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.

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 (${\text{CO}}_2$) 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 ${\text{CO}}_2$ 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 ${\text{CO}}_2$ 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 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

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

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 ${\text{CO}}_2$ 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.

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 $\left(\text{NO}x\right)$ 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 ${\text{CO}}_2$ 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.

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.

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.

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.

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