First, the article contrasts a coal-fired power plant being forced to shut down because it can’t comply with EPA regulations, versus a natural gas plant that is opening. The moral is that regulations hurt some sectors and help others, so it’s basically a wash.

Even though this analysis omits some important details, it represents a lot of progress. Recently former EPA chief Carol Browner was on the Colbert Report, arguing that the EPA created jobs on net with its regulations. (Rep. Keith Ellison made a similar argument last month as well.) So at least now we’re dealing with a weaker claim, that federal regulations have no impact either way.

How does the WaPo reach this conclusion? It cites data from the BLS:

Data from the Bureau of Labor Statistics show that very few layoffs are caused principally by tougher rules.

Whenever a firm lays off workers, the bureau asks executives the biggest reason for the job cuts.

In 2010, 0.3 percent of the people who lost their jobs in layoffs were let go because of “government regulations/intervention.” By comparison, 25 percent were laid off because of a drop in business demand.

This type of argument is hardly conclusive, however. Regulations on business might cripple some firms, which in turn leads to “a drop in business demand” for others. For example, if an asteroid destroyed most of the continental United States, the entire globe would be plunged into an economic depression, even though Europe might not be physically impacted. Indeed, surveys of the businesses that had to shut down in France, Germany, Italy, etc. might learn that the two major reasons were, “Rising costs” and “Falling demand.” It’s possible no CEO would list “asteroid strike” as the primary cause of the problem, even though it clearly would be.

By the same token, increased regulations on conventional energy sources will make electricity and gasoline prices higher for American businesses and consumers. Certain investments and expansions might be postponed, while households might cut their discretionary spending in light of larger utility bills. Many of the affected businesses and workers would have no idea that energy-sector regulations were the primary culprit.

Ironically, the WaPo article concludes by quoting a Stanford professor who actually makes the case against new regulations without realizing it:

Regardless, regulatory experts say that viewing a rule solely through the lens of whether it will cost jobs misses the point.

Noll, [a] Stanford professor, said the government could outlaw tractors to create $5-a-day jobs for people working in the fields, but “that would not be a legitimate social goal.”

“The notion that we should deregulate everything because we have a recession is completely wrongheaded,” he said. “Whether a regulation is a good or bad idea is not a function of employment in the industry being regulated.

“The right question is: On balance, does our society benefit?”

Noll raises some excellent points, but they actually cut against the spirit of the article. He’s certainly correct to say the job creation per se shouldn’t be the goal—after all, the government could order people to dig holes and then fill them back up. In the long run, the labor market adjusts so that everybody who wants to work can eventually find a job. The problem with inefficient regulations isn’t permanently higher unemployment, but rather the problem is that they lead to lower wages, making (employed) workers poorer than they otherwise would be.

Yet that’s not what the current debate over regulations is about. The WaPo piece is explicitly criticizing Republican candidates or officials who blame “job-killing regulations” for the economy’s weak recovery. In this context, Noll’s observations don’t really do the job that the WaPo thinks.

The reason we have high unemployment is that businesses can’t find jobs for workers to do, that will be productive enough to justify wages that the unemployed want to accept. It takes time for this search process to unfold.

One way to speed it up would be to remove federal shackles on energy development. Not only would this immediately make jobs in the energy sector more productive—and thus justify hiring more workers—but the lower energy prices would lead to more opportunities elsewhere in the economy.

Whatever the alleged benefit of the regulations (reduced carbon emissions, workplace safety, etc.) it must be balanced against the costs of reduced output in other respects. After all, if you have workers and other resources installing smokestack scrubbers rather than making TVs, then Americans have fewer TVs to enjoy.

However a person comes down on that tradeoff—weighing the benefits and costs of government regulations—surely the pendulum swings away from more regulations in the midst of a terrible recession. Simply put, Americans are less able to afford regulations that slow job creation at the moment.

Despite the claims of the WaPo article, economic theory and common sense support the idea that reducing federal regulatory burdens on domestic energy production would help stimulate economic recovery.

The EIA found that under the CES:

• Average electricity generation costs would increase by 16 percent in 2025 and 29 percent in 2035.
• Household electricity bills would increase by $115 in 2025 and by $211 in 2035 (in 2009 dollars).
• Expenditures on electricity would increase by $41 billion in 2025 and by $77 billion in 2035 (in 2009 dollars).
• Gross Domestic Product would be reduced by $127 billion in 2025 and $74 billion in 2035 (in 2005 dollars).
• Manufacturing employment would decline by 1 million jobs in 2025.
• Average natural gas prices would be 9.3 percent higher in 2025 and 5.4 percent in 2035. Natural gas accounts for much of the compliance with the CES in the early part of the projection period, resulting in the increase in price. As other compliance options become available, the price impact is lessened.
• Electricity prices in 2035 would increase by at least 40 percent in seven market regions: Texas (42 percent), Oklahoma (46 percent), Tennessee/Kentucky (47 percent), Colorado (48 percent), Eastern PA and New Jersey (50 percent), Long Island (51 percent) and Southern Illinois/Eastern Missouri (61 percent). Regions that are more dependent on generation fuels that are not CES-eligible, primarily coal, have a higher price impact.
• Coal-fired generation, which grows by nearly 23 percent between 2009 and 2035 in the Reference case, decreases by 46 percent between 2009 and 2035 under the CES. Coal is primarily displaced by increased natural gas generation, which is 38 percent greater in 2025 and 30 percent greater in 2035 under the CES. Generation from nuclear and renewable sources is also higher under the CES with nuclear generation increasing primarily after 2025. Nuclear generation is 30 percent higher in 2035 under the CES.
• Wind and biomass would be the renewable generating sources that have the largest generation increases under the CES. Wind generation almost doubles by 2035. Additional biomass generation is met primarily through increased co-firing in existing coal plants, but it decreases in the latter part of the projection period as new nuclear generation capacity comes online and existing coal capacity is retired.
• Electricity sector carbon dioxide emissions would be lower by 35 percent in 2025 and 60 percent in 2035.

Conclusion

It seems that the Obama Administration is pursuing energy policies that limit energy consumption or production, and increase energy prices. According to Chairman Ralph Hall, “This report—prepared by independent government experts—makes clear that the CES amounts to an expensive new electricity tax on the American people. With an anemic economy and unemployment stuck above nine percent, it is very troubling that the President continues to pursue an energy policy that would add billions to Americans’ energy bills.”[ii]

 **UPDATE**  December 19, 2011

In the two months since we released this report, electricity producers have announced another 1.5 GW of impending plant closures as a result of EPA’s upcoming regulations. To see the updated information, click here for the updated report. 

 Download the report as a PDF

Are EPA regulations closing power plants in your state?

The United States has the world’s largest coal resources. In fact we have 50 percent more coal than Russia, the country with the next largest reserves. But coal use in the United States is under assault.

Before becoming President, Barack Obama promised to bankrupt coal companies. As President, he has tried various strategies to force Americans to use less coal. After failing to pass a national energy tax (cap-and-trade), the President vowed to continue his attack on coal stating, there is “more than one way to skin a cat.”

Currently, EPA is leading the Obama administration’s assault on coal with a number of new regulations. Two of the most important are the “transport rule” and the “toxics rule” (Utility MACT). Combined, these regulations will systematically reduce access to affordable and reliable energy. According to our report:

• EPA Regulations Will Close At Least 28 GW of Generating Capacity

EPA modeling and power-plant operator announcements show that EPA regulations will close at least 28 gigawatts (GW) of American generating capacity, the equivalent of closing every power plant in the state of North Carolina or Indiana. Also, 28 GW is 8.9 percent of our total coal generating capacity.

• Current Retirements Almost Twice As High As EPA Predicted

EPA’s power plant-level modeling projected that Agency regulations would close 14.5 GW of generating capacity.  That number rises to 28 GW when including additional announced retirements related to EPA rules, almost twice the amount EPA projected.  Moreover, this number will grow as plant operators continue to release their EPA compliance plans.

• Announced and Projected Retirements Higher Than Worst Case Scenarios

Analysis by the North American Electric Reliability Corporation (NERC), the entity in charge of grid reliability, projected that EPA’s Transport Rule and Toxics Rule would close 20 GW of generating capacity.  This list indicates that at least 28 GW will retire.  EPA’s Transport Rule and Toxics Rule push U.S. energy security past the NERC worst case scenario.

• EPA’s New Regulations Will Hit States Trying To Get Back On Their Feet

Current announcements and EPA projections indicate that EPA regulations have a dramatic impact on states reeling from economic hardship.

• Ohio: 2,894 MW retired, 8.6% of state total generating capacity.

• West Virginia: 2,448 MW retired, 14% of state total generating capacity.

• Indiana: 2,168 MW retired, 7.5% of state total generating capacity.

• Tennessee: 1,376 MW retired, 6.2% of state total generating capacity.

• Missouri: 1,325 MW retired, 6.3% of state total generating capacity.

• Wisconsin:  902 MW retired, 5% of state total generating capacity.

Download the spreadsheet of power plants by clicking here: Announced and EPA Projected Power Plant Retirements

Earlier this year, President Obama tapped General Electric (GE) CEO Jeff Immelt to head the President’s Council on Jobs and Competitiveness.  Immelt knows a great deal about creating jobs – just not in the U.S.  China has been a huge beneficiary of GE’s job machine since Immelt took over.  Having Immelt as your lead advisor on domestic job creation and competition is akin to offering Bernie Madoff the job of government investment advisor: you’re not going to like the results (though in Immelt’s case, there will likely be no illegality involved).

I’m not sure whether Immelt is himself a committed environmentalist, but the corporate “Ecomagination” program is his baby and it’s all about green technologies.

There is just one problem, most of the energy products in the Ecomagination portfolio don’t work as well as the products they are replacing, can’t compete in the marketplace and thus need government support – big government support.  Under Immelt’s leadership GE has gone from a company that competed well in the marketplace to one that curry’s favor with dictators (in China for example), sucks on the government teat at every turn, supports policies that are bad for consumers, bad for our energy security, bad for GE’s workers.  For example, despite GE’s long history of making high quality incandescent light-bulbs, GE under Immelt’s leadership supported a Federal ban on incandescents.  GE’s last incandescent bulb factory closed in 2010 and its new CFL bulbs are made in China.

Immelt’s GE is also one of the biggest boosters of the Obama administration’s plan to limit greenhouse gas emissions.  Any scheme to limit emissions necessarily raises the costs of energy in general, but of fossil fuel generated energy in particular – which would help wind and solar power reach price parity.

Under GE’s previous CEO, the famous (some would say infamous) Jack Welch, GE made money by serving consumer demand for well-made, cost-competitive products.  Under Immelt, GE receives (notice I didn’t say earns) an increasing share of its revenue in the form of government subsidies, grants and tax credits.  Rather than competing to satisfy consumer demand, Immelt’s GE tries to bugger the competition with costly regulations while encouraging consumers to want different products, and, absent that, forcing them to purchase the goods he believes in his green wisdom, they should desire.

I have written about the effect that Immelt’s initiatives have had GE’s stock price, value and taxes paid elsewhere – check it out, I think you’ll find it interesting reading.

If anything, President Obama’s choice of John Bryson for Commerce Secretary is even worse news for the economy than his choice of Immelt.

Mr. Bryson may be many things but a friend of capitalism and free markets – especially for energy – isn’t one of them.  He was a co-founder of the Natural Resources Defense Council one of the most aggressive environmental lobbying groups fighting through lobbying, lawsuits (Bryson was a lawyer for them), and grass roots organizing against almost every technology that modern industrial civilization was built upon and which Americans’ relatively high standard of living still depends upon.  They have fought to shut down power plants – and to prevent new ones from being built – they have helped to foist numerous environmental regulations and costly conservation requirements on factories, power plants, and consumers – raising the price of energy and consumer goods and causing unemployment in the process.  In the last 40 years almost no government agency has done more to retard economic progress than the U. S. Environmental Protection Agency, and it has had no greater friend (directly and indirectly) in these efforts  than the NRDC.

Since his time with the NRDC Mr. Bryson has gone on to work in the both the public and private sectors – hurting the economy every step of the way.  When he served on the California Public Utilities Commission, under his influence, it separated utility profits from power use in an effort to force conservation upon utilities and ratepayers.  Later, when he joined the utility Edison International as CEO and chairman he worked with the California Public Utilities Commission to define the terms of the state’s catastrophic electric restructuring.

California’s restructuring led to blackouts, energy shortages, near bankruptcies – and ultimately did little or nothing to reduce consumer prices or increase competition. In short, Bryson, both in the public and private energy sector in California, has overseen or helped shape a situation in which, while power use is down, prices are among the highest in the nation and even with a declining economy and companies and jobs fleeing the state, California lives just one hot day away from blackouts  – planned and unplanned.

In addition, Edison, under Bryson’s leadership, has been front and center in pushing the potentially catastrophic cap and tax energy plan that the Obama administration would like to foist upon the nation.

Bryson is also on the board of a number of green energy companies and associations, all of which depend upon government support and/or mandates for their existence and continued growth.

It’s not surprising that Bryson, with his background as  a leading environmental lobbyist would support these companies, what is surprising is that with his support of these companies he would even be considered to represent the U.S. economy and trade to the world.  Rather than a proponent of free markets and consumer choice – what the position of Commerce Secretary deserves – he is like one of the bad guys in an Ayn Rand novel: a welfare industrialist who supports industries and companies that people won’t freely choose to support and thus can’t compete and so uses the force of government to gain power and advantage.

The President Agrees: Rising Oil Prices Are Bad!

Although we won’t have many kind things to say about the speech, at least the president acknowledged what many interventionists refuse to concede: rising oil prices hurt Americans, in particular working families with kids. Here is the president on this presumably obvious point:

Now, for the last few months, gas prices have just been killing folks at the pump.  People are filling up their tank, and they’re watching the cost rise — $50, $60, $70.  For some families, it means driving less.  But a lot of folks don’t have that luxury.  They’ve got to go to work.  They’ve got to pick up the kids.  They’ve got to make deliveries.  So it’s just another added expense when money is already tight.

We’ll be sure to place this quotation in the file, to deploy it the next time someone from the Obama Administration touts the wonders of a carbon tax or cap-and-trade scheme.

Are Tax Hikes the Way to Boost Production?

Although he started strong by acknowledging the importance of lowering fuel prices for Americans, Obama then strayed into trouble when diagnosing the causes of this dire situation:

[T]his is not a new problem.  For decades, we’ve left our economy vulnerable to increases in the price of oil.  And with the demand for oil going up in countries like China and India, the problem is only getting worse.  The demand for oil is inexorably rising far faster than supply.  And that means prices will keep going up unless we do something about our own dependence on oil….

At the same time, it’s also true that there is no quick fix to the problem.  There’s no silver bullet here.  But there are steps we can take now that will help us become more energy independent….

So I’ve laid out an energy strategy that would do that.  In the short term, we need to increase safe and responsible oil production here at home to meet our current energy needs.  And even those who are proponents of shifting away from fossil fuels have to acknowledge that we’re not going to suddenly replace oil throughout the economy.  We’re going to need to produce all the oil we can.

But while we’re at it, we need to get rid of, I think, the $4 billion in subsidies we provide to oil and gas companies every year at a time when they’re earning near-record profits, and put that money toward clean energy research, which would really make a big difference.  (Applause.)

We at IER agree that the federal government shouldn’t be subsidizing oil and natural gas production; it was the first plank in our recommendations to the new Congress early this year. But neither should the government be subsidizing solar, wind, biomass, electric vehicles, or any other energy technology. Also, when it comes to the matter of subsidies, people need to remember that adjusted for the energy output, subsidies to oil and natural gas are dwarfed by those to the politically-favored techniques. According to new data from the Energy Information Administration, solar is being subsidized by over 1200 times more than coal and oil and natural gas electricity production, and wind is being subsidized over 80 times more than the more conventional fossil fuels on a unit of production basis (ie. the amount of energy output per dollar of subsidy).

Yet if we put aside the principled issue of whether the government ought to be picking winners and losers, there is an inconsistency in Obama’s rhetoric. On the one hand, he argues that the supply of oil is having trouble keeping pace with increases in demand, and that the government should do everything it can to encourage domestic oil production. Then he states matter-of-factly that raising the tax bill on U.S.-based energy companies is the right thing to do.

Just because a firm is having a profitable year, doesn’t mean that the laws of economics suddenly stop applying. By effectively raising taxes (through ending the “subsidies” in the tax code etc.) on oil and natural gas companies, President Obama would reduce their incentives to find and develop new deposits to meet the rising demand. By the same token, if the government suddenly imposed a 50% surcharge on the incomes of Hollywood actors, they would make fewer movies per year, even though their after-tax income would still make them “obscenely rich” compared to most Americans. Incentives matter.

Obama: Taking Credit for Something Companies Would Have Done Anyway?

Let’s return to Obama’s speech and specifically the role of fuel economy standards:

And that’s why we’re here today.  This agreement on fuel standards represents the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil.  Think about that.  (Applause.)

Most of the companies here today were part of an agreement that we reached two years ago to raise the fuel efficiency of their cars over the next five years.  And the vehicles on display here are ones that benefited from that standard….

And today, these outstanding companies are committing to doing a lot more.  The companies here today have endorsed our plan to continue increasing the mileage on their cars and trucks over the next 15 years.  We’ve set an aggressive target, and the companies here are stepping up to the plate.

By 2025, the average fuel economy of their vehicles will nearly double to almost 55 miles per gallon.  (Applause.)  So this is an incredible commitment that they’ve made.  And these are some pretty tough business guys.  They know their stuff.  And they wouldn’t be doing it if they didn’t think that it was ultimately going to be good business and good for America.

Think about what this means.  It means that filling up your car every two weeks instead of filling it up every week.  It will save a typical family more than $8,000 in fuel costs over time.  And consumers in this country as a whole will save almost $2 trillion in fuel costs.  That’s trillion with a T. [Bold added.]

We’ve asked this before and we’ll repeat the question: If a government intervention into the energy markets is supposed to be so good for business…then why does the government have to force the businesses to do it? Obama should simply fax his suggestions to these “pretty tough business guys” and then, once they see the light (that it took government officials to discover), they’ll gladly produce the more fuel-efficient vehicles without government prodding. After all, it’s good for business, right? Why would the government have to force companies to do something that is profitable, especially if they agree with the claim, as the president is here saying?

CAFE Standards Kill

What Obama is ignoring with his claims of saving trillions of dollars is that there are downsides to raising fuel efficiency standards. The automakers aren’t dumb. They know that gasoline is expensive and that, other things equal, a more fuel-efficient care is more desirable to their customers.

Yet other things aren’t equal. Engineers have already plucked the “low hanging fruit” when it comes to vehicle design. In order to make vehicles more fuel efficient, the increase must come with a sacrifice in some other desirable feature, such as size or weight of the vehicle. That is why interfering with the optimal tradeoff—as it would be determined in a free market—will lead to undesirable consequences, such as more traffic fatalities.

Writing for The American Thinker last year, J.R. Dunn summarized the lethal legacy of CAFE standards:

Fuel standards are the longest-lived of an entirely futile array of attempts to address 1970s oil shortages. They first went into effect in the 1975 Energy Policy and Conservation Act as the Corporate Average Fuel Economy program, better known as CAFE. Under the CAFE standards, domestic and foreign automobile manufacturers had to meet a certain mileage standard in their cars and light trucks. They were allowed a very short time to carry this out before fines were levied, so they met the challenge in the easiest way possible: by designing small engines that used less fuel while lowering the size and weight of new vehicles to preserve performance.

…

The new regulations did accomplish one thing — they killed drivers and passengers in large numbers. By lightening cars and removing material, auto companies were inadvertently discarding the armor that protected motorists in the event of a crash. Similarly, the compressed new models lacked space for impact forces to attenuate before causing damage and injury. Drivers in lightweight cars were as much as twelve times more likely to die in a crash. It was once said about American autos that they were “built like tanks.” Many of the new models from the late ’70s onward more closely resembled go-carts — and proved to be about as sturdy.

…

How many deaths have resulted? Depending on which study you choose, the total ranges from 41,600 to 124,800. To that figure we can add between 352,000 and 624,000 people suffering serious injuries, including being crippled for life. In the past thirty years, fuel standards have become one of the major causes of death and misery in the United States — and one almost completely attributable to human stupidity and shortsightedness.

Conclusion

Consumers desire fuel efficiency in their vehicles, but that isn’t their sole criterion—if it were, we’d all be riding bicycles or skateboards to work. The president’s claim that higher fuel efficiency mandates will be good for business is absurd on its face, because if that were true, no mandate would be necessary. In order to comply with the new regulations, automakers will produce vehicles that will be more dangerous. Americans may save money at the pump, but fewer of them will be alive to enjoy the savings.

• Renewable energy subsidies were 49 times greater than fossil fuel subsidies when evaluated on a Btu (British thermal unit) basis of production. In other words, when making a comparison based on the amount of energy produced, renewable subsidies were 49 times greater than fossil fuel subsidies.
• On a straight amount-of-subsidy basis, renewable fuels received over 6 times more tax revenue dollars than fossil fuels received, as estimated by the Joint Tax Committee.
• Renewables received a 77 percent share of total federal energy incentives in 2009, while fossil fuels received a 13 percent share but produced more than 7 times the energy.

The April CRS Analysis

In April, the CRS produced a report that discussed the reasons why governments provide subsidies, listing the estimated tax revenue losses as a result of  U.S. energy-related subsidies for 2010 to 2014. According to the CRS, governments provide subsidies to fix market failures, i.e. to correct distortions in energy markets, or to achieve an economic objective. But, as CRS notes, tax policy is determined within a political system with compromises, which complicates the process and can either mitigate or compound the distortions. Current and past policies have been used in an attempt to reduce imported oil through greater use of domestic resources and to decrease environmental emissions by promoting renewable energy and conservation.

The total tax revenue lost due to energy-related federal subsidies for the 5-year period from 2010 to 2014 is estimated at $71 billion with renewables getting the lion’s share of $49 billion or 69 percent. See table below.

The May CRS Analysis

The May CRS analysis, like the one above, is based solely on Federal tax incentives targeted to energy. It does not include federal support that is also available to other industries or forms of federal financial support such as research and development funds, nor does it include state energy incentives. The tax expenditure estimates are from the Joint Tax Committee and are projected revenue losses, not actual losses.

The study found that in 2009, estimated tax revenue losses for the energy sector totaled $19.9 billion. Of the $19.9 billion, renewable energy received $15.4 billion in tax breaks, while fossil fuels received $2.5 billion. Another $2 billion worth of tax breaks went toward conservation, efficiency, alternative vehicles, and other energy-related tax incentives. Alcohol fuels and biofuels received the largest share of tax breaks in 2009, consisting of estimated tax revenue losses of $12.5 billion. Over half of this amount was for black liquor qualifying for a tax credit as an alternate fuel mixture—a tax credit that was discontinued after 2009. Black liquor is a fuel obtained from digesters in the process of chemically pulping wood that is burned in a recovery furnace to extract certain basic chemicals.

Tax Incentives by Category, 2009

Source: Congressional Research Service, http://assets.nationaljournal.com/pdf/051411_CRSsubsidies.pdf

CRS used primary energy production data reported by Energy information Administration (EIA) in its Annual Energy Review to compare the amount of production from each source. The following figure provides the distribution of primary energy production in 2009 by fuel type using EIA data. Fossil fuels represented 77.9 percent of total energy production in the United States in 2009, while nuclear fuel represented 11.4 percent, and all renewable fuels combined represented 10.6 percent. Of the renewable share, biomass represented the largest portion, exactly half at 5.3 percent, with hydroelectric power second with a 3.7 percent share. Wind and solar energy represented a combined 1.1 percent of the 10.6 percent renewable production share.

Primary Energy Production by Source, 2009

Source: Congressional Research Service, http://assets.nationaljournal.com/pdf/051411_CRSsubsidies.pdf

One way to compare subsidies is based on the amount of energy produced. When evaluated on a unit of production basis, fossil fuel estimated subsidies were $0.04 per million Btu (British thermal unit) and renewable fuel subsidies were $1.97 per million Btu. In other words, renewable fuel subsidies were 49 times greater than fossil fuel subsidies on a per Btu basis.

Alcohol and biofuels, excluding black liquor, received estimated subsidies of over $6 per million Btu based on production of 981 trillion Btu in 2009. Alcohol and biofuel subsidies on a Btu basis of production were over 150 times higher than fossil fuels subsidies. While biofuels and other oxygenates received the largest share of subsidies, these fuels only produced  3.9 percent of total petroleum products supplied in 2009, according to EIA.

CRS also compared the 2009 estimated tax revenue losses by tax subsidy category to the estimated tax revenue losses estimated for 2010. The alcohol and biofuels tax subsidies decreased from an estimated $12.5 billion to $6.3 billion because black liquor is no longer eligible for the subsidy, but those for other renewables increased from $2.9 billion to $6.7 billion. The latter increase was mainly due to the section 1603 grants that are provided for qualifying investments in lieu of tax credits. Those grants allow solar plants and wind farms to get an immediate rebate of 30 percent of their investment cost instead of taking the 30 percent over time as a tax credit. That change increased the lost tax revenues due to those subsidies from $1.1 billion in 2009 to $4.2 billion in 2010. The decline in tax revenue losses for alcohol fuels was due to the scheduled expiration of the excise tax credit at the end of 2010. That tax credit, however, was temporarily extended through the end of 2011 by the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L.  111-312). The tax revenue losses from subsidies for energy efficiency improvements to existing homes also saw a large increase, rising from $0.3 billion in 2009 to $1.7 billion in 2010. The revenue losses from tax subsidies for fossil fuels were estimated to decline from $2.5 billion in 2009 to $2.4 billion in 2010. Total revenue losses due to direct energy subsidies in 2010 were estimated to be $19.1 billion, 4 percent less than in 2009.

Conclusion

While renewable energy advocates do not want to admit it, renewables get the lion’s share of direct energy subsidies both on a total dollar basis and also when compared to the amount of energy produced. Fossil fuels garnered an estimated 13 percent of 2009 energy tax incentives, while renewable energy received 76 percent. Alcohol and biofuels subsidies received the largest share of renewable tax incentives in 2009. In 2010, total tax incentives were estimated to be 4 percent less than in 2009, but fossil fuels still only garnered an estimated 13 percent, while renewables totaled an estimated 68 percent. And, on a unit of production basis, renewable subsidies in 2009 were 49 times as great as fossil fuel subsidies.

The questions for policy makers are: “What market distortions are the subsidies trying to fix? Are the distortions mitigated or compounded by the subsidies? Are benefits being reaped?”

A recent study estimated that in 2009, the development of the Marcellus Shale created 44,000 jobs in Pennsylvania; added $389 million in state and local revenue; over $1 billion in federal tax revenue; and almost $4 billion in value added to the state’s economy.  These economic gains were realized in just one state, whereas shale plays and basins can be found throughout many of the lower 48 states.

Despite revolutionizing the production of natural gas, some Members of Congress such as Colorado Congresswoman Diana DeGette are waging war against hydraulic fracturing, or “fracking”—the extraction technique that is enabling Poland and the U.S. to access greater amounts of shale gas trapped in tight underground formations. In her attacks on natural gas and fracking, DeGette hides behind the alleged dangers of natural gas production. She says that “natural gas is an important economic driver and a significant bridge fuel – particularly for Colorado – but we must ensure the process for extracting is done safely and responsibly.”

DeGette neglects to mention that two studies conducted by the Environmental Protection Agency (EPA) and the Ground Water Protection Council (the national association of state ground water and underground injection agencies whose mission is to promote the protection and conservation of ground water) found that there have been no confirmed incidents of groundwater contamination from hydraulic fracturing. Given this compelling evidence, we have to wonder what additional studies would convince DeGette and her allies that natural gas production is safe.

Americans can only hope that President Obama will not only learn how to polka in Poland, but will also the benefits of increasing natural gas production through the use of hydraulic fracturing.

Any time the government proposes a new tax, Americans should be suspicious. But this particular proposal raises unique red flags, at least for those who favor free markets and individual liberty.

Big Brother Is Watching Your Odometer

The creepiest aspect in the new push for tracking vehicle miles is the idea being batted around in Texas to have the government install GPS tracking in cars that would then compute a driver’s bill the next time he or she refueled.

Although the federal proposal doesn’t explicitly mention GPS tracking, The Hill article says:

Among other things, CBO suggested that a vehicle miles traveled (VMT) tax could be tracked by installing electronic equipment on each car to determine how many miles were driven; payment could take place electronically at filling stations.

As in so many other areas, here there is a danger that the government will assume far more new power than is necessary for the ostensible goal—in this case, maintaining adequate funding for highway maintenance.

The Bait and Switch

After the leak, the Obama Administration was quick to distance itself from the proposal. However, as the government becomes increasingly starved for revenue—and assuming electric car sales at some point exceed their currently anemic pace—we can expect a growing drumbeat to get the “freeloaders” who drive on the roads without paying their fair share in gasoline taxes.

We can even expect various economists to favor the VMT tax on grounds of “efficiency.” After all, if the purpose of the current gasoline tax is to raise the revenues needed to pay for road maintenance, then surely it is inefficient to give an implicit subsidy to drivers who buy electric or even hybrid cars, that manage to impose the same wear-and-tear on the roads while consuming far fewer gallons of gasoline.

The problem here is twofold: In general, it would be naïve to expect the government to completely phase out gasoline taxes. Especially at the state level, gasoline taxes may be a significant source of revenue. Even if the introduction of a VMT tax were coupled with reductions in the gasoline tax, the next budget crisis would probably give drivers the worst of both worlds.

A second problem, more specific to this particular tax swap, is that gasoline taxes are supposedly addressing the “negative externality” of carbon dioxide emissions from gasoline-fueled vehicles. In other words, economists who are very concerned with global warming think the tax code should be encouraging motorists to switch to more fuel-efficient (in terms of gasoline consumption) vehicles.

Let’s think for a minute about the implications. If the government then comes along and slaps a tax on drivers for total miles traveled—whether or not their cars use gasoline or electricity—then the advantage of electric cars could be significantly muted, depending on the details of the new tax and motorists’ driving patterns. Rather than agreeing to a reduction or elimination of gasoline taxes, economists worried about global warming might insist that “efficiency” requires a hike in the tax on gasoline, to ensure that new car buyers are still nudged into purchasing electric.

A Genuine Market Solution

As with other thorny issues, the problem here is government involvement. Given that the government at various levels has a virtual monopoly on the highway and road system, it becomes very difficult for policymakers to design a fee structure that is both economically efficient and yet respects the privacy of citizens. In fact, it may be impossible to achieve various goals in this way, because of the nature of government ownership.

In contrast, if the roads were moved into private hands to the extent this were possible, then many of these problems would disappear. We would no longer have a public debate on the best way to finance road repairs, just as we don’t have a public debate on whether software companies should make their money charging for the software or for the service plans.

With free and open competition, different companies can try different pricing strategies, and the most efficient will win out. If a particular company insists on policies that too many people find intrusive of their privacy, that company will go out of business. Most important, in a truly free market it’s not the same organization that would control all the roads, as well as be in charge of the police, fire department, and IRS. It is ironic that so many leftists are wary of “concentrated power” when it comes to media corporations and other big businesses, but not when it comes to the agency that actually controls the army.

Conclusion

As the fiscal situation of the federal and state governments continues to deteriorate, we can expect proposals for a European-style VAT (value added tax) as well as the more recent VMT (vehicle miles traveled) tax. Economists will be able to market the plans as “revenue-neutral” and “efficiency-enhancing,” but those with a sense of history and common sense will know that they should watch their wallet.

The analysis unfortunately ignores some basic facts about fuel economy and gasoline consumption, as well as the connection between lighter vehicles and increased crash fatalities. Yet the most ironic aspect is that the report completely undercuts the entire rationale for government CAFE mandates: If the Big Three stand to make so much money from higher fuel economy, then they don’t need the government to force them to make the changes.

The Ceres/Citi Report

The following summary of the findings is drawn from Ceres’ website:

The 42 mpg standard by 2020 is consistent with a 6% annual mileage improvement, starting in 2017, that would boost fleet mileage to 62 mpg by 2025. In addition to increasing profits, these goals are eminently achievable technologically and cost-effective.

Commenting on the reports, Ceres Senior Manager of Transportation Programs Carol Lee Rawn said: “This analysis demonstrates that it’s both feasible and profitable for U.S. automakers to meet the strictest standards under consideration.  Strict fuel economy standards will not only reduce our dependence on oil and cut pollution; they’ll help a major driver of our economy – US auto companies and their suppliers – to compete successfully in the 21st century.”

Walter McManus, an economist at the University of Michigan Transportation Research Institute (UMTRI) and Director of the Automotive Analysis Group, said: “Our research indicates that increasing industry average fuel economy to 42 miles per gallon by 2020 could raise industry variable profit by $9.1 billion, or 8 percent. Most of the added profit, $5.1 billon, could go to the Detroit 3.”

Alan Baum of Baum and Associates, who has produced automotive sales and production forecasts since 1990 plus long-range industry analyses with a focus on fuel economy and electric vehicles, said: “our study shows that the automakers are well positioned to meet the fuel economy requirements necessary in 2020 with a variety of approaches already in their product plans. Consumer interest in fuel economy, and their expectation that gas prices will remain high, suggests that consumers will purchase these products.”

Dan Meszler of Meszler Engineering Services provided estimates of vehicle technology costs and fuel economy impacts for the CAFE study. Meszler, who has analyzed transportation energy and air quality issues since 1982, said: “technology exists to address a number of continuing inefficiencies associated with internal combustion engines.  Between now and 2020 much of this technology is expected to mature, so that a 2020 CAFE requirement of 42 miles per gallon should produce consumer savings starting at gas prices of $2.00 per gallon. Since current and expected future gasoline prices far exceed that price, these technology‑driven fuel savings are extremely cost effective and indicate that a 42 mile per gallon CAFE program will not only reduce petroleum imports, but save consumers money.”

Lily Donge, Manager for Environment and Climate Change at Calvert Asset Management Company, Inc., said: “Investors often view tighter environmental regulations as an impediment to growth but these reports offer a refreshing counterpoint. Stricter environmental standards actually have the potential to spark innovation and improve the competitive positioning of US automakers. So reports like these are important for investors – they shed light on the long-term growth prospects of American industries that are an important slice of our portfolios.”

It’s certainly true that other things equal, American consumers would prefer vehicles with higher fuel economy, and would be willing to pay more for such vehicles because of the implied savings on fuel cost. However, other things aren’t equal. It is well documented that lighter, more fuel-efficient cars aren’t as safe for the occupants as heavier, less fuel-efficient cars.

CAFE Mandates Kill

Writing last year in The American Thinker, J. R. Dunn summarized the grim legacy of CAFE mandates:

Fuel standards are the longest-lived of an entirely futile array of attempts to address 1970s oil shortages. They first went into effect in the 1975 Energy Policy and Conservation Act as the Corporate Average Fuel Economy program, better known as CAFE. Under the CAFE standards, domestic and foreign automobile manufacturers had to meet a certain mileage standard in their cars and light trucks. They were allowed a very short time to carry this out before fines were levied, so they met the challenge in the easiest way possible: by designing small engines that used less fuel while lowering the size and weight of new vehicles to preserve performance.

…

The new regulations did accomplish one thing — they killed drivers and passengers in large numbers. By lightening cars and removing material, auto companies were inadvertently discarding the armor that protected motorists in the event of a crash. Similarly, the compressed new models lacked space for impact forces to attenuate before causing damage and injury. Drivers in lightweight cars were as much as twelve times more likely to die in a crash. It was once said about American autos that they were “built like tanks.” Many of the new models from the late ’70s onward more closely resembled go-carts — and proved to be about as sturdy.

Studies have repeatedly demonstrated the fatal results of mileage regulations, starting in 1989 with the Brookings Institution (in collaboration with the Harvard School of Public Health), followed by USA Today in 1999, the National Academy of Sciences in 2001, and at last the federal government’s own National Highway Transportation and Safety Administration in 2003. This formidable lineup of organizations all came to the same conclusion: Fuel standards kill.

According to the Brookings Institution, a 500-lb weight reduction of the average car increased annual highway fatalities by 2,200-3,900 and serious injuries by 11,000 and 19,500 per year. USA Today found that 7,700 deaths occurred for every mile per gallon gained in fuel economy standards. Smaller cars accounted for up to 12,144 deaths in 1997, 37% of all vehicle fatalities for that year. The National Academy of Sciences found that smaller, lighter vehicles “probably resulted in an additional 1,300 to 2,600 traffic fatalities in 1993.” The National Highway Transportation and Safety Administration study demonstrated that reducing a vehicle’s weight by only one hundred pounds increased the fatality rate by as much as 5.63% for light cars, 4.70% for heavier cars, and 3.06% for light trucks. These rates translated into additional traffic fatalities of 13,608 for light cars, 10,884 for heavier cars, and 14,705 for light trucks between 1996 and 1999.

How many deaths have resulted? Depending on which study you choose, the total ranges from 41,600 to 124,800. To that figure we can add between 352,000 and 624,000 people suffering serious injuries, including being crippled for life. In the past thirty years, fuel standards have become one of the major causes of death and misery in the United States — and one almost completely attributable to human stupidity and shortsightedness.

Ironically, in exchange for increased traffic fatalities, CAFE standards don’t achieve the environmental benefits that their supporters allege.

CAFE Standards An Inefficient Way to Achieve Emissions Reductions

In the first place, it’s not obvious that higher fuel economy standards should achieve any emissions benefits, because people drive more when the relative cost of driving is reduced. Of course we at IER have pointed out numerous problems with a direct carbon tax, but at least it makes the alleged problem (emitting carbon dioxide) more costly. Perversely, higher CAFE standards actually make it cheaper to drive (in terms of fuel expenses) and so unwittingly encourage more fuel consumption, more emissions, more imported oil, and so on.

The general principle here is known as Jevons’ Paradox, which states that as energy use becomes more efficient, historically people often increase their total energy usage. In practice, a particular increase in energy efficiency might increase or decrease total energy usage, but the point is that the supporters of stricter CAFE standards often assume that energy efficiency automatically translates into lower energy usage—and this is simply not the case historically. (Oil imports have dramatically risen since the introduction of CAFE standards in the 1970s, for example.)

Even if we accept the premise that the government should manipulate fuel economy standards in an effort to reduce gasoline consumption, the CAFE approach—which sets ever-higher mandates for newly produced vehicles—is nonsensical. This short YouTube video put out by two researchers at Duke University explains that the very focus on “miles per gallon” is itself misleading, and should be replaced with the concept of “gallons per mile.”

I spell out the argument more fully in this post, but we can see the gist of it with a simple numerical example: Suppose for the same amount of tax dollars, the government can either (A) replace 10 mpg vehicles with ones that get 15 mpg, or (B) the government can replace the same number of 25 mpg vehicles with ones that get 100 mpg. Assuming that people don’t alter their driving behavior in response to the new fuel efficiency, which policy would save the most gasoline?

Most people would think that option (B) would be preferable, since it achieves such a dramatic increase in fuel efficiency. But this is wrong, assuming that motorists drive the same amount in either vehicle. For an average motorist who drives 6,000 miles per year, the first policy reduces fuel consumption from 600 down to 400 gallons, saving 200 gallons per vehicle per year. In contrast, the second policy reduces gasoline consumption from 240 down to 60 gallons per year, a savings of only 180 gallons per vehicle.

This is not to suggest that it would a good idea for the government to implement policies to remove older, very fuel-inefficient vehicles from the road. The point is simply that the CAFE approach is incredibly inefficient, even on its own terms.

If the Move Is So Profitable, Why Is Coercion Necessary?

The final observation on this whole episode is that the Ceres study, if true, would completely undercut the case for mandating fuel efficiency standards in the first place. At least the standard case for imposing a tax on carbon dioxide relies on a “market failure” argument, in which emitters don’t take into account the full environmental costs of their actions.

Yet if the Ceres study is to be believed, the Big Three are foolishly waiting around for the government to force them to make gobs more money. And in this case, there isn’t even the patina of a “market failure” or “externality” argument. If indeed consumers would be willing to pay more for vehicles with greater fuel efficiency, then one farsighted manufacturer could capture all of the looming profits for itself by rushing the vehicles into production. There is no need for government mandates at all, if these higher standards really would mean greater profits for the industry because of happier consumers.

Conclusion

Increased CAFE standards fail to achieve their alleged benefits for various reasons, and they come at a high price in terms of increased traffic fatalities. Furthermore, if the promoters of the Ceres study really believed the results, they would admit that there is no need for government action to promote higher standards.

Committee on Energy and commerce

The Institute for Energy Research (IER) is a non-profit organization that conducts historical research and  evaluates public policies in energy markets. IER articulates free market positions that respect private property rights and promote efficient outcomes for energy consumers and producers. IER staff and scholars educate policymakers and the general public on the economic and environmental benefits of free market energy. The organization was founded in 1989 as a public foundation under Section 501(c)(3) of the Internal Revenue Code. Funding for the institute comes from tax-deductible contributions of individuals, foundations, and corporations.

Energy Secretary Steven Chu and other administration officials paint a very dire picture of the U.S.-vs.-China race for clean energy, implying that China is quickly outstripping United States in that race.[1] However, all the facts are not on the table. In both 2008 and 2009, the United States added more non-hydroelectric renewable capacity than it added traditional capacity (natural gas, coal, oil, and nuclear).[2] At the end of 2010, the United States and China each had over 20 percent of the world’s installed wind capacity.[3] While it is true that China’s total installed wind capacity was about 5 percent more than that of the United States in 2010, not all of China’s wind capacity is connected to the electric grid. Adjusting for that difference, the United States has in essence over 30 percent more useable wind capacity than China.  At the end of 2009, the United States ranked fourth in solar capacity, with only Germany, Spain, and Japan having a larger amount; China did not even make the list of the top 8 countries.[4] According to the Pew Environment Group, in 2010, China had about 75 percent less solar capacity installed than the United States. [5]

Where China is outstripping us in domestic construction is in coal-fired, nuclear, and hydroelectric generating technologies. Legal and bureaucratic red tape makes it is much more difficult to build these energy technologies in the United States than in China. China is eclipsing the United States in all forms of energy, and especially the most cost-efficient energy sources. For example, their ability to quickly permit energy projects allows them to build the cleanest and most efficient coal plants.[6] China is building supercritical plants that produce about 15 percent less carbon dioxide emissions for $500 to $600 per kilowatt[7], much lower than the $2800 per kilowatt cost in the United States, exclusive of financing costs, according to the Energy Information Administration.[8]

China realizes that it needs affordable energy to fuel its economic growth and manufacturing productivity, and it is building all forms of generating technologies at breakneck speed. By contrast, the electric generating construction program in the United States has slowed tremendously, owing to regulatory, financial, legal and demand problems. Economic growth has slowed in the United States and with it our energy demand has grown more slowly. History shows that the United States became the world’s workshop – replacing Britain – shortly after we became the world’s largest consumer of energy. Since energy is literally, “the capacity to do work,” the United States needed enormous amounts of energy in the 20th century to do more work than our competitors, and ended up the lone superpower in the world. Policymakers need to understand that energy availability and affordability spur economic growth. Without reasonably priced energy, it will be difficult to achieve high levels of economic growth in the United States, and industry will move offshore where energy is more affordable, taking jobs away when we can least afford to lose them.

As the following chart illustrates, the use of energy to propel the U.S. economy and increase the capacity to do work led to unprecedented growth and opportunity. Of note is the fact that the U.S. economy once ran entirely on renewable forms of energy from well before our founding until well after the Civil War, at which time the advent of new forms of concentrated energy enabled us to surpass Britain in energy consumption and economic output. It is therefore important to understand China’s energy path today realistically. Data from the International Energy Agency indicated that China consumed more energy than the United States in 2009 – the first time since 1885 that the United States was no longer the number one user of energy.[9] Just 8 short years ago the United States used twice as much energy as China, according to statistics from the Energy Information Administration.[10]

Comparison of Generating Capacity Data for the U.S. and China

Energy Information Administration data for 2008 (the most recent year available from the Energy Information Administration) indicates that China added more than 5 times the total generating capacity that the United States did (80 gigawatts of total capacity for China, versus 15 gigawatts of capacity for the United States).[11] While that statistic is in itself interesting, the split between fuel types is even more interesting. Embedded in these capacity addition statistics is China’s 26 gigawatts of hydroelectric capacity to none for the United States. China also added 47 gigawatts of thermal capacity (primarily coal), while the U.S. added 6 gigawatts (primarily natural gas). That’s almost 8 times more thermal capacity and on a carbon dioxide-emitting basis, over 15 times more.

So, based on an apples-to-apples comparison of newly built capacity in 2008, China is out stripping us in hydroelectric and coal-fired capacity, which the Administration and environmental organizations fail to mention. Not only did they build more hydroelectric and coal-fired capacity in 2008 than we did, but their total hydroelectric capacity is over twice that of the United States, and as of the end of 2008, their coal-fired capacity was almost twice that of the United States.

Why is China Building Wind and Solar Capacity?

China builds wind and solar partly because ratepayers in other countries pay them to do so. China has  taken advantage of the Clean Development Mechanism (CDM) under the Kyoto Protocol to obtain funding for its solar and wind power.[12] Under this program, administered by the United Nations, wealthy countries can contribute funds and get credit for “clean technology” built elsewhere as long as it is additional, that is, as long as that technology would not have been built otherwise. China is the world’s largest beneficiary of the program and has benefited to the point where about 30 percent of its wind capacity is not operable because it is not connected to the grid.[13] However, in mid 2009, the United Nations started questioning whether the Chinese CDM program was in fact “additional,” because the U.N. found that China was lowering its subsidies to qualify for the program.[14] That is, China was reducing its own government’s support in order to get international subsidies.

What are China’s Electric Construction Plans?

Both China’s generating sector and its industrial sector rely heavily on coal, with 80 percent of its electric generation being coal-fired.[15] Even with China’s substantial clean energy targets, the Energy Information Administration expects fossil fuels, mostly coal, to generate 75 percent of the country’s electricity in 2035. Clean energy sources (nuclear, wind, solar, biomass, and hydroelectric power) generated 19 percent of China’s electricity in 2009, and they are expected to increase their share to 25 percent by 2035. China has the world’s largest hydroelectric capacity, generating 16 percent of its electricity from water.

Hydroelectric  Power

Most of China’s hydroelectric capacity is from very large dams on major rivers. China’s most famous hydroelectric project, the Three Gorges Dam that many thought was an impossible engineering feat, brought its final generator on line in October 2008, with a total capacity of 18.2 gigawatts. The Three Gorges Project Development Corporation plans to further increase the project’s total installed capacity to 22.4 gigawatts by 2012. The 12.6-gigawatt Xiluodu project on the Jinsha River is scheduled for completion in 2015 as part of a 14-facility hydropower development plan. China also has the world’s second tallest dam (at nearly 985 feet) currently under construction, as part of the 3.6-gigawatt Jinping I project on the Yalong River. It is scheduled for completion in 2014 as part of a plan by the Ertan Hydropower Development Company to construct 21 facilities with 34.6 gigawatts of hydroelectric capacity on the Yalong.

The Chinese government has set a target for 300 gigawatts of hydroelectric capacity by 2020, and according to the Energy Information Administration, the Chinese government has sufficient projects underway to meet the target.[16] China currently has about twice the hydroelectric capacity of the United States and its 2020 goal is almost four times more capacity than the United States is expected to have by then.

China has a goal to produce 15 percent of its primary energy from renewable energy by 2020.[17] According to an official from China’s National Energy Administration, “Hydropower is the key to reaching that target. It will make up 9 to 10 percentage points out of the 15.”[18] By comparison, most proposals for renewable energy mandates in the United States do not include existing hydroelectric power as a source.

Wind

The Global Wind Energy Council reports that China had 42,287 megawatts of wind capacity at the end of 2010, 5 percent more than the U.S. total of 40,180.[19] China added 16,500 megawatts in 2010 to 5,115 megawatts added by the United States. Both Europe and the United States saw a slowdown in installations of wind turbines due to the financial crisis, reduced electricity demand expectations, and issues regarding the future forms of subsidies.

According to the Pew Environment Group, China has a goal to produce 150,000 megawatts of wind by 2020.[20] To help meet this goal, China is planning to build the world’s largest wind farm in the northwest part of the country. The plan was to complete 5 gigawatts in 2010, and expand to 20 gigawatts by 2020, at a cost of $1 million per megawatt,[21] or $1,000 per kilowatt, about 40 percent of the cost of an onshore wind unit in the United States, according to the Energy Information Administration.[22]

Unlike the United States that can back up its wind power with several fuel types, China backs up its wind power with coal-fired plants when the wind does not blow or when the electric grid is inadequate to handle the wind capacity. According to the China Power Union, only 72 percent of the country’s total wind power capacity is connected to the grid.[23] Adding to the problem is poor connectivity between regional transmission networks, which makes it difficult to move surplus power from one part of the country to another and thus requires each region to have sufficient reserve capacity.[24] For example, the wind project in Jiuquan in Gansu, although fairly large at 10 gigawatts, is located too far from the regional load-bearing center. In Inner Mongolia, less than 2 gigawatts of wind power was originally connected to the grid, with an additional 8.3 gigawatts needing to be connected. China plans to spend over $600 billion to upgrade its power grid to accommodate all of its new electricity expansion over the next decade.[25]

Currently China is mainly manufacturing wind turbines for domestic use, but with saturation in China’s domestic market, many wind turbine manufacturers have looked to overseas markets to meet their expanding output. With the Investigative Reporting Workshop of the American University finding that 79 percent of U.S. stimulus funds for renewable projects have gone to overseas firms, mainly for wind projects, it is no wonder that the Chinese are looking into U.S. markets.[26] China’s wind industry tried to enter the U.S. market to build a 600-megawatt wind farm in West Texas as part of a consortium of Chinese and American companies. The original proposal had the wind turbines manufactured in China, creating thousands of jobs there, but only a few hundred temporary installation jobs in the United States.[27] Due to criticism from some U.S. senators, the Chinese firm agreed to build a plant in Nevada to manufacture turbine parts. However, although the Chinese are providing the financing for the project, the consortium needs $450 million, 30 percent of the wind farm’s cost, to come from a federal stimulus grant. The $1.5 billion cost for the project is $2.31 million per megawatt, or $2,310 per kilowatt,[28] over twice the cost of wind farms in China.

Not only does China want to enter in the U.S. market by building wind farms, but U.S. manufacturers have plants in China, capitalizing on their lower labor cost. GE, a major U.S. wind turbine producer, already owns three facilities in China that produce turbine components.[29] And it opened a factory[30] in Vietnam that employs 500 local workers and will export 10,000 tons of components to GE Energy assembly plants around the world.[31]

Solar

China leads the world in solar cell manufacture, but 95 percent of its production is exported. [32] According to the Pew Environment Group, China had 800 megawatts of solar capacity at the end of 2010 compared to 3,100 megawatts in the United States. China’s target for 2020 is 20,000 megawatts of solar capacity so it has a long way to go.[33] In 2009, China generated only 0.01 percent of its grid-connected electricity from solar energy.[34] However, Arizona-based First Solar has signed a deal to build the first phase (30 megawatts) of what was to be the world’s largest solar farm (2,000 megawatts) in China in cooperation with China Guangdong Nuclear Solar Energy Development Company Ltd. (CGN SEDC).  CGN SEDC will be the majority project owner and operator, providing the engineering, procurement and construction functions. First Solar will supply its thin-film solar photovoltaic modules and will support CGN SEDC with advisory services.[35]

Realizing that the United States may be a good market for solar, China’s Suntech, the world’s largest supplier of solar panels, opened a solar manufacturing plant in Arizona last year.[36] Suntech will be supplying solar panels to the 150-megawatt Mesquite solar plant in Arizona with construction beginning this year and completion in 2013. The company has orders for 350 megawatts of utility sales in 2011.[37] Suntech’s factory will create finished panels from subcomponents that will be manufactured in the company’s Chinese facilities. According to Suntech, locating the assembly in the U.S. will lower delivery time and costs, as well as reduce the overall carbon footprint of getting finished panels to U.S. customers.[38]

Due to lower operating costs in China, a U.S.-based firm, Evergreen Solar, after receiving at least $43   million in incentives from the state of Massachusetts, moved its assembly plant to China, laying off 800 workers in the United States.[39] Chinese solar manufacturers have been able to lower prices because of financing from state-owned banks and lower manufacturing costs. World prices for solar panels have fallen as much as two-thirds in the last three years.

Nuclear

According to the World Nuclear Association, China has 13 nuclear reactors operating and at least 25 reactors under construction, half of the units in the world’s construction pipeline.  Many more units are planned with construction due to start within three years. As of June 2010, official installed nuclear capacity projections were 70 to 80 gigawatts by 2020, 200 gigawatts by 2030 and 400 to 500 gigawatts by 2050.[40] If China meets its 2030 target, it will have twice the amount of nuclear capacity as the United States.[41] China Daily reports that nuclear power should contribute up to six percentage points towards China’s goal of attaining 15 percent of primary energy consumption from non-fossil energy by 2020.[42]

China has under construction the world’s first Westinghouse AP1000 units, a demonstration high-temperature gas-cooled reactor plant. China’s four AP 1000 reactors under construction at two different sites,  Haiyang and Sanmen,[43] are the same reactors that the U.S. Nuclear Regulatory Commission (NRC) has ruled need additional analysis, testing, or design modifications of the shield building to ensure compliance with NRC requirements.[44] At least eight more at four sites are planned, and about 30 more are proposed to follow. For the first four units, construction is expected to take 50 months from pouring of concrete to fuel loading and an additional six months to be connected to the grid. The construction time is expected to be significantly reduced for the following units. The cost of the first four is expected to be less than $2000 per kilowatt and $1600 per kilowatt for future units.[45] The initial cost is over 2.5 times the cost projected for a plant built in the United States exclusive of financing costs, according to the Energy Information Administration.[46] China builds these reactors at lower cost than the United States because of less red tape, state-owned financing, and low cost labor familiar with large infrastructure projects.

The Chinese are aiming to enter into the global nuclear marketplace by 2013—just a few short years. With Western know-how being transferred and low-cost manpower, China can become a formidable competitor, as they have become to wind and solar markets. The World Nuclear Association indicates that the Chinese are very quickly becoming self-sufficient in reactor design. That is not surprising, when western nuclear companies provide technical training and related documents to the Chinese. Westinghouse, for example, as part of their contractual agreement with its Chinese customers, turned over more than 75,000 technical documents.

The United States is not the only country working with the Chinese to construct nuclear plants. France, for example, is honchoing a project of third-generation reactors in the Guangdong province, where construction on two European pressurized reactors is underway based on a contract signed in November 2007 with France’s Areva. In fact, work is progressing much better than the company’s other projects due to the experience Areva gained on them and to the 9,000 Chinese laborers on-site, who work 7 days a week at 10-hour shifts. The first reactor should be on-line at the end of 2013 and the second in the fall of 2014. Two more may follow in the future.[47] Clearly, western nuclear companies are hoping for a long-term partnership with the Chinese, but, in reality, they may only be gaining near term profits, instead.

Public concern over Japan’s nuclear accident has led China to review the safety of its operating and proposed nuclear units. The country temporarily suspended approvals for new nuclear units to revise its safety standards and has asked for safety checks at their six operating nuclear plants.[48] One of the problems at the Japanese nuclear units affected by the earthquake and the tsunami has been fixed in the design of advance nuclear reactors. Instead of using diesel generators to pump cooling water into the reactors, Westinghouse’s AP1000 uses a passive cooling system where water circulates by natural convection instead of needing electricity to pump the cooling water.[49]

Coal

China gets over 70 percent of its energy from coal,[50] and 80 percent of its electricity. According to the Department of Energy’s National Energy Technology Laboratory (NETL), from 2006 through 2009, China has been building 55 to 80 gigawatts of coal-fired power a year, and has over 70 gigawatts more under construction. NETL reports that China has plans to build over 200 gigawatts of coal-fired plants in the near future.[51] (See figure below.)

According to Australia, China is planning to build 500 coal-fired plants over the next ten years.[52] That means every week or so, for the next decade, China will open another large coal-fired power plant. The Energy Information Administration forecasts that coal will still generate about 75 percent of China’s electricity in 2035, even with its massive building programs in other generating technologies. According to Ashok Bhargava, a China energy expert at the Asian development bank, “No matter how much renewable or nuclear is in the mix, coal will remain the dominant power source.”[53]

Prospects for Electric Capacity in the United States

The United States has made it difficult to build generating plants in this country, particularly coal-fired and nuclear power plants. According to NETL, only eleven coal-fired plants totaling 6,682 megawatts became operational in the United States in 2010, but this was the largest increase in coal-fired capacity additions in one year since 1985.[54] Prospects of cap-and-trade legislation, reviews and re-reviews by the Environmental Protection Agency, direct action protests, petition drives, renewable portfolio mandates in many states, competition from subsidized and mandated wind power, and lawsuits have slowed the construction of new coal-fired plants.[55] According to the Sierra Club, plans for over 150 coal plants have been shelved due to their activities.[56] The graph above compares the coal-plant additions in the United States to that of China, showing only a handful of coal plants under construction in the United States. Because the capital cost of most of our existing coal-fired plants has been paid, that fleet produces 45 percent of our electricity at very little cost. Average production costs for coal-fired generators in 2009 were only 2.97 cents per kilowatt hour, slightly higher than our nuclear plants at 2.03 cents per kilowatt hour.[57]

No nuclear plant has started up in the United States since 1996, and no construction permits have been issued since 1979. NRC requirements, financing difficulties, and slow fulfillment of the nuclear provisions of the Energy Policy Act of 2005 have slowed the construction of new nuclear power reactors. However, as part of the 2005 Energy Policy Act, President Obama announced that his administration is offering conditional commitments for $8.33 billion in loan guarantees for nuclear power construction and operation. Two new 1,100 megawatt Westinghouse AP1000 nuclear reactors were to be constructed at the Alvin W. Vogtle Electric Generating Plant in Burke, Georgia, supplementing the two reactors already at the site. Before the nuclear accident in Japan, the two new nuclear generating units were expected to begin commercial operation in 2016 and 2017 at a cost of $14 billion. As part of the conditional loan guarantee deal, the U.S. Nuclear Regulatory Commission must determine if the AP1000 fulfills the regulatory requirements for a construction and operating license. (These are the same units permitted, licensed, and being constructed in China right now.) But, as a recent Wall Street Journal energy conference noted, loan guarantees are “meaningless in the absence of regulatory certainty.” [58]

Natural gas and wind power are the technologies that seem best able to surmount the financial, regulatory, and legal hurdles of getting plants permitted and operational in the United States. However, organized local opposition has halted even some renewable energy projects by using “not in my back yard” (NIMBY) arguments, changing zoning laws, opposing permits, filing lawsuits, and bleeding projects of their financing.[59]

Generating Costs of New Technologies

According to the Energy information Administration (EIA), the annualized cost of solar photovoltaic technology is 21.07 cents per kilowatt hour (in 2009 dollars), and solar thermal is 31.18 cents per kilowatt hour. Offshore wind is expected to cost 24.32 cents per kilowatt hour, and onshore wind is less at 9.7 cents per kilowatt hour. These costs are levelized costs, which is the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation. The EIA estimates these costs for the year 2016, which is the first future year that generating technologies can be compared because of the different lead times for building the plants. Some plants, such as photovoltaic plants, require 1 or 2 years to build, while others (such as nuclear plants) require 6 or more years.[60]

The costs for new solar and wind technologies are generally higher than the costs of competing technologies. For 2016, natural gas combined-cycle technologies have costs estimated at 6.31 to 6.61 cents per kilowatt hour, and pulverized coal and coal-fired integrated gasification combined-cycle technologies have costs of 9.48 and 10.94 cents per kilowatt hour, respectively. EIA includes a 3-percentage point increase in the cost of capital when evaluating investments in greenhouse gas intensive technologies to represent the difficulties in obtaining financing, which is equivalent to a $15 per ton carbon dioxide emission fee.[61] (See figure below.)

If one considers just the capital cost of building these plants, without finance charges, the EIA estimates those at $4,755 per kilowatt (in 2009 dollars) for photovoltaic technology, $4,692 per kilowatt for solar thermal technology, and $5,975 for offshore wind.[62] Of course, plant costs can vary depending on site locations, terrain, labor costs, and other factors. For a solar photovoltaic plant that came on line last October in southern Florida, Florida Power and Light spent $152 million building a 25-megawatt plant, which is equivalent to $6,080 per kilowatt. [63]

The Cape Wind project, off the coast of Cape Cod in Massachusetts, is expected to be the first offshore wind farm in the United States. The 130-turbine wind farm is estimated to cost at least $2 billion and was approved last year by Interior Secretary Ken Salazar after more than eight years of federal review. National Grid, the state’s largest utility, is to buy half of Cape Wind’s power, starting at 18.7 cents per kilowatt hour,[64] less than EIA’s estimate of 24.32 cents per kilowatt hour, but increasing annually at 3.5 percent in a 15 year deal.  But that’s still about twice what the utility pays for power from conventional sources, and almost twice the average U.S. cost of electricity—9.9 cents per kilowatt in 2010.[65] As one might expect, the project is having trouble getting buyers for the other half of the project’s output due to its high cost.[66]

Summary

China is on a fast track to bring online new generating units using coal, nuclear, hydroelectric, solar, and wind power, which will allow its economy to continue to grow. Because China is endowed with a sizable amount of coal resources and because coal is the cheapest energy source in China, coal-fired generating additions will far outpace those of other technologies. By continuing to rely heavily on currently available coal technology, China will remain the number one emitter of carbon dioxide. According to the Energy Information Administration, China’s carbon dioxide emissions are already 5 percent higher than those of the United States, and by 2035, they are expected to be over twice that of the United States.[67]

The United States, on the other hand, has made it difficult to build generating plants in this country. Prospects of cap-and-trade legislation and reviews and re-reviews as well as changing emissions requirements by the Environmental Protection Agency have slowed the construction of new coal-fired plants. NRC requirements, financing difficulties, and slow fulfillment of the nuclear provisions of the Energy Policy Act of 2005 have slowed the construction of new nuclear power reactors. Even renewable energy projects have been halted by “not in my back yard” (NIMBY) protesters. They have blocked energy projects by organizing local opposition, changing zoning laws, opposing permits, filing lawsuits, and bleeding projects dry of their financing. Without reasonably priced energy, it will be difficult to achieve high levels of economic growth, and U.S. industry will just move offshore where energy is more affordable.

Our President has a goal to reduce oil imports by one-third by 2025 to improve our energy security. However, we may be just trading one energy source for another since Chinese manufacturers can easily produce solar and wind generating technologies for far less than manufacturers in the United States. After many years of relying on unstable governments in the Middle East and elsewhere for oil, the United States may now turn to China for renewable energy technologies.

The United States became the world’s most productive economy by using its energy resources to increase output and make life better for its citizens. Contrary to the claims of some, the Chinese are not fixated on “green technology” solely, and in fact, are growing other parts of their energy mix much more extensively. The Chinese are building all generating technologies much more quickly than the United States, and are using energy to build an economy for the future.

At IER, we urge Members of the Committee to look at his matter comprehensively, since history tells us energy consumption is directly linked with economic growth. Should the United States choose to concentrate solely on a path of expensive energy sources for our future “capacity to do work,” our nation will do less work. That is a stark departure from the path that led and sustained our position in the world, and has implications far beyond those related to energy security.

Thank you for the opportunity to supply this testimony for the Committee’s use.