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.

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.

And while proponents of this legislation tout the “minimal costs” such a policy would have on household budgets, it’s important to note that the EPA has a history of systematically underestimating the costs of cap-and-trade legislation. Today’s analysis is no different.

Thomas J. Pyle, president of the Institute for Energy Research issued this statement on the economic analysis released today on the American Power Act:

“The American people overwhelming oppose an increase in the gas tax – yet, it’s included in this legislation. Cap-and-trade, which will cause electricity prices to “necessarily skyrocket,” has also been soundly rejected by the American people – yet, it is also included in this proposal. We can argue about how high the costs of this legislation will be, but no one denies that the consumer will end up with less money in their pockets after this legislation is signed into law.

“Bottom line: the more expensive it is to do business in this country, the less productive and competitive our economy will be. Mandating the use of expensive energy and artificially increasing the price of coal, oil and natural gas will only further harm our already struggling economy. It is clear that the American Power Act will do just that, so one has to ask: What are policymakers and Wall Street trying to accomplish with this legislation?”

Note: EPA’s analysis is not a cost-benefit analysis. According to EPA models, the global temperature savings of the Kerry-Lieberman bill is astoundingly small—0.043°C (0.077°F) by 2050 and 0.111°C (0.200°F) by 2100. In other words, by century’s end, reducing U.S. greenhouse gas emissions by 83% will only result in global temperatures being one-fifth of one degree Fahrenheit less than they would otherwise be. That is a scientifically meaningless reduction.

Senators John Kerry and Joe Lieberman have finally released their cap-and-trade energy tax bill. Like the Kerry-Boxer energy tax bill and Waxman-Markey energy tax bill, this is shaping up to be incredibly costly and restrictive of Americans’ energy freedom.

All cap-and-trade bills drive up the cost of energy and harm the economy, but this bill goes one step further and includes an explicit gas tax (see Sec. 729). Do Americans really need to pay higher prices at the pump?

This bill has been shopped around to big business and environmental special interests for months, but this is the first time that the American people, ones who will be forced to pay the higher energy prices get to see the bill.

Amazingly, even though the bill will cost Americans billions in higher taxes, their bill will not affect global temperature in any significant way. Chip Knappenberger reports that:

“The global temperature “savings” of the Kerry-Lieberman bill is astoundingly small—0.043°C (0.077°F) by 2050 and 0.111°C (0.200°F) by 2100. In other words, by century’s end, reducing U.S. greenhouse gas emissions by 83% will only result in global temperatures being one-fifth of one degree Fahrenheit less than they would otherwise be. That is a scientifically meaningless reduction.”

A full copy of the 987 page bill is available here.
A 21 page summary Kerry and Lieberman’s bill is available here.

Washington, DC – After months of behind-the-scenes horse-trading and corporate deal-making, Senators John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) finally unveiled their global warming measure, The American Power Act. However, they have yet to release the actual legislative text, which will include the all important details of exactly what these senators seek to regulate tax and subsidize.

Thomas J. Pyle, president of the market-based Institute for Energy Research (IER) issued this statement on The American Power Act:

“Until we see legislative text, there is not much to say other than it is obvious that these Senators designed this bill with specific corporate and Wall Street interests in mind. It’s unfortunate that as the economy continues to struggle and unemployment remains at near double digits, the American consumer and worker did not receive a seat at the negotiating table.

“Once the American people find out that this bill will increase prices at the pump with a gas tax, jack electricity rates with cap-and-trade and ship more American jobs overseas, they will most certainly reject this deeply flawed proposal.”

#####

FOR IMMEDIATE RELEASE:
May 12, 2010
CONTACT:
Patrick Creighton: 202.621.2947
Laura Henderson: 202.621.2951

Tomorrow, with the support of the White House, Senators Kerry and Lieberman are introducing a bill to regulate energy. The Obama administration and Congress are trying to make the American public believe that cap-and-trade and other “clean energy” policies will reduce greenhouse gas emissions while not significantly increasing consumer prices. These Senators and the President point to Europe as providing a model the U.S. should follow.

The problem is that  the European community has already tried such approaches, and the results have been poor. Clean energy policies in the generating sector have increased electricity prices, indeed often doubling them. Cap-and-trade policies have enriched the companies that were granted free allowances by giving them a commodity to sell that they paid nothing to obtain. European carbon-dioxide emissions were rising, until the global recession lowered them—lowered them, in many cases, below targets set by cap-and-trade, so that companies did not have to take further actions to reduce emissions. And, as studies have shown, European clean-energy policies have resulted in job losses, often in economies already hurting.

Why, with results like these, are U.S. politicians still trying to persuade companies to accept such policies, and handing out free incentives to entice them?

The European Experience with Cap-and-Trade

The European Union started a cap-and-trade scheme in January 2005 in an attempt to comply with the 1997 Kyoto Protocol. Most Western European nations participating in the cap-and-trade program found the program to be expensive, as well as inefficacious in reducing carbon dioxide emissions, actually resulting in increased rather than decreased emissions until the global recession hit.[i] According to European Commission figures, emissions from the 27 member states rose by 1.9 percent in the first three years after cap-and-trade was put into effect.[ii] Several countries were seeing a faster growth in carbon-dioxide emissions than the United States, which did not adopt the policy. From 2000 to 2006, European emissions rates under the cap-and-trade policy increased by 3.5 percent. During that same time, U.S. emissions increased by 0.7 percent.[iii] To the extent European nations have reduced emissions below business-as-usual levels, their economies have been hurt with higher unemployment and energy costs than the United States.[iv]

Further, the Europeans found misuses and abuses in the system, because all parties have an incentive to manipulate it. Many companies got free permits, and because those permits were based on future estimates of emissions levels, there were too many free permits. As a result, companies made large profits by selling unneeded permits and not passing their savings on to their customers. As a result, consumers were paying higher energy and commodity costs, and taxpayers paid for the program’s implementation, which created a new middleman to run the carbon-permit trading program.[v]

Europe found the costs of the program to be large. In 2006, individual businesses and sectors had to pay €24.9 billion ($31.6 billion) for permits totaling over one billion tons. The WorldWatch Institute estimates the costs of running a trading system designed to meet the European Union’s Kyoto obligations at about $5 billion. The costs of a trading system designed to meet the European Union’s commitments of a 20 percent reduction by 2020 (against a 1990 baseline) are estimated to be about $80 billion annually.[vi]

Recently, tax evasion has been added to the list of ills stemming from carbon trading. German prosecutors searched 230 offices and homes of employees of Deutsche Bank, Germany’s largest bank, and of RWE, Germany’s second-biggest utility, to investigate tax evasion of 180 million euros ($238 million U.S.) linked to emissions trading. Last year, the U.K., France, and the Netherlands started investigating carbon traders who committed fraud by collecting the tax and then disappearing without turning the tax funds in. According to estimates from Bloomberg New Energy Finance, about 400 million metric tons of emission trades may have been fraudulent last year, or about 7 percent of the total market.[vii]

Another issue has been the lack of predictability regarding the emissions permit price. Companies need a relatively stable price for long-term planning, but the European Union saw the permit price range by a factor of 3—and even at the higher price range, it was insufficient to meet emission targets; before the global recession.[viii]

Clean Energy Policies in Europe

Besides cap-and-trade, European countries have been aggressively promoting renewable energy. Several countries in Europe have instituted renewable energy standards that require a certain percentage of electricity come from renewable energy, and that also provide subsidies in an effort to  help achieve these targets. The outcome has been higher electricity rates, job losses, and high tax-payer supported subsidies.

People wait in line at a government employment office in the center of Madrid on April 30, 2010. Photo: Dominique Faget, AFP/Getty Images

Spain. Spain’s requires that 20 percent of its electricity production be from renewable energy by 2010. The government’s Renewable Energy Plan expects to have 20,155 megawatts of wind capacity by then. In 2008, wind energy provided 10.2 percent of the country’s electric consumption at a price per kilowatt hour that was almost 50 percent higher than wind’s generating price 10 years prior, partly owing to high premiums in the regulated rates for renewable energy and the requirement that all renewable energy be purchased by electricity retailers. Spain provided both regulated rates and direct incentives to attract investment and meet its renewable policy goals.

This these regulations come at a high cost. A Spanish study found that Spain’s “green jobs” agenda resulted in job losses elsewhere in the country’s economy. For each “green” megawatt installed, 5.28 jobs on average were lost in the Spanish economy as an opportunity cost; for each megawatt of wind energy installed, 4.27 jobs were lost; and for each megawatt of solar installed, 12.7 jobs were lost. Although solar energy may appear to employ many workers in the plant’s construction, in reality it consumes a great amount of capital that would have created many more jobs in other parts of the economy.  The study also found that 9 out of 10 jobs in the renewable industry were temporary.[ix] Based on Spain’s experience, the United States can expect to lose 2.2 jobs for every ”green” job created, and each of those “green” jobs will cost about $803,000 in government subsidies.[x]

Last year, the Spanish Government decided to slash subsidies to solar power, subsidizing just 500 megawatts of new solar projects, down sharply from 2,400 megawatts.[xi] More recently, Spain—worried that it may end up in a similar debt crisis as Greece, owing to a cut in its credit rating by Standard and Poor’s—has decided to curb subsidies to renewable plants already generating, in order to reduce energy costs that are largely passed on to the consumer. Solar energy producers are getting about 12 times what fossil fuel plants earn.[xii]

Britain. Britain has a target of meeting 15 percent of its electricity demand in 2020 with renewable sources. The government’s clean-energy advisers have warned that Britain could spend £100 billion over the next decade and still not hit the target. The credit crunch slowed the already slow rate of renewable deployment to a crawl. With financing and credit harder to come by, expensive offshore wind farms look less attractive to the big utilities.[xiii] Although the U.K. has built, with enormous subsidization, enough wind turbines to generate 5 percent of its electricity, no more than 1 percent is operational when needed since wind does not operate during periods of intense heat or cold.[xiv] In 2008, the U.K. had 3.24 gigawatts of wind capacity, 2.7 percent of the world total, and ranked 8^th in the world.[xv]

Germany. In 1991, Germany established the Electricity Feed-in Law, which established feed-in tariffs to subsidize renewable energy, and in 2000, it passed legislation that guaranteed continued support for 20 years. Feed-in tariffs require electric utility companies to purchase power from independent renewable energy producers at technology-specific rates that are far above their production costs. For example, solar photovoltaics, the most expensive renewable, has a feed-in tariff of 43 euro cents per kilowatt-hour ($0.59 U.S. per kilowatt-hour), over 8 times the wholesale price of electricity  and over four times the feed-in tariff for onshore wind power. By 2008, Germany was second to the United States in installed wind power, and first in installed solar power. But wind power in Germany was still 300 percent more costly than conventional electricity, on a per kilowatt-hour basis.

Financial aid to Germany’s solar industry reached a level that far exceeded average wages, with per worker subsidies as high as $240,000 U.S. In addition, Germany has learned—as the U.S. is beginning to learn—that green jobs created by government actions disappear as soon as government support is terminated.[xvi] Germany is reducing its subsidies for solar to ease costs for electricity consumers. Surprisingly, Germany’s photovoltaic manufacturing industry is supporting slashing subsidies, owing to competition from Chinese manufacturers, whose production costs are 30 percent lower. China is now the world’s largest producer of solar cells.[xvii]

Denmark. The Obama Administration often touts the fact that 20 percent of Denmark’s generation comes from wind. While Denmark does generate 19 percent of its electricity from wind, a far smaller amount goes toward meeting the country’s electricity demand. In 2006, for example, only 5 percent of Denmark’s electricity demand was filled by wind, and over the last 5 years, it has averaged 9.7 percent.[xviii]

The reason is that wind is an intermittent technology, with the best winds occurring at night when electricity load is low. Since wind energy can’t be stored, Denmark exports its wind power to Norway, Sweden, and Germany. West Denmark exports, on average, 57 percent of its wind power, and East Denmark exports 45 percent. Norway, whose generation is 99 percent hydroelectric power, is able to use that energy source as a large battery for Denmark’s wind power. Denmark’s taxpayers have, in essence, subsidized power for its neighbors, who are buying the wind power at inexpensive electricity rates. Between 1999 and 2006, Denmark found its energy technology sector had under performed by 13 percent, compared to the industrial average, meaning that government subsidies paid for employment to shift from more productive sectors to the less productive energy-technology sector.[xix]

Conclusion

The European experiences with cap-and-trade and the promoting of renewables shows us that these schemes are expensive and do not achieve the desired results. But the President and Senators Kerry and Graham continue to promote these ideas nevertheless.

Even the  Washington Post has noted the problem with cap-and-trade:

“Cap-and-trade regimes have advantages, notably the ability to set a limit on emissions and to integrate with other countries. But they are complex and vulnerable to lobbying and special pleading, and they do not guarantee success.” [xx]

The European Union has found this to be the case: their cap-and-trade program did not meet its targets, made many companies wealthier, and resulted in higher energy prices for consumers.

The Tax Foundation and others have found cap-and-trade bills to be regressive, with bottom income earners paying a higher percentage of their income toward the implied tax than top income earners.[xxi] The cost to the average American family would vary based on the actual cap-and-trade program instituted. And even then, the estimates vary. For example, the Tax Foundation estimated the average household would spend an extra $1,218 a year; yet, for the same cap-and-trade policy, the Congressional Budget Office estimated the average American family would spend an extra $1,600 per year. [xxii]

The fact that the carbon-trading market in Europe is drawing suspicions of tax evasion should also be a bad sign for cap-and-trade proponents, because that market is so young and still small. It just points to further areas of potential fraud beyond the companies making a fortune off of free emission permits because of Europe’s hastily and poorly constructed cap-and-trade program. But can such a policy as cap-and-trade, which is necessarily complex, be constructed well? Can politicians refrain from deals and favors to companies, resulting in consumers’ paying more? And can the banking institutions be trusted if the carbon-trading market gets even larger?

Australia has decided to postpone, until at least 2013, its carbon-trading scheme, intended to cut carbon emissions by 5 percent from 2000 levels by 2020. The reasons Prime Minister Rudd announced are the need for more time to judge any global actions on climate change and the opposition’s “back flip,” blocking the proposal for a second time in parliament and portraying it as a “great big new tax on everything.”[xxiii]

While Australia may be learning from the example of others, it seems as though we are not, for the latest proposal put together by Senators Kerry, Graham, and Lieberman is reported to have a lot of backdoor deals with big business included to try to win business support. [xxiv] While the specifics of legislation has not yet been  released,   they have apparently changed the minds of some companies that either produce hydrocarbons or use them, getting them to switch from their attacks on previous proposed bills to supporting the current proposal. [xxv]

But the question of what benefit the policy is achieving is still at issue. China has now passed the United States in emissions of carbon dioxide. With 70 percent of China’s energy demand coming from coal, the most carbon-intensive hydrocarbon, any reduction that we make in carbon dioxide emissions will be swallowed up by China and other developing countries—countries that refuse to participate in a global cap-and-trade program.

Other clean energy programs have had issues of producing higher electricity rates and requiring large subsidies for technologies that contribute small amounts to supply. And here, too, any emission reductions will be totally offset by emissions from developing countries. Moreover, countries that have supported such programs are now beginning to worry about their credit ratings.

The question is whether it makes sense to force Americans—still feeling the results of the recession—to incur these costs. With the unemployment rate stubbornly stuck  around 10 percent, and companies lowering wages, many Americans have all they can do to survive with the bare necessities. How can they afford to pay more for the energy they need for cooking, heating, cooling, lighting, and commuting?

[ii] The Wall Street Journal, Cap and Trade Doesn’t Work, June 25, 2009, http://online.wsj.com/article/SB124587942001349765.html

[iii] The Denver Post, Cap and Trade: It’s an Economic Catastrophe, June 21, 2009, http://www.denverpost.com/opinion/ci_12624650

[iv] The Heritage Foundation, The European Experience with Cap and Trade, July 10, 2009, http://www.heritage.org/Research/Testimony/The-European-Experience-with-Cap-and-Trade

[v] The Wall Street Journal, Cap and Trade Doesn’t Work, June 25, 2009, http://online.wsj.com/article/SB124587942001349765.html

[vi] Ibid.

[vii] Bloomberg, Deutsche Bank, RWE raided in German probe of CO2 tax, April 28, 2010, http://www.bloomberg.com/apps/news?pid=20601130&sid=aIPHlf4UHkqU

[viii] Ibid.

[ix] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf .

[x] Eagle Tribune, Cap-and-trade bill is an economy-killer, June 28,2009, http://www.eagletribune.com/opinion/x1650961524/Our-view-Cap-and-trade-bill-is-an-economy-killer?keyword=topstory

[xi] Wall Street Journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html .

[xii] Bloomberg, Spain Pricks Solar Power Bubble as Greek Fate Looms, April 30, 2010, http://www.bloomberg.com/apps/news?pid=20601130&sid=aKBPkdonLv3U

[xiii] The Guardian, March 21, 2009, http://www.guardian.co.uk/environment/2009/mar/21/renewable-energy

[xiv] “Windmills flap helplessly as coal remains king”, February 18, 2009, http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article5 755210.ece

[xv] Global Wind Energy Council, Global Wind 2008 Report, http://www.gwec.net/fileadmin/documents/Global%20Wind%202008%20Report.pdf

[xvi] Economic impacts from the promotion of renewable energies; the German experience, October 2009, http://www.instituteforenergyresearch.org/germany/Germany_Study_-_FINAL.pdf

[xvii] Wall Street Journal, “Solar-Power Incentives in Germany Draw Fire,” Vanessa Fuhrmans, September 28, 2009, http://online.wsj.com/article/SB125383541153239329.html

[xviii] Wind Energy: The Case Of Denmark, September 2009, http://www.cepos.dk/fileadmin/user_upload/Arkiv/PDF/Wind_energy_-_the_case_of_Denmark.pdf

[xix] Wind Energy: The Case Of Denmark, September 2009, http://www.cepos.dk/fileadmin/user_upload/Arkiv/PDF/Wind_energy_-_the_case_of_Denmark.pdf

[xx] The Washington Post, Climate Change Solutions, February 16, 2009, http://www.washingtonpost.com/wp-dyn/content/article/2009/02/15/AR2009021501425.html

[xxi] The Denver Post, Cap and trade: It’s an economic catastrophe, June 21, 2009, http://www.denverpost.com/opinion/ci_12624650

[xxii] Ibid.

[xxiii] The Economist, A Change In the Climate, April 29, 2010, http://www.economist.com/displaystory.cfm?story_id=16009369&fsrc=nlw|wwp|04-29-2010|politics_this_week

[xxiv] AOL News, Corporations at the Cap-And-Trade Trough, April 26, 2010, http://www.aolnews.com/opinion/article/opinion-corporations-at-the-cap-and-trade-trough/19 454953

[xxv] AOL News, Corporations at the Cap-And-Trade Trough, April 26, 2010, http://www.aolnews.com/opinion/article/opinion-corporations-at-the-cap-and-trade-trough/19 454953

Washington, DC – As Senators John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) prepare to unveil their much-awaited global warming legislation, many Americans find themselves wondering who will benefit from the proposal. Well, after a quick search of newspapers from the past few years, it’s obvious who wins and who loses: Wall Street wins, consumers lose. Following are a few selected articles that paint an abundantly clear picture of what’s at stake and why specific rent-seeking corporations are aggressively lobbying for implementation of energy rationing legislation.

It’s also important to note that while this trio of senators has been working for months—over six to be exact—behind closed doors with many of the companies and trade associations mentioned below, the American consumer, who will inevitably foot the bill through higher energy and electricity prices, was absent from the negotiating table.

While Sens. Kerry, Graham and Lieberman have publicly distanced themselves and their legislation from the House-passed Waxman-Markey legislation, their proposal, at its core, will achieve the same goal: it will artificially increase the price of coal, oil and natural gas through added legislation and regulation.

Exelon, the nation’s largest nuclear power company, stands to rake in roughly an extra $1 billion to $1.5 billion a year if the House climate change bill passes, according to the company’s own estimates. The House is expected to vote on the bill on Friday… Exelon CEO John Rowe recently told a gathering of investors and senior executives that the energy bill “will add $700 to $750 million to Exelon’s annual revenues for every $10 per metric ton (MT) increase in the price of CO2 allowances.” Prices will range between $15 and $18 per metric ton, the report estimates, “implying a positive earnings impact of $1 to $1.30 per share.” (Huffington Post, 7.24.09)

Banks: Gearing Up for Carbon Trading…while U.S. policymakers continue to squabble over the details of the “cap-and-trade” proposal, big banks are gearing up for what they see as a new profit center. “U.S. carbon trading is coming,” says Louis Redshaw, head of environmental markets at Barclays’ (BCS) investment bank. “You have to be in it to win it.” Analysts figure rules will be in place by 2013, and carbon trading could top $1 trillion a year by 2020, according to research firm New Carbon Finance. At that size, carbon would rival oil as one of the largest commodity markets… The biggest banks in the U.S. and Europe are quietly preparing for the potential payoff in trading. France’s Société Générale (SCGLY) has set up a U.S. group devoted to carbon. Morgan Stanley, which already is active on the U.S. regional exchanges, says it will expand its unit once policymakers finalize the rules. (Business Week, 5.28.09)

Behind the Green Doerr… In essence, Doerr is helping to create the biggest new market the world has seen since the dawn of the oil industry—and asking for taxpayer dollars to do it. Doerr regularly trots out chum Al Gore to run through his Inconvenient Truth slide show in front of influential audiences of businesspeople and politicians. Doerr has an unlikely solution to the tech-bubble problem: He denies there ever was one. “People think of it as a bubble,” he says, gesticulating enthusiastically. “I prefer to think of it as a boom. The payoff on some of these innovations was longer term.” Asked if greentech could repeat the dotcom crash, Doerr admits, “It’s possible.” He pauses and rubs his forehead before repeating, “It’s possible.” Kleiner Perkins partner Ray Lane… goes further. “A bubble? You can almost count on it…” “Bubbles are common. They end badly for those who come in late. For those who come in early, it’s not that bad.” But he predicts that alternative energy will get overheated and others will undoubtedly go up in flames. “If the bubble develops out of a whim,’’ he says, “then shame on investors. They need to get burned.” (Forbes, 4.16.07)

Chemical Makers Poised to Gain In New Cap-and-Trade System… DuPont Co. expects that by 2015 its sales from renewable materials that displace fossil fuels will nearly double to $8 billion. That could include sales of ethanol made from corn cobs and switchgrass that the company is developing in a joint venture with food-ingredient company Danisco AS. German chemical maker BASF SE sees big business opportunities in the weatherproofing of residential homes, which typically contain an average $17,000 worth of chemical products, according to the chemistry council. There’s room to raise that to up to $30,000 per house, says BASF. Among its weatherizing products: tiny wax-filled capsules that can be embedded in plaster, wall board and insulation. The wax absorbs heat when it melts and releases it when it solidifies. (Wall Street Journal, 6.5.09)

Industries Hope for a Feather in Their ‘Cap and Trade’ Emissions Plan… Robert Stavins, a professor of business and government at Harvard University, said a cap and trade program would be fantastic for GE and other companies that sell products that consume power. He said that if energy costs go up as a result of the regulation — something he believes is likely — a wide array of products from appliances to power plants would become prematurely obsolete and need to be replaced with greener models. (Politico, 2.28.07)

One major group of recipients of the free money being given to industry in the form of carbon permits are the electric utilities, represented in Washington by the Edison Electric Institute. Along with the coal and steel businesses, the utilities are positioned to receive a huge portion of the carbon permits — some of which will be disguised as measures for consumers — and have become one of the nation’s highest-spending lobbies, working to ensure that their interests are served by cap-and-trade. (National Review, 7.2.09)

Rio Tinto to Congress: Get going on carbon pricing… Not only is Rio Tinto concerned about higher costs for energy required to run its business, but it also sees opportunities to sell more commodities, such as copper and aluminum, that could be used in climate-control technologies. (Salt Lake Tribune, 4.12.10)

Imagine a Google executive demanding a tax on software, or General Mills asking for a tax on wheat. That’s where we now are in the U.S. auto industry, with Ford CEO Alan Mulally believing he has little choice but to seek a tax on the very fuel that powers his products… Michael Jackson, CEO of AutoNation, the largest auto dealer in the country, was more explicit: “Mr. Mulally said it very elegantly last night and I will say it more straightforward. We need more expensive gasoline.” He figures a tax that guarantees a gas-price floor of $4 a gallon is a “good start.” Mr. Mulally, for his part, talked about how good Ford’s sales of small cars were in Europe, and that “one of the reasons is that gasoline and diesel is somewhere between seven and nine dollars a gallon.” So: The U.S. government mandates fuel-economy standards that force Detroit to make cars Americans don’t want to drive. When Detroit loses money on those cars, Washington throws taxpayer dollars at its mistake, and the car makers demand a tax increase that would prod Americans to buy the unpopular cars that Washington mandates. As for what the American consumer or taxpayer wants — or can afford in today’s economy — who cares? Welcome to government-run energy policy. (Wall Street Journal, 3.17.09)

Randy Zwirn heads Siemens Energy Americas, part of a 19 billion euro revenue business that accounted for 25% of the German conglomerate’s revenue in 2008. Siemens Energy’s fortunes are intertwined with the development of the global green energy industry, and often hinge on government policy that would support the development of renewable energy. Siemens produces wind turbines, photovoltaics and has developed a new generation of efficient large natural gas-fired turbines, in addition to its coal-fired generation and nuclear businesses. (Forbes, 6.11.09)

#####

FOR IMMEDIATE RELEASE:
May 11, 2010
CONTACT:
Patrick Creighton: 202.621.2947
Laura Henderson: 202.621.2951

Washington, DC – With Sens. John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) set to introduce their much awaited global warming legislation later this week, the Institute for Energy Research compiled and defined a list of terms expected to be included.

It is important to remember that the principal behind the KGL approach is identical to that of the House-passed Waxman-Markey bill: reduce carbon emissions by artificially increasing the price of coal, oil and natural gas.

Cap-and-trade: Everyone now knows that cap-and-trade is a tax on energy. Since this term is now toxic these three senators have tried to all but eliminate it from their vernacular. Sen. Kerry told reporters “I don’t know what ‘cap and trade’ means. I don’t think the average American does…This is not a cap-and-trade bill, it’s a pollution reduction bill.”

Cap-and-trade, or whatever the Senators want to call it, is nothing more than a tax on energy. Period. And while KGL does not advocate for the exact same cap-and-trade scheme as Waxman-Markey, KGL will use this mechanism to regulate electricity generation, hospitals, schools, nursing homes, sports arenas and yes, even dry cleaners. What does this mean for you, the consumer? Well, that’s anyone’s guess, as the authors have refused to share the legislative language with the American people. But we do know this: if Congress implements policies that increase the price of coal, oil and natural gas, consumers will end up with less money in their pockets.

Renewable Electricity Standard: A renewable electricity “standard” is a mandate to force Americans to use expensive, unreliable, intermittent forms of electricity. While some may characterize the description of these sources as unfair, it is a fact that solar power and wind power are more expensive generating technologies than their more efficient alternatives. And while the renewable industry is quick to ask for—and receive—handouts from Uncle Sam, those billions are not enough. Now they are lobbying for guaranteed market share. There is only one other industry (that we’re aware of) that has guaranteed market share: corn-based ethanol. And we all know how well that’s working. Think about it this way; the U.S. Government bailed out Detroit automakers. In fact, they still hold a 61 percent stake in General Motors. Now, imagine if policymakers on Capitol Hill mandated that the public purchase a GM vehicle. Not exactly a good policy for consumers.

Linked Fee: A linked fee is a Washington code word for a gas tax. The linked fee—thought to be the cornerstone of this legislation—applies a fee on gasoline at the pump, as opposed to inside the refinery gate. The fee was a bargaining tool used to gain the support of a few big oil companies. What KGL are not telling you is that it’s a gas tax – and 71 percent of Americans oppose an increase in the gas tax. And while it is rumored that this exact proposal may have been shelved, rest assured, any proposal to regulate carbon dioxide emissions from a car’s tailpipe will increase the price at the pump. In essence, one way or another, a gas tax will be included in this proposal.

Offshore Drilling/Revenue Sharing: Today, the entire Outer Continental Shelf (OCS) is open for new exploration and development. New legislation is not necessary. The holdup is the Administration’s decision to slow walk any new energy exploration. But, in the wake of the Gulf of Mexico oil spill, there is much debate around whether KGL will include any new provisions to increase domestic exploration and production of oil and natural gas offshore. This provision was drafted by Sen. Graham in an attempt to get the oil and natural gas industry on board to support, or at least remain neutral on the bill. But the reality is this: there is no amount of offshore drilling language that could make this bill worth supporting. Fact is, when you seek to regulate an energy source that will increase the cost to consumers on the one hand, and give industry a carrot on the other, the consumer loses. As for revenue sharing, it’s a must-have in any legislation that seeks to increase domestic production, but in this context is meaningless because of the toxic elements contained in the package as a whole.

Price Collar: A price collar is the maximum and minimum price that the government will auction the right to emit carbon dioxide. A price collar is Goldilocks policy for carbon dioxide prices—not too high and not too low, but just right. The intended purpose of the price collar is to minimize price volatility and not inflict too much harm too fast on trade-intensive industries such as manufacturing, petrochemical refining and agriculture. A price collar may be more efficient than just a price ceiling, but it will strangle the economy nevertheless, as the point of the collar is to artificially raise the price of energy.

Preempting EPA and State Carbon Dioxide Regulation: This bill is said to include language to preempt the Environmental Protection Agency (EPA) from regulating carbon dioxide using the Clean Air Act and to preempt individual states from regulating carbon dioxide. This is a worthy and laudable goal, but until we see the bill, we will not know if the bill’s language will achieve real preemption of EPA’s regulatory authority. For example, the Waxman-Markey bill preempted EPA from regulating greenhouse gases using the Clean Air Act, but it did not forbid EPA from using the Clean Water Act or the National Environmental Policy Act (NEPA). Furthermore, it did not forbid the Fish and Wildlife Service from using the Endangered Species Act to regulate greenhouse gases. In other words, while Waxman-Markey had preemption language, it is not clear that it would actually preempt much regulation.

The three senators involved in crafting this legislation were quick to share their details with big business, the utility industry, and selected environmental groups, but their behind the scenes negotiating left one important interest group out of the equation: the American people. In fact, our affiliate, the American Energy Alliance had to file a freedom of information request with the EPA and Energy Information Administration (EIA) to obtain the details of the legislation. To date, these requests have been acknowledged by the respective agencies, but no response has been issued.

#####

FOR IMMEDIATE RELEASE:
May 10, 2010
CONTACT:
Patrick Creighton: 202.621.2947
Laura Henderson: 202.621.2951