CHAPTER 18
Energy Policy and the Future

18.0 Introduction

Of all economic activities, energy production and use present the biggest challenge to the quality of the environment. This book began with an extended discussion of the challenge of global warming, due to the release of carbon dioxide from the combustion of fossil fuels. But, beyond global warming, energy consumption also yields as by-products acid rain and sulfate pollution, urban air pollution and traffic jams, oil spills, oil drilling and strip mining in sensitive habitats, acid mine drainage, hazardous mine tailings and oil drilling muds, occupational diseases such as black lung, and exposure to radioactivity in the mining, transport, and disposal of nuclear fuel and waste. Our three main energy sources—oil, coal, and nuclear—each have their own environmental drawbacks.

Yet, reliable access to reasonably priced energy is the lifeblood of any economic system, and the American economy relies more heavily on it than most. This chapter presents an overview of the current energy picture and then considers the prospects for a cleaner energy path, one based on a combination of renewable energy (solar, wind, and biomass electricity), energy efficiency, and electric, hybrid, and biofuel vehicles. The basic message is that the future is up for grabs. Depending on the interaction of technology, economics, and government policy, the energy system could follow the current fossil-fuel path or switch to either a renewable/efficiency path or, less likely, a high nuclear path.

How costly is a clean energy future likely to be? As was suggested in the introductory chapter on global warming, there is substantial disagreement among economists about the economic impacts of the different options. Some argue that combating global warming by adopting clean energy options will be expensive, while others have maintained that, through aggressive energy-efficiency measures, we might actually be able to reduce global warming at a profit. This chapter looks more closely at these arguments and evaluates energy options via the clean technology (CT) approach developed in Chapter 17.

What is clear is that, to hold global warming to the low end of 4 degrees F will require a staggering, rapid, and wholesale transformation of the global energy system. To meet the energy needs of 3 billion more people, address the rising aspirations of the developing world, and at the same time move quickly away from the global workhorse for baseload electricity—coal combustion—will be the work of a generation.

18.1 Technology Options: Electricity and Heat

Every day, each American consumes the energy equivalent of 6.5 gallons of oil in all uses: heat, power, and transportation. This section looks at the heat and power side of that equation—how can we satisfy our growing demands for electricity to run our gadgets and the heat we need to stay warm in the winter? The first way is to become efficient. It turns out that the cheapest and cleanest power is the power we save and don’t have to produce. Turning next to the supply side of the market, coal (33 percent), natural gas (32 percent), and nuclear (19 percent) are the three main sources of electricity production in the United States. Wind and solar energy—the fastest-growing sources—are now at 8 percent, with hydropower covering the remaining 7 percent.1

Efficiency. How do Americans stack up against the rest of the world in energy use? Unfortunately, as Figure 18.1 illustrates, we are close to the top of the heap among wealthy countries. What explains the wide variation in international demand for energy illustrated in the figure? National income, of course, but climate, population density, energy prices, transportation infrastructure, and government conservation policy are all also important factors.2 Canada loses on all fronts—cold climate, low population density, low energy prices, a transport system geared to the automobile, and a government with a relatively laissez-faire attitude, by international standards, toward energy conservation.

Histogram for Energy Consumption per Capita, International Comparisons: Norway, Canada, U.S., Belgium, Australia, Sweden, Germany, and Japan.

FIGURE 18.1 Energy Consumption per Capita, International Comparisons

Source: U.S. Department of Energy.

Germany and Japan, each of which uses about half as much energy per capita as we do in the United States, have comparable climates. However, both are much more densely populated and have urban and interurban transport systems designed heavily around mass transit. Of the two, Japan has pursued energy efficiency most aggressively. Before the first oil shock in 1974, Japan already had one of the most energy-efficient economies; over the next two decades, the nation improved its efficiency by one-third, compared to a 25 percent improvement in other industrial countries. One reason is that Japanese factories are required to have at least one energy conservation engineer on site who must pass a rigorous national test.3

The good news reflected in Figure 18.1 is that there is clearly a lot of room for Americans to save energy without compromising lifestyles. Demand-side management (DSM) involves promoting technologies that use energy more efficiently. Note that many conservation measures, such as turning down the thermostat from 68 to 65 degrees or driving 55 mph on the highway, are not efficiency measures as they involve some sacrifice in consumption. By energy efficiency, we mean technologies that generate a comparable quality of service using less energy. Such DSM measures “produce” energy by freeing up supply. Amory Lovins calls this power “negawatts.”

In earlier chapters, we have discussed many DSM options: compact fluorescent and LED lighting (Chapters 6 and 8), energy-efficient building codes, and standards for refrigeration and lighting (Chapter 17). Other DSM measures include using waste energy from electricity production to heat buildings (cogeneration) as well as adopting energy-efficient industrial motors and cooling and cleaning appliances.4

Coal. On the supply side of the market, the dominance of coal in electric power generation to date has been due to one primary factor—a reliable, low-priced fuel source. The technology for producing electricity from coal is well developed, and because domestic coal resources are abundant, the supply of fuel is not subject to the disruption and price fluctuations associated with oil.

On the other hand, the environmental and social problems of using coal are well known. In addition to problems of acid rain, mercury, and criteria air pollutants discussed in Chapters 13 and 16, underground mining for coal is quite dangerous, while strip mining and “mountaintop removal” destroy natural ecosystems. Both can cause acid drainage problems. Coal transport also has a major impact on the nation’s roads. But, coal’s long-run outlook hinges mostly on the progress of efforts to stop global warming. Electric power contributes about 33 percent of America’s carbon dioxide (CO2) emissions, mostly from coal. Any serious effort to control the greenhouse effect will require that conventional coal-burning power production be restricted, if not ultimately eliminated.

Recent technological advances now allow coal to be gasified before combustion; this process substantially reduces the carbon emissions but, more importantly, allows carbon dioxide to be filtered out of the stack. Coal advocates argue that carbon dioxide can be captured and injected into chambers that used to hold natural gas, through a process called underground sequestration. However, no one is yet sequestering carbon. Will sequestration work, and can it be made cost-competitive? This is the question that hangs over coal’s future as a primary fuel for electric production.

Although coal is still the primary source of electricity in the United States, its primacy is being challenged. In the recent years, coal’s share of generation has dramatically fallen from 48 to as low as 33 percent. No new coal plants are being built, and old ones are being retired, under a combination of pressures: cheap natural gas (more on this later), the growth of renewable generation, a new round of pollution control focused on mercury emissions and criteria air pollutants (see Chapter 16), and the threat of future liability associated with CO2 emissions.

Nuclear. Atomic power faces both economic and environmental challenges. On the economic front, nuclear power is competitive only as a result of heavy subsidies, some deeply hidden. From an environmental perspective, nuclear power is hindered by three concerns that must be resolved: meltdowns, waste storage, and terrorism.

Recently proposed and canceled nuclear power plants—in Turkey and Quebec—have been extraordinarily expensive, with power prices above $0.20 per kWh. A Finnish plant recently under construction has seen cost overruns greater than 50 percent. Most plants under construction around the globe are in China and Russia, and little activity is seen in capitalist countries. France, the world leader in nuclear power, has not completed a domestic plant since 1999. In the United States, after decades with no new plants, in 2012, construction began on four additional reactors at existing sites.5 Why so little activity?

Nuclear is inherently a highly centralized technology, and because each plant is so expensive, requiring many years to build before any returns are realized, the financial risks are great. Advocates argue that if enough orders are placed, economies of scale will kick in, and the costs of later plants will fall, but this argument has so far failed to attract investors. An important issue is construction delays. Intense safety concerns, permit, failed inspections, and public opposition can further slow down plant construction and reduce the profitability of investment. This adds another layer of risk. For these reasons, private-sector investors remain very wary of nuclear power.

Much debate has centered on the safety of nuclear facilities, and the most concern is focused on a Chernobyl-type core failure, or meltdown, with worries reinforced by the 2011 tragedy at the Fukishima plant in Japan. Estimates of cancer-induced fatalities from meltdowns have ranged from 0 (Three Mile Island) to as high as 500,000 for Chernobyl, though most fatality estimates for Chernobyl are much lower. A worst-case disaster in a populous area of the United States might lead to casualties of more than a hundred thousand. Based on these figures, nuclear power presents a social gamble: the possibility of accidents leading to either a small or very large number of fatalities.6

At the same time, people die regularly, but more anonymously, from coal pollution. On the basis of lives lost per kilowatt hour, nuclear power production stacks up favorably compared to coal. But, the risks to those living close to a nuclear power plant will be higher, explaining intense local opposition to siting. Moreover, a risk assessment looks only at the relative probability of death, without assessing the magnitude of the potential disaster—whole communities destroyed overnight. As we noted in Chapter 5, people will buy insurance to avoid very risky situations that occur with low probability. Stronger opposition to nuclear power facilities may thus reflect simple risk aversion.

A new obstacle for nuclear is increasing concern that reactors could somehow become terrorist weapons, either through a triggered meltdown or through the use of waste materials to assemble “dirty bombs.” Terrorism and nuclear proliferation also ensure that even if atomic power experiences a comeback in developed countries, it will not present a desirable solution to the energy needs of developing countries with less stable governments. The potential global warming benefits of nuclear power are thus inherently self-limiting. Finally, public distrust of scientific risk assessment in the nuclear field—whether by government or industry officials—is very high. (Witness The Simpsons!) In part, this distrust is attributable to the widespread perception that the Nuclear Regulatory Commission (NRC), which enforces safety standards for nuclear power, has been captured by the industry. In part, it is because of uncertainty in the science. Official estimates of “safe” exposure to radiation have been repeatedly lowered.

Beyond meltdowns and radiation releases, the other major environmental issue facing the nuclear industry is waste disposal. Nuclear waste is divided into two categories: high-level and low-level waste. High-level waste consists of spent fuel rods and waste from weapon production; it remains toxic for hundreds of thousands of years. Low-level waste includes contaminated clothing and equipment from nuclear power plants and defense establishments and wastes from medical and pharmaceutical facilities. Nuclear power accounts for about 80 percent of the radioactivity found in low-level civilian waste. The radioactive elements in most low-level waste decay to levels the NRC considers harmless within 100 years, although about 3 percent of this waste needs to be isolated for longer periods.

The main waste disposal options are burial in geologically stable formations or aboveground storage. Given the extraordinarily long-term nature of the waste’s toxicity, the scientific community is divided on the safety of various permanent waste disposal options. Currently, there are no permanent storage facilities for high-level civilian nuclear waste in the United States. As a result, both high- and low-level wastes are piling up in temporary above-ground storage at commercial power plants and government installations. Regardless of the technical issues at stake, however, political opposition to the siting of waste facilities has essentially put a brake on nuclear power. Solving the disposal problems—technical and political—for existing waste is essential before we move on to produce more of it.

In a world that has been headed steadily toward decentralized and distributed technology solutions such as rooftop solar or micro-natural gas turbines, nuclear power faces the challenge that it is a massively centralized power production system. Financing a nuclear power plant depends on a long-term captive audience of power users. In addition, and unlike other electricity sources, production of nuclear power inherently requires expensive, ongoing government supervision. First, the possibility of nuclear terrorism has meant that government must closely monitor shipments of fuel and waste. Second, the need for intense regulation of reactor safety has led to extensive bureaucratic involvement in reactor design, operation, and maintenance. Finally, public opposition to siting, as well as the long-lived nature of waste, has meant that government has taken over the responsibility for trying to solve the disposal problem.

Nuclear power is a significant player in the energy field today as a result of ongoing government support. As we will see in our discussion of subsidy policy, nuclear power in the United States has been aggressively supported by government funds. In France, the country with the world’s biggest commitment to nuclear power, the industry is state-owned and heavily subsidized. Yet, this remains nuclear power’s principal advantage—thanks to the substantial investment of public funds, it is today a proven source of large-scale electricity production, albeit somewhat expensive. Nuclear’s best hope in the United States is that global warming becomes recognized on a bipartisan basis as a serious environmental threat, requiring an immediate reduction in coal-fired power production. Only then will intense local opposition to facility siting, leading to construction delays and high costs, have a significant chance of being overcome.

Natural Gas. This fuel source has emerged as a major competitor to coal. The reason: large domestic deposits of natural gas, composed primarily of methane, have recently become accessible because of the development of a new technology called horizontal hydrofracturing or “fracking.” In the fracking process, gas companies drill down to reach shale deposits that hold widely scattered concentrations of natural gas. From a single vertical well, they then drill arms out horizontally. Into these arms, they inject the fracking fluid, containing a variety of chemicals, at very high pressures, which fractures the shale. When the fluids are removed, the natural gas flows through the fractures in the rock back into drill holes and out of the well.

Natural gas has one major environmental advantage. In terms of air pollution, it is the cleanest of fossil fuels: It has a low sulfur content, emits far fewer particulates and less mercury when burned, and yields about 70 percent more energy for each unit of carbon dioxide emitted than does coal. However, methane itself is a greenhouse gas. Thus, for natural gas to have any advantage over coal in terms of avoided global warming, careful controls must be implemented to prevent the release of the so-called fugitive emissions—methane that escapes into the atmosphere during production or transport or from abandoned wells.

In addition, fracking has sparked major concerns over potential contamination of groundwater in the drilling process, contamination of surface water through the disposal of fracking fluids, excessive withdrawals of freshwater from streams and rivers for drilling, fragmentation of habitat, air pollution in the vicinity of the wells, earthquake risk, and general industrialization of rural landscapes. The conflict has become heated because many of the promising gas deposits are in populated areas. It is, thus, common to have drillers seeking sites quite close to houses and drinking water wells.

In spite of this controversy, since 2008, fracking has generated a large increase in the U.S. natural gas supply. This, along with the leveling out of U.S. demand due to the 2008 recession, has led to a period of low-cost natural gas supply, likely to persist for a few years. Unlike highly centralized coal and nuclear plants, natural gas plants can also be built cheaply, at relatively small scale. These factors have led to a rapid rise in the share of natural gas in electricity production: up from 20 percent at the beginning of 2009, to 33 percent in 2015, largely displacing coal, and also slowing down the growth of the solar and wind industries.

How far will the rush to gas go? This depends on the degree to which citizen pressure imposes greater regulatory control over the industry—with respect to global warming, water contamination, and habitat protection. In addition, the fracking technology itself is new enough that it is difficult to judge whether recent estimates of large U.S. (and global) reserves are realistic. For the medium term, however, low natural gas prices are likely to continue to promote increased investment in gas-fired electric generation capacity.

Renewables. The final major energy category includes hydroelectric, solar, wind, geothermal, and biomass energy.7 Hydroelectric power currently contributes about 7 percent of the nation’s electricity. Although from a pollution perspective, hydroelectric energy is relatively clean, dam projects can have significant environmental impacts, ranging from the flooding of ecologically valuable lands to negative impacts on aquatic life, such as salmon.

Solar energy is divided into two categories: active solar, which produces electric power (and heat as a by-product), and passive solar, which produces heat. The major use of passive solar is for heating water for direct use, but it can also be used to heat and cool homes. The two principal active solar technologies are solar thermal power, produced by focusing the sun’s energy to heat a fluid that is then used to create electricity, and photovoltaic (PV) power, produced from solar cells.

Solar thermal is already being deployed on a commercial scale: a recently completed Arizona plant employs 3,500 mirrors to produce 300 MW of power—about one-third of the power production from a large nuclear plant. Solar thermal has tremendous potential as a near-term baseload technology in desert environments, as plants can store power for several hours in heated liquids and thus supply power 24 hours a day, all year long. Arizona, Mexico, Northern Africa, and Middle Eastern countries are looking to become major electricity exporters on the back of this technology.8

The better known solar technology, photovoltaic (PV) cells, or solar cells, produce electricity directly from sunlight and do not face the limited geographic range of solar thermal. In fact, cloudy Germany is a world leader in PV technology and installed capacity. In 2015, Germany was generating 30 percent of its power from renewables, much of it from solar PV. In early 2016, on a sunny day in May, the country actually produced 95 percent of its power needs from renewables. Germany has moved rapidly to build solar PV into a major player in its base-load generation capability.9

PV is a classic large-scale clean technology. First developed as part of the space program in the 1960s, the technology has advanced slowly but steadily, based on government R&D and subsidy programs. Until recently, PV remained too expensive for more than niche applications. However, as the Germany case demonstrates, in the second half of the 2000s, PV has begun to see rapid price declines. These cost gains have been driven by technology advances in turn sparked by global and U.S. subsidy policy, growing markets, especially in Europe and China, and finally, the entry of Chinese manufacturers.

PV can be a distributed source of power, installed on rooftops, covered parking garages, or in fields and fed back into the grid via “smart meters.” It can also be developed to support a centralized, utility-scale plant. One of the world’s largest plants, in Yuma, Arizona—at 290 MW set to deliver power equivalent to one-third of a nuclear power plant—became fully operational in 2014. The Yuma plant received a $290 million federal loan guarantee (see Chapter 17) to support its construction.10

In addition, photovoltaic systems are very low risk projects: fuel sources are assured at a constant (zero) price, and there is no danger of increased environmental regulation in the future. For this reason, utilities can require a lower rate of return from solar projects than others. The discount rate used to evaluate a PV project matters, because PV systems have very high up-front investment costs and very low operating and maintenance costs.

The main environmental impacts of solar PV are in the manufacture of the solar cells. Beyond that, they are emission-free sources of power. They also have the advantage of reducing transmission needs, as the power can be produced on site. For that reason, they are a promising source of new power in developing countries, seeking to bypass the construction of new transmission systems. Cost remains a challenge for distributed PV. While solar panel prices have dramatically dropped, and utility-scale solar is now cost-effective in many parts of the world (for example, in California), rooftop and small community solar systems still require subsidies to compete on the grid in most developed countries.

In addition to solar PV, the other fast-growing player in renewable energy is wind power. In 2015, global installed wind capacity was greater than 200,000 MW, equivalent to 200 large nuclear plants, and growing at a rate higher than 20 percent per year. Costs were competitive with new natural gas plants—given access to a good site, with accessible transmission—where wind power comes in as low as $0.04 per KWh.

While economies of scale and technology improvements have driven the costs of wind power production down to levels competitive with fossil fuels, wind faces two major economic obstacles. The main one is access to transmission lines. While in theory, wind production could satisfy all U.S. electricity needs, in practice, transmission lines to get this power from windy regions to urban users are often not in place. A related problem is storage. Both wind and active solar technologies produce power on an intermittent basis when the wind blows or the sun shines. Thus, effective long-run development of these resources will require storage. The current solution is to use the electricity grid; PV and wind power now supply electricity to the existing system for distribution. However, because electricity is lost in the transmission process, grid storage and transport are limited. A variety of technologies, primarily improved batteries, are being explored. Other options include using electricity to pump water behind a dam, compress air, or produce hydrogen, all to be used for future power production.

The major environmental concern about wind is aesthetic: recent high-profile battles have been fought over locating wind farms off scenic (and wealthy) Cape Cod and on mountaintops in New England. Despite a common belief that wind farms are dangerous to birds, avian mortality has been quite low at recent wind farm developments, though concerns remain regarding bats.11

Geothermal power is used residentially and commercially to heat and cool buildings. Ground-source heat pumps take advantage of the fact that the ground is cooler than the buildings it supports in the summer and warmer than the buildings in the winter. Beyond this, as a potential utility-scale electricity source, advanced drilling technologies, similar to fracking discussed previously, now make it possible at many sites across the world to create generate steam to drive turbines by injecting water deep underground. A recent study argued that a significant fraction of U.S. power might come from this source by 2050. However, one early experiment using this technology in Europe was shut down after causing small earthquakes!12

Finally, an immediate way to reduce CO2 emissions from coal plants is to “co-fire” the plants using a mix of coal and biomass. Burning biomass reduces the global warming pollutants from the power plants, because the woody material that is burned grows back and recaptures the carbon.

Renewable energy has gotten a lot of good press lately, but it is important to realize that in the United States, nonhydro renewables from all sources remain a small but fast-growing player—at 8 percent of the nation’s electricity supply. State and federal policy aims to up that level to 20 percent or more by 2020, biting into the 33 percent share currently held by coal.

18.2 Policy Options: Electricity and Heat

Now that we understand the energy players, we can begin to think through energy solutions for heat and power. If we are going to stop global warming, how, exactly, could we shake our coal dependence in the next couple of decades? Chapter 17 provided a three-part approach for evaluating decisions such as this:

  1. Pick the clean, low-cost technology.
  2. Increase CT profitability by eliminating subsidies and/or internalizing social costs for competitor technologies, preferably through IB regulation.
  3. Directly promote the technology.

STEP 1—PICKING WINNERS

On the environmental scale, efficiency comes in first, wind power and solar are tied for second, geothermal is third, co-fired biomass fourth, new natural gas fifth, nuclear is sixth, and coal is in last place. Ranked in terms of current costs, efficiency measures are the cheapest. Wind in good locations is second; natural gas is third. Utility scale solar is fourth, rooftop and small-scale solar and geothermal are fifth, and nuclear brings up the rear. New coal is not an option today in the United States, as EPA requirements for carbon sequestration cannot be met yet. (See Chapter 12.)

The low-hanging fruits in this case are clearly efficiency, wind, and solar, both utility-scale and rooftop. Geothermal also looks to be a decent investment. Is there a case for aggressive promotion of nuclear? Probably not. It will be difficult to reduce nuclear costs in the United States below their current range and still provide a politically acceptable margin of safety. Efficiency, wind, solar, and geothermal offer more feasible, cleaner, and cheaper alternatives to fossil fuels than does nuclear.

STEP 2—LEVEL THE PLAYING FIELD

The current U.S. energy market is far from the ideal of a free market; government intervention is widespread through both regulation and subsidy. One recent estimate of annual federal energy subsidies ranged from $37 to $64 billion. Tax breaks alone for the oil industry amount to an estimated $7 billion annually. To provide a feel for the type of expenditure undertaken by government agencies, Table 18.1 details the agencies involved in supporting just the exploration phase of oil production—efforts range from subsidies for procurement of resources to R&D to infrastructure development to risk reduction. One of the biggest subsidies to the oil industry is spending by the military to protect shipping in the Persian Gulf; analysts put that cost at between $12 and $20 billion, not including the costs of the two Gulf wars.13

TABLE 18.1 Federal Agency Subsidies for Oil Exploration

Source: Koplow. 1993. Federal energy subsidies: energy, environmental and fiscal impacts. Washington, DC: Alliance to Save Energy, 46, Appendix A-2. Used with permission.

Support Activity Agency Involvement
Procurement U.S. Geological Survey, National Oceanic and Atmospheric Administration, and Bureau of Indian Affairs all provide survey, mapping, and development support
Technological development Department of Energy finances R&D on oil extraction
Industry infrastructure Bureau of Land Management provides low-cost access to leases
Risk reduction Fish and Wildlife Service conducts environmental impact assessment of arctic drilling

A major subsidy for the nuclear industry is a legal liability limit in the event of a meltdown. As noted in Chapter 17, because nuclear plants would otherwise be unable to obtain private insurance, the Price–Anderson Act limits liability for nuclear accidents. On a per-reactor basis, the subsidy works out to be more than $20 million per year.

Who wins and who loses from the federal subsidies? Figure 18.2 provides a breakdown of subsidies between the major energy sources. Efficiency and nonhydro renewables, the two clean technologies identified previously, received only 5.4 percent of the total. The major beneficiaries of subsidy policies were clearly the conventional fuel sources—nuclear and fossil fuels received 88.5 percent of all energy subsidies. The fact that coal, oil, and fission (nuclear) technologies have received the bulk of subsidies is not surprising; they also supply the bulk of the country’s power (and have important political constituencies). In addition, research to find ways to mitigate the impact of coal burning on global warming is certainly reasonable. However, even on an energy-adjusted basis, one study found that coal and nuclear fission received the highest subsidies calculable, and efficiency came in last.14

Pie chart for Federal Energy Subsidies by Sector: Fossil fuels (66%), Nuclear (12%), Ethanol (8%), Renewables (8%), Conservation (2%), and Other (4%).

FIGURE 18.2 Federal Energy Subsidies by Sector, 2005

Source: Data are from Koplow (2007).

This discussion of subsidy policy highlights two points. First, energy markets are not free markets; government intervention to promote technologies has been and continues to be substantial. Thus, our current energy mix, in which coal dominates electricity production and low gas prices dominate transport, is not a “natural” outcome of market forces. Coal has received tremendous federal subsidies, including large R&D expenditures, to develop cleaner coal technologies that have allowed the industry to expand. Second, federal policy currently tilts the playing field heavily against renewables and energy efficiency. The government’s substantial support of conventional technology works against market penetration of inherently clean alternatives.

Reducing the subsidies for conventional options, or at least leveling the playing field by boosting subsidies for clean technologies, is necessary for their promotion. What about internalizing externalities associated with conventional fuels? The major externalities associated with fossil fuels used for heat and electricity are urban air pollution, acid rain, and global warming.

As we discussed in Chapter 17, the EPA has recently tightened the regulations on ozone pollution and mercury emissions. In addition, in 2013, the agency issued global warming regulations for new power plants that have closed off interest in new coal plants until carbon sequestration technology is developed. Finally, pending EPA regulations could force reductions in CO2 emissions from existing coal plants post 2017—although President Trump’s EPA may reverse these initiatives. If Obama-era regulations do go forward, then most nonglobal warming externalities from coal plants (if not coal mines) would be largely addressed. On the natural gas side, many environmental impacts of fracking remain unregulated, as do “fugitive” methane emissions from leaking natural gas wells and pipelines.

Bottom line: as a result of EPA regulation of externalities, renewable power sources now face a relatively level playing field against new coal plants, but not yet existing coal or new natural gas plants. On the subsidy side, large tax breaks in particular provide an advantage to existing oil companies. Having evaluated measures in place to level the playing field for clean energy, we now consider the final policy step: direct support of clean alternatives.

STEP 3—DIRECT PROMOTION OF CLEAN TECHNOLOGIES

The most powerful and widespread policy tool for promoting clean electric power is a renewable portfolio standard (RPS). This policy requires utilities in a state to provide a certain percentage of power from renewable sources. As we noted in Chapter 17, by 2009, close to half the states had introduced RPS legislation, including major wind producers: Texas, California, Oregon, and Minnesota. These requirements were instrumental in driving very fast U.S. wind power growth from 2000 to 2012 and were also incentivizing utility-scale solar development.

Beyond an RPS, let us take a brief look at more targeted subsidy policies directed at the principal late-stage clean energy technology (efficiency) and one early-stage alternative (solar PV power). The basic message is that, to avoid waste and counterproductive incentives as well as to ensure equity, subsidies should be carefully targeted. Begin with a

Here is the equity issue. By providing the weatherization service free of charge, Octopus would provide dramatic benefits to a quarter of its clients at the expense of the rest. While the company and ratepayers will save money in total, most of Octopus’s clients will be worse off than if the power plant were built.

Another possible problem is strategic behavior. By subsidizing one portion of the population, Octopus may inadvertently discourage others from weatherizing on their own. This group may hold back until more subsidies become available. Octopus may also be paying more than it needs to for conservation due to the potential for free riding. Some who would have otherwise weatherized on their own may take advantage of the subsidy.

Finally, there is the problem of rebound effects. Because electric bills for weatherized homes are now lower, residents will spend some of their increased income on keeping their house warmer or buying new appliances, which use more electricity. The size of the rebound effect in the electricity field is the subject of current debate. It is probably around 10 percent.15

An alternative plan helps resolve all these issues: have the residents whose buildings are weatherized pay the bill. Consider a house with pre-weatherization electricity use of 12,000 kWh per year; weatherization reduces it to 10,000 kWh. The residents could thus afford a substantial rate increase (e.g., from $0.05 up to $0.06 per kWh) and still come out with the same overall electricity bill ($0.06 per kWh * 10,000 kWh=$600; $0.05 per kWh * 12,000 kWh=$600).

If energy-efficiency measures are truly cost-effective, then in theory, it will always be possible to design a financing mechanism by which the recipient ultimately pays for a substantial portion of the service and still comes out ahead. That is, cost-effective efficiency investments can be designed to generate something close to a Pareto-improving situation.

In practice, the government or utility ratepayers at large may still need to absorb the risk and marketing costs necessary to overcome poor information and access to capital on the part of its clientele. For example, one utility found that requiring participants to pay for insulation to cover hot-water heaters, even though the clients would save money at zero risk, substantially reduced program participation. Lowered participation, in turn, increased the cost per kilowatt-hour saved by 350 percent due to scale economies in operating the program.

Yet, minimizing the subsidy level by requiring recipients to pay at least a portion of the cost will reduce problems of inequity, strategic behavior, free riding, and rebound effects. This general rule will be true for any subsidy policy designed to encourage small-scale CTs.

Two recent policy innovations are moving us toward this goal of beneficiaries paying program costs. New York’s On-Bill Recovery program allows residents to borrow money for energy-efficiency upgrades through their utilities and then pay the loans back as part of their utility bill. Because the energy savings are greater than the repayments, customers both get the energy upgrades and pay less on their monthly bills—a true win-win. The policy is just underway. A similar policy called PACE (Property Assessed Clean Energy) allowed homeowners to pay for energy-efficiency upgrades or solar investments through their property tax bill. When first instituted in Berkeley and on Long Island, the policy created mini solar booms, but PACE has been at least temporarily derailed by federal loan agencies.

Efforts to promote large-scale solar power through subsidies should be crafted with a similar eye toward the potential for waste. In the photovoltaic field, the challenge remains to reduce PV costs. As discussed in Chapter 17, there are essentially two ways to do this: (1) develop better technology through R&D and (2) capture cost savings through economies of scale and learning by doing. In the early 1980s, government policymakers prematurely took the latter route, funding flashy but uneconomic solar demonstration projects at the expense of basic R&D. At the same time, tax credits for the purchase of solar units were instituted to encourage the purchase of PVs; however, because PV was still not a competitive technology, when the credits expired, the PV market collapsed.16

Throughout the 1990s, PV developed further through a combination of low-level U.S. R&D subsidies and aggressive policies to promote solar installation in Europe, especially Germany. A steady decline in prices brought PV down through 2000—and then came a sudden boom in demand, supported by state and federal level incentives in the United States. In some states, homeowners could get both state support and federal tax credit for installing rooftop solar, and so the number of installations exploded. But, this demand boom—unlike that of the early 1980s—was reinforced by rapidly declining costs. With surging global demand, the PV market in the late 2000s began to attract substantial investment.

The fast and furious pace of German deployment was fed by a feed-in-tariff policy. With a feed-in-tariff, electric companies must buy back electricity produced by households and businesses at a set rate. In the German case, the rate was favorable, and it sparked a massive boom in solar installments.

Germany is both moving to phase out nuclear and simultaneously reduce carbon footprint—this requires the very rapid pace of renewables deployment that they have been pursuing. In the United States, feed-in-tariffs, and their kin, purchase power agreements, are sparking renewables development in California, New York, Oregon, and other states. Purchase power agreements are long-term contracts for power negotiated with small producers—say a household or business. In this case, the producers do not have the choice of utilizing the power themselves, but instead sell it all at a predetermined rate.

After a good run in the 2000s—first at the state level, and then via the Obama stimulus—U.S. solar subsidies were locked in for another 5 years in 2015. But regardless, a combination of private sector interest with continued European and Chinese support means that PV prices will continue to fall. Solar PV has now crossed the threshold to become a late-stage clean technology—increasingly cost-competitive in many applications. The question now is: how fast will the sector grow?

This section has looked at the process of clean technology promotion in the energy sector. To summarize, CT-promoting subsidies need to be carefully tailored. Consumer subsidies need to minimize pitfalls such as equity problems, strategic behavior, rebound effects, and free riding. Subsidies targeted at large-scale technologies should strike an appropriate balance between R&D and market building.

At the end of the day, clean energy alternatives ranging from energy efficiency to solar PVs hold out the promise of a low-cost replacement for fossil fuels in the generation of heat and power—in the process, reducing problems of urban air pollution, destruction of upstream habitat, and global warming. Smart government policy can help explore how real those promises are. However, electric power production and heat are only one part of the bigger energy picture.

18.3 Technology Options: Transport

Our transportation system relies almost exclusively on oil and accounts for the bulk of petroleum use. The United States currently consumes about 17 million barrels of oil (about 3 gallons per person) per day, about 25 percent imported. Close to 30 percent of U.S. imports come from the Persian Gulf.

The social costs of oil use fall into three categories: (1) taxpayer subsidies (discussed in Section 18.2), (2) environmental externalities, and (3) energy security. In developed countries, motor vehicles are a major source of urban air pollution, accounting for half of the nitrogen oxide NOx and volatile organic compound (VOC) emissions and nearly two-thirds of the carbon monoxide (CO) emissions. (Recall from Chapter 13 that nitrogen oxide causes airborne acid pollution and, in combination with VOCs, ground-level ozone. CO reduces the oxygen content of the blood.) While autos contribute to local pollution problems, they are also a major source of carbon dioxide, the principal greenhouse gas. Worldwide transportation accounts for 14 percent of CO2 emissions from fossil fuels, and this figure rises to around 35 percent in the United States.17

The energy security issue arises from the impact that dramatic oil price swings have had on the U.S. economy over the last 30 years. Oil price shocks, the latest from the period of heavy, sustained Chinese and Indian demand that first peaked in 2008, have been associated with and have deepened our last four economic recessions. In addition, such price shocks substantially boost inflation. Estimates of the economic costs of dependence on oil have ranged from $1 to $20 a barrel. Related to the energy security issue is the fact that high U.S. demand (about 25 percent of world consumption) for oil props up the price. As a result of our major presence in the market, we have what economists call monopsony power over the price; a unilateral cut in U.S. demand would lower oil prices around the world.

The major technology options for replacing oil can be divided into two categories. The first includes those options compatible with continued reliance on private auto transportation: increased fuel efficiency and switching to cleaner fuels, especially electricity. The second involves a switch to alternative transportation modes: urban mass transit, intercity and long-haul rail, carpooling, and bicycling and walking.

FUEL EFFICIENCY

Of all the options, increased fuel efficiency comes closest to being a simple clean technology as defined in Chapter 17. In the late 1990s, Japanese automakers began to introduce the so-called hybrid vehicles. Hybrids run on batteries in the city and on gasoline engines on the highway. The batteries recharge while the vehicles are running on gas, so there is no need to plug in the car at night. These vehicles get between 50 and 70 mpg, twice the fuel efficiency of conventional vehicles. Do they save the consumer money? In 2001, I (Eban) bought a Toyota Prius for about $2,000 more than a comparable conventional vehicle would have cost. The Prius had about a 15-mpg advantage. With gas at $3.50 a gallon, the Prius saves me around $450 a year—meaning it took about 5 years to pay off the $2,000 premium and begin realizing net savings.

Safety and performance have been the major concerns raised about fuel-efficient cars. One way to achieve better fuel performance is through “downsizing”—building smaller, lighter cars. However, in the past, lighter cars have proven less safe in a collision with a heavier vehicle. Based on these factors, a National Academy of Sciences panel concluded (with some dissent) that the fleet downsizing between 1975 and 1990 led to an increase of perhaps 2,000 traffic fatalities per year in the early 1990s.

Critics have charged that this is a substantial overestimate, as it fails to take into account that smaller cars pose less danger to others, as well as that the disparities between car sizes—another factor in accidents—shrank as the fleet downsized through 1990. (Of course, disparities dramatically grew again in the 1990s with the SUV fad; and SUVs themselves face safety concerns relating to rollovers.) Moreover, small cars have become safer in recent years, as engineers have focused increasing attention on crash problems and new, high-strength, lightweight materials have been developed. The true impact on safety of increased fuel performance could, in fact, be zero. Nevertheless, to the extent that fuel efficiency is achieved through downsizing, there is likely to be some safety impact.18 In addition, American consumers have a taste for many energy-intensive features: large size, four-wheel drive, and rapid acceleration. Increased fuel efficiency may require giving some of this back.

In addition to safety and performance concerns associated with improved fuel economy, in the long run, increased fuel efficiency can be swamped by increases in “population” and “affluence” (P&A vs. T in the IPAT equation!). Total vehicle miles traveled increased at a rapid rate of 3.3 percent per year between 1990 and 2000; this rate was much faster than population growth. The average American car now travels over 12,000 miles a year, up from 10,000 in 1970. Total miles rose even faster as the number of cars per person increased from less than 0.50 to more than 0.65 (the average American household now has more cars than drivers), and population also increased. Interestingly, total vehicle miles traveled per year stopped growing in 2008, and has stabilized, even as the economy has recovered.19

There is also the possibility of a rebound effect—better fuel efficiency leading to cash savings, some of which will be spent on increased driving. Estimates of the rebound effect in auto transport are in the 10 percent range. Finally, until 2008, American drivers were shifting from cars to light trucks and SUVs, which got much poorer mileage. As a result of all these factors, during the period in which the fuel efficiency of the auto fleet increased by about one-third—1970 to 1988—total U.S. fuel consumption by cars, trucks, and buses still grew by 40 percent. And since then, with the shift to SUVs and light trucks, the average efficiency of the fleet has actually declined. With the recent tightening of fuel economy standards, discussed later, expect this trend to reverse.20

FUEL SWITCHING

The second technology option in the transport sector is to run vehicles (cars, trucks, and airplanes) on fuels other than petroleum. The three main contenders are biofuels, electric batteries, and hydrogen fuel cells. Biofuels are fuels derived from vegetable matter. Biofuels in commercial use today include ethanol (primarily from corn, about 2 percent of the market) and biodiesel (primarily from soybeans, still much less than 1 percent of the market). It is also possible to convert diesel cars to run on straight vegetable oil, including used fry oil, but there is not a lot of that to go around!

Biofuels are typically cleaner in terms of conventional urban air pollutants, although not always. In its comparison of the emissions of vehicles that can run on either 85 percent ethanol or straight gasoline, the EPA judged the ethanol option to have roughly half the pollution impact.21 However, recent concern has surfaced that ethanol vaporizes more easily than gas, contributing to smog problems. And both ethanol and biodiesel can have somewhat higher emissions of nitrogen oxides than does petroleum fuel. On the global warming front, biofuels do emit carbon dioxide when burned. However, the next year’s crop pulls that carbon back out of the atmosphere, so over their life cycle, biofuels have the potential to substantially reduce global warming pollution.

Biofuels face several obstacles to large-scale adoption. First, fuels from agricultural crops are still often more expensive than conventional gas or diesel—though the price gap shrinks, and in places disappears, when gas is around $3 per gallon. More significantly, crop supplies that can be devoted to fuel production are limited. Ethanol from corn could displace only 6 percent of the U.S. gasoline market before corn costs would start to rise. Concerns about this kind of “food versus fuel” conflict emerged during the biofuel boom of the first half of the 2000s, before the industry crashed along with oil prices in 2009. Thus, serious commercialization of biofuels requires R&D to drive down the cost of ethanol and biodiesel produced from non-food-crop sources. The target feedstock for ethanol is cellulose—the woody material found in the leaves and stems of plants. Some analysts believe that the United States has sufficient surplus acreage to grow enough perennial crops such as switchgrass to eventually supply more than 50 percent of today’s U.S. petroleum needs.22

Rather than biofuels, a fuel switch from oil to electricity now seems to be the option with the most promise to substantially reduce global warming pollution. In the last few years, Tesla, General Motors, Nissan, and BMW have all introduced electric cars that are getting close to mid-market prices. Some of these have range-extending gasoline motors that recharge the batteries, allowing trips of close to 200 miles. However, as most drivers travel fewer than 30 miles in a day, the vehicles often will use no gas at all. But, isn’t this just a leakage problem? Aren’t reductions in gasoline use being offset by increases in coal combustion to produce electricity? Not necessarily.

The beauty of electric vehicles is that many coal-fired (and all nuclear) power plants do not power down at night, and the electricity they produce is simply wasted. So, little additional pollutants are generated when the cars plug in at night, even when coal is a part of grid’s electric mix. Electric cars even have the potential to act as grid storage devices. Owners could recharge at night when power is cheap and then sell battery-stored power back to the grid from their cars at times of high demand. All that said, by the time electric vehicles do achieve significant market penetration, the grid will need to move to low-carbon power sources to ensure that overall pollution does not rise due to increased electricity demand.23

How fast will the electric car market grow? Demand from China is providing a major stimulus, as the country seeks to cut sources of conventional air pollution in its heavily polluted cities. Growing demand there, and worldwide, is in turn supporting large-scale investment designed to bring down the cost (and size) of batteries. To penetrate the U.S. market at scale, electric car manufacturers will need to both compete on price and overcome concerns about range limitations. Otherwise, electric cars have significant advantages over gasoline cars—they are quiet, high-performance vehicles with fewer moving parts requiring maintenance. The primary environmental issue with electric cars, beyond power plant pollution from grid charging, will be creating systems for effective battery recycling.

The final alternative to the internal combustion engine is the hydrogen fuel cell. You may remember from a high school physics experiment that if you run electricity through water, it splits the molecules into hydrogen and oxygen. Fuel cells do the reverse. They combine hydrogen and oxygen in the presence of a catalyst to produce electricity; the only immediate by-product is water vapor!

In the short term, fuel-cell vehicles will be powered either by liquid fuels (gasoline or ethanol derived from biomass) or by natural gas. These fuels will be converted onboard into hydrogen. In the longer run, car tanks are likely to get directly filled up with hydrogen gas. This may sound dangerous, but because hydrogen vents quickly, in the event of a crash, hydrogen vehicles will be less likely to explode compared to gasoline-powered ones. If the hydrogen gas were to be produced using renewable energy (electric current from wind, solar, or biomass run through water), fossil-fuel combustion and pollution would be completely eliminated from the transport sector.

Fuel cells are used in a few metropolitan bus systems and to produce electricity in some boutique applications. They are currently too expensive for private vehicles. However, all the major auto companies are pursuing fuel-cell research. Cars with fuel cells are currently available in limited commercial release, but the vehicles remain quite expensive.

To summarize this section, strategy 1 for reducing the environmental impact of vehicles is to change what is under the hood. We now look at Strategy 2, getting some of these vehicles off the road.

MODE SWITCHING

Urban mass transit—rail or bus—has considerable environmental advantages over private transport. First, because these options are more energy-efficient, they reduce both local and global air pollution problems. For example, a busload of 40 commuters on a 10-mile trip to work emits 1,140 pounds less carbon dioxide than if the commuters had driven their cars to work. In addition to increased efficiency for a given passenger mile traveled, mass transit helps slow the growth in total miles traveled. With good transit, even when people use their cars, they travel shorter distances, because the greater residential and retail densities that develop along with the mass transit system reduce the need for auto travel.

America’s high reliance on private auto transport clearly illustrates the importance of path dependence in technological development, discussed in Chapter 17. Some cities heavily depend on cars while others have well-developed transit. Toronto has North America’s best public transportation system, in part because of a decision not to invest in a freeway infrastructure; the Toronto city government has also kept mass transit a viable long-run option through zoning laws that encourage relatively dense residential neighborhoods, as well as business development, in the area of mass transit stations.24

However, the dominance of private auto transport is not based solely on accidents of history or on public-policy measures. Cars clearly have an edge in convenience and greater mobility. Thus, as incomes have risen in both developed and developing countries, people have tended to opt for auto travel. The decline of mass transit has occurred even though in the United States, private transport—including vehicle purchase, finance charges, insurance, and fuel—costs the average commuter about significantly more than using public transport.

The suburban sprawl that now characterizes most American cities means that private transport is a virtual necessity for shopping, getting to work and school, and recreation. In addition, many residents of developed countries have shown an evident preference for auto travel. Thus, any rapid switch to mass transit will be difficult. Nevertheless, given the potential environmental benefits from mass transit—greater efficiency and reduced passenger miles traveled—a gradual transition to this mode could be promoted where economically feasible.

One technology trend that may effect private car ownership and lead to a greater interest in transit is the emergence of ride-sharing companies such as Zipcar, Uber, and Lyft. If people can gain access to convenient ride services, they will be less likely to opt for (expensive) car ownership and, as a consequence, shift some of their demand to mass transit. Indeed, it is possible that the leveling off of total vehicle miles traveled in the United States may reflect a broader change in the perceived desirability of private transport.

A final form of mode switching involves interurban travel; roughly one-third of air travel involves trips of fewer than 600 miles. High-speed rail is a potentially attractive alternative for this market in terms of convenience and cost. From an environmental perspective, rail uses substantially less energy than does air travel.25

18.4 Policy Options: Transport

The social case against petroleum-based transportation by land, sea, and air is becoming stronger: mounting global warming, urban air pollution, habitat destruction, and energy security. The CT framework developed in Chapter 17 suggests two steps to promote clean alternatives. First, level the playing field by internalizing externalities; second, directly promote clean alternatives.

POLICY OPTIONS FOR FUEL EFFICIENCY AND FUEL SWITCHING

Fuel efficiency clearly qualifies as a CT. Under a variety of scenarios, achieving greater fuel efficiency standards passes a benefit–cost test. The National Academy of Sciences concluded that, using known technologies, fuel economy could be substantially raised over a decade at no net cost to consumers. SUV mileage, for example, could be improved by 25–40 percent, and the increased vehicle costs are more than offset by the (discounted) fuel savings. Moreover, the Academy agreed that these improvements could be achieved with no compromise in safety or performance. Taking into account the external benefits from both reduced greenhouse gas emissions and increased oil security, the committee recommended that “the federal government (take action) to ensure fuel economy levels beyond those expected to result from market forces alone.”26

The best way to achieve greater fuel efficiency would be through an incentive-based (IB) approach; raising the cost of petroleum products (or emissions) would simultaneously drive the market toward more fuel-efficient choices and encourage the prospects for alternative fuels. Several types of emission-related fees might be considered: gas taxes, “feebates,” emission taxes, and the adoption of pay-by-the-mile auto insurance. Gas taxes have the advantage of both forcing fuel efficiency improvements and attacking the growth in vehicle miles.

However, gas taxes would have to be fairly high to force efficiency improvements of 10 mpg—a 30–35 percent increase over the current average of 28 mpg. As casual evidence, European cars are not much more efficient than American cars of a similar size, though gas prices are at least double and in some cases are four times as high. The elasticity of fuel usage with respect to gasoline price is about 0.21, meaning that a 1 percent increase in price leads to a 0.21 percent increase in fuel economy. This suggests that prices would have to rise from $3.50 per gallon to $5.00 per gallon to achieve only a 10 percent increase in miles per gallon.

Several other fee-based approaches to encourage fuel efficiency and switching have been proposed. One interesting possibility is an auto emissions tax. When cars go in for their annual inspection, owners could be required to pay a tax based on their total emissions: the product of emissions per mile and yearly mileage. This would have the effect of both encouraging cleaner fuels (based on market criteria) and reducing miles driven. The tax could be tailored to suit regional needs.

Another widely discussed possibility has earned the nickname feebates. Feebates combine a fee on gas-guzzling cars with a rebate on fuel-efficient cars. A feebate policy would thus be revenue-neutral in an obvious way, have the politically attractive feature of punishing evildoers and rewarding the good, and probably not be regressive, as poor folks would opt for the subsidy. Feebates appear to be a better alternative to high gas taxes for encouraging a market-driven shift to fuel efficiency. However, by lowering the cost of fuel-efficient automobiles, feebates might increase the growth in vehicle miles.

A final suggestion has been reforming auto insurance so as to provide a pay-by-the-mile option. Auto insurance is quite expensive but is currently paid in a lump sum. Yet, this unfairly penalizes drivers who are on the road less frequently. If accident rates correlate with miles driven, then people who drive less should have lower payments. Billing could be based on odometer checks or electronic monitoring of miles driven. Converting an annual insurance bill to a per-mile basis works out to an equivalent charge of about $1.50 per gallon of gas—certainly a big enough charge to affect people’s driving habits! One study estimates that this would reduce miles traveled by 10–20 percent and suggests that a very small tax credit of $100 per year would be sufficient to start a stampede in the direction of pay-by-the-mile insurance on the part of low-mileage drivers.27

All of these policies—higher gas taxes, feebates, emission taxes, and pay-by-the-mile insurance—would also help promote a switch to cleaner cars: hybrid, electric, and fuel-cell vehicles. However, none of these policies is currently in widespread use. In the absence of these IB approaches, the federal government and, in recent years, the state of California have instead relied on technology-forcing regulation to increase fuel efficiency. (Recall that a technology-forcing regulation mandates that industry deliver technology meeting some environmental standard by some future date.)

The federal technology-forcing tool for fuel efficiency is the CAFE (Corporate Average Fuel Economy) standard, discussed in Chapter 17. However, until 2012, CAFE standards had not been substantially tightened since 1978! With federal policy sidelined, California stepped in with two initiatives—one in the 1990s and another in the mid-2000s. Under the Clean Air Act, California is unique among the states in its ability to set air-quality standards that are more stringent than the federal standards. Other states can then either follow California’s lead or stick with the federal regulations.

In the mid-1990s, concerned about smog, the state instituted a zero-emissions vehicle (ZEV) requirement that 10 percent of all vehicles sold in 2003 in the state must have “zero” (later modified to include “ultra low”) emissions. This meant that a car company selling in California must not only produce a qualifying vehicle but also price it low enough to satisfy the 10 percent requirement. Massachusetts and New York introduced similar policies. The California requirement, combined with growing concerns about global warming, sparked a research race among car companies. The first commercial fruits of this effort were the Japanese hybrids that hit the market in the early 2000s.

California struck again in 2003 with its Clean Car law mandating that, beginning in model year 2009, car companies had to begin reducing emissions of global warming gases—primarily carbon dioxide—so that by model year 2016, a 30 percent reduction in the fleetwide average would be achieved. Most of the emission reductions in California are projected to come from improvements in fuel efficiency. Therefore, the California mandate is likely to save consumers money! Higher up-front vehicle costs are likely to be more than offset by fuel savings. Several other states, as well as Canada, adopted California-style regulations, And then in 2012, President Obama stepped in with a national mandate. The administration updated the CAFE standards (see Chapter 17), essentially duplicating the California requirements nationwide.28 Nationally, fleetwide averages are required to rise to 34.1 mpg by 2016 and 54.5 mpg by 2025.

Relative to an IB approach such as a gas tax, the problem with CAFE or California’s Clean Car mandates is the potential for a rebound effect: by reducing customers’ gas bills, vehicle miles may increase. And technology forcing of this kind does little to promote alternative fuels. Nevertheless, technology-forcing regulations such as CAFE can be a powerful tool for driving R&D and investment in clean technology.

POLICY OPTIONS FOR MODE SWITCHING

Mass transit is often viewed as a highly subsidized, noncompetitive option vis-à-vis private transport. Indeed, transit does receive substantial government subsidies, typically 30–80 percent of fares.29 Less often recognized is that private auto transport also receives public subsidies that can rival those of transit systems. These include expenses for roadway construction and maintenance (not covered by gas taxes), police and emergency services, the costs of accidents (not covered by auto insurance), congestion costs, and the costs of pollution. One study puts the annual cost from these categories at $1.76 per gallon of gasoline consumed, roughly $800 per year per car. This figure does not include tax subsidies for parking construction, the energy security costs of oil dependence, and military expenditures to defend Persian Gulf oil transport.30 Subsidies for private auto transport thus range upward from around 20 percent of the total private costs of operation.

Most economists have focused on promoting mode switching by removing subsidies for private transport (e.g., tax-free and employer-provided parking) and internalizing externalities, particularly those associated with congestion. Congestion generates a variety of problems: wasted commuting time, increases in vehicle operating costs, pollution and accident rates, lowered productivity through worker fatigue and stress, and slowed delivery of products. While most of these costs are borne by vehicle travelers as a group, the commuting decision is a classic open-access problem (discussed in Chapter 3). The individual commuter may recognize that, by taking her car to work, she will slow down average traffic by 15 seconds. This is a small amount of time to her and a cost she is willing to bear. But 15 seconds times several thousand commuters quickly adds up to large social costs. With each commuter viewing the problem in the same way, the result is a “tragedy of the commons” quite similar to an overfished ocean.

With the highways being common property, some kind of rationing system is necessary. One rationing system is price: many economists have advocated toll systems to internalize congestion externalities. These systems can be quite sophisticated, using sensors in the roadbed to monitor passing traffic equipped with electronic identification and generating monthly bills. One way to attack congestion is congestion or peak-load pricing: charging higher tolls for travel during congested hours. However, this may have the effect of shifting work habits and commuting times without reducing overall vehicle use. While this may be useful for reducing certain urban air pollutants, it would not have much impact on greenhouse gases. Congestion pricing would also tend to be regressive unless the funds raised were used to compensate for this problem.

A non-price-rationing scheme involves dedicated traffic lanes. These lanes are reserved for (or dedicated to) buses and multioccupant vehicles and effectively lower the price of carpooling or bus travel. To those interested in mode switching, dedicated lanes offer a carrot that could be combined with the stick of congestion pricing and higher parking fees. In addition, because poorer people tend to take the bus, the overall income impact of dedicated lanes would be progressive.

This section has looked at the ways to level the playing field between mass transit and private vehicles: reduce subsidies, and internalize the externalities associate with car use, in particular, traffic congestion. Government can also use planning and investment tools to directly promote mass transit. As noted earlier, the primary advantage of transit is the way that it “naturally” reshapes urban and suburban densities. With denser living patterns, transit does much more than simply replace auto trips in and out of the city. It also substantially reduces vehicle transport for shopping and entertainment. At the same time, cities dominated by urban and suburban sprawl have a hard time providing competitive mass transit. Thus, zoning laws often in the form of urban growth boundaries are helpful to lay the groundwork for a successful transit or bicycle system. And, of course, any serious effort to promote mode switching requires large-scale infrastructure investment in bus systems, urban light rail, and intercity high-speed rail.

18.5 Summary

In this chapter, we have looked closely at the American energy system, powered throughout the twentieth century largely by coal and later nuclear for electricity and heat and oil for transport. Today, climate change is forcing a debate on the potential for a rapid global transition to energy efficiency and renewable energy, an electrification of vehicle transport, and a move toward mass transit. Here, we have looked at a suite of potential policies to drive these changes, involving (1) eliminating subsidies for and internalizing the externalities associated with fossil fuels and (2) directly promoting less-polluting alternatives. At the end of the day, can we really do this? Phase out fossil fuels over the coming few decades? And if so, at what cost?

Progressive economists see the government moving in a rational manner to implement cost-effective demand-side measures while promoting renewable energy sources to bring their costs down to a level competitive with natural gas power plants and gasoline-powered cars in the coming years. Optimists are not overly concerned about government failure due to the existence of very obvious “low-hanging fruit,” especially in the heat and electricity field and electric or biofuel-powered vehicles for transport. Because they see these governmental demand- and supply-side efforts as ultimately delivering energy services at lower cost than the technologies in use today, global warming can actually be reduced at low cost or even yield a net economic benefit.

Conservative economists, on the other hand, do not believe that government efforts to promote renewable energy and energy efficiency will be very successful. First, they fear that technology-forcing standards (such as the CAFE) will generate self-defeating problems, such as new source bias, that poorly thought-out design standards will retard rather than promote technological change or that money will simply be wasted by bureaucrats promoting cost-ineffective measures. Second, government must bear the real marketing costs necessary to speed up the slow diffusion of energy-efficient technologies, reducing the net savings. Third, they argue that easy efficiency measures will soon be exhausted, meaning that even a successful, short-term government effort to promote efficiency cannot be sustained. Finally, pessimists tend to feel that renewable energy options do not have the dramatic economic promise that optimists claim.

Despite their disagreements, however, economists largely agree on one point: First, there should be an increased commitment of government R&D funds to non-carbon-based and renewable energy sources. The earlier that cost-competitive technology alternatives become available, the lower will be the cost of reducing greenhouse gases. As we noted in Chapter 6, early cost savings become especially important over time because they free up capital for investment, which raises future productivity.

Beyond R&D funding, however, there is disagreement over whether government should make efforts to promote clean energy sources. However, again most economists feel that if it does so, to the extent possible, such efforts should rely on an IB approach. Where possible, government should not try to sort out whether photovoltaic-powered electric vehicles or biomass-based ethanol fuels will be a cheaper, greenhouse-friendly transportation option, and then develop and implement a promotional strategy; the better approach is simply to impose a nonregressive carbon price on all energy sources and then let the issue be decided in the market. However, as we have stated repeatedly, taxes (or tradeable permit systems) are not always politically feasible or easy to implement at the level needed to drive change. Thus, a role will remain for direct promotion of clean technologies in attacking the global warming problem.

Stepping back from energy issues, the previous four chapters have examined the question “How can we do better?” in protecting the quality of our environment, where doing better has been defined as achieving a given level of pollution reduction at lower cost and with greater certainty. We have explored two ideas: IB regulation and clean technology promotion. We have argued first that IB regulation, where technically and politically feasible, provides more cost-effective pollution control and better incentives for technological change than does the dominant command-and-control (CAC) system.

However, we have also seen that the regulatory process itself—whether CAC or IB—can be challenging to implement effectively. Moreover, climate stabilization policies—if they are to be effective—demand a rapid transition to cleaner technologies, not end-of-the-pipe fixes. As a result, recent economic attention has been focused on policies designed to promote technologies that reduce pollution in the first place. Path dependence theory suggests that government can and should use selective subsidies tied to cost reductions as a cost-effective complement to regulation. By tying subsidies to performance, a means is provided to avoid government failure in promoting clean technology.

The next section of the book turns to global problems. An optimistic view of the world sees rapid economic development in poor countries based on clean technologies, leading to a stabilization in the world population as living standards rise and birth rates fall. But even under this scenario, the global population will increase by another third, to close to 10 billion, before it stabilizes. Can the global ecosystem survive this impact? Clearly, the rapid development of clean technology is a prerequisite to a sustainable future. My own view is that without cheap, readily available solar and wind energy, it will be difficult for poor countries to achieve rapid enough economic growth to stabilize population growth without imposing high environmental costs in the process—and in particular, pushing the globe toward a very dangerous, high-end warming. In my mind, the most important task for environmental economists is to help design and implement policies to speed up the diffusion of clean technologies.

KEY IDEAS IN EACH SECTION

  1. 18.0 This chapter looks at technology options and government energy policy in the areas of electric generation and transport. The energy path that the United States follows over the next few decades will depend on the interaction of technology, economics, and government policy.
  2. 18.1 Technology options for electricity (and heat) break down into eight main categories. (1) Demand-side management (DSM) (energy efficiency) has substantial cost-effective savings potential. (2) Coal is the dominant U.S. power plant fuel, but it is also the heaviest global warming polluter; carbon dioxide capture and underground sequestration may provide a solution to this problem. Coal emissions can also be reduced through biomass co-firing. (3) Nuclear power faces unresolved high- and low-level waste storage issues, as well as widespread political opposition. (4) Natural gas is the most greenhouse-friendly fossil fuel but has a somewhat limited supply. (5) Hydroelectric supply can be expanded, but at a cost to flooded ecosystems. (6) Solar power can be divided into passive and active categories, with the latter including photovoltaics and solar thermal. (7) Wind is a very attractive candidate, while (8) geothermal also has considerable potential as a baseload power source. Wind and solar will require improved means of electricity storage.
  3. 18.2 Based on environmental advantage and cost-effectiveness, clean technology candidates for electric power generation include efficiency, wind power, and solar power. Two steps to promote these CTs are (1) level the playing field by reducing subsidies for “dirty” technologies and/or internalizing externalities through IB regulation and (2) invest in the new technologies directly. For PVs, feed-in-tariffs and purchase power agreements have been important policy drivers. Subsidies need to be designed to deal with equity issues, strategic behavior, free riding, and rebound effects, and the right mix between R&D and market development. Two attractive policies that can align these incentives for residential and commercial energy efficiency and solar are on-bill recovery and PACE financing.
  4. 18.3 Technology options for transport break down into three categories. (1) On net, fuel efficiency appears to be relatively cheap. In particular, hybrid vehicles including plug-in hybrids hold great promise for cost-effective improvements. Economic benefits include increased energy security and lower oil prices through the monopsony effect. Costs include possibly reduced performance and safety. (2) Fuel-switching options include biofuels, hydrogen fuel cells, and electric vehicles. In the medium term, fuel cells will be powered by gasoline, or biomass-derived ethanol, or natural gas. Electric vehicles remain limited by range. (3) Mode switching, from autos to mass transit, yields an increase in residential density as a significant benefit, reducing the growth in vehicle miles traveled. High-speed rail is a CT alternative to short-haul air travel.
  5. 18.4 Fuel efficiency appears to be a CT according to our definition. Incentive-based tools to promote efficiency would include gas taxes, feebates, emissions fees, and insurance reforms promoting pay-by-the-mile. In the absence of these polices, Federal CAFE standards (late 1970s and late 2000s) and California’s ZEV (mid-1990s) and Clean Car (mid-2000s) technology-forcing regulations are pushing fuel efficiency. R&D funding is required to promote a more fundamental switch to alternate fuels. Finally, in the area of mode switching, when subsidies to auto transport are considered, transit systems may be considered CTs, which would justify infrastructure investment and zoning supporting rail and buses. To encourage mode switching, tools such as congestion (peak-load) pricing and dedicated traffic lanes can be used.

REFERENCES

  1. Baker, Dean, and James Barret. 2000. Energy insurance. The American Prospect 11(17): 18–9.
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  3. Center for Sustainable Systems. 2006. Personal transportation fact sheet. Ann Arbor: University of Michigan. http://css.snre.umich.edu/css_doc/CSS01-07.pdf.
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