One of the major factors behind increasing fuel poverty in the UK is government policies instituted to meet carbon stabilization targets, the most aggressive in the world. Britain has a legally binding carbon dioxide reduction target of 80 percent of 1990 levels by 2050. As a result of current measures and increasing fuel prices, industrial electricity prices in the UK are already among the highest of any industrialized country in the world.[ii]

Current Statistics

The average annual bill for a customer using electricity and natural gas is about 6 percent of median household income now, up from 3.3 percent in 2004. Since 2004, the cost of energy in the UK increased by 117 percent–more than six times faster than UK household income (which only increased by 18 percent since 2004). If these trends continue, energy’s share of median household income in the UK will reach 7.4 percent by 2013, 8.2 percent in 2014, and 10 percent in 2015.[iii]

The data show that the majority of households in fuel poverty in the UK contain “vulnerable” individuals, defined by the government as elderly, disabled, the long-term sick, or children. According to Age UK, the UK’s largest charity for older people, almost half the people living in fuel poverty were over 60. Michelle Mitchell, the charity director of Age UK, said: “Research shows many older people are forced to choose between eating and heating their homes, causing illness and in extreme cases, needless deaths.”

Centrica, which owns British Gas, blamed rising wholesale costs, which increased 30 percent since last winter on higher global demand for natural gas and the impact on supply of unrest in the Arab world. However, government policies also have an effect on the increasing energy costs. Currently, UK “policy costs” add 10 percent to household energy charges, mainly because of the “renewables obligation”, which mandates electric utilities to buy a proportion of their electricity from renewable sources, and the European Union’s carbon trading scheme.

The UK Energy and Infrastructure Plan

The UK government put together a white paper that proposes a plan that will guarantee a fixed price for electricity and include a carbon price floor effective in 2013 that will make it more costly to run coal and natural gas plants. Using these mechanisms, the government plans to change the UK’s energy mix in favor of renewables and nuclear power. EDF Energy, a subsidiary of EDF of France, has plans to build four nuclear reactors in the UK. The UK also has a “renewable energy roadmap” setting a target of building 18 gigawatts of offshore wind generating capacity by 2020, predicated on reducing the cost of wind generation by almost 50 percent (from up to £190 per megawatt hour ($300 per megawatt hour) to £100 per megawatt hour ($158 per megawatt hour)). The UK government is investing £30 million ($47 million) of innovation support to this goal. To deal with the intermittency issue of renewable energy, the plan includes a capacity mechanism that would keep non-renewable power stations on standby to ensure permanent spare capacity. The plan also contains tougher environmental standards for coal-fired power stations, forcing them to add equipment for reducing emissions or close down.[iv]

The country has an official target to spend £200 billion ($316 billion) on new infrastructure by 2020, which includes the large expansion of wind power. The total cost of building power stations is expected to be £110 billion ($174 billion), which will lead to higher household bills. But according to the government, the average electricity bill would increase by £160 ($252) by 2020 under this plan, compared to an increase of £200 ($315) if current practices are continued. The assumptions behind the higher cost number for current practices are not clear, but most likely include the policy changes that lead to more renewables and nuclear power.

Current practices mean more fossil-fueled plants. Dozens of new gas-fired power plants are being planned by energy companies in the UK. Scottish Power wants to construct a 1.2 gigawatt plant at Avonmouth, near Bristol; RWE npower is building a 2 gigawatt gas plant at Pembroke, South Wales and a 2.4 gigawatt plant at Willington in Derbyshire. It is also looking to build a smaller facility at Fawley, near Southampton. Smaller projects for gas-fired power include ones by Welsh Power, which wants to construct an 850 megawatt plant at Fleetwood in Lancashire, and Trafford Peaking Power, which is developing one in Manchester. As many as 30 potential gas projects that are either in late development stage or very early proposals have been identified. Utilities are building natural gas plants because they are relatively cheap to build and quick to construct. But, building those plants could result in a higher carbon emissions levels than the government’s plan that promotes renewable power and nuclear energy.[v]

What the government has not faced up to is that the shale gas revolution has decoupled the prices of oil and gas and is reducing natural gas prices significantly in the countries that have begun shale gas production. Recently, an estimated 200 trillion cubic feet of shale gas was discovered near Blackpool. Shale gas could supply the UK’s energy needs for a century and create an energy industry that would generate revenue and jobs unlike green energy and expensive subsidies. Shale gas could make UK manufacturing more competitive, reduce gas and electricity bills and reverse the rising trend in fuel poverty.[vi]

According to Deutsche Bank, the most effective policy to bring down energy costs would be to abandon the “renewables obligation” and the carbon floor price, cutting bills by 15 percent from 2015 levels. And, an additional 15 percent or more could be cut if the shale gas revolution was encouraged.[vii]

A New European Commission Study

The European Union (EU) study examines how it can meet its target of cutting greenhouse gas emissions to 80 to 95 percent of 1990 levels by 2050 through use of efficiency measures, renewable energy, nuclear power and carbon storage. According to the study, the EU’s green energy campaign could double household electricity bills by 2050. It predicted rising electricity prices over the next 20 years as Europe meets half of its electricity demand from wind farms, which provides 5 percent of its electricity currently. The result will be 50 percent higher bills by 2030 and 100 percent higher bills by 2050.[viii]

Conclusion

Energy costs in the United Kingdom are increasing due to higher fuel prices and government policies. Currently, the UK has over 5.5 million households that are facing fuel poverty, most of which are elderly or disabled. Policies currently in place such as a renewable obligation and a carbon trading scheme have increased prices by 10 percent. The government has a plan that will increase prices further by adding a carbon price floor, a guaranteed price for power, a requirement to ensure standby power to back up intermittent power sources such as wind, and a requirement to either make coal-fired power plants “clean” or retire them. That will increase energy costs further. By 2015, the average household in the UK is expected to be in fuel poverty.

[i] AFP, Fuel poverty on the rise amid energy price hikes, July 15, 2011, http://www.google.com/hostednews/afp/article/ALeqM5jX6Ox5adrhTfx2tYh41Aq-3JPPfQ?docId=CNG.d49bc7cdcf00b93d5c189e6d2d9ee1a0.451

[ii] City A.M., A few cold facts in the debate on high energy bills, October 18, 2011, http://www.cityam.com/forum/few-cold-facts-the-debate-high-energy-bills

[iii] Financial Times, Average household faces fuel poverty by 2015, October 10, 2011, http://www.ft.com/intl/cms/s/0/f4213ec2-f287-11e0-931e-00144feab49a.html#axzz1ag5hoWqf

[iv] Financial Times, Huhne aims for ‘cleaner energy future’, July 12, 2011, http://www.ft.com/intl/cms/s/0/c6aab426-ac70-11e0-bac9-00144feabdc0.html#axzz1alFujOXA

[v] The Guardian, Energy firms plan dozens of new fossil-fuelled power stations, July 17, 2011, http://www.guardian.co.uk/business/2011/jul/18/energy-industry-gas?CMP=twt_fd

[vi] City A.M., A few cold facts in the debate on high energy bills, October 18, 2011, http://www.cityam.com/forum/few-cold-facts-the-debate-high-energy-bills

[vii] Ibid.

[viii] UK News, GREEN ENERGY COULD DOUBLE HOUSEHOLD BILLS, October 18, 2011, http://www.express.co.uk/posts/view/278122/Green-energy-could-double-household-bills

Photo credit for natural gas flame: Public Service Commission of Wisconsin.

The experience of the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States shows us once again that the point of cap-and-trade is to generate tax revenue and not to reduction carbon dioxide emissions or reduction global warming.

Currently there is one operating cap-and-trade program for carbon dioxide in the U.S.—the Regional Greenhouse Gas Initiative. On Monday it was reported the demand for CO2 allowances had crashed at the latest RGGI auction. If the goal of RGGI were to reduce CO2 emissions, this would be hailed as good news. Lower prices mean that demand is down for the necessary CO2 permits. This should be good news.

RGGI’s website describes RGGI as, “is the first market-based regulatory program in the United States to reduce greenhouse gas emissions. Ten Northeastern and Mid-Atlantic states have capped and will reduce CO2 emissions from the power sector 10 percent by 2018.” [emphasis added]

The good news is that carbon dioxide emissions in the RGGI states have already far exceeded RGGI’s goals. In fact, carbon dioxide emissions from power plants are down by more than 30 percent—three times more than RGGI’s goals.

RGGI’s proponents should be ecstatic, right? After all, the goal has been achieved. In fact, since the stated goal has been achieved three times over, it would makes sense to declare victory and end the program. But that isn’t happening.

Instead, RGGI’s proponents, such as David Littell, the Maine Public Utilities Commissioner, argues, “The RGGI states have put a price on carbon to foster innovation in our region. . . The RGGI auctions are continuing to drive large-scale investments in energy bill savings and improved business competitiveness.”

In other words, RGGI is a tax. By putting a “price on carbon” RGGI generates tax revenue that is spent by bureaucrats on pet projects such as energy efficiency projects that some business would not spend personal or company money, but are more than willing to undertake the projects with ratepayer’s money.

The bottom line is that carbon dioxide emissions have dropped precipitously is not because of RGGI or putting “a price on carbon.” The reason carbon dioxide emission have dropped is because of the rise of shale gas and the poor economy. As E&E News reported, “the consultancy ICF International has told RGGI members that their system isn’t contributing to lowering emissions in the Northeast, nor would it ever, unless the current cap is slashed by at least one-fourth.” [emphasis added]

The situation with RGGI shows what we said all along about cap-and-trade. It’s a tax—a great big tax as Rep. John Dingell described it. We are much better off as a country to have avoided a nationwide carbon tax.

President Obama hailed the appointment of Mr. Bryson as being key to helping the United States’ clean energy industry—and there is no doubt that he will be a staunch ally in that regard. Mr. Bryson, a former utility executive, was a co-founder of the Natural Resources Defense Council, an environmental advocacy group that has lobbied vigorously for regulations on carbon dioxide emisssions and for renewable energy subsidies. Since September 2010, Mr. Bryson has been chairman of BrightSource Energy Inc., a solar power plant developer and recent beneficiary of a $1.6 billion loan guarantee—funded by the U.S. government with stimulus money—to build a massive solar complex in the Mojave Desert.

It is also troubling to note that Mr. Bryson’s confirmation would make him the top official at an agency that includes the National Oceanic and Atmospheric Administration—the U.S. regulator responsible for oversight and protection of the U.S.’ oceans and atmosphere. A former member of the United Nations’ advisory group on climate change, Mr. Bryson notably referred to the Democratic climate change bill passed by the House in 2009—also known as Waxman-Markey—as being “moderate” in its approach, even though a study by the American Council for Capital Formation (ACCF) and the National Association of Manufacturers (NAM) found that implementing Waxman-Markey would result in economic losses up to $571 billion by 2030, and up to 2.4 million lost jobs. Furthermore, under the cap-and-trade program, gasoline prices were forecasted to increase 20 to 26 percent, residential electricity prices by 31 to 50 percent, residential natural gas prices by 56 to 74 percent, and coal prices to electric utilities increase a whopping 565 to 755 percent in 2030. And yet, for Mr. Bryson, this doesn’t push the envelope far enough.

Indeed, Mr. Bryson’s long history of environmental advocacy and his ties to the subsidy-dependent green industry seem to be principal reasons for his appointment as Commerce Secretary. “In the years ahead, a key to achieving our export goal will be promoting clean energy in America. It’s how we’ll reduce our dependence on foreign oil,” President Obama said in his nomination announcement. ”John understands this better than virtually anybody,” he went on, “Throughout a distinguished career in which he’s led nonprofits, government agencies and large companies, he’s been a fierce proponent of alternative energy.”

President Obama’s belief that clean energy investments will offset our dependence on foreign oil in the short-term is misplaced, given that oil is used predominantly as a transportation fuel and produces less than 1 percent of U.S. electricity. This scenario would only be feasible were many of the United States’ 250 million passenger vehicles to be changed over to electric models, and only if the United States switched from using coal to produce 45 percent of its electricity to mostly alternative energy sources. Ultimately, the wisdom of this goal is questionable given that generating electricity from wind and solar is substantially more expensive than burning coal—more than triple the cost, in the case of photovoltaic solar.

Lastly, the idea that massive subsidies for alternative energy will significantly benefit the U.S. economy is disingenuous, as promised “green jobs” continue not to materialize. In any event, alternative energy promotion should not be the focal point of Commerce’s mission, nor a factor in the selection of its top official. Mr. Bryson should be thoroughly vetted by Congress to ensure that his background and experience are appropriate for the position of our nation’s chief economic advocate, and as the top official in charge of its regulating its oceans and atmosphere.

Although he is no doubt a technically savvy economist, Keohane is an unabashed advocate for government intervention in energy markets. His video “The Facts of Cap and Trade”—which urged Americans to support Senate passage of the American Clean Energy and Security Act after the House had passed H.R. 2454—shows a remarkably one-sided presentation of the “facts.” Someone viewing this video would think there wasn’t any conceivable downside to unilateral U.S. implementation of federal limits on carbon emissions:

In the interest of balance, here are responses to a few of the statements from the video (with the time-stamp in parentheses after each quotation):

“We’ve been dumping carbon pollution into our atmosphere for decades, warming our planet, and wreaking havoc on the climate.” (0:09)

This is simple hyperbole. Even if the most alarming climate models are correct, and mankind must drastically curb emissions in order to avoid catastrophe, such havoc is in the future—so long as the word “havoc” implies “events that seriously impact human welfare.” The IPCC reports do indeed argue for a strong link between carbon emissions and rising global temperatures, but they do not say that this has caused appreciable damage to humans yet. Keohane talks as if the evidence of harmful, human-caused climate havoc is all before our eyes, when in fact they are projections in models.[i]

“As cap-and-trade kicks in, the demand for clean energy increases. That means lots of opportunities for entrepreneurs to supply wind, solar, tidal, and other clean-energy technologies, like making jet fuel from algae, and roof shingles that double as solar panels.” (1:48)

This is true as far as it goes, but Keohane never mentions the downside: higher energy prices (and prices of other goods that rely on energy). After all, the reason we don’t make jet fuel from algae right now, is that it would be absurdly inefficient compared to making it from crude oil. Air travel would be prohibitively expensive if jet fuel had to be made from algae anytime soon.

It’s no surprise that by artificially suppressing competing technologies through an arbitrary “cap,” the government can spur all sorts of new “innovation.” For example, if the government placed an annual (and shrinking) cap on how many pounds of meat U.S. restaurants could serve each year, the demand for meat-free meals would increase. That would mean lots of opportunities for entrepreneurs to supply fish tacos, tofu burgers, and asparagus skewers, because the permit for a T-bone steak would eventually cost $500. This would clearly make consumers worse off.

Of course, there is an argument to be made that carbon emissions involve “negative externalities” and that a cap-and-trade program corrects the market signals. Yet Keohane doesn’t discuss any of this. It is amazing that an economist could make a case to the public and list the (alleged) benefits of a program without even alluding to the fact that there are huge costs. Indeed, someone watching Keohane’s video—of cute little smokestacks turning into wind turbines—would have no idea that the CBO’s own analysis (back in 2009) showed that the Waxman-Markey bill would likely have no net economic benefits to the U.S. In other words, the CBO’s own numbers show that uninterrupted climate change poses a smaller threat to the U.S. (measured in terms of GDP loss) than the cap-and-trade program proposed under Waxman-Markey.

“The bill also allows smart companies to profit, by cutting their pollution even more than is required.” (2:04)

This segment of the video features a “clean” company selling its permits to the “dirty” company. It’s true, this is the aspect of cap-and-trade that leads its supporters to call it a “market-based solution.” Rather than the government passing precise, top-down commands on how emissions should be cut, a cap-and-trade program leaves it up to the market place (through the secondhand-market for emission permits) to make the cuts in the cheapest possible way.

However, this analysis overlooks the fact that it is government officials who pick the size of the “cap,” and who determine all of the other minutiae involved with the program, such as “safety valve” thresholds, how many permits are “bankable,” and how much of the cap can be satisfied through the purchase of “offsets” (e.g. planting trees in Brazil instead of reducing emissions in the U.S.). It’s hardly a “market-based solution” that relies on a massive bill that takes lawyers to interpret.

Furthermore, Keohane doesn’t tell his viewers that the determination of which groups get the coveted emission permits in the first place is a process fraught with corruption. Using standard economic analysis, this study found that in practice the Waxman-Markey climate bill would redistribute income from the poor to the rich, because the higher energy prices (due to the shrinking cap on emissions) would be partially offset by free allowances given to large corporations (owned by rich shareholders).

“Europe is already using cap-and-trade to cut carbon emissions. An MIT study shows it’s already working there.” (2:54)

If we look at the bibliography at the end of the video, we see that Keohane is referring to a 2008 paper by Denny Ellerman et al. on the European Union’s Emissions Trading Scheme.[ii] Although that particular paper does not appear to be online, Ellerman is the co-author of a similarly titled 2008 piece for the Pew Center on Global Climate Change, which presumably offers the same evidence of the “success” of the EU’s cap-and-trade program. Here is an excerpt from the Executive Summary of that paper:

The performance of the European Union’s Emissions Trading System (EU ETS) to date cannot be evaluated without recognizing that the first three years from 2005 through 2007 constituted a “trial” period and understanding what this trial period was supposed to accomplish….The trial period was a rehearsal for the later more serious engagement and it was never intended to achieve significant reductions in CO2 emissions in only three years. In light of the speed with which the program was developed, the many sovereign countries involved, the need to develop the necessary data, information dissemination, compliance and market institutions, and the lack of extensive experience with emissions trading in Europe, we think that the system has performed surprisingly well.

Although there have been plenty of rough edges, a transparent and widely accepted price for tradable CO2 emission allowances emerged by January 1, 2005, a functioning market for allowances has developed quickly and effortlessly without any prodding by the Commission or member state governments, the cap-and-trade infrastructure of market institutions, registries, monitoring, reporting and verification is in place, and a significant segment of European industry is incorporating the price of CO2 emissions into their daily production decisions.

…
The deeper significance of the trial period of the EU ETS may be its explicit status as a work in progress. As such, it is emblematic of all climate change programs, which will surely be changed over the long horizon during which they will remain effective. The trial period demonstrates that everything does not need to be perfect at the beginning. In fact, it provides a reminder that the best can be the enemy of the good. [Emphasis added.]

That doesn’t sound too promising, does it? If you had left town for a week, while carpenters were working on your house, would you be reassured on the phone if the guy in charge used language like this—his workers were going through a “trial period” on your house and that there were “rough edges” and you have to understand that his renovations were a “work in progress” that “does not need to be perfect at the beginning?” If we can all agree that such language would be very alarming concerning just your house, why should we be eager to sign up the whole economy for the program?

Ellerman’s excuses would be one thing if the EU cap-and-trade program got off to a rocky start—it was just a “trial,” you see—but then in the second phase, it really kicked in hard and reduced emissions dramatically, even though this would seriously hamper economic growth in the affected countries.

But Ellerman (and Keohane who cited him) didn’t know what the results would be, when writing that assessment. His paper came out in 2008, yet he was explicitly saying that the period 2005-2007 shouldn’t be held against the system, even though that was the only experience he had seen.

For those interested in the details, some of the “rough edges” that Ellerman has in mind include the fact that during Phase I of the EU ETS, from 2005-2007, total emissions of the participating nations increased 1.9 percent, and increased dramatically among certain countries (e.g. Finland’s emissions increased 28.5 percent in that three-year stretch). Moreover, the emission allowances were distributed so generously that their market price fell to €0.10 per ton in September 2007.

No one denies that a cap-and-trade scheme can “work”—if the government imposes serious enough penalties on greenhouse gas emissions, of course businesses will reduce them. But the most draconian governments can’t overturn economic law. The reason industry operates in its current configuration, is that this is the way to deliver the most output to consumers at the lowest possible prices. If the government imposes new constraints on businesses, this will necessarily reduce product quality and/or increase prices, compared to what otherwise would be the case.

Conclusion

The White House’s new man at the National Economic Council is no doubt a smart economist with extensive experience studying greenhouse gas policy. Unfortunately, Keohane’s educational video for the public reveals someone who only sees one side of the issue.

Academics can make a case for giving the government even more power over the economy—in the name of fighting climate change—but Keohane didn’t even make such a case. Instead, he presented the benefits while completely ignoring the costs of his favored program.

[i] The IPCC’s summary of the climatic changes that have already occurred—and mankind’s possible responsibility—is at the bottom of this link.

[ii] A. Danny Ellerman et al., “Lessons for the United States from the European Union’s Emissions Trading Scheme.” Cap-and-Trade: Contributions to the Design of a U.S. Greenhouse Gas Program (Cambridge, MA: MIT Center for Energy and Environmental Policy Research, 2008).

IER President: “The American people are smarter than the political class in Washington think – they see this tragic accident playing out in the Gulf, and are overwhelmingly opposed to the Obama Administration’s plan to capitalize on it politically by pushing a national energy tax.”

Washington, DC – The Administration’s ongoing effort to use the unprecedented tragedy in the Gulf as “an opportunity” to restrict domestic energy production and push a national energy tax was dealt a major blow today, as new polling data released by the Institute for Energy Research (IER) finds that a vast majority of Americans oppose the underlying agenda that is currently costing thousands of jobs in the Gulf, and soon could be costing millions more across the country.

Some top-line findings in the attached report show that 70 percent of Americans oppose a new tax to address global warming. While consistent with historical trends, this number is somewhat surprising based given the president’s recent investment of time and political capital in support of “pricing carbon” in the wake of the BP oil spill. The same percentage of respondents (70%) said that such a tax would also have no discernable effect on global warming.

In contrast, voters are very much more interested in creating jobs (38%) and reining in profligate government spending (31%) – which ranked high above new regulations for the oil industry (4%) or global warming (3%).  Nearly every (99%) American is somewhat familiar with the BP oil spill.

“The American people are smarter than the political class in Washington think – they see this tragic accident playing out in the Gulf, and are overwhelmingly opposed to the Obama Administration’s plan to capitalize on it politically by pushing a national energy tax, ” said Thomas J. Pyle, president of the Institute for Energy Research. “And while some in Washington are focused on ways to increase tax revenue on the backs of hardworking Americans, this poll shows once again the massive disconnect between Pennsylvania Avenue in Washington, and Main Streets all across America.

Pyle continued, “The American people want Washington to focus on cleaning up the gulf, creating an environment that puts folks back to work and reducing our federal deficit. That’s it. There is no interest in pushing through a radical agenda in the name of global warming and there is no interest on the part of consumers to pay more at the pump for a gallon of gasoline.  It’s time for Washington, DC to get serious about its priorities, and start getting back in line with those of the American people.”

A majority of respondents believe things in this country are on the wrong track (59% wrong track, 34% right track) while two-thirds (68%) disapprove of the job being done by Congress. A slight majority (53%) approve of President Obama’s job performance overall.

To view the complete survey, click HERE.

NOTE: This survey of 1005 respondents was conducted between June 17 – June 22, 2010 and has a margin of error of +/- 3.1 percent with a confidence level of 95 percent.

To speak with Mark Blankenship, the pollster that conducted this survey, please contact Patrick Creighton at pcreighton@ierdc.org or 202.621.2947.

#####

Another criticism made by Levi is that the estimated employment impacts in our study are invalid because more capital-intensive industries will be more heavily affected than labor-intensive industries by climate policy.

As we make clear in our study, our figures for potential job losses are only order-of-magnitude estimates designed to give a general idea of the size of the employment effects we can expect from a policy that reduces GDP by the amounts predicted by EPA in various years. We don’t model the entire American Power Act bill. Instead, we show about how many jobs can reasonably be expected to disappear if GDP falls by a given amount, holding all else constant.

In our study, we assume overall GDP reductions will be felt by industries in proportion to the fossil-fuel carbon intensity of their products. Levi is right that if industries are affected in different proportions than what we assumed, the pattern of employment losses — and potentially the overall total job losses — will differ from our estimates. But it’s easy to see that they won’t differ by much. In fact, it turns out our estimates are robust across a wide variety of assumptions about the distribution of GDP impacts among industries.

To see why, suppose Levi is correct that capital-intensive industries will be most heavily affected by Kerry-Lieberman. Rather than dividing the overall GDP impacts among industries by carbon intensity as we’ve done, we can instead divide it by an estimate of capital intensity by industry. A back-of-the-envelope way of doing this is to use data on the relative share of labor income as a percentage of value added for industries. In capital-intensive industries, labor income will be small relative to total value added. We can then weight these “capital intensity factors” by total industry output to arrive at a reasonable proxy for capital intensity by industry. These figures can then be used to distribute overall GDP impacts to industries, consistent with Levi’s argument above.

Re-running our model using this method, we find the employment effects of Kerry-Lieberman would be significantly larger than our estimates—not smaller as Levi assumes. Here are the figures for total job losses in various years under the assumption that capital-intensive firms are more heavily affected:

2015 : -653,783

2020 : -895,924

2030 : -3,511,055

2040 : -4,915,477

2050 : -6,440,970

Overall, these figures are broadly comparable to our original estimates. However, they are higher by roughly 25 percent. It is simply not the case that our study has over-stated employment effects from the bill as Levi claims. To the contrary, if Levi’s argument above is correct, our estimates may in fact may err on the conservative side. This should not come as a surprise—our estimates of job losses should be considered order-of-magnitude estimates, which are unlikely to vary dramatically to changes in the assumption of how overall GDP declines are distributed among industries.

Michael Levi at the Council on Foreign Relations argues for a naive view of state and local utility regulation. He argues for a world in which municipal regulators have the ability to force utility managers to act against their own economic interests, passing forward the full benefit of free emission allowances to consumers rather than their own shareholders. Levi argues,

“The regulator knows the value of the free allowances: it is equal to the number of allowances given out for free multiplied by the value of the allowances at auction. If the LDCs cannot account for having spent that money on public purposes, the regulator will know… [I]t’s actually pretty simple.”

If only regulating public utilities were simple. Even in the absence of climate policy, there exists today a vast and complex network of utility regulatory boards, governed by millions of pages of regulatory guidelines, all designed to simply govern the ordinary business of utilities. The American Power Act would overlay a complex federal climate policy atop this arrangement. Saying anything about the behavior of regulated firms under climate policy is “simple” belies the complex reality of public utility regulation in the U.S.

There are several problems with Levi’s criticism. The most obvious is, why not distribute allowance values directly to electricity and natural gas consumers, rather than first granting them to utilities? As we have seen in recent financial and environmental disasters, regulators can, and often do, fail to fulfill their role as industry watchdogs. Other provisions of the bill, such as the “consumer relief” program, auction allowances and distribute cash payments directly to households. This could easily be done for electricity and natural gas consumers. Using a simple database of addresses for existing ratepayers, IRS administrators could distribute rebate checks to households, piggybacking on the infrastructure of the Earned Income Tax Credit with no danger of moral hazard, and no need for additional costly, complex regulations on LDCs. Why not make the system as simple as possible, rather than leaving it open to the possibility of regulatory failure? As we make clear in our study, lawmakers did not follow this approach. That suggests there exists instead a political dynamic at work that has more to do with compensating industries for losses from cap-and-trade than actually compensating consumers, as claimed by advocates of the bill.

Levi’s argument that shareholders will not economically benefit from free allowances is simply inconsistent with the fact that LDCs and their parent companies themselves have lobbied heavily for these provisions. U.S. Senate records show electricity LDCs have spent millions lobbying for provisions in cap-and-trade bills in recent years. Atlanta-based Southern Company, which covers 4.4 million residential customers with local utilities in four states, spent $9.8 million alone in 2008 on climate change lobbying. American Electric Power, which operates electricity LDCs in 11 states serving more than 5 million customers, spent $8.4 million. Other large electricity firms such as Duke Energy, FPL Group and Ameren spent similar amounts lobbying during the period in which both the Waxman-Markey and Kerry-Lieberman bills were being crafted on Capitol Hill. If shareholders are expected to receive zero benefit from free allowances, what explains these tremendous lobbying expenditures? Such behavior is simply not consistent with a naive view the American Power Act that simply assumes, with no microeconomic foundation, that utility consumers stand to benefit from free LDC allowances.

In fact, distributing funds directly to households rather than indirectly through free allowances to LDCs would have been a much more efficient way to provide consumer relief. If households are given cash rebates, these may be used for other purposes than electricity and natural gas, such as home weatherization, more efficient vehicles or other household expenditures. Instead, the American Power Act leaves open the possibility that utilities could simply be forced to offer households a credit on a utility bill. That is, rather than allowing consumers to choose how best to spend these benefits, LDCs would have the ability to restrict it for use on utility bills only—guaranteeing LDCs additional revenue they wouldn’t otherwise enjoy. Thus, even in the unrealistic scenario in which regulators are able to perfectly force LDCs to pass benefits on to consumers, the bill does this in a highly inefficient way that favors utilities over consumers.

In our study, we argue lawmakers cannot control the economic incidence of regulatory policy any more than revenue officials can control the economic incidence of business taxes. Levi argues this analogy is inaccurate since “those firms aren’t regulated.” But from the standpoint of revenue officials, they are very much regulated. Revenue officials are charged explicitly with enforcing the legal incidence of business taxes specified by lawmakers. This is a different form of regulation than cost-of-service price regulation, but it remains an explicit legal control over the behavior of firms backed by the force of law. The fact that this regulatory regime is unable to control tax incidence is highly relevant to understanding the behavior of regulated utilities under cap-and-trade.

Levi argues that since regulators will know the dollar value of the subsidy granted to each LDC, they can simply verify that an identical amount has been spent on “public purposes.” But this view is highly unrealistic. Anyone who has worked in a municipal regulatory rate-setting environment—which I have at the Seattle Department of Transportation—will tell you that accounting costs are not unique. Labor comprises the vast majority of costs within regulated utilities. Accounting costs for projects within LDCs are built from time-card data on employees’ allocated of time, along with various indirect and other allocated costs—all of which are subject to wide discretion by both employees and utility managers, little of which is observable by outside regulatory bodies.

Consider a simple example. Suppose that an electric utility receiving $12 million of free allowances is required by regulators to increase expenditures on “public purposes” by $12 million, as Levi argues. Suppose further that prior to cap-and-trade, this utility operated a $15 million energy conservation program, distributing energy-efficient light bulbs to households and conducting public education campaigns. What in the language of the American Power Act prevents utility managers from simply shifting funds internally, scaling back the energy conservation program to $3 million, freeing up $12 million of existing budget authority for “public purposes?” Because internal funds are fungible, managers can easily reduce ancillary services to households—effectively increasing electricity rates to consumers on a quality-adjusted basis—while leaving shareholders unaffected, thus shifting the full burden of climate policy onto consumers. Such behavior is common in the regulatory literature in economics, which is vast and brimming with examples of regulatory failure of exactly this type assumed away by Levi and the authors of the Kerry-Lieberman bill.

Levi argues utilities can be forced to spend the value of free allowances for “public purposes.” But what qualifies as a “public purpose”? The text of the American Power Act provides only vague guidelines, and does not require that utilities actually provide rebates to consumers as has been widely assumed by advocates of the bill. Does investing in clean energy sources qualify as a “public” purpose? What if doing so leads to somewhat higher profit margins for utilities? What if the value of free allowances is instead used to establish a “rate stabilization fund” to shield consumers from rate volatility? What if consumers are granted only a partial rebate check, with the remainder used to upgrade capital equipment that lowers costs and thus increases profits for the firm?

Levi assumes a clear distinction between “public” and “private” purposes for utility expenditures. In reality, the language of the American Power Act leaves the concept of “for the benefit of” ratepayers open to wide discretion—something utilities themselves are surely aware of, judging from their extensive lobbying efforts to secure those provisions.

Part II here.

A crucial part to realize about cap-and-trade is that it will affect the prices of all goods that are manufactured or transported. When the price to produce those goods goes up, that’s going to leave consumers with less money to spend.

85% of energy the United States uses every day come from coal, oil, and natural gas. The goal of this conference is to draft a framework to reduce carbon dioxide emissions, which would fundamentally alter our way of life while our foreign competitors will benefit.

Cap and trade proposals discussed in Congress and Copenhagen will severely impact all forms of energy and transportation. Planes, trains, and automobiles provide the high standard of living we enjoy today.

While cap and trade will surely raise the price of energy, the long-term effects will exacerbate an already crippled economy.

Various legislative and other proposals have promoted policies that would tax or place a price floor on petroleum-based transportation fuels such as gasoline because as President Obama stated in his recent address, “we’re running out of places to drill on land and in shallow water.”[1] Their object is to spur conservation and promote the manufacture of more efficient vehicles, as well as reduce greenhouse gas emissions, increase national security (by lessening our dependence on foreign oil), and decrease congestion. But such policies assume that oil is unduly scarce, even though current worldwide oil reserves are the highest ever. And reserves are only a fraction of potential oil resources, not to mention that technology is continually unlocking new resources.  Moreover, as the experience of Europe has shown, setting an artificially high price for petroleum-based transportation fuels will not change the growth of U. S. carbon dioxide emissions, which are the largest component of greenhouse gas emissions. In any case, lessened U.S. carbon dioxide emissions would be dwarfed by future increases in those emissions from developing countries, particularly China, making unilateral action problematic.

Introduction

Numerous policy proposals advocate higher prices on gasoline and other transportation fuels in order to spur conservation by both producers and consumers. Advocates of such policies believe that charging customers a “fair” or “socially optimal” price for their use of a “depleting fuel” will promote the manufacture of more efficient vehicles and foster consumers’ use of mass transit, carpooling, home relocation, or other fuel-reducing endeavors. An example of such a policy is the tax on gasoline in the American Power Act, a legislative proposal by Senators Kerry and Lieberman to reduce greenhouse gas emissions.

Another proposal appears in a paper by Thomas Merrill and David Schizer,[2] where they advocate a plan that would both increase the stability of the price of transportation fuels by not allowing them to fall and be revenue neutral. According to the plan, a fee would be added to the price of transportation fuels, and that fee would rise if the price of crude oil fell, but fall if the price of crude oil rose. In theory, this would keep the price of transportation fuels more stable by setting a dynamic floor on the price. In any case, the price of transportation fuels would never fall below the prices they had when the plan was launched, since the fee would keep rising to offset any decline in the price of crude oil. In order to ensure revenue neutrality, and thus to sell the policy politically, the stabilizing fee would not be kept by the government but would be rebated back to citizens, minus administrative costs. The fee, however, would not be rebated back to purchasers but would be distributed to all persons of driving age, so that those who used mass transit or drove less than the average amount would garner a sizable share.

The goals of these policies are to reduce greenhouse emissions, improve national security by decreasing oil imports, and hopefully reduce road congestion. But another reason for promoting such a proposal is to “help the economy adjust to a future of scarce petroleum”. That is simply not an issue, as will be seen below. In addition, as history has shown and as forecasters continue to show, carbon dioxide emissions, the largest component of greenhouse gas emissions, will continue to grow despite increasing crude oil prices and thus despite any such policies.

Global Oil Reserves vs. Oil Resources

Almost as long as people have been using oil, people have been declaring that we are running out of it.  Ronald Bailey, science correspondent for Reason Magazine, writes:[3]

Predictions of imminent catastrophic depletion are almost as old as the oil industry. An 1855 advertisement for Kier’s Rock Oil, a patent medicine whose key ingredient was petroleum bubbling up from salt wells near Pittsburgh, urged customers to buy soon before “this wonderful product is depleted from Nature’s laboratory.” The ad appeared four years before Pennsylvania’s first oil well was drilled. In 1919 David White of the U.S. Geological Survey (USGS) predicted that world oil production would peak in nine years. And in 1943 the Standard Oil geologist Wallace Pratt calculated that the world would ultimately produce 600 billion barrels of oil.

During the 1970s, the Club of Rome report The Limits to Growth projected that, assuming consumption remained flat, all known oil reserves would be entirely consumed in just 31 years. With exponential growth in consumption, it added, all the known oil reserves would be consumed in 20 years.

Some other interesting factoids from the past regarding oil depletion are:[4]

• In 1885, the U.S. Geological Survey indicated that there was little or no chance of discovering oil in California.
• In 1914, an official of the U.S. Bureau of Mines estimated total future production at 5.7 billion barrels. (By 1984, more than 34 billion barrels had been produced.)
• In 1920, the Director of the U.S. Geological Survey predicted that the U.S. had nearly reached peak production. (By 1984, production was over four times the 1920 rate.)
• In 1939, the Interior Department predicted U.S. oil supplies would last thirteen years.
• In 1949, the Secretary of the Interior predicted that the end of U.S. oil supplies was almost in sight.

On the other hand, and more currently:

• Edward L. Morse, an energy official in Carter’s State Department, indicates that the world’s deep-water oil and gas reserves are significantly larger than was thought in the 1990s, and high prices have spurred development of technologies  for extracting them. The costs of developing oil sands are declining, so projects that were not economic last year with the price of oil under $90 a barrel are now viable with oil at $79 a barrel.[5]
• Daniel H. Yergin, co-founder and chairman of Cambridge Energy Research Associates, writes “careful examination of the world’s resource base . . . indicates that the resource endowment of the planet is sufficient to keep up with demand for decades to come.” [6]

According to the Journal of Oil and Gas, global proved oil reserves as of January 1, 2009, were 1,342 billion barrels,[7] the highest level ever, and about 10 billion barrels higher than in 2008. Thus, enough reserves were found in 2008 to meet demand in that year and to add 10 billion barrels to the global reserve level. The Middle East holds the majority of proved oil reserves at 746 billion barrels,[8] followed by North America with 210 billion barrels. Canada with 178 billion barrels (85% of the North American share)[9] is second in rank only to Saudi Arabia with 267 billion barrels of proved oil reserves.

Proved reserves of crude oil are the estimated quantities that geological and engineering data indicate can be recovered from known reservoirs with existing technology and current economic and operating conditions. That is, they are quantities of oil that can be retrieved by producing companies to meet demand in the near future, without needing new technology or having to explore and develop a totally new oil well.  As such, they represent the lowest estimate of petroleum supplies. Estimates of proved reserves are developed from data reported to the U.S. Securities and Exchange Commission,[10] foreign government reports, and international geologic assessments.

Thus, the term ‘proved reserves’ refers to oil deposits that have actually been discovered and carefully estimated. Although it is true that every barrel of oil removed from the ground reduces the physical total by one, the economically relevant fact is that humans historically go out and find more usable oil reserves in order to keep pace with consumption.

The Institute for Energy Research put together a table of global oil reserves beginning with the year 1971 (when proved reserves were at a level of 521 billion barrels) and continuing through 2007 (when they were at 1,317 billion barrels).[11] Between 1971 and 2007, the world consumed 910.3 billion barrels of petroleum[12], which would have made the reserve total 2,227 billion barrels were they not used. As the table shows, in this 36-year time span, proved oil reserves worldwide have grown by a factor of 2.5, while global oil demand over the same period has grown by a factor of 1.7.  Thus, at the 2007 level of global demand, 31.3 billion barrels per year,[13] proved oil reserves were capable of meeting that demand for 42 years. As the table indicates, there have been periods during which global oil reserves have increased more than 200 billion barrels.[14] One such period occurred early this decade with the addition of Canadian oil sands reserves. Currently, the U.S. benefits from these reserves from our northern neighbor, but proposed government policies (such as a low-carbon fuel standard[15] or legislation enacting a cap-and-trade policy on greenhouse gas emissions[16]) could endanger this source of proved reserves, allowing other countries without such policies to benefit instead.

U.S. Oil Resources

Proved oil reserves are a subset of the oil resource base, which includes estimated quantities of both discovered and undiscovered oil that have the potential of being classified as reserves in the future. These oil resources may be difficult to produce with current technology or their access may be limited by government policy. Thus, new technologies and better government oil recovery policies, as well as “risk mitigation” incentives, could help industry convert the higher-cost, undeveloped domestic oil resources into economically feasible reserves. Access to additional offshore, Alaskan, and public-land resources could be accelerated rather than stalled, as under the current Administration.[17]

The U.S. Department of Energy estimates that light and heavy oil resources in the United States total 1,124 billion barrels, with 40% believed to be recoverable.[18] In addition, the U.S. has a world-leading 2,118 billion barrels of in-place oil shale,[19] of which 800 billion barrels is estimated to be recoverable.[20] Other estimates have the recoverable shale oil number even higher, at approximately 1.38 trillion barrels.[21] That’s five times the oil reserves in Saudi Arabia.

Oil shale is found largely in Utah, Colorado, and Wyoming, and the best sources are believed to be on public lands. Oil producers need to have access to these resources in order to demonstrate that they can produce shale oil at current prices with technologies they believe will work. However, access is currently being stalled by the owner of the public lands, the federal government. [22]

The Denver Post carried an article that addressed this issue:[23]

Colorado is sitting on a bounty of oil shale that could make energy cheaper in America and free it from the whims of Middle Eastern oil barons. Unfortunately, it looks like oil companies can’t do the work necessary to extract the fuel because of political roadblocks. And this attitude seems to go all the way to the top. Interior Secretary Ken Salazar, one of Colorado’s two U.S. senators until he joined the Obama administration this year, tossed the latest obstacle into the path to progress in February when he canceled leases for oil-shale development in Colorado, Utah and Wyoming. Salazar’s backward thinking is typical of the politicians who embrace environmental hysteria. They seem to despise fossil fuels and want to stop Americans from using them.

Price Stabilization Policy Formulation

Analysts, such as Merrill and Schizer, who advocate policies that would stabilize transportation fuels, know that they need to make their fee formulation easy to implement and as free of administrative burden as possible. That is why they advocate having the IRS handle the fee: that agency collects the Federal taxes on gasoline. They also advocate that the fee should be based on the price of crude oil, since that is the largest component of the price of transportation fuels and is determined by global forces of supply and demand, making it less amenable to manipulation by domestic producers, refiners, and retailers. But one pitfall in their plan is that the price of the petroleum product does not always follow the price of crude oil, as can be seen by the following chart for gasoline.

The price of gasoline is based on four price components: crude oil, Federal and State taxes, refining operations and profits, and distribution and marketing.[24] In 2008, crude oil represented 69 percent of the gasoline price while the refining component represented only 7 percent. That was not typical of the past 9 years, however, when the refining component represented an average of 15 percent. Generally, there are certain times of the year when the refining component spikes gasoline prices. One example is in the spring, when refiners switch from winter grade gasoline to summer blends. This switch takes place the end of April and in May, causing the price of gasoline to spike, as seen in the chart for the years 2006 and 2007. Another phenomenon that affects the refining component is weather, and in the fall of 2005 the price of gasoline increased because many of the Gulf of Mexico refineries were shut in, owing to hurricane Katrina.

Another factor to note is that a price stabilization policy could in fact inflict a higher fee on petroleum transportation fuels than a likely cap-and-trade policy would provide. For example, if the price stabilization policy had been in effect in 2008, the world oil price increase would have resulted in a fee of about $2.50 per gallon, while according to EIA’s analysis of H.R. 2454, the American Clean Energy and Security Act of 2009, the “tax” on gasoline would have been closer to 35 cents per gallon.[25] Also, as we saw in 2008, the higher prices for petroleum-based transportation fuels had a secondary impact on consumer spending, increasing food prices and other products requiring transportation to move them to market.

The question remains whether a price stabilization policy or a gasoline tax will have the desired affects of limiting greenhouse gas emissions and increasing national security by reducing oil imports. To evaluate these issues, we’ll examine three oil price scenarios that the Energy Information Administration’s Annual Energy Outlook 2010 forecasts using different prices of crude oil.[26] The cases are the reference case, the high oil-price case, and the low oil-price case. They are depicted in the graph below:

In the reference case, the crude oil price rises gradually, until by 2035 it reaches $133 per barrel (in 2008 dollars), about $60 per barrel more than the current price. In the low price case, the crude oil price decreases to $51 per barrel during the next several years and remains there through 2035, the end of the forecast period. In the high price case, the crude oil price increases to $209 per barrel (in 2008 dollars) by 2035. Both the high price case and the reference case could very well represent a price stabilization scenario since the price of crude oil never falls and steadily rises.

The following graph depicts the carbon dioxide emissions, the largest component of greenhouse gases, in the 3 scenarios. Note that in each of the three cases, U.S. carbon dioxide emissions increase over time and by 2035 range from 2.5 percent to 12.5 percent higher than they were in 2007.

Another way to look at this issue is with the European experience in mind. Since World War II, European countries have had a hefty tax on gasoline to encourage the use of more efficient transportation fuels. Over the past 25 years, carbon dioxide emissions in Europe have ranged between 4,300 and 4,750 million metric tons, and in 2008 they were 5.5 percent higher than in 1983.[27]

The next graph depicts the net petroleum import share for each of the three price cases. The imported amount varies with the demand for liquid fuels, which is dependent on the price of crude oil, and which in 2035 varies by less than 4 million barrels per day across the three cases: 20.8 million barrels per day in the high price case and 24.5 million barrels per day in the low price case.

The petroleum import share also varies with the amount of ethanol production, which is mandated by the Energy Independence and Security Act of 2007 (EISA2007). That Act mandates the production of 36 billion gallons of biofuels, such as ethanol, by 2022.[28] It also requires the sale of flex-fuel vehicles that can burn E85, a blend of 85 percent ethanol and 15 percent gasoline—a much higher percentage of ethanol than the 10 percent blend that conventional gasoline vehicles can safely use without causing damage to the vehicle.

A further factor is the stricter mandates for Corporate Average Fuel Economy. EISA2007 requires the fuel efficiency of the combined fleet of all new passenger cars and light trucks sold in the U.S. in model year 2020 to be equal to or exceed 35 miles per gallon, 34 percent higher than the current fleet average of 26.4 miles per gallon.[29] In none of the three cases are petroleum imports at a level that is independent from foreign oil, and in fact, in none of the cases is the U.S. independent of petroleum imports from non-North American countries. In the high price case, where petroleum imports are the least, the higher oil prices increase the penetration of biofuels and the use of flex fuel vehicles.

World Implications

The Energy Information Administration provides forecasts of the next 18 months in their Short-Term Energy Outlook.[30] The next chart shows world demand for petroleum and the annual change in demand for the United States, China, and the rest of the world from 2003 through 2011. In 2008 and 2009, U.S. demand for petroleum declined. However, China’s petroleum demand increased in both 2008 and in 2009, even though the U.S. and the rest of the world’s demand decreased in 2009, and its demand is expected to continue to increase. Thus, any reduction in U.S. petroleum consumption will be made up by China or other countries.

As can be seen from the next chart, China’s domestic oil production is fairly flat, but its oil consumption is increasing at a fast pace, making its reliance on oil imports grow. The growth in oil consumption is primarily to provide for its expanding transportation sector. From 1996 to 2006, growth in the combined length of China’s highways averaged 11.3 percent per year. With this level of highway construction, China is on track to exceed the United States in total highways in the next decade.[31]

Infrastructure projects in China account for 15 percent of China’s gross domestic product, which grew by 8.7 percent in 2009, when the economies of the United States and Europe did not grow at all. Besides highway construction, their inventory projects include almost 100 new airports, some in isolated cities, and dozens of subways.[32]

In 2006, China became the world’s second-largest vehicle market, after the United States, and in 2009, it has overtaken the U.S market in vehicle sales.[33] New passenger car sales rose 55 percent in February of this year from a year earlier, following a 116 percent increase in January, aided by the extension of government incentives to boost purchases of smaller vehicles and spur rural demand for cars.[34]

In 2007, China produced nearly 8.9 million motor vehicles, an increase of 22 percent over production in 2006. The country is now the third largest vehicle producer in the world, after Japan and the United States. According the Energy information Administration, China’s passenger transportation use per capita is projected to triple by 2030.[35]

China is not endowed with a lot of oil resources. Its oil reserves totaled 16 billion barrels in January 2009.[36] As a result, China has spent nearly $200 billion on oil deals during the past few years, joining with more than 19 countries —including Russia, Turkmenistan, Kuwait, Yemen, Libya, Angola, Venezuela and Brazil[37]— and paying for exploration, production, infrastructure construction, as well as “loans for energy” deals.[38] Recently, China’s Sinopec International Petroleum Exploration and Production Company agreed to buy, for $4.65 billion, the 9 percent interest that ConocoPhillips holds in Syncrude,[39] a Canadian business involved in the production of oil sands (an asphalt-like heavy oil). .It is even pursuing buying leases in U.S. waters, in the Gulf of Mexico.[40]

During the first quarter of this year, China set records with huge year-over-year increases in oil demand.  In February, China’s oil demand rose 19.4 percent over a year earlier, the second fastest rise on record.  China is the world’s second largest oil user (second to the United States).[41] China’s oil imports were up 13.8 percent in March over February, reaching 4.95 million barrels per day, according to preliminary data from China’s General Administration of Customs.[42] In part, these large oil increases are fueling China’s passenger car fleet.

China’s economic and energy profile can be summarized as follows:[43]

• Between 2000 and 2008, China’s real gross domestic product averaged 10 percent per year. While its economic growth in 2008 and in the first half of 2009 is less than this average rate, its $586 billion economic stimulus package is expected to stimulate more normal growth in the second half of 2009 and in 2010.
• China is the world’s most populous country and the second largest energy consumer behind the United States.  Rising oil demand and imports have made China a significant factor in world oil markets.
• China is the world’s second-largest consumer of oil behind the United States, and the third-largest net importer of oil after the U.S. and Japan.
• China’s largest oil fields are mature and production has peaked, leading companies to focus on developing largely untapped reserves in the western interior provinces and offshore fields.
• In 2006, 93 percent of China’s energy consumption was from fossil fuels. (See figure below.)

China is the largest producer and consumer of coal in the world, with 70 percent of its demand for energy coming from coal. In the late 1980s, China surpassed the U.S. in coal consumption and the Energy Information Administration expects China’s coal consumption to be 4.5 times that of the U.S. by 2035.[44] Many of China’s large coal reserves have yet to be developed. 

• China’s electricity generation is dominated by fossil fuel sources, particularly coal. In 2007, coal-fired generators produced 80 percent of China’s electricity and the Energy Information Administration predicts that, by 2035, coal-fired generators will produce 74 percent of its electricity, with mainly wind and nuclear power making up the difference in coal’s lower share.[45] (See figure below.)

Because of China’s large population, high economic growth rate, and large consumption of fossil fuels, it is the world’s largest emitter of carbon dioxide, which is the largest component of greenhouse gas emissions. China surpassed the United States in emissions of carbon dioxide in 2006 and is expected to emit over twice as much carbon dioxide than the United States in 2035.

Since 2002, the average annual increase in China’s carbon dioxide emissions has been over 550 million metric tons.[46] In 2009, U.S. carbon dioxide emissions from transportation uses were 1,851 million metric tons.[47] Thus, if China continues its high level of economic growth and its use of fossil fuels as forecast, in just over 3 years, its increase in carbon dioxide emissions will equal the total carbon dioxide emitted from the U.S. transportation sector. Small, incremental changes in U.S. transportation emissions will not have an effect on overall global greenhouse gas concentrations.

And while China has professed that it will meet renewable generation goals, it will not partake in meeting targets for greenhouse gas reductions that will hurt its projected economic growth and its future status as a major world power.[48] Instead, China is willing to make reductions in greenhouse gas intensity (greenhouse gas emissions per unit of GDP), a measure proposed by the U.S. almost a decade ago, that allows for both economic growth and lower emissions per unit of GDP from improved efficiency and technology.[49]

Conclusion

Concerns about traffic congestion, greenhouse gas emissions, and the use of foreign oil are valid concerns, but increasing the price of oil does not do a good job of addressing those concerns. Policies that artificially raise the price of petroleum-based transportation fuels will have the desired effects of limiting usage and reducing demand. But even with the price of crude oil at a $200 per barrel (in 2008 dollars) the U.S. will still increase its carbon dioxide emissions and will still be dependent on non-North American sources of imported oil. Reductions of petroleum demand in the United States will just make crude more available for other countries to use, with little progress in reducing global carbon dioxide emissions.

The U.S. has transitioned to other sources of energy in the past without the need for government policies. The picture below from a 1910 Midwestern town depicts the transition from horse and buggy transportation to the horseless carriage. The smoke from the early autos was felt to be far less polluting than the horse excrement and carcasses on the street. Early autos were noisy and belched smoke, but they kept the streets clean of tons of waste and dead bodies of thousands of horses.[50] Now, of course, technology has improved automobile engines so that they are more powerful, efficient, and cleaner than those of the past, supporting our thirst for increased transportation, better mobility, and a higher quality of life—all at reduced emissions of criteria pollutants. The “ultimate resource” of human ingenuity has indeed improved the economic and environmental characteristics of petroleum.

[2] Thomas Merrill and David Schizer, “Advancing Energy Policy Goals in an Economic Downturn: A Proposed
Petroleum Fuel Price Stabilization Plan”, November, 2009.

[3] Ronald Bailey, “Peak Oil Panic”,  May 2006, http://reason.com/archives/2006/05/05/peak-oil-panic

[4] William M. Brown, “The Outlook for Future Petroleum Supplies,” in Julian Simon and Herman Kahn, eds., The Resourceful Earth (Malden, MA: Blackwell, 1984), p. 362.

[5] www.foreignaffairs.com

[6] www.foreignpolicy.com

[7] “Worldwide Look at Reserves and Production,” Oil and Gas Journal, Vol. 106, No. 48, December 22, 2008, pp. 23-24.

[8] Since the Middle East has had a high concentration of global oil reserves for decades, its reserve level is not an indicator of market share.

[9] A large portion of Canadian reserves are oil sands, which cannot be produced at the same rate as conventional oil, so the 178 billion barrels of Canadian reserves are not functionally equivalent to 178 billion barrels of conventional oil.

[10] Companies whose stocks are publicly traded on U.S. stock markets are required to report their holdings of domestic and international proved reserves to the SEC.

[11] Institute for Energy Research, August 26, 2008, www.instituteforenergyresearch.org/2008/08/26/has-oil-reached-its-peak/

[12] Energy Information Administration, Annual Energy Review 2008, Table 11.10, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec11_21.pdf

[13] In 2007, the U.S. demand for petroleum was 20.68 million barrels per day or 7.548 billion barrels per year, approximately one-fourth of the world total. See Energy Information Administration, Annual Energy Review 2008, Table 5.1, www.eia.doe.gov/emeu/aer/petro.html

[14] The increase in Middle Eastern oil reserves in the late-1980s is somewhat controversial and has been questioned by some to be, in part, paper increases.

[15] A Low Carbon Fuel Standard reduces the carbon intensity of transportation fuels by requiring that the mix of fuels sold reaches pre-specified targets of carbon reduction. Since oil sands yield heavier crude, more energy is required for producing and refining it, thus giving that crude a higher carbon intensity than conventional crude.

[16] H.R. 2454 is a cap-and-trade proposal that the House of Representatives has passed to reduce future levels of greenhouse gas emissions. It requires that lower targets for emissions be met by manufacturers and other producers, either by reducing emissions themselves or by purchasing emissions permits from producers that can economically reduce their emissions at lower cost. The American Power Act is the Senate’s version of H.R. 2454 that proposes a cap and trade regime on electric utilities and later (in 2016) on industrial sources, and taxes gasoline consumption.

[17] Greenwire, “Oil and Gas: Industry knocks Obama admin claims on Utah leases,” November 20, 2009, www.eenews.net/Greenwire/2009/11/20/archive/9?terms=salazar;  and Land Letter, “Oil and Gas: Interior agencies showing marked shift in leasing policies”, November 19, 2009, www.eenews.net/Landletter/2009/22/19/archive/3?terms=salazar ; Greenwire, Offshore Drilling: Lift shallow-water moratorium, Landrieu tells Obama admin, May 20, 2010, http://www.eenews.net/Greenwire/2010/05/20/archive/6?terms=offshore+oil+moratorium,  the Washington Post, “Obama presses for action on energy bill”, June 16, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/06/15/AR2010061505595.html?sub=AR , and the Wall Street Journal, Crude Politics, The drilling experts speak out on the Obama deepwater moratorium, June 17, 2010, http://online.wsj.com/article/SB10001424052748704198004575311033371466938.html?mod=WSJ_Opinion_LEADTop

[18] U.S. Department of energy, Office of Fossil energy, “Undeveloped Domestic Oil Resources: The Foundation for Increasing  Oil Production and a Viable Domestic Oil Industry,” February 2006, http://www.fossil.energy.gov/programs/oilgas/publications/eor_co2/Undeveloped_Oil_Document.pdf

[19] The U.S. Geological Survey recently updated its assessment of the Piceance Basin in western Colorado and found it to have oil shale resources that are 50% higher than the previous estimate of 1 trillion barrels. That resource update would increase the total U.S. shale oil resources to 2.6 trillion barrels. See http://www.usgs.gov/newsroom/article.asp?ID=2182

[20] Strategic Unconventional Fuels Integrated Program Plan, February 2007, http://www.unconventionalfuels.org/publications/reports/executiveSummary.pdf

[21] The Congressional Research Service, October 20, 2009, http://epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=01feb68b-ef57-4748-8f5c-d88c0e7d6bd5

[22] E&E Publishing, “Oil and Gas: Industry chafes over Interior’s revised oil shale leases,” October 29, 2009, www.eenews.net/Landletter/2009/10/29/archive/1?terms=oil+shale

[23] The Denver Post, “Oil shale opponents aren’t just evil—they’re just wrong,”’ November 23, 2009, http://www.denverpost.com/commented/ci_13846941?source=commented-

[24] Energy Information Administration, “Factors Affecting Gasoline Prices,” http://tonto.eia.doe.gov/energyexplained/index.cfm?page=gasoline_factors_affecting_prices

[25] Energy Information Administration, “Energy market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of 2009,” August 4, 2009, www.eia.doe.gov/oiaf/servicerpt/hr2454/index.html

[26] Energy Information Administration, Annual Energy Outlook 2010, www.eia.doe.gov/oiaf/aeo/index.html

[27] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=90&pid=44&aid=8

[28] Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/leg_reg.html

[29] Ibid.

[30] Energy Information Administration, Short-Term Energy Outlook,  June 2010, www.eia.doe.gov/emeu/steo/pub/contents.html

[31] The Washington Post, China may have dug a financial hole, June 18, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/06/17/AR2010061705794.html

[32] Ibid.

[33] “China’s Car Sales Down in October—To 80 Percent Growth”, November 7, 2009, http://www.thetruthaboutcars.com/china%E2%80%99s-car-sales-down-in-october-%E2%80%93-to-80-percent-growth/

[34] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true

[35] Energy Information Administration, International Energy Outlook 2009,  http://www.eia.doe.gov/oiaf/ieo/index.html

[36] “Worldwide Look at Reserves and Production,” Oil and Gas Journal, Vol. 106, No. 48 (December 22, 2008), pp. 23-24.

[37] For example, Venezuela signed a deal with China under which the latter would invest $16 billion over three years. The deal could raise oil output by several hundred thousand barrels a day. http://www.eenews.net/Greenwire/2009/09/18/. China National Petroleum Corp. received a $30 billion low-interest loan from a state-run bank to finance overseas acquisitions, Beijing’s latest bid to secure mineral resources to fuel the country’s burgeoning economy. http://www.eenews.net/Greenwire/2009/09/09/. CNOOC and Sinopec have agreed to buy a 20 percent stake in an oil field off the coast of Angola for $1.3 billion, the latest in a series of Chinese acquisitions of overseas energy and mining assets. http://www.eenews.net/Greenwire/2009/07/20/

[38] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb

[39] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413 and www.conocophillips.com

[40]David Pierson, “China’s push for oil in the Gulf of Mexico puts U.S. in awkward spot,” Los Angeles  Times, http://www.latimes.com/business/la-fi-china-oil22-2009oct22,0,2776603.story?track=rss.

[41] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true

[42] Reuters, Oil falls as demand, inventories weigh, April 12, 2010, http://www.reuters.com/article/idUSTRE6142V820100412

[43] Energy Information Administration, Country Analysis Brief on China, www.eia.doe.gov/emeu/cabs/China/Background.html

[44] Energy Information Administration, International Energy Outlook 2010,  Table A7, http://www.eia.doe.gov/oiaf/ieo/pdf/ieorefcase.pdf

[45]Energy Information Administration, International Energy Outlook 2010, Appendix H, http://www.eia.doe.gov/oiaf/ieo/pdf/ieoecg.pdf

[46] Energy Information Administration, Annual Energy Review 2008, Table 11.19, http://www.eia.doe.gov/emeu/aer/pdf/pages/sec11_39.pdf, and International Energy Outlook 2010

[47] Energy Information Administration, U.S. Carbon Dioxide Emissions in 2009: A Retrospective Review, May 5, 2010, http://www.eia.doe.gov/oiaf/environment/emissions/carbon/index.html

[48] Institute for Energy Research,  Lost in Translation,   http://www.instituteforenergyresearch.org/2009/07/28/lost-in-translation/.

[49]http://online.wsj.com/article/SB125409730711245037.html

[50] Robert L. Bradley, Jr. and Richard W. Fulmer, Energy: The Master Resource (Kendall/Hunt Publishing Company, 2004), page 49.