Not all is rosy for new coal-fired plants. Last year, coal-fired generation fell from 48.2 percent to 44.6 percent of total U.S. electricity generation,[iii] as low natural gas prices raised the gas share, and higher water levels and wind turbine capacity increased the renewable share. While some states remain favorable to new coal-fired generation, others are tied up in legal opposition and regulatory hold-ups for permits. Nevertheless, many folks agree that the present difficulty of putting cap-and-trade legislation through the Senate is having positive effects on new coal builds.[iv]

Past Announcements vs. Operational Units

NETL has tracked announcements versus actual construction of units over time and has noted that escalating costs and uncertainty about whether climate change legislation would pass have caused fewer coal-fired power plants to be constructed than were originally announced. NETL’s 2002 report, for example, noted that over 36,000 megawatts of coal-fired capacity were to be built by 2007, while only 12 percent of that amount (4,500 megawatts) was actually constructed during that period. The figure below shows the announcements of coal-fired plants versus actual plant construction over the past decade.

Current Status

According to NETL, in 2009, 8 coal-fired plants, listed in the figure below, came on-line in the following states: Iowa, Kentucky, Colorado, Illinois, Nebraska, Texas, and Arizona. The laboratory categorizes future plant additions as announced, permitted, near construction, or under construction. A plant in the announced phase is in the early stages of development and may be filing for permits. A plant in the permitted phase either has two or more permits approved or its fuel or power contracts have been negotiated. A plant near construction has obtained approval and received the majority of its permits, has begun site preparation, and is contracting for vendors and Engineering, Procurement and Construction contractors.

As of January 2010, NETL reported that 46 coal-fired plants were announced (26,233 megawatts), 8 were permitted (3,280 megawatts), 1 was near construction (320 megawatts), and 22 coal-fired plants were under construction (13,755 megawatts)for a total of 43,588 megawatts in the pipeline. (See table below.) While plants under and near construction are likely to come on line, NETL warns that regulatory uncertainty and industry cost increases are impacting development decisions for all projects.

The EIA is a little less optimistic. In its Annual Energy Outlook 2010, it is forecasting that between 2008 and 2035, an additional 26,400 megawatts of coal-fired capacity will come on-line; of that, 15,600 megawatts are in the pipeline.[v] EIA’s assessment reflects their beliefs about regulatory and financial uncertainty in the cost of capital for coal-fired units, and assumes a 3-percentage point increase in the cost of capital when evaluating investments in greenhouse gas intensive technologies without carbon capture and sequestration (CCS) technology. The 3-percentage point adjustment is similar to a $15 per ton carbon dioxide emissions fee when investing in a new coal plant without CCS technology. The adjustment accounts for the possibility that the plants may need to purchase allowances or invest in other greenhouse gas emission-reducing projects that offset their emissions in the future.[vi]

The International Energy Agency is a little more optimistic than the EIA in its World Energy Outlook 2009, forecasting an additional 35,000 megawatts of coal-fired capacity above 2007 levels by 2030.[vii]

Regulatory Climate

In some states, coal is essentially banned or is having a very difficult time getting permitted. In California, for example, there is a de facto ban on new coal-fired plants resulting from a performance standard that requires all new base-load generation to produce no more greenhouse gas emissions than a new natural gas combined cycle plant.[viii] Washington State also has a de facto ban on new coal-fired plants, requiring a 20 percent offset in carbon dioxide emissions from new fossil fuel plants.[ix]

In Kansas, in 2008 and 2009, then-governor Kathleen Sebelius vetoed bills by the state legislature that would have allowed Sunflower Electric Power to build two 700-megawatt coal-fired power plants that had been originally rejected by a state environmental official because of its output of carbon dioxide emissions. Once Kansas Governor Sebelius became a cabinet secretary in the Obama Administration, the atmosphere turned more favorable. The new Kansas governor, Mark Parkinson, is allowing one new coal-fired plant to be built.[x]

In Georgia, a state where coal is the primary fuel for electric generation, Longleaf, the first coal-fired power plant to be built in more than 20 years, is tied up in litigation. In late June 2008, Fulton County Superior Court Judge Thelma Wyatt Cummings Moore overturned the decision by state regulators to issue the plant an air permit, saying state environmental officials failed to take the plant’s carbon dioxide emissions into consideration. In her decision, Moore said the plant would annually emit large amounts of air pollutants, including nine million tons of carbon dioxide (even though carbon dioxide was not defined as a regulated pollutant at the time). In November 2008, the plant owners appealed the decision to the State Court of Appeals. In July 2009, the Court of Appeals overturned the decision, but left the plant’s permit invalid. In September 2009, the Georgia Supreme Court ruled that they would not hear an appeal by the Sierra Club against the previous ruling. While the Sierra Club appealed to the court to reconsider, the Georgia Supreme Court held to their prior ruling. In April 2010, the state Environmental Protection Division issued two amendments to the permit, but failed to allow enough time for public comment. The plant is on hold while the state determines when they will provide the documents for comment.[xi]

In New Mexico, the Desert Rock coal-fired power plant, whose permit was originally approved by the Environmental Protection Agency (EPA) under the Bush Administration. The permit, however, was withdrawn by the same EPA during the Obama Administration, citing inadequate analysis of environmental issues and a failure to use the appropriate technology, coal gasification combined cycle. The plant was to use supercritical coal technology and meet standards defined by the International Energy Agency for carbon capture and storage, allowing it to be retrofitted for future deployment of the coal-gasification technology when it becomes commercially available. The 1,500 megawatt plant was to serve parts of Arizona, New Mexico, and Utah, using Navajo Nation coal resources. According to the President of the Navajo Nation, the EPA is holding it accountable to higher standards than other parts of the United States. In April 2010, the power plant owner indicated that the project was not dead, but it is no longer clear what fuel the owner will use—fossil or renewable.[xii]

China’s Reliance on Coal

It is important to remember the big picture. Carbon dioxide emissions are global emissions, in that reducing them in the United States does not guarantee an absolute reduction. For example, unlike the United States, China has no qualms of dramatically increasing its coal-fired electricity generation and carbon dioxide emissions.

China currently gets 70 percent of its energy and 80 percent of its electricity from coal. China is the largest producer and consumer of coal in the world, and many of China’s large coal reserves have yet to be developed. The country currently ranks third in coal reserves, after the United States and Russia, with 13 percent of the world total.[xiii]

The EIA is projecting that those percentages will change very little in the future, despite the so-called lead that the U.S. administration says China has in green energy. By 2035, EIA expects China to get 62 percent of its energy and 74 percent of its electricity from coal. The statistical agency expects China to add 737 gigawatts of coal-fired capacity to its existing 496 gigawatts, an increase of about 150 percent. China’s coal-fired capacity in 2007 exceeded that of the United States by over 180 gigawatts and the additions that China is expected to make to coal-fired capacity by 2035 will be more than double the current coal-fired capacity in the United States. In fact, the forecasted coal-fired capacity of China in 2035 (1233 gigawatts) exceeds the total capacity of all types forecasted for the entire United States in that year (1216 gigawatts).[xiv]

The International Energy Agency (IEA) is also in agreement that China will be building a massive number of coal plants in the future. Their forecast has an additional 773,000 megawatts of coal-fired capacity being constructed by 2030 from 2007 levels, surpassing the total generating capacity in the United States in 2030. They also expect China’s electricity sector to be mainly coal fired, with coal producing 75 percent of the country’s electricity in 2030.[xv]

NETL also agrees with EIA’s and IEA’s outlook regarding construction of coal-fired capacity as the figure below indicates. During the past decade, China has been building 10 to 70 gigawatts of coal-fired capacity each year, and it has about 185 gigawatts planned.

The chart below shows the dramatic difference between the Chinese and American build-rates for coal-fired generating capacity. The blue and green bars show China’s new coal-fired capacity, built, under construction, and planned, and they are compared to the red and yellow bars for the U.S.’s coal fired capacity that are operational and under construction. The announced U.S. plants have been so tentative in the past that they are not included on the chart.

Conclusion

While the current outlook is somewhat brighter for coal-fired power plants here in the United States, their ability to compete with natural gas and renewable technologies is hampered by uncertainty over legislation and regulation, along with legal delays. Congress has had various proposals for a cap and trade bill to limit greenhouse gas emissions, but to date only the House of Representatives has passed their version of the bill. In the mean time, the EPA is planning to limit those emissions through regulation. Coal’s fate in this country is still uncertain, but China realizes that coal is its answer to economic growth, providing the energy it needs to improve the living conditions of its population.

[ii] Energy Information Administration, Electric Power Monthly, http://tonto.eia.doe.gov/ftproot/electricity/epm/02260904.pdf, http://tonto.eia.doe.gov/ftproot/electricity/epm/02261003.pdf, http://tonto.eia.doe.gov/ftproot/electricity/epm/02261008.pdf

[iii] Energy Information Administration, Monthly Energy Review, http://www.eia.gov/emeu/mer/pdf/pages/sec7_5.pdf

[iv] Associated Press, America’s New Coal Boom, August 17, 2010, http://www.google.com/hostednews/ap/article/ALeqM5iCjlywOJyCu1MSGH7FUqj7jD1c1QD9HL5RUO2

[v] Energy Information Administration (EIA), Annual Energy Outlook 2010, Table 9, http://www.eia.doe.gov/oiaf/aeo/aeoref_tab.html

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

[vii] Organization for Economic Cooperation and Development, International Energy Agency, World Energy Outlook 2009.

[viii] Institute for Energy Research, Energy Regulation in the States: A Wake-up Call, http://www.instituteforenergyresearch.org/states/california/

[ix] Institute for Energy Research, Energy Regulation in the States: A Wake-up Call, http://www.instituteforenergyresearch.org/states/washington/

[x] The Washington Post, Gristmill: What’s not the matter with Kansas, July 10, 2008, http://www.washingtonpost.com/wp-yn/content/article/2008/07/15/AR2008071500930.html, and http://www2.ljworld.com/news/kansas/energy/sunflower/

[xi] Wall Street Journal, February 4, 2008, http://blogs.wsj.com/environmentalcapital/2008/02/04/wall-street-tells-big-coal-not-so-fast/?mod=WSJBlog , April 2, 2008, http://blogs.wsj.com/environmentalcapital/2008/04/02/bank-of-america-more-heat-on-coal/ , August, 13, 2008, http://blogs.wsj.com/environmentalcapital/2008/08/13/burning-cash-coal-friendly-banks-under-fire/, and http://www.sourcewatch.org/index.php?title=Longleaf

[xii] The New Mexico Independent, EPA plugs the plug on Desert Rock coal-fired power plant, April 28, 2009, http://newmexicoindependent.com/26011/epa-pulls-the-plug-on-desert-rock-coal-fired-plant , Greenwire, COAL: Extension granted for appeals of N.M. power-plant permit , August 22, 2008, http://www.eenews.net/Greenwire/2008/08/22/8, and The Navajo Times, Desert Rock not dead, April 15, 2010, http://www.navajotimes.com/news/2010/0410/040810desertrock.php

[xiii] Energy Information Administration, http://www.eia.doe.gov/emeu/cabs/China/Coal.html

[xiv] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[xv] Organization for Economic Cooperation and Development, International Energy Agency, World Energy Outlook 2009.

History and Projections

Just a short seven years ago, China consumed less than half the energy that the United States consumed.[iii] By 2009, China had not only caught up with the United States as far as energy consumption was concerned, but consumed almost 4 percent more energy than the United States, which was suffering from an economic downturn. According to the IEA, China consumed 2,252 million tons of oil equivalent last year, compared to 2,170 million tons of oil equivalent consumed by the United States.[iv] China’s economy and energy demand have grown at breakneck speed as it has become the world’s leading exporter, and it stands poised to overtake the United States in manufacturing output in 2011. [v]

The United States is the largest consumer of energy on a per capita basis, according to the IEA, using about 5 times the amount of energy as China per inhabitant, in part because of the much wider use of personal transportation in the United States. [vi] However, sales of automobiles in China have now outstripped those in the United States.[vii] So that U.S./China per capita ratio is not likely to continue for long.

China recorded its largest oil demand in June of 2010 at 8.98 million barrels per day, 10 percent higher than a year before, and 0.7 percent higher than May 2010, the previous record.[viii] And China is expected to build an additional 1,000 gigawatts of generating capacity, about the total U.S. electric capacity base, in the next fifteen years, according to the IEA.   In contrast, growth in U.S. energy demand has been reduced by the recession, efficiency and intensity improvements, and regulations, while supply has been constrained by opposition to all forms of non-renewable energy and its transport.

The Energy Information Administration projects that by 2035, China will have a total of 1,924 gigawatts of electric generating capacity, compared to 1,216 gigawatts for the United States, with an annual growth rate of over 5 times that of the United States. [ix] Over 60 percent of that new generating capacity is projected to be coal-fired. And while there are “clean” coal technologies for removing sulfur dioxide and nitrogen oxide, there is no commercial technology as yet for removing carbon dioxide emissions. Thus, the EIA projects that China’s carbon dioxide emissions will be over twice that of the United States by 2035, with its emissions from coal being 4.5 times as much as those in the United States.[x]

Global Carbon Dioxide Emissions

According to the  Netherlands Environmental Assessment Agency (PBL)[xi]—using data from British Petroleum (BP), the U.S. Geological Survey (USGS), and the latest version of the Emission Database for Global Atmospheric Research—global carbon dioxide emissions were constant in 2009. (See chart below.) The developed world’s recession brought about reduced fossil fuel consumption, but China and India together offset those reductions.[xii] China increased its coal consumption by 9.6 percent in 2009, and India increased coal consumption by 6.8 percent.[xiii]

According to PBL calculations, emissions from fossil fuel combustion in the industrialized countries (including those from gas flares, the burning of waste gas from oil drilling, and other industrial processes, such as the production of cement and ammonia) decreased by 7 percent owing to an attempted compliance with the Kyoto Protocol by countries that have ratified it and to the global recession. In China, despite a doubling of wind and solar energy for the fifth year in a row, carbon dioxide emissions increased by 9 percent, and in India, they increased by 6 percent.[xiv] Owing to the United Nations’ Clean Development Mechanism (CDM), the developed countries have been funding wind and solar projects in underdeveloped countries as a form of compliance with the Kyoto Protocol.[xv] China has benefited from the CDM to the point that 30 percent of its wind units are still not connected to its electrical grid.[xvi]

China’s Goals for Emission Reductions

China has set targets to reduce energy consumption per unit of economic output by 20 percent this year compared with 2005, and to reduce emissions of greenhouse gases per unit of economic output by 40 to 45 percent in 2020 from its 2005 levels.  However, it is finding it difficult to meet these targets owing to its expanding economy and its population’s desires for Western conveniences (e.g., bigger cars, more appliances).   As a result, apartment and office buildings are being constructed at a rapid pace; sales of large household appliances (such as refrigerators and washing machines) have more than doubled in the past year in rural China alone, owing to government subsidies to help peasants afford modern conveniences; and Chinese malls, which are exempt from temperature regulations, are being built throughout Chinese cities. To provide the electricity needed, last year, China built new coal-fired power plants with a total capacity greater than all the power plants in New York State.[xvii]

Further, China’s auto sales increased by 48 percent last year, surpassing U.S. auto sales for the first time, and they continue to increase.  With its economy shifting away from light industries for export (e.g., toys and clothing) and toward energy intensive industries such as steel and cement to satisfy domestic demand for goods, China has seen its efficiency gains reverse, having declined by 3.2 percent in the first quarter of this year. China uses twice as much energy per dollar of output as the United States and three times as much as the European Union. Further, manufacturing, which is energy intensive, makes up three times as much of the Chinese economy as it does the U.S. economy.[xviii]

With huge demand increases in electricity generation and steel mills, Chinese coal imports are expected to reach a record in 2010. According to Peabody Coal, China imported 70 million metric tons of coal during the first 6 months of this year, double the amount it imported through June of last year.[xix] China uses coal in its industrial processes in addition to its electricity production. In 2007, for example, China produced  50 percent of the world’s cement, more than 13 times as much as the United States.[xx]

Conclusion

As a result of its economic growth—expected to be 10 percent this year—and its citizens’ demand for Western conveniences, China’s energy requirements are increasing and it is becoming less energy efficient, contrary to its stated goals. Because most of its energy is produced from coal, China’s carbon dioxide emissions are increasing at a rapid pace. In fact, China’s carbon dioxide emissions have shown the largest six-month increase ever by a single country.[xxi] With double-digit economic growth, plus growing consumer demand and manufacturing capabilities, China is focused on supplying energy to feed its economic growth and to meet the needs of its population.  As Faith Birol, head of the IEA said when announcing China’s new status as the world’s number one energy consumer, China’s ascendancy marks “the start of a new age in the history of energy.”

[ii] Energy Information Administration, Monthly Energy Review, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec2_3.pdf

[iii] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=44&pid=44&aid=2&cid=&syid=1999&eyid=2004&unit=QBTU

[iv] According to the BP Statistical Review that includes oil, natural gas, coal, nuclear, and hydroelectric power in its primary energy statistics, China was still slightly behind the U.S. in energy consumption with the U.S. consuming 2,182 million metric tons of oil equivalent, and China consuming 2,177 million metric tons of oil equivalent.  See http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[v] “US manufacturing crown slips”, Financial Times, June 20, 2010  http://www.ft.com/cms/s/0/af2219cc-7c86-11df-8b74-00144feabdc0.html

vi The Wall Street Journal, China Passes US as the World’s Biggest Energy Consumer IEA, July  19, 2010, http://online.wsj.com/article/SB10001424052748703720504575376712353150310.html?hat_input=China+Passes+U.S.+as+World%27s+Biggest+Energy+Consumer

[vii] “China overtakes US as world’s biggest car market” The Guardian, January 8, 2010. http://www.guardian.co.uk/business/2010/jan/08/china-us-car-sales-overtakes

[viii] Platt’s Report: China’s Oil Demand in June Hits New High, Up 10% from Year Ago, July 21, 2010, http://www.prnewswire.com/news-releases/platts-report-chinas-oil-demand-in-june-hits-new-high-up-10-from-year-ago-98919164.html

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

[x] Ibid., http://www.eia.doe.gov/oiaf/ieo/pdf/ieorefcase.pdf

[xi] “No growth in total global CO2 emissions in 2009″, Netherlands Environmental Assessment Agency, July 1, 2010, http://www.rivm.nl/bibliotheek/rapporten/500212001.pdf.

[xii] Financial Times, China and India, the CO2 culprits of 2009, July 5, 2010, http://blogs.ft.com/energy-source/2010/07/05/china-and-india-the-co2-culprits-of-2009/

[xiii] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[xiv] “No growth in total global CO2 emissions in 2009″, Netherlands Environmental Assessment Agency, July 1, 2010, http://www.rivm.nl/bibliotheek/rapporten/500212001.pdf.

[xv] Institute for Energy Research, http://www.instituteforenergyresearch.org/2010/03/24/kyotos-clean-development-mechanism-is-it-producing-results-for-whom/

[xvi] Wall Street Journal, China’s Wind Farms Come With a Catch: Coal Plants, September 28, 2009, http://online.wsj.com/article/SB125409730711245037.html

[xvii] New York Times, China Fears Consumer Impact on Global Warming, July 4, 2010, http://www.nytimes.com/2010/07/05/business/global/05warm.html?_r=1

[xviii] Ibid.

[xix] ClimateWire, Coal: Peabody’s 2Q earnings surge on China’s galloping energy demand, July 21, 2010, http://www.eenews.net/climatewire/2010/07/21/3/

[xx] U.S. Geological Survey,  http://minerals.usgs.gov/minerals/pubs/commodity/cement/mcs-2008-cemen.pdf

[xxi] New York Times, China’s Energy Use Threatens Goals on Warming, May 6, 2010, http://www.nytimes.com/2010/07/05/business/global/05warm.html?scp=3&sq=China’s%20Energy%20Use%20Threatens%20Goals%20on%20Warming&st=cse

The White House has launched a coordinated PR campaign to argue that it is not anti-business. That is a difficult argument to make when we look at the Administration’s record on energy. Time after time the Administration has acted to make it more difficult to produce energy domestically and they are actively seeking to make energy more expensive. This only makes an economic recovery more difficult.

The Administration’s Assault on Domestic Energy Production and the Use of Energy [Partial List]

The Administration has been working around the clock to achieve President Obama’s goal of bankrupting coal companies and making electricity prices necessarily skyrocket.

Within days of taking office, the Administration cancelled 77 oil and gas leases in Utah, postponed a new 5-year plan for offshore resources, and cancelled commercial oil shale research leases. But that was just the beginning.

In the wake of the Gulf oil spill, the Administration is trying to put cap-and-trade legislation back on the agenda, calling multiple White House meetings to try to find consensus on increasing the cost of energy. And the Administration has announced a variety of other regulations that will increase the price of energy.

The most impactful new regulation is the Environmental Protection Agency’s (EPA) regulation on greenhouse gas emissions. EPA has already announced regulations on carbon dioxide emissions from automobiles. According to EPA itself, this will increase the price of automobiles by $1000 a car and reduce global temperature (the whole point of the rule) by only a maximum of 0.015 °C  90 years from now.

But that’s only one part of the Administration’s efforts to drive up the cost of producing and using energy. EPA wants to revise the Bush-era ozone rule. If EPA ratchets down the ozone level too far, many counties – even those with no industry – will fail the standard. EPA also wants to tighten particulate matter regulations and mercury regulations nationwide and it has announced a new “transport” rule to further regulate SO2, NOx, and mercury in Eastern states. Finally, the Administration is preparing a new boiler rule to regulate hazardous air pollution from boilers and process heaters.

Administration Cancels 122 Previously-Issued Permits in Texas

Besides imposing new burdensome regulations, EPA is cancelling previously-made decisions to further ratchet up the cost of doing business for domestic energy manufacturers.  In Texas, the Administration cancelled 122 previously-issued air quality permits under a program started under the Clinton Administration. E&E News reports:

According to figures touted by [Gov.] Perry and state regulators, Texas beat national averages over the past 10 years by achieving a 22 percent reduction in ozone emissions and a 27 percent drop in nitrogen oxide emissions.

…

“We are defending our flexible air permitting program because it works,” TCEQ [Texas Commission on Environmental Quality] Chairman Bryan Shaw said earlier this month. “EPA is not able to demonstrate how our program is less protective of the environment than the bureaucratic federal approach. EPA’s philosophy of more bureaucracy by federalizing state permits will not lead to cleaner air, but will drive up energy costs and kill job creation at a time when people can least afford it.”

According to industry representatives, it will cost millions of dollars for each company to change their pollution control technologies. This could cost a lot of jobs. According to a story in the Houston Chronicle:

Corporations said the decision creates uncertainty for their companies.

“Valero has six refineries operating under flex permits, employing more than 2,700 people,” the company said in a statement, noting the EPA did not object to the program when it was created. “Now, 16 years later, EPA is reversing course, and our facilities are caught in the middle, creating significant uncertainty at a time when our economy can least afford it.”

Also, one likely reason the Administration cancelled these permits now is to force these plants to get carbon dioxide permits under EPA’s new carbon dioxide regulations.

Conclusion

We need to be vigilant about air pollution, but the Obama Administration’s carbon dioxide rules, for example, have nothing to do with air pollution. The carbon dioxide regulations are supposed to address global warming, but even EPA admits (as seen above), they will have miniscule impacts on global temperature.

The President says he wants to be pro-jobs, pro-consumer, and pro-market.  If that is indeed the case, then he needs to consider holding off on his regulatory assault on the American economy. One of the reasons that unemployment rates are high and people have been unemployed for so long is because of uncertainty about future regulations and the cost of those regulations.

The American economy is hurting and this regulatory assault needs to be reconsidered for the economy to have any hope of recovering and – more importantly – for enabling the private sector to create real jobs.

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.

Despite the timing, there is important information in this review. According to the report:

• The United States increased its oil and natural gas production more than any country.
• In 2009, Russia surpassed Saudi Arabia as the world’s largest oil producer.
• Global proved oil reserves are at the highest levels of all time. At the end of 2009, there were 1,333.1 billion barrels of proven reserves. Including Canadian oil sands brings total oil reserves to 1,476 billion barrels.[ii]
• The United States surpassed Russia as the world’s largest producer of natural gas.
• Global proved natural gas reserves are at the highest levels of all time. Global reserves of natural gas at the end of 2009 were 6,621 trillion cubic feet[iii], an increase of 1.2 percent. These reserves would last about 63 years at 2009 world production levels.[iv]
• China’s carbon dioxide emissions grew by 9.1 percent in 2009
• Carbon dioxide emissions in the United States declined by 6.5 percent mainly due to lower energy usage resulting from the recession.[v]
• China is not the only emerging country with increased emissions from carbon dioxide in 2009. India’s carbon dioxide emissions increased by 7 percent in 2009, Saudi Arabia’s by 5.4 percent, Iran’s by 4.6 percent, and Indonesia’s by 2.5 percent.
• China’s oil consumption increased by 6.7 percent in 2009, compared to a drop in the oil consumption of the United States by 4.9 percent.[vi]
• Global proved coal reserves are at the highest levels of all time. Global reserves of coal totaled 826,001 million tons at the end of 2009. This is 119 years of production at 2009 production levels and the United States has the largest share (28 percent) of these coal reserves.

Carbon Dioxide Emissions Fall in Developed Countries, Rise in Developing Countries

According to BP’s 2010 Statistical Review of World Energy,[vii] the global recession has not affected China’s thirst for fossil energy. Its subsequent emission of carbon dioxide, the largest component of greenhouse gas, is at an all-time high.  China’s carbon dioxide emissions grew by 9.1 percent in 2009, while those of the United States declined by 6.5 percent primarily owing to lower energy usage resulting from the recession.[viii] [ix] Further, China was not the only emerging country with increased emissions of carbon dioxide in 2009. India’s carbon dioxide emissions increased by 7 percent in 2009, Saudi Arabia’s by 5.4 percent, Iran’s by 4.6 percent, and Indonesia’s by 2.5 percent.

Unlike the United States Congress and the administration, these emerging countries are not under the delusion that cap-and-trade or other tax-like policies for reducing greenhouse gas emissions are either good for their economies or that their unilateral action in reducing emissions would make a dent in lowering future temperatures. The American Power Act, a legislative proposal sponsored by Senators Kerry and Lieberman, has as its goal to reduce greenhouse gas emissions 83 percent below 2005 levels by 2050. That would reduce temperatures by only one-fifth of one degree Fahrenheit by 2100, a scientifically meaningless amount.[x]

BP’s Statistics for Global Energy Consumption

In 2009, global consumption of oil, natural gas, and nuclear power declined, while global coal consumption remained almost flat, and renewable consumption increased modestly. The increase in non-hydroelectric renewable consumption resulted from government subsidies and mandates, stimulus funding, feed-in tariffs requiring that renewable energy be purchased at higher than average retail electricity prices to cover their cost, the United Nations’ Clean Development Program (under which wealthy nations pay developing countries to construct renewable power projects), and other incentives.

Oil. Global oil proved reserves at the end of 2009 totaled 1,333.1 billion barrels, the largest ever recorded by BP. Including Canadian oil sands brings total oil reserves to 1,476 billion barrels.[xi] (Proved oil reserves are those quantities of oil that geological and engineering information indicates can be recovered from known reservoirs under current economic and operating conditions with reasonable certainty.)  This level of reserves is enough to support global oil production at 2009 levels for over 45 years.[xii] However, history has shown that as more oil is consumed, new technology and exploratory methods are developed to keep increasing reserves.[xiii]

Even with this level of global oil reserves, global oil consumption declined by 1.7 percent (1.2 million barrels per day) in 2009, the largest decline since 1982.  Oil consumption in the Organization for Economic Cooperation and Development (OECD) countries declined by 4.8 percent (2 million barrels per day) in 2009.  That decline was only partially offset by non-OECD countries, who increased their oil consumption by 2.1 percent.[xiv] The developing countries that incurred higher oil consumption were led by China, India, and the Middle East. China’s oil consumption increased by 6.7 percent in 2009, compared to a drop in the oil consumption of the United States by 4.9 percent.[xv]

Owing to oil production cuts by the Organization for Petroleum Exporting Countries (OPEC), global oil production declined by 2.6 percent (2 million barrels per day) in 2009, the largest decline since 1982. Non-OPEC countries increased oil production in 2009 by 0.9 percent (450,000 barrels per day). The largest increase in world oil production in 2009 was by the United States, which increased oil production by 7 percent (462,000 barrels per day). Other increases in oil production in 2009 were largely in Russia, other ex-Soviet states, and Brazil. Russia became the largest producer of oil in the world in 2009, surpassing Saudi Arabia.[xvi]

Natural Gas. Global reserves of natural gas at the end of 2009 were 6,621 trillion cubic feet,[xvii] an increase of 1.2 percent, which would last about 63 years at 2009 world production levels.[xviii] Global consumption of natural gas fell by 2.1 percent in 2009,[xix] the largest decline on record, and OECD consumption fell by 3.1 percent, the largest decline since 1982.[xx]

Global natural gas production declined by 2.1 percent in 2009, the first time on record, owing mainly to lower production by Russia (12.1 percent) and Turkmenistan (44.8 percent), which resulted from lower demand in Russia and Europe. Europe’s demand for Russian gas was less both because of the recession and because of competition from liquefied natural gas.[xxi]

The United States surpassed Russia as the largest producer of natural gas, having recorded the largest global increase in natural gas production for the third consecutive year, owing to increases in unconventional supplies such as shale gas. The United States increased its natural gas production in 2009 by 3.5 percent, according to BP.[xxii]

Surprisingly, the United States is reported to have had the largest 2009 increase in both oil and natural gas production of any country. With technologies such as horizontal drilling and hydraulic fracturing, production of shale gas has increased the availability of natural gas in the United States. But policies by the U.S. Government could make these increases disappear quickly by limiting off-shore and on-shore leasing, establishing moratoria and increasing costs and regulations on offshore drilling, and moving to restrict practices such as the hydraulic fracturing of wells, which has led to huge new supplies of natural gas.

Coal. Global reserves of coal totaled 826,001 million tons at the end of 2009, resulting in 119 years of production at 2009 production levels. Global coal consumption declined slightly in 2009, owing primarily to OECD’s reduced consumption of 10.4 percent and the Former Soviet Union’s decline of 13.3 percent, the largest declines on record, resulting from the recession and from the competition of natural gas. These reductions in coal consumption were counterbalanced by increased consumption of 7.4 percent in the rest of the world, of which China represented 95 percent.[xxiii]

China’s coal consumption in 2009 was 1,537 million tons oil equivalent, higher than its consumption level in 2008 by 9.6 percent. That level is 3 times the amount of coal consumed in the United States in 2009. U.S. coal consumption was 498 million tons oil equivalent in 2009, 11.5 percent lower than its consumption of coal in 2008. As a share of world consumption, China consumed 46.9 percent compared to 15.2 percent for the United States.[xxiv] No wonder that China has exceeded the United States in emissions of carbon dioxide.

Nuclear. Nuclear output declined 1.3 percent globally in 2009 with only countries in Asia increasing their nuclear output. For example, China’s nuclear power output increased 2.8 percent, India’s increased 10.7 percent, and Japan’s increased 9.4 percent. [xxv]

Hydroelectricity. Hydroelectric output increased 1.5 percent globally in 2009. China’s quantitative increase was the largest (5.5 percent), followed by Brazil (6.1 percent).[xxvi] Both water levels and new capacity additions affect increases in hydroelectric output.

Other renewable energy. BP does not include in their consumption statistics other renewable energy, such as biomass, wind, solar, and geothermal, because those estimates can be unreliable for some renewable resources. BP indicates, however, that global wind capacity increased by 31 percent in 2009, global solar capacity increased 47 percent, and global ethanol production increased 8 percent.[xxvii] While these were major percentage increases for wind and solar power, because of their low capacity factors (that is, the amount of generation obtained per unit of capacity), they remain a small portion of total world-wide consumption.

Conclusion

According to BP’s chief economist, Christof Ruehl, “The shift toward the developing world continues.”[xxviii] In 2009, many of the developing countries increased their energy consumption, particularly of fossil fuels, even with the global recession. China, for example, whose GDP increased by 8.7 percent in 2009,[xxix] fueled the growth by increasing its oil consumption by 6.7 percent, its natural gas consumption by 9.4 percent, its coal consumption by 9.6 percent, its nuclear output by 2.8 percent, and its hydroelectric output by 5.5 percent. While it added 13 gigawatts of wind power capacity,[xxx] a 9 percent increase in carbon dioxide emissions indicates that wind was not a major supplier of China’s energy in 2009. China’s government is clearly not hampered by policies and legislative proposals that would limit its economic growth by reducing its fossil fuel consumption to save only a fifth of one degree Fahrenheit by 2100.  At some point, opinion leaders in the United States may be forced to confront the reality that energy consumption and economic growth go hand-in-hand.

[ii] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[iii] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[iv] BP Press Release, Recession Drove 2009 Energy Consumption Lower, June 9, 2010, http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=7062811

[v] Reuters, China top carbon emitter for second year running, June 9, 2010, http://alertnet.org/thenews/newsdesk/LDE6580Y1.htm

[vi] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[vii] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[viii] Reuters, China top carbon emitter for second year running, June 9, 2010, http://alertnet.org/thenews/newsdesk/LDE6580Y1.htm

[ix] These figures are most likely low because BP does not include cement production in its carbon data, an industry that makes up about 10 percent of total carbon dioxide emissions.

[x] The American Power Act: A Climate Dud, May 12, 2010,

http://www.masterresource.org/2010/05/the-american-power-act-a-climate-dud/

[xi] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[xii] BP Press Release, Recession Drove 2009 Energy Consumption Lower, June 9, 2010, http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=7062811

[xiii] Institute for Energy research, Has Oil Reached Its Peak?, http://www.instituteforenergyresearch.org/2008/08/26/has-oil-reached-its-peak/

[xiv] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[xv] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[xvi] Ibid.

[xvii] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[xviii] BP Press Release, Recession Drove 2009 Energy Consumption Lower, June 9, 2010, http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=7062811

[xix] Percent changes and world shares are calculated by BP based on million tons of oil equivalent figures.

[xx] BP Statistical Review of World Energy, June 2010, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

[xxi] Ibid.

[xxii] Ibid.

[xxiii] Ibid.

[xxiv] Ibid.

[xxv] Ibid.

[xxvi] Ibid.

[xxvii] Ibid.

[xxviii] BP Press Release, Recession Drove 2009 Energy Consumption Lower, June 9, 2010, http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=7062811

[xxix] 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

[xxx] Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0

Wind is not a new technology. It was one of our principal sources of energy, along with wood and water, prior to the carbon era. But the use of renewables in the pre-carbon age was very different from the current use of renewables. Today, people rely on energy being available 24 hours a day, 7 days a week, 365 days a year, regardless of whether the sun shines, the wind blows, or there are high or low water levels.  We now have over 1,000 gigawatts of generating plants[1], and a large and elaborate electrical grid that requires great coordination among system operators to avoid disruptions.

Also, in the pre-carbon energy era, when renewables were the sole source of energy, there were no coal-fired or natural-gas fired power plants to provide back-up power. Studies have found that the efficiency of those carbon-based plants is affected by incorporating wind energy into the system. When a plant’s efficiency is reduced, its fuel consumption and emissions increase, causing unintended consequences that wind proponents do not disclose. Requiring even larger amounts of renewable energy through renewable portfolio standards will only exacerbate this problem.

Background

Our various electricity generating technologies were designed and constructed to meet electricity demand based on their best operating characteristics for meeting portions of the electricity load duration curve. The load duration curve illustrates periods of constant demand that are served by base-load power versus periods of intermediate and peak demand. Owing to their high capital cost, low fuel cost, and high capacity factors, technologies such as coal and nuclear were designed to operate continuously to meet the base-load demand component. Owing to their lower capital costs but higher fuel costs, natural gas technologies, including combined-cycle and turbine plants, were designed to meet intermediate and peak electrical load.

Wind is an intermittent technology since it can generate power only when the wind blows. Its low operating cost (with no fuel component) and the mandates of state Renewable Portfolio Standards (RPS) make it practically a “must take” technology for system operators. RPSs require that a certain amount of electricity generation be produced by renewable fuels. The renewable target mandates tend to start out low but increase over time, with those of most RPS states reaching 15 to 30 percent by 2020 or 2025.[2] Wind tends to be the primary technology for meeting RPS targets, since it is lower in capital cost than solar, thermal, and photovoltaic technologies, the other politically acceptable “green” technologies.

Part of the rationale for introducing RPSs is that the substitution of “green” technologies for carbon technologies is supposed to reduce pollution emissions as well as carbon dioxide emissions. However, studies have shown that this may not be the case. As conventional generation (coal or natural gas) is reduced to make room for wind generation and is then increased as wind generation subsides, its heat rate rises. The heat rate is a measure of a generating station’s thermal efficiency commonly stated in units of Btu per kilowatt-hour. This reduction in efficiency  increases its fuel consumption and emissions. When sudden increases or decreases occur in generation output, it is referred to as “cycling”.

The Bentek Study

Bentek did a study of the results of integrating wind into the generation mix of the Public Service Company of Colorado (PSCO), using data from the company’s financial reports, the Energy Information Administration, the Federal Energy Regulatory Commission, the Environmental Protection Agency, and the National Renewable Energy Laboratory.[3] PSCO is a largely coal-fired utility with 3,764 megawatts of coal-fired generators, 3,236 megawatts of gas-fired combined-cycle and gas turbine capacity, 405 megawatts of hydro and pumped storage capacity, and 1,064 megawatts of wind generators. Colorado has an RPS that required 3 percent of the electricity generated by investor-owned utilities come from qualifying renewable technologies by 2007, and 30 percent by 2020.[4]

Colorado’s energy demand is highest during the day, peaking in late afternoon or early evening. Wind generation, however, is greatest between the hours of 9 pm and 5 am; it cannot be counted on to provide power when most needed, and so is used when available to meet the RPS. Most of the time that wind generation is available, it backs out (or replaces) natural gas. However, there are times when coal generation, which provides over 50 percent of PSCO’s base-load generation, is backed out to make room for the wind generation. When this happens, coal generation is cycled, causing its heat rate to increase and resulting in more fuel consumption and emissions. In PSCO, coal cycling predominates because of the low amount of gas generation in the system since most of its gas-fired generation is from turbines and because wind is strongest at night when coal use is even more pronounced.

In the Denver non-attainment area, PSCO has 4 coal-fired plants: Arapahoe, Valmont, Pawnee, and Cherokee. Between 2006 and 2009, these coal-fired plants have experienced higher emission rates ranging from 17 to 172 percent higher for sulfur dioxide, 0 to 9 percent higher for nitrous oxide, and 0 to 9 percent higher for carbon dioxide. In 2008, Cherokee even switched to a lower sulfur coal, but still ended up with sulfur dioxide emissions higher by 18 percent. And, between 2006 and 2009, these plants reduced their generation by over 37 percent, exacerbating further the increase in emissions.

Because the PSCO data are limited, Bentek checked their results against data from the Energy Reliability Council of Texas, whose utilities are required to report generation levels by fuel every 15 minutes. Texas has the most wind capacity in the country—over 9,500 megawatts.[5] Texas also has an RPS that was instituted during George W. Bush’s governorship and that pushed Texas ahead of California in wind capacity during 2006. The Texas renewable portfolio standard requires that utilities have 5,880 megawatts of renewable capacity by 2015, including a target of 500 megawatts of renewable-energy capacity from resources other than wind. The legislation also set a target of reaching 10,000 megawatts of renewable energy capacity by 2025, although it will be exceeded much earlier.[6] However, even in Texas, which has a large natural gas–fired capacity base, with over 40 percent of its generation being natural gas-fired,[7] coal-fired generation is cycled as is shown in the graph below.

Another benefit that wind power generators get is that their forecast power generation entails no penalty if it is not available. Other generators must provide their own back-up power if their generation is suddenly unavailable. But the owners of wind generators believe that they can’t be held accountable for whether the wind blows and thus for inaccuracies in their forecasting capability. For example, on February 26, 2008, a cold front moved through West Texas and rendered wind’s output 1,000 megawatts less than promised, and that unexpectedly had to be made up by other generating technologies.[8] Only careful and extensive coordination, such as was carried out in West Texas on that cold February day, can divert brown outs and black outs from occurring.

The Netherlands Experience[9]

Two researchers, C. le Pair and K. de Groot, found that the Netherlands Government was overestimating the amount of carbon dioxide reductions associated with wind production. The government was using incorrect data because it did not correct for the reduction in efficiency of the conventional power plants once wind was introduced into the system. Using data provided by CBS, the Dutch Institute for Statistics, the researchers made an estimate of the “turning point” where the efficiency reduction of conventional power plants balances out the fuel savings from wind energy. Using data for 2007, when wind power was at 3 percent, they found the turning point to be at an efficiency reduction of 2 percent based on all the power stations serving the Netherlands. That is, when the efficiency of the back-up plants was reduced by over 2 percent due to cycling caused by the integration of wind energy into the system, fuel use and emissions of the back-up plants increased.

Heat Rate Simulations

An engineer, Kent Hawkins, evaluated several heat rate simulations to represent cycling of the plants when wind is introduced into the system.[10] One set of simulations evaluates wind energy replacing coal power with different technologies serving as the back-up power to wind, in order to evaluate their effect on fuel use and carbon dioxide emissions. He found that because of cycling, carbon dioxide emissions increase with the incorporation of wind energy if coal is the sole back-up power for wind. If coal and gas turbines or gas combined-cycle and gas turbines are used to back up the wind power, carbon dioxide emissions are reduced mainly due to the lower carbon dioxide emissions produced from natural gas generators as compared to coal generators. This is best seen by examining the last bar in the chart below where the lowest carbon dioxide emissions result when natural gas combined-cycle plants are solely used to replace coal.

An interesting consequence of this analysis is that certain areas of the world where wind is integrated into a system that is primarily coal-based may result in an increase in total carbon dioxide emissions from using wind in their generating sector. That is, in these circumstances, wind would not be providing an offset in carbon dioxide emissions, but would actually be providing an increase in those emissions. China, for example, relies on coal for 80 percent of its generation and natural gas for only 2 percent. [11] China also added the most wind power of any country in 2009, 13 gigawatts,[12] ranking third in the world in total wind capacity, with the United States first and Germany second.[13] Since China’s wind would primarily be backed up by power from coal-fired generating units, it is no wonder that China’s carbon dioxide emissions increased by 9 percent in 2009.[14]

Conclusion

As more wind units are built and data become available regarding their integration into conventional energy systems, we will learn more about the effects of wind units on the operation of conventional plants. A few studies have been done showing that the effect of wind integration on both fuel consumption and emission reductions can in fact be negative. Further evaluation of our current wind units and their effects on fuel consumption and emissions should be done before increasing the penetration of renewable energy to the 20 and 30 percent levels currently mandated by some state renewable portfolio standards, and before a national renewable portfolio standard is considered for enactment.

[2] Institute for Energy Research, Energy Regulation of the States: A Wake-up Call, www.instituteforenergyresearch.org/states/

[3] Bentek Energy LLC, How Less Became More: Wind, Power and Unintended Consequences in the Colorado Energy Market, http://www.bentekenergy.com/WindCoalandGasStudy.aspx

[4] Institute for Energy Research, Energy Regulation of the States: A Wake-up Call, http://www.instituteforenergyresearch.org/states/colorado/

[5] American Wind Energy Association, http://www.awea.org/projects/projects.aspx?s=Texas

[6] Institute for Energy Research, Energy Regulation of the States: A Wake-up Call, http://www.instituteforenergyresearch.org/states/texas/

[7] Energy Information Administration, Electric Power Monthly, March 2010, http://tonto.eia.doe.gov/ftproot/electricity/epm/02261003.pdf

[8] The Wall Street Journal, Natural Gas Tilts at Windmills in Power Feud, March 2, 2010, http://online.wsj.com/article/SB10001424052748704188104575083982637451248.html?K

[9] The impact of wind generated electricity on fossil fuel consumption, C. le Pair and K. de Groot, http://www.clepair.net/windefficiency.html

[10] Wind Integration: Incremental Emissions from Back-Up Generation Cycling (Part V: Calculator Update), Kent Hawkins, February 12, 2010, http://www.masterresource.org/2010/02/wind-integration-incremental-emissions-from-back-up-generation-cycling-part-v-calculator-update/#more-7271

[11] Energy Information Administration, International Energy Outlook 2010, Tables H10, H12, and H13, http://www.eia.doe.gov/oiaf/ieo/pdf/ieoecg.pdf

[12] Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0

[13] Global Wind Energy Council, http://www.gwec.net/index.php?id=13, and Global Wind Energy Council, Global wind power boom continues amid economic woes, March 2, 2010, http://www.gwec.net/index.php?id=30&no_cache=1&tx_ttnews[tt_news]=247&tx_ttnews[backPid]=4&cHash=1196e940a0

[14] Reuters, China top carbon emitter for second year running, June 9, 2010, http://alertnet.org/thenews/newsdesk/LDE6580Y1.htm

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.