Today, Senator Lisa Murkowski (R-AK) released her long-anticipated energy policy “blueprint.” Murkowski is a relatively centrist Republican and has historically made energy policy a priority. This makes her one of the most important votes in Congress on energy, and the blueprint is therefore worth a close look—it is an important indicator of what is possible in this Congress. The whole thing is worth skimming, but if you don’t have time, Brad Plumer’s overview is a good summary. Here's our quick views on a few issues where we find grounds to differ with the blueprint.
Energy Prices and Externalities
If the blueprint has a single philosophy, it’s that “energy is good” (its first line) and that policy should make it cheaper. This means expanding fossil fuel production at every opportunity (including ANWR), government spending on R&D on both fossil and renewable technologies, and eschewing taxes to internalize negative externalities. Reducing energy intensity (energy use per unit of GDP) is OK, but policies solely aimed at reducing total energy use are misguided.
While the comprehensiveness of the blueprint is laudable, it unfortunately rules out the most economically promising method for implementing such an ambitious strategy. It accepts in principle that energy choices create differential environmental externalities, but rejects the best policies to deal with this—putting a price on them. It says that “[e]conomics also indicates that sizeable tax increases on fossil fuel producers are ill‐advised, as higher taxes on a good or service will result in less of it—not more.” But this is a straw man. Energy taxes come in two basic forms: general production taxes, and Pigouvian taxes aimed at externalities, neither of which are intended to increase production. General taxes are intended to raise revenue—Alaska has among the highest such taxes in the country, though Sen. Murkowski has supported efforts to cut them.
Moreover, for Pigouvian taxes (like a carbon tax), decreasing production and increasing prices of relatively dirty energy is precisely the point, not a negative side effect. That increase gives both producers and consumers incentives to switch to cleaner energy, driving investment without government spending on R&D or other subsidies. That investment should—contrary to what the blueprint says—bring down clean energy prices over time.
More fundamentally, the singular focus on energy prices ignores the real costs of energy choices. While a modest carbon tax would drive up some energy prices, maybe permanently, it would improve the national welfare, including not only the economy but also public and environmental health. Those benefits are real and quantifiable, but aren't reflected in energy prices—unless they are priced in with a tax or other policy.
The blueprint sets out a goal of “full independence from OPEC oil imports by the year 2020.” The argument here is more subtle than the common but mistaken belief that the U.S. can become truly independent from foreign oil. No matter how large U.S. production gets, oil will be traded on a global market and the U.S. will be subject to price swings triggered by supply or demand shifts.
Instead the blueprint argues that the U.S. can produce enough oil (and substitutes) that the world price will fall substantially and that the U.S. will be less vulnerable to volatile price swings. Historically, any shift in North American production has been viewed by most analysts as far too small for this to be true. With tight oil and Canadian oil sands production booming, is this changing? We’re skeptical such changes in North America and others to come will be enough to seriously alter the world market, but this deserves more study.
Besides the amount of production, the cost of extracting U.S. oil is crucial. If it's close to the (very low) cost of extracting OPEC oil, this price effect might be important. If, on the other hand, it’s close to the current marginal producer, it has much less value and confers much less power to the U.S. If it costs $100/barrel to extract U.S. oil, big new supplies reduce the risk of 2008-style price spikes. But they can’t bring oil prices back to 1990s levels.
As for ensuring us against price volatility, it is hard to imagine that OPEC would lose its ability to jack up prices through slashed production under any U.S. supply scenario. And, any price swings in the world market would be felt in the U.S. unless the U.S. can ramp up its production to counter OPEC cutbacks. This seems a stretch.
Further, the blueprint doesn’t want to see energy use reduced. This means continued exposure to world oil prices and market volatility, no matter what effects increased U.S. production has. Sustained lower world oil prices requires both increases in supply in non-OPEC countries and reductions in world demand—and that means, ultimately, reducing consumption, something the report barely considers.
The blueprint makes another suggestion: redefining “clean” energy, currently a code word for renewables, to mean “less intensive in global life-cycle impacts on human health and the environment than its likeliest alternative.” In other words, natural gas or even coal could be considered “clean,” depending on what it is being compared to. Clean becomes a relative concept, not an absolute one. This is an important conceptual point. Energy choices, like all others, need to be compared to real-world alternatives. You may not particularly like natural gas or nuclear. But the real-world alternative is coal, not solar.
This rebranding is not necessary though: English already does a good job with comparatives. We humbly suggest “cleaner” be used to describe the relative relationship the blueprint highlights. This would avoid unproductive fights over terminology.
Another positive element of the blueprint from an economics perspective is its support (albeit heavily qualified) for wider U.S. natural gas exports. But we hope to have more on that in another post.
A few years ago RFF conducted a comprehensive analysis of a multitude of alternative strategies for reducing greenhouse gas emissions and promoting energy security. The most effective approaches by far involved pricing carbon along with efforts to reduce overall fuel consumption, two elements that unfortunately remain absent from this blueprint.