In December 2004, the National Commission on Energy Policy (NCEP) released a report titled “Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges.” The group claims to have established “a constructive center in the often polarized debate over national energy policy.”
The report contains some good ideas, and the studies prepared by subcontractors to the commission, listed in an appendix to the report, may contain valuable original research. (This writer has not read them.) However, the report is marred by faulty assumptions and neglect of economic theory.
Sound Science and Economics
The NCEP report makes a few concessions to the legions of scientists and economists who do not buy into alarmist predictions of energy shortages, climate change, and environmental destruction. For example, the report acknowledges that:
- world oil production has not peaked but will continue to grow for the foreseeable future (p. 1);
- oil is a global commodity so that “as market forces prevail, the price of U.S. and world oil will be the same” (p. 3);
- tar sands in Canada and heavy oil in Venezuela have the potential to expand enormously the world’s usable reserves of fossil fuels (p. 6); and
- estimates of the cost-effectiveness of energy-saving technologies do not “account for–and thus cannot by themselves resolve–potential trade-offs in terms of vehicle performance, safety, and impacts on jobs and competitiveness” (p. 8)
However, these nuggets of good analysis are difficult to find among the many dubious and outright false assertions and conclusions.
The NCEP report says “the risk of global climate change from emissions released by fossil fuel combustion will exert a profound influence on the world’s energy options and choices over the decades ahead.” (p. vi) It is a classic non sequitur, since nowhere in the report is it established that the possibility of global warming should be allowed to exert such an influence on energy planning and use.
The report comes perilously close to repeating the now meaningless mantra of a “growing scientific consensus” on the need for immediate action. The claim is meaningless because science does not advance through consensus and because scientists are leaving the alarmist camp, as demonstrated in January by the resignation of Chris Landsea from the Intergovernmental Panel on Climate Change (IPCC). The NCEP avoids the error by leaving out any mention of how much warming may be attributable to the human presence and what harm, if any, that warming could cause. (p. 20)
Increasing global demand for oil, says NCEP, “will be accompanied by higher oil prices and the potential for more serious and frequent supply disruptions.” (p. 1) This is another non sequitur, since it is never shown demand will outstrip supply or that slowing the rate of growth in U.S. demand would make the U.S. economy less vulnerable. Many experts, including Douglas Bohi and Michael Toman of Resources for the Future (1996) and the Congressional Research Service (1997), say it would not.
Slowing U.S. demand for oil is likely to make the country more, rather than less, reliant on imports because oil production costs are higher in the U.S. than in other parts of the world. If prices fall, less oil would be produced domestically and more oil would be imported.
Why Raise CAFE?
The commission calls for “a significant strengthening of new vehicle fuel economy standards … based upon a variety of studies of technology potential and cost-effectiveness completed since 2000.” (p. 10) The studies cited somehow do not include any that show how raising Corporate Average Fuel Economy (CAFE) standards imposes social costs several times the value of fuel saved, even when such dubious “externalities” such as global warming and higher defense spending are counted.
In a 2003 Journal of Economic Perspectives essay, Paul Portney and colleagues concluded “that tightening CAFE could significantly reduce social welfare overall.” A 2002 CBO report found that “CAFE standards do not directly encourage either producers or consumers to decrease gasoline use, so they do not offer the flexibility or the incentives for gasoline reductions to occur at the lowest possible cost.”
The CBO study also called the flaws in CAFE “intrinsic to any policy that regulates fuel economy instead of providing a direct incentive to reduce gasoline consumption.” The study was requested by Sen. Jim Jeffords of Vermont.
The commission claims “passenger vehicle and heavy-truck fuel economy improvements offer the potential to reduce U.S. oil consumption by 10-15 percent or 3-5 MBD oil by 2025.” (p. 2) That is unlikely, given the experience with CAFE so far.
Better mileage lowers the cost of traveling, resulting in a “rebound effect” that cancels out between one-quarter and one-half of the theoretical gains. Higher CAFE standards lead to longer retention of older and less fuel-efficient (but generally bigger, more powerful, and/or safer) cars and trucks, canceling out even more of the gains. High-tech substitutes for steel, used to lighten cars and trucks without surrendering safety, consume more energy to create, offsetting still more of the savings. And in the past, consumers chose different kinds of vehicles (SUVs and light trucks) to evade CAFE standards on passenger vehicles.
Even if higher CAFE standards translated into less oil consumption in the U.S., NCEP makes no effort to predict what impact that would have on either energy security or global warming. We can be quite sure it would be negligible in both cases.
Shaky Case for Energy Conservation
NCEP claims the U.S. could significantly reduce its energy consumption by investing more in energy efficiency. “Unfortunately,” says the report, “… market forces alone are unlikely to deliver the full potential of energy savings given a host of market failures that tend to discourage efficiency investments even when they are highly cost-effective.” (p. 30)
Evoking “market failures” to explain why spending on energy efficiency is less than what is thought to be efficient on the basis of engineering studies shows a fundamental neglect of economic theory. Markets, unlike engineering studies, take into account learning curves and risk aversion as well as values such as safety, convenience, flexibility, and performance that compete with energy efficiency. It is outrageous to dismiss these competing values and benefits as “market failures” when they represent real choices made by real people.
Consumers are not ignorant and entrepreneurs are not blind. If the benefits of investing more in energy conservation were greater than the costs, more would be invested. We don’t need subsidies and market-distorting regulations to make this occur.
The National Commission on Energy Policy does not offer a roadmap for “ending the energy stalemate.” It offers, instead, a large helping of the same alarmism and flawed analysis that flow liberally from other, less credible, advocacy groups.
Because it fails to take seriously most of the research and analysis that challenge the myths and assumptions of the left wing of the environmental movement, the NCEP fails to offer a strategy that those of us closer to the middle can accept.
Joseph L. Bast ([email protected]) is president of The Heartland Institute, coauthor of Eco-Sanity: A Common-Sense Guide to Environmentalism, and publisher of Environment & Climate News.