The Providence Journal just published an op-ed I wrote regarding how long term contracts for clean energy can help reduce costs and risks for electric utility ratepayers.
Category Archives: Energy Policy
Recently, I testified at the Rhode Island Statehouse regarding the impact of the state’s Distributed Generation Contracts law on ratepayers. In preparing the testimony, I realized it is important for legislators to have a tool to estimate those impacts under a variety of scenarios. I decided to create that tool for them, which is attached here:
This isn’t intended to replace a full economic impact study, and actually significantly underestimates the positive benefit of solar for ratepayers. But it gives a general sense that cab hopefully help better inform policy related to renewable energy and utility regulation. Try it out.
Bjorn Lomborg is often disparaged by environmentalists for questioning what in my view have generally been very questionable public policy prescriptions that environmental advocacy groups have promoted around the issue of climate change. In a recent Newsweek article, Lomberg takes a great shot at properly defining the concept of sustainability. He quotes the UN Brundtland report defining sustainable development:
“meets the needs of the present without compromising the ability of future generations to meet their own needs.”
The measure of success, then, is whether or not we give future generations the same opportunities that we have had.
Lomberg goes on to define sustainable solutions in terms of economic opportunities, educational opportunities and technological opportunities that we provide for future generations. After outlining progress the world has made over the last century or so he suggests:
Rather than celebrating this amazing progress, many find it distasteful. Instead of acknowledging and learning from it, we bathe ourselves in guilt, fretting about our supposed unsustainable lives.
At the end of the article he concludes:
We forget too easily that innovation and ingenuity have solved most major problems in the past. Living sustainably means learning the lessons from history. And chief among those is that the best legacy we can leave our descendants is to ensure that they are prosperous enough to respond resiliently to the unknown challenges ahead.
It would be great if environmentalists could celebrate and learn from our long legacy of creative solutions rather than continually viewing the world as a zero sum game. Lomberg is right. The path to a sustainable future is not through excessive environmental regulation or redefining the fundamental rules of our economy, but rather through economic prosperity, educational opportunity, technological progress, peace and the fair rational enforcement of the rule of law.
The following was published in the Spring 2011 Issue of Northeast Sun, the journal of the Northeast Sustainable Energy Association.
A New Tax Policy for the 21st Century
Let’s revitalize the US economy by replacing all federal revenues with a simple energy tax
America needs new answers regarding energy, economics and the environment. There are no real solutions on the table. And everybody knows it.
One radically simple proposal could work: Replace all federal government revenue with a simple energy tax. That may sound impossible. But it is a far more realistic approach to the problems our country faces than the pseudo-solutions that make their way through Congress these days.
This idea could inspire and appeal to Americans across the political spectrum while igniting an unprecedented era of economic prosperity. Along with radically reducing energy waste and pollution, it could release our society from the burdens and economic distortions of our current tax system, make our economy vastly more efficient and our industries far more competitive internationally, and provide the security of greater energy independence.
The numbers work
According to the US Energy Information Agency, in 2009 our country consumed about 18.8 million (18,771,400) barrels of petroleum a day, the equivalent of more than 287 billion (287,765,562,000) gallons of petroleum a year.
The Congressional Budget Office reports that all federal revenues for fiscal year 2010 were about $2.2 trillion ($2,162,000,000,000). That includes all individual income tax, corporate income tax, investment taxes, social security tax, disability insurance, hospital insurance, unemployment insurance, excise taxes, fees, energy and transportation taxes, and every other form of federal government revenue other than debt.
Doing the math, if we replaced every source of government revenue with a tax on petroleum, that tax would be only $7.51 per gallon. And if you add the average mid-December 2010 cost of premium gasoline of $2.85 a gallon (before taxes), the total price on gasoline and other petroleum products would average about $10.36 per gallon.
That isn’t a whole lot more than average prices for premium gas in Europe in mid-December 2010, as reported by the US Energy Information Agency: Belgium, $7.42; France, $7.15; Germany, $7.39; Italy, $7.19; Netherlands, $7.93; UK, $7.31. And those countries are burdened with massive taxes on top of high energy prices.
Along with paying far more for petroleum, in 2009 Europeans paid about twice what Americans paid for natural gas and coal. If our federal energy taxes roughly doubled the price of both the billion-plus short tons of coal and the 23 trillion cubic feet of natural gas we consume each year, that could partially offset and reduce taxes on petroleum, leaving our overall level cost of energy around the same as Europeans currently pay—while replacing all other forms of government revenue completely.
To keep American industry competitive, the feds should also collect a tariff on goods from countries that don’t implement similar levels of taxation on energy. That unilateral action would do far more to spur responsible energy policy worldwide than well-intentioned but unenforceable international treaties. At the same time it could further reduce energy taxes or help offset the federal budget deficit.
Most sensible people would favor the opportunity to adopt a European level of energy prices in exchange for no government interference with business revenues and personal income: no IRS, no income taxes, no payroll taxes, no business taxes, no inheritance taxes, no government fees.
The obvious pushback
Many will argue that high price signals will encourage energy conservation and alternative energy resources, thus putting government revenues at risk.
Radically reducing energy waste and pollution is one of the fundamental benefits of this proposal. Reducing the need for military adventures and compromised foreign policy to secure oil are other intended benefits. With the Congressional Budget Office reporting that federal expenditures are now more than twice what was spent in the year 2000, most Americans are also ready to see the excesses of government spending and intrusions into the economy constrained.
As the idea of tax shifting is taken seriously and refined, we can likely find consensus to tax other wasteful or counterproductive activities. With a shift to rational taxation, we can balance our federal budget and pay down our out-of-control federal debt, while more appropriately aligned market forces improve our lives and the environment.
We should begin the tax-shift conversation by recognizing how affordable it could be to align rational revenue policy with sensible market mechanisms that would encourage economic prosperity, job and business growth, broadly shared environmental and clean-energy goals, and the basic principles of personal freedom and liberty that our country was founded upon.
Big changes for big challenges
Minor adjustments to the sclerotic, contradictory patchwork of public policies that have emerged over the decades won’t address the massive challenges that confront our nation. As we face continuing economic stagnation and pass the era of peak oil production, it’s time to get serious about transforming our economy and restoring our economic productivity. We need to rethink the role of government and how we fund it.
It is clear from polls that most Americans are fed up with Congress, the federal government, and politicians from both parties. Everyone hates the complexity, irrationality, and obvious corruption of our tax system, which discourages work, productivity, entrepreneurship, job creation, and almost every other goal and fundamental value that our economy is purported to be based upon.
Think of the productivity gains that would be unleashed if businesses could make decisions based on common sense rather than manipulations of the tax code.
Think of the jobs that would be created if we no longer imposed punishing taxes on working and productive investment, if we eliminated the insane tax subsidies for shifting industrial productivity overseas, and if we eliminated the payroll tax penalties on hiring.
Think of the time, money, and talent that would be freed up if we no longer had to spend countless hours and dollars reporting our personal business to the government. The IRS itself estimates that about 7.75 billion hours of human labor went into completing 2009 tax forms—and that doesn’t include the vast amounts of time and money spent figuring out how to game the system and avoid taxes.
Making the transition
Change this profound couldn’t and shouldn’t happen overnight. We should plan a transition over at least fifteen years, first replacing the most regressive and counterproductive forms of taxation, like payroll taxes, with energy taxes, and then phasing out other forms of taxation while increasing energy taxes. The transition period would give businesses and individuals time to make appropriate plans and investments for the future. The certainty associated with substantial energy taxes would do far more than any other solution being proposed to encourage investment in energy conservation and clean energy.
To minimize the cost, complexity, and impacts of tax collection, energy taxes should be implemented at the wholesale level, at the mine, well, or port of entry. Another technicality that could help ease the transition would be a ratchet mechanism on energy prices. Whenever market forces pushed energy prices up, they would be allowed to rise, but as energy prices declined, energy taxes would rise at a matching rate. This would have the added benefit of discouraging unproductive speculation in energy trading markets.
Change this fundamental would affect every American. Inevitably, the winners and losers will lobby madly to turn a simple idea into the complicated sausage making that is the hallmark of Congress. But if we insist that its simplicity and transparency are critical to its success, perhaps a bold proposition like this could gain enough support to overcome the corrupting influence of lobbyists.
Why tax fossil fuels?
Energy is the lifeblood of a modern economy. The highly concentrated energy available from fossil fuels is a precious resource both for us and for future generations. Unlike metals or other materials that can be readily recycled in a prudent society, once mined and burned, fossil fuels are gone forever. They shouldn’t be squandered but rather husbanded wisely, as higher prices would encourage. Balance of trade deficits, compromised foreign policy, pollution, the cost of military entanglements, and other challenges resulting from our fossil fuel addiction offer clear reasons to focus taxation on fossil fuels. It is far past time to put a fair price on the costs of the traditional energy industry’s “economic externalities.”
Arguably, irreplaceable fossil fuels that have taken millions of years to form should be considered common resources that provide benefits for the common good. Although we begrudgingly accept being forced to pay such taxes today, government funding through the confiscation of the fruits of citizens’ work and investment is actually far less rationally or morally justified.
Finding broad-based consensus
We all need to overcome our fear of sensible change. This proposed tax shift represents a real test for clean-energy advocates, environmentalists, and political liberals, conservatives, and libertarians to all match our rhetoric with good policy solutions. Are conservatives really willing to effectively promote liberty, economic efficiency, and fair free markets? Are liberals able to admit that like so many federal policies they have supported, our convoluted tax system is completely failing to meet their progressive goals? Are libertarians able to admit that there is a role for government and that collecting taxes rationally is better than the corrupt irrational system of taxation we have today? Are environmentalists ready to support policies that are economically sensible? Are clean-energy advocates ready to compete in a fair marketplace rather than begging for government subsidies? Rather than blaming others for our nation’s problems, we all need to focus on finding solutions sensible enough to garner broad support.
Let’s start taxing waste and pollution instead of punishing people for working, creating jobs, and making productive investments.
Let’s try real market-oriented solutions and restore the economic competitiveness our nation enjoyed before every aspect of the economy was micromanaged by the government and manipulated for tax reasons.
Let’s encourage conservation of our limited fossil fuel reserves so we don’t impoverish our children, grandchildren, and planet with our profligate waste.
Let’s fundamentally reform the American economy with a government funding system that doesn’t undermine the most essential ideals and principles of our national heritage.
Let’s support an idea bold enough, simple enough, and compelling enough to actually work.
Another solar manufacturer closes up shop, shedding 800 “green jobs”.
It is indeed tough to compete with Chinese manufacturers, as the news report suggests. What wasn’t made clear is that even in situations like ARRA funded projects requiring solar panels made in America, Evergreen still couldn’t compete. Even with their high prices, Evergreen Solar has never turned a profit. The Boston Globe reports that Evergreen “since its founding in 1994 has run up a deficit of over $685 million.”
Perhaps less government funding would force companies to operate more efficiently and develop a more sustainable business culture.
There’s been some very good people at Evergreen. But perhaps it would be helpful, if along with hiring all the brilliant college professors, scientists and lobbyists, some of these over-hyped green technology firms hired some stars in fields like budgeting, production, procurement, sales, marketing, cost control and other basic business functions.
Just two months ago, another government funded solar company with inflated claims of superior technology shut the doors to one of its plants, facing market reality rather than the sunny rhetoric of government grant applications.
The clean energy sector would be better off it the government got out of the game of picking winners and losers and let at least some level of competitive market forces shape the growth and development of healthy businesses.
In “Get The Energy Sector Off The Dole“, clean energy investor Jeffrey Leonard offers a great way to make renewable energy more competitive, reduce pollution and greenhouse gas emissions, and help restore our economy to some rationality and health with competitive markets.
The title says it all. Leonard suggests ending all direct subsidies, tax advantages, hidden subsidies in special regulatory treatments and other “externalized” subsidies for all energy industries. Its great stuff.
Some choice quotes:
Government statistics show that about 70 percent of all federal energy subsidies goes toward oil, natural gas, and coal. Fifteen percent goes to ethanol, the only renewable source of energy that consistently gets bipartisan support in Congress (think farm lobby and Iowa). Large hydro-power companies—TVA, Bonneville Power, and others—soak up another 10 percent. That leaves the greenest renewables—wind, solar, and geothermal—to subsist on the crumbs that are left.
None of these estimates account for continuing support to the nuclear industry, estimated to be about $1 to $2 billion, much of it to promote research and development efforts on new nuclear technologies and waste disposal methods. There are plenty of hidden subsidies, too. We place a cap on liability for accidents (like the BP oil spill). We offer the nuclear industry large loan guarantees. And, of course, we maintain an immense military embroiled in the Middle East and elsewhere as it tries to secure access to energy resources around the globe………..
We can waste money and distort the market by subsidizing all of these forms of energy. Or we can just call it quits on the waste. Disarm completely. Kill all the subsidies—yours and mine,,,,,,,,,,,.
So we find ourselves in a new political moment when for the first time it is possible to imagine an alliance of GOP libertarians, disaffected environmentalists, and budget hawks coming together for a grand deal that would sweep away sixty years of bad energy policy. Obama should seize the moment to bring this coalition together in support of a single objective: to eliminate all government subsidies and tax credits on production of all primary sources of energy.
I’ve been thinking a lot lately about the price and value of energy. Generally I am a strong believer in the rationality and self correction of markets. But thinking about what we pay for energy in different forms, as measured in dollars per BTU, one sometimes has to wonder about how markets determine value.
In this article at the Oil & Gas Evaluation Report, I ran across a pretty amazing table (below).
The difference of values between natural gas and petroleum is pretty hard to explain on a $/MMBTU basis. Much harder to explain would be the difference in price between fuel and beer. I know at least most beers taste better than fuel ethanol for instance, and the processes for getting that flavor is more complex than simple fermentation. But deep water oil drilling and petroleum refining aren’t cheap or easy either.
The amazing thing about these figures really is how little we play for energy. I wonder how long that can really last.