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View related content: Environmental and Energy Economics
Good morning. I’d like to thank J.P. Morgan for the opportunity to address you all today.
I was asked to help you all do what we think tank people have the rare privilege of doing for a living, which is to get out of the weeds now and again, and to consider public policy (in this case, energy policy) from a big picture perspective.
It’ll be my pleasure to do that, though some may find what I have to say disappointing, because unlike advocates of various energy technologies I won’t offer soaring promises that we can replace all of our electricity production with renewables in 10 years, as Al Gore assures us we can.
I’m not going to pick out one technology, such as plug-in hybrid cars, and extrapolate radical changes to our energy systems in only a few years.
I’m not going to fill the air with mystical visions of a world free of fossil fuels where we all have flying cars and robot servants powered by the beauty of rainbows.
Instead, what I am going to talk about is humanity’s inextricable relationship with fossil fuels, the importance of affordability, the unavoidability of trade-offs, and the risk of unintended consequences that come with government intervention into as large and complex a market as we have with energy.
So let’s start with the big picture.
The first thing to understand about energy is that it is omnipresent in our lives, and we consume energy with virtually everything we do.
Everything we eat, buy, or use, every service we consume is produced with energy, maintained with still more energy, and increasingly, consumes energy with every use.
Right now, as we gather here, we’re sucking down energy-especially electricity-with wild abandon.
Our food is grown with energy intensive fertilizers, harvested by energy consuming equipment, prepared, packaged, shipped, and frequently cooked with still more energy.
Our water is pumped, purified, and distributed using energy. If you’re in a tall building, the water has to be pumped upward with energy: it doesn’t flow uphill all by itself.
The light we read by at work, and at home is the product of energy use. The lumens coming out of your lamps are mostly transformed coal and natural gas, with a leavening of transformed falling water, and nuclear power, and the barest bit of seasoning from wind and solar power.
The materials used in our clothing were grown using energy, processed, dyed, cut, woven, sewn, packaged, shipped, and so on, all using energy. When we wash, dry, or dry-clean them, we use still more energy.
The same is true for where we live, the furniture we use, the transportation that moves us, the gadgets that entertain us, and basically, everything in your life. Very little of what we do is untouched by energy.
Environmentalists say that we are “addicted to energy.” We are not addicted to energy. We are biologically adapted to a high-energy lifestyle. There’s a big difference. All human tribes, however small and remote have been found to control fire. No animals have been seen to do so in nature. Smoking chimpanzees don’t count.
We are not so much homo sapiens, as we are homo igniferens, man who kindles fire. And that’s going to grow, as population grows, and as more and more humans around the world crawl out of energy poverty, and seek to live as we do in the developed world.
Next, I want to talk about the importance of affordability.
Because energy is integral to our lives, affordability matters. The higher the cost of our energy, the higher the cost of the things we do, the way we travel, the things we buy, and cost of maintaining the things we own, and the children and pets we care for.
In research conducted at AEI, we found that half the energy people consume (and half the money they spend on energy consumption altogether) is embedded in the things they buy, and the services they use. When you buy a cup of coffee, you may not have realized that in fact, you’re paying for the long energy chain that produced it.
So, last night’s pizza? A share of the price was the energy used to grow all the different ingredients, make the pizza, package the pizza and keep the pizza warm as it was delivered.
The email notification you just got from your blackberry? The result of countless pulses of energy, being bounced vast distances through wire and air to reach your pocket. Not to mention you plugging it in every night to charge it, which consumes more power than you might think.
If the person beside you doesn’t smell, it’s because he or she has used petroleum products to keep their hair and skin clean, and other chemicals to deodorize. Shampoo, for example, is reformulated oil packaged in a bottle of solidified oil (plastic) that used oil-derived adhesives to hold the label on while petroleum-derived inks displayed the contents.
Oh, that MRI, or your prescription drugs, or the sterile operating room you might need someday? The healthcare industry is a massive consumer of energy, with the costs passed on to you.
The bottom line here is that raising the costs of energy raises the cost of virtually everything, and that has consequences. As economists will tell you, all things being equal, raising the cost of goods and services leads people to consume less of them.
Less consumption means less production, which means less economic exchange, less productivity, and less employment. If you raise energy costs unilaterally, as some would do with climate policy here, you raise the cost of exports, making you less competitive on world markets.
Now, let’s turn to the question of free-lunches and trade-offs.
Right now, the US gets the vast majority of its energy (about 85%) from fossil fuels-coal, oil, and natural gas, a situation that disturbs many environmentalists, politicians, and other special interest groups.
Some people call for us to “end our addiction to foreign oil,” or to oil altogether.
Some want more subsidies for wind, or solar.
Environmentalists would ban coal in a heartbeat.
Republicans have a love affair with nuclear power, and can’t seem to get enough.
Obama seems fixated on battery-electric cars. Everybody has their favorite proposals for remedying some perceived energy woe.
So, can the US “get off of petroleum?” Can we stop using coal for electricity? Can we grow our own transportation fuels? Can we be “energy independent” Can we build more nukes?
Sure we can, to varied extents. But all of these choices come with serious economic and environmental tradeoffs, and will take a long time: energy systems evolve on a time scale of decades, not years.
Trying to rush it is just likely to break the bank, and result in abortive transition efforts, as is happening in Spain and elsewhere in Europe, where excessive haste led to unsustainable subsidies for renewable energy.
Equally troubling, the relentless focus on renewable could lead us to let our established, reliable fossil-fuel powered installations dwindle, putting us at risk of power shortages if wind and solar fail to produce.
If we ditch fossil fuels for wind power, for example, we’ll need many hundreds of thousands of windmills, requiring a vast network of service roads and power lines if it is to seriously displace coal or natural gas in electricity generation.
As Stanley Fish recently wrote in the New York Times, people are rightfully balking at having even one wind turbine near them much less the hundreds and thousands we’d need to significantly displace fossil fuels.
And the wind is fickle: it doesn’t always blow when you need power, so it requires completely redundant backup power. It’s also hard on the environment.
Besides killing birds and bats, offshore wind is suspected of harming sea mammals because of the sonic vibrations induced in the water.
Other studies have shown that windmills cause warming of the local environment, which could affect local ecosystems.
Most worrying of all, wind’s fickleness causes backup power to “cycle” up and down creating inefficiencies that could lead to higher greenhouse gas and conventional pollutant emissions.
Wind power is more expensive than other types, even when you don’t count the redundancy, and there’s one more problem: it doesn’t blow when you need it.
A recent study from Scotland found that windmills there, even in their windiest places, only produced about 17% of their supposed capacity, and rarely if ever generated power when power demand was high.
Solar power has many of the same issues. First, people generally don’t live out in the hottest places, so the power has to be transmitted long distances, often through populated areas, or wilderness areas.
In addition, desert ecosystems are quite fragile, and are populated by many endangered species. This is one reason why so much of California’s deserts have been set off limits for development or even recreational use.
Gathering in lots of sunlight means gobbling up lots of space. Solar thermal power stations also require a lot of water, to generate steam for turbines. Think about that. Deserts, and lots of water…they don’t usually go together, so add in piping water, and releasing humidity into the desert into the equation.
Solar photovoltaic power is also the most expensive form of power we can generate, and of course, it only generates power half the time, whereas your natural gas power plant can run at high outputs, if needed, 24 hours a day.
Solar photovoltaic cells, it has been found, are also dangerous for the water-seeking insects that are at the base of desert food chains. Apparently, the little bugs interpret the reflections from the solar arrays as water, and they hover over it until they die.
Oh, and about those rooftop solar arrays? As Ed Begley points out in his book “Living like Ed,” You have to get up there and clean them three or four times a year, or they lose efficiency. Doesn’t that sound like fun?
Biofuels have turned out to be an economic and ecologic disaster. Corn-ethanol is not only uneconomic, producing it causes air pollution, water pollution, wildlife contamination, huge coastal oceanic dead zones, soil erosion, excessive water withdrawals, and more.
Corn ethanol also raises the cost of food, and was partially responsible for the surge in food prices a few years back that had Mexicans near rioting over the cost of corn tortillas. It may count as the biggest energy boondoggle of all time.
Geothermal? Small scale works in some areas, but who wants to see a geothermal plant in Yellowstone? Hydro power is great, but we’re demolishing dams to reduce harm to fish populations, and we’ve already dammed the major potential sources in North America.
More domestic energy production? We have plenty of resources (contra to “running out of energy” myth), but they’re not without risk. Look at the spill in the Gulf of Mexico, and the coal mining disaster in West Virginia. Further, the regulatory landscape that the Obama administration is paving will almost certainly slow domestic oil and gas production for the foreseeable future.
Nuclear power? It’s not clear that it’s economic, given how entangled it is with government for the fuel cycle, and it’s not clear where we’ll put the waste. It’s also unclear how much fuel is out there, or how long it would last.
Cellulosic ethanol? It’s a technology that’s been 10 years away for 40 years now, and it’s still that far away. And it would consume massive land areas even if it were further along in development.
Algae fuels? There’s real promise there, but again, it’s far from ready for prime time, and when it does eventually happen, it’ll almost certainly require genetically modified algae. Environmentalists are just going to love that.
Well, can’t we just be more efficient? Maybe, but when you dig into proposed “efficiency” measures, you find that usually, there’s a good reason why someone has chosen not to perfectly insulate their house, or use fluorescent lights, or drive a compact car, or use a clothes dryer rather than hang their clothes out to dry. And, when you start subsidizing “efficiency,” you risk a range of unintended consequences.
We subsidized energy-efficient refrigerators, and people kept the old one out in the garage. Consequence? More energy use. We subsidized electric cars with stimulus money, but didn’t rule out golf carts, so a bunch of rich people got free golf-carts at the expense of less well-off Americans. We forced cars to be made more fuel efficient, and people drove more miles.
This rebound effect is well documented, and there’s little one can do to avoid it.
So, it’s not a question of whether we can do the things that the politicians and environmental groups talk about with regard to energy, the answer is “sure we can,” at least to a limited extent. But there is no such thing as a free lunch, and trade-offs matter.
Finally, a few words about the green-tech revolution that we’re told will flourish if we only mandate expanded use of more expensive renewables.
Politicians and environmentalists are promising that the U.S. will be a leader in the manufacturing and sale of environmental technologies if only we listen to them, go along with the technologies they pick for us, and live more like Europeans. I have a word for such promises, and the polite version would be “cow flop.”
The idea that the U.S., with our wage laws, our worker health and safety laws, our environmental protection laws, our high tax rates, and our ever-dwindling natural-resource production is going to compete with Asia on manufacturing is flat out crazy.
China’s average total compensation for a manufacturing worker is 57 cents per hour. It’s lower in rural areas. According to the Bureau of Labor Statistics, the mean wage for assemblers and fabricators in California last year was about $14 an hour. Not to mention that China controls 85% of the rare-earth elements needed to make wind-turbines and other green technologies.
Could we, with protectionist measures, and massive subsidies create a domestic industry that creates batteries, solar cells, or windmill components? Sure we could, for a short time, until our energy costs become so insanely high that our economy gets even farther along the road to collapse, after which, those factories will be tomorrow’s ghost towns. How long do we want to subsidize the difference between 57 cents and 14 dollars an hour to prop up a domestic clean-energy manufacturing center?
So, to conclude. Energy discussions must start with a realization that abundant, affordable energy is not discretionary, it is a necessary element for the maintenance of technological civilization. How we get that energy is always open for discussion, but a realistic discussion includes an honest appraisal of costs, trade-offs, and the potential for unintended consequences.
Kenneth P. Green is a resident scholar at AEI.
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