of the average consumer’s transportation budget is spent on gasoline (and motor oil)?

According to the Bureau of Labor Statistics, in 2004, the average consumer spent 20% of their transportation budget on gasoline and motor oil.
Source: http://www.bls.gov/cex/csxann04.pdf

How much do Federal and state taxes add to the price of a gallon of finished gasoline?

In August 2008, Federal and state taxes made up about 11% of the price of a gallon of gasoline.
Source: http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp

How much do all sources of “renewable energy” (wind, solar, biomass, hydropower, geothermal) contribute to meeting total U.S. energy needs?

The Energy Information Administration estimates that, in 2007, renewable energy supplied 7% of total U.S. energy needs.  Fossil fuels and nuclear power provided 93% of the energy used by Americans.
Source: Energy Information Administration, Annual Energy Review 2007, Table 1.3, page 9.

How much has the U.S. refining industry spent over the last 10 years on environmental improvements to their facilities and processes?

The U.S. refining industry has spent  $54.5 billion over the last 10 years on making environmental improvements, much of it to make cleaner fuels.
Source: http://www.api.org/ehs/performance/upload/ENVIRON_EXPEND_REPORT.pdf

What is the greatest source of crude oil and petroleum products found in U.S. waters?

The vast majority (63%) of petroleum found floating in oceans, rivers, streams, and lakes comes from oil seeping naturally out of the ocean floor, lake beds, and the land.  Spills caused by petroleum users such as improperly discarded motor oil, gasoline spilled during fueling, leaky petroleum storage tanks, and even fuel leaking from pleasure boat engines are responsible for about 33% of petroleum in U.S. waters.  Only 4% of oil spills result from the exploration, production and transportation of crude oil and refined petroleum products. Data are for 1990-1999.
Source: http://www.eia.doe.gov/kids/energyfacts/sources/non-renewable/oil.html#Environment

What percentage of retail gasoline outlets/service stations are owned and operated directly by the large, integrated oil companies?

Large, integrated oil companies control only 10% of the Nation’s retail gasoline service stations.  About 90% of gas stations in the U.S. are owned by non-integrated companies and individuals.  Individual service stations may bear the logo of a major petroleum company, but they are typically owned by franchisees – people who purchase the right to market and sell a company’s name-brand products, just like people who invest in a 7-11 or McDonald’s.
Source: http://www.api.org/aboutoilgas/sectors/marketing/index.cfm#q12

How much of the nation’s refining capacity is controlled by the four largest U.S. refining companies?

In 2003, the four largest U.S. refining companies controlled a little more than 40% of refining capacity.  In contrast, the top four companies in the auto manufacturing, brewing, tobacco, floor coverings, and breakfast cereals industries controlled between 80% and 90% of their markets.
Source: http://www.eia.doe.gov/neic/rankings/refineries.htm

Of the industry sectors listed below, which has the largest earnings profit margin?

For the 2rd quarter of 2008,  the pharmaceutical and medicine industry  reported making an estimated 26.3 cents in earnings per dollar of sales.  Oil and natural gas industry earnings, at about 6.8 cents per dollar of sales, were the lowest among these industry sectors.
Source: http://www.api.org/statistics/earnings/upload/earnings_perspective.pdf

Most crude oil and petroleum products are transported at some point by pipelines.  How many miles of pipelines are there in the U.S.?

There are a whopping 2.3 million miles of pipelines crisscrossing the U.S.  If all these pipelines were laid end to end, they would circle the Earth a little more than 92 times!
Source: http://www.phmsa.dot.gov/portal/site/PHMSA

How many barrels of petroleum does a typical modern ocean-going supertanker hold?

“Supertankers” are generally defined as those greater than 250,000 tonnes deadweight (meaning the maximum weight they can carry when fully loaded).  Today’s supertankers, on average, can carry about 2 million barrels or 84 million gallons of crude oil and petroleum product.  The largest supertanker in the world is the Norwegian-owned Knock Nevis which is 647,955 tonnes deadweight and can hold 4.1 million barrels of petroleum.
Source: http://www.eia.doe.gov/emeu/cabs/Saudi_Arabia/pdf.pdf

The Renewable Fuel Standard (RFS) contained in the Energy Policy Act of 2005 mandated the use of corn-based ethanol in motor fuels. The recently enacted Energy Independence and Security Act accelerated this mandate to 9 billion gallons of ethanol in 2008 and 36 billion gallons in 2022. Recent spikes in food prices, however, have led many to question the wisdom of these mandates and subsidies that encourage the use of corn and other sources of food for use as fuel.

The monthly average price of corn jumped from $2.06 per bushel in January 2006 to more than $6.00 per bushel on the Chicago Board of Trade as of May 1, 2008. Not surprisingly, many observers believe that there is a correlation between the RFS mandate and the skyrocketing prices of corn and foodstuffs. In response, proponents of ethanol mandates and tax subsidies have claimed that food price hikes have nothing to do with the price of corn; that the increase in food prices is due to the higher price of energy. For example, Rick Tolman, chief executive of the National Corn Growers’ Association, deflected criticism of the ethanol mandates by saying, “If you want to know who the real axe murderer is, look at $4-a-gallon gasoline.” Bob Dineen, the president of the Renewable Fuels Association, said, “Rising oil prices have twice the impact [on food prices] of similar increases to corn.”

Although the causes of the increase in food prices are complex, a sober analysis of the data suggests that defenders of biofuel mandates are exaggerating the role energy prices have played in the recent spikes. They also seem to ignore the obvious impact of a policy that requires nearly 20 percent of the corn crop to be diverted for use in motor fuels. In fact, in its 2005 analysis, the Congressional Budget Office projected that the ethanol mandate could reduce farm support payments – due to higher corn prices – by more than $4 billion from 2005-2015.[1]

Perhaps the strongest argument put forth by proponents of the ethanol mandate is a recent study by Texas A&M researchers.[2] The study claims that “[i]mportant food items like bread, eggs, and milk have high prices that are largely unrelated to ethanol or corn prices” (p. 3). This conclusion naturally resonates well with those supporting the RFS mandates and continued subsidies.

However, a close reading of the Texas A&M study argues strongly against the notion that oil prices have driven up the price of food. The authors use an econometric model to gauge the equilibrium price effects of “shocks” to various input prices, in order to fully account for feedback loops in the system. Table 6.2 (p. 25) shows the results. The long run (i.e. after 24 months) impact of a 1 percent crude oil price shock was zero for every single food category in the model-namely eggs, bread, milk, beef, pork, chicken, lettuce, and tomatoes-and also zero for the overall food-at-home CPI; only food-away-from-home CPI was influenced, with a meager 0.007 percent increase. In contrast, a 1 percent shock to corn prices caused egg prices (after 24 months) to rise 0.250 percent, bread prices to rise 0.066 percent, and milk prices to rise 0.100 percent. Overall, the food-at-home CPI increased 0.038 percent for a 1 percent increase in corn prices. As the authors state: “for all retail food prices considered, we cannot find a statistically significant effect of crude oil prices” (p. 25). If ethanol proponents wish to continue pointing to the Texas A&M study, therefore, they will have to drop their rhetoric about oil prices driving up the cost of food.

Setting aside econometric models and employing common sense, rising corn prices surely have to have a major impact on some retail food prices. Feed costs can account for 50 percent of the cost of production for milk, and up to 80 percent for eggs. The price of corn feed is also a significant factor in the cost of raising cattle. For example, a lactating cow can consume 106 bushels of corn per year.[3] In truth there are many factors influencing commodity and food prices;[4] there is no single “smoking gun.”

In addition to the role played by biofuel mandates and energy prices, there is also the strong economic growth in developing countries such as China and India, where their increasing consumption of protein places upward pressure on feed prices for livestock. Another major factor has been the falling dollar, which depreciated a total of almost 20 percent against the euro during 2006 and 2007. A weaker currency not only makes imported items more expensive, but also amplifies foreign demand for American agricultural exports, thus raising their prices even higher. Rather than trying to pick “the” cause of higher food prices, the task is rather to assess the relative importance of the various factors.

It is difficult to measure the full impact on food prices of ethanol mandates and subsidies because of feedbacks in the economy. As farmers devote more land to corn, they must devote fewer acres to other crops, such as soybeans. This reduces the soybean crop, raising soybean prices. Therefore, even food items that have nothing to do directly with corn can see their prices rise because of competition for farmland. As explained in a USDA report:

“By the end of the 2006/07 crop year, over 2 billion bushels of corn (19 percent of the harvested crop) were used to produce ethanol, a 30-percent increase from the previous year. Higher corn prices motivated farmers to increase corn acreage at the expense of other crops, such as soybeans and cotton, raising their prices as well.“[5]

The USDA has assessed the direct impact of the cost of oil on food prices. A 1997 study used three different approaches to model the impact of a doubling of crude oil prices on food prices at home. The two short run models yielded estimates of 0.52 percent and 1.82 percent, while the long run model estimated that a doubling in the price of a barrel of crude oil would only lead to a 0.27 percent increase in the CPI of food at home.[6] We can use these estimates to interpret the recent rises in both food and oil prices. The food-at-home price index in March 2008 was 4.7 percent above the March 2007 level. During the same 12-month interval, the monthly average spot price of crude oil increased from $60.44 to $105.45,[7] a 74 percent increase. Therefore, using the highest estimate of the three USDA models, only 29 percent of the latest March/March rise in food prices can be attributed to rising crude prices, while the other 71 percent of the food-at-home CPI increase must be attributed to other factors. Using the sensitivity estimate from either of the other USDA models with lower estimates, the proportion of food price inflation due to the price of oil would be even less.

There are many factors that contribute to rising food prices including government-induced demand for ethanol, rising oil and gasoline prices, strong economic growth in poorer countries, and a general weakening of the U.S. dollar against other currencies. The price of gasoline is quite obviously not the “real axe murderer” in the rising price of food. Rising oil prices do account for a small portion of the recent spike in food prices. But when 20 percent of U.S. corn production is being diverted from the dinner table to the gas tank, we can confidently say that the ethanol mandate has had – and will continue to have – a lasting impact on the price of food.

Robert P. Murphy is an economist with the Institute for Energy Research (IER). His research focuses on the proper discount rate to be used in cost-benefit analyses and the implications of structural uncertainty for policy solutions.

[1] Congressional Budget Office, July 27, 2005. http://www.cbo.gov/ftpdocs/65xx/doc6581/hr6prelim.pdf

[2] Anderson, David P. et al. (2008) “The Effects of Ethanol on Texas Food and Feed.” Agricultural and Food Policy Center, Texas A&M, April 2008. Available at: http://www.afpc.tamu.edu/pubs/2/515/RR-08-01.pdf.

[3] See http://www.extension.org/faq/25593.

[4] Trostle, Ronald. (2008) “Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices.” USDA WRS-0801, May 2008. Available at: http://www.ers.usda.gov/Publications/WRS0801/WRS0801.pdf.

[5] Leibtag, Ephraim. (2008) “Corn Prices Near Record High, But What About Food Costs?” AmberWaves February 2008. Available at: http://www.ers.usda.gov/AmberWaves/February08/Features/CornPrices.htm.

[6] Reed, A.J. et al. (1997) “Changing Consumer Food Prices: A User’s Guide to ERS Analyses,” USDA Technical Bulletin No. 1862, page 7, Table 5, available at http://www.ers.usda.gov/publications/TB1862/tb1862.pdf.

[7] See data on West Texas Intermediate crude spot prices, available through the EIA at http://tonto.eia.doe.gov/dnav/pet/hist/rwtcM.htm.

Mr Brown wrote: “There is growing consensus that we need urgently to examine the impact on food prices of different kinds and production methods of biofuels, and ensure that their use is responsible and sustainable.”

(Source: EU Observer)

(Source: New Mexico Business Weekly)