November 11, 2008

My General Perspective

One conviction that runs throughout this work should be stated at the outset. Though I consider myself friendly to free markets and "market solutions," it is very evident that the mantra--let the market decide—is an profoundly inadequate basis for resolving the energy predicament.

Energy policy is closely tied to costs, whether in the form of hidden subsidies or external costs (like dirty air) for which the market pricing is non-existent.

One important subsidy for oil are the US military forces that hover in and around the Persian Gulf. Those forces are in some sense a cost of extracting the oil from the Persian Gulf, yet they not registered in the market price of oil. In that sense, the price of oil is heavily subsidized by the US government, a benefit accorded not only to American consumers but all consumers of oil (as there is a world price for the stuff). Other things being equal, the oil price would presumably be higher if those military forces were not “standing guard.” Because we pay the cost, it does not necessarily follow that we reap the benefit we intend, but in principle those military costs should be added to the overall public cost of depending on Persian Gulf oil.

Carbon emissions are another cost of energy usage that is not registered in the market price. They are an instance of what the economists call “externalities.” They are real costs, yet the market by itself does not incorporate the real costs into the market prices.

Both examples—the military cost of extracting oil from the Persian Gulf, the environmental costs of carbon emissions—suggest the incoherence of the mantra: let the market decide. The public must decide; that is, it must create a coherent framework of policy that takes account of these various subsidies and costs.

My general perspective is reflected in these considerations. We need an energy policy

--that reflects the probable cost of carbon and other toxic emissions, looking toward the establishment of a tax and regulatory framework that favors the least emitting as against the most emitting;

--that anticipates, as accurately as we can, the cost and availability of energy sources in the future and prepares for potential interruptions in energy supply;

--that treats respectfully the rights and interests of developing nations to various forms of energy;

--that helps the capital markets look to the long term and ensures that markets function, like an invisible hand, for the public benefit;

--that registers the true cost of extracting oil from dangerous regions, of which the Persian Gulf is the most notable, and looks with grave skepticism on military solutions to our energy predicament;

--and that seeks cooperative solutions with other nations to address global warming, energy security, and other common problems.

A rational approach to energy policy would assess alternatives with appropriate foresight regarding costs and benefits in all their various dimensions. That, of course, is easier said than done. In fact, the energy business reflects lots of grubby realities; it can make an excellent case study in government of the few, by the few, and for the few. 

Our inherited energy infrastructure, too, is a case study in path dependency, or the idea that where you are depends on where you start. It is exceedingly difficult to change. That said, we must in principle hope that it is amenable to change. 

Energy is both indispensable to human development and threatening to the human and natural environment, another of those things that we can’t live with and can’t live without. Our objectives should be to extend its advantages and limit its disadvantages, even while acknowledging that finding the right balance is an extremely difficult task.   

We need both realism and idealism in addressing the energy predicament. Realism is difficult because the facts are often very uncertain; idealism is difficult because the values at stake are sometimes incommensurable. Rightly understood, however, I think these contrasting tendencies toward realism and idealism depend on and need one another. 


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