REJECTING THE GOSPEL OF THE TOOTH FAIRY By Gar Lipow
Few pundits can refuse the temptation to hurt you for your own good. "It is time to embrace pain" they will say. "Pain is our friend. From pain comes great and enduring good – or at least a shiny quarter under your pillow tomorrow morning".
The current version of this, as oil prices head upwards towards $80 dollars per barrel, is the call for gasoline or other carbon taxes to make driving (and other fossil fuel use) more expensive. See any standard environmental economics textbook, or recent tooth-fairy wannabes Brad DeLong, Mark Kleiman, Jacob Weisberg, and Max.
And why not; after all, as I've pointed out in previous posts we have sources that are only a bit more expensive than fossil fuels; and efficiency measures substantially cheaper. Raise the prices; make all us energy hogs and gas guzzlers pay attention.
The problem is that neither U.S nor world fossil fuel consumption is primarily a matter of individual choice; people with money and power determined what infrastructure would be built where, what capital investments would be made where. In response to a gas tax most people do not have a choice of driving a great deal less; unlike D.C., most cities don't have significant rail. Public transit for most people means commuter and city buses – which average fewer passenger miles per gallon than automobiles[1].
Perhaps the U.S. should reverse the suburbanization of the nation? That would make sense in the long run, since cities subsidize suburban sprawl. But population distribution based on suburban homes receiving low interest loans, cheap water, sewers, electric utilities and roads at the expense of cities over the course of more than half a century will not reverse itself quickly. Begin the slow process of reviving cities; but don't wait for it to complete to get us off of fossil fuels.
In the macro-economic sense, the problem with energy or carbon taxes is that energy has a low long term demand elasticity[2]. (A very large increase in energy prices result in very low decreases in demand.) Note that elasticity for individual fuels tends to be higher – though still weaker than we'd like[3].
Long term inelasticity applies most strongly to energy demand as a whole, because people tend to replace energy sources with other energy sources – even when efficiency increases would deliver the same goods or services less expensively. For example it is not unknown for people to switch from electric to natural gas space heating, without first upgrading attic insulation. Neglecting this not only means they burn more gas, but have to buy a larger, more expensive gas boiler to heat their home.
Thus, efficiency tends to be neglected in favor of more expensive alternatives in response to energy price rises. This is bad news, because carbon neutral energy sources tend – on average – to be more expensive than carbon emitting ones[4]. Without efficiency the percent of GDP devoted to energy will rise; more money spent on energy (which is a means towards what we want, not an end), means less available for everything else. Claims that efficiency improvements in the U.S. won't result in absolute savings are both irrelevant and wrong [5].
To overcome energy demand inelasticity in response to price increase, the standard economic response is to advocate greater price increases. After all, if you raise the prices high enough consumption will drop. The problem with this is you have to raise prices by a great deal more than you need people to spend to reduce consumption.
Take the case of attic insulation again. In my home state of Washington, the optimum amount of attic insulation is ~R50. With R20 insulation or less upgrading to this will pay itself back in four years or fewer. (In new homes of course the payback is even faster.) However regulations only require R38. Almost every new home built is at the R38 level. Even when existing homes upgrade from R20 or below, they typically choose R38. (That is because insulation contractors know that competitors will quote R38, and don't want to be the high bidder.) A price rise sufficient to motivate homeowners to demand R50 in new homes, and to let contractors risk bidding higher insulation levels would cost consumers much more than including an R50 insulation requirement in a comprehensive set of efficiency regulation.
In short, contrary to the "command and control" libel about how regulation is always the worst solution, strong efficiency regulations would actually improve home efficiency faster and at a lower cost than carbon taxes on heating fuel. If the CAFÉ standards had not been stalled early after their passage – with increases in standards, plugging of the SUV and other loopholes, and even basic enforcement all blocked by Congress - fleet efficiency would average 40 MPG today. Most cars would probably already be hybrids – which would have made it comparatively easy to upgrade them to plug-in hybrids, and double their effective mileage.
Similarly public works could play a huge role in increasing energy efficiency. Ultra-light electric trains save even more energy than electric cars. Many people would be happy to either give up cars altogether or use them less – if they had a reasonable alternative that (unlike our current public transit system) did not double travel time[6].
One answer to this might be automated ultra-light system such as Cybertran (http://www.cybertran.com/)– far less expensive both to build and run than normal light rail, suited for comparatively low density suburbs because of their low station costs, and 24 hour service availability. And as mentioned in a previous post, heavy rail transports freight at a far lower energy cost than heavy trucks. All these types of public works and more could be brought together in something along the lines of what the Apollo Alliance proposes – but on steroids.
Instead of spending 30 billion a year reducing oil use over the course of ten years (as the Apollo Alliance suggests), we should spend around 150 billion a year over the course of 30 years completely phasing out fossil fuels. Aside from trains, such spending could finance the full insulation, weather sealing, window improvement, and installation of solar space and water heating equipment in every home in the U.S. It could jump start true mass scale solar cell and electric car manufacture. That is a lot of money; but it is less than a third of our current military budget, and a lot less than various tax giveaways we have made to the very rich from the time Nixon was elected forward. Bill Gates might have to pay a little more in taxes, but if that is what is required for the good of this nation, I'm willing to make that sacrifice.
This does not mean that there is no role for carbon taxes.
The key here is at beginning you want to drive capital investment in efficiency –something green taxes don't do well. As public transit gets built, and residential, industrial and commercial efficiency improve you can gradually phase in carbon taxes – directing the money into helping to fund renewable improvements. But it is important to do these things in the right order; provide the incentives to use alternatives after you provide the alternatives.
A good way to phase in such taxes, aside from phasing them in slowly as infrastructure improves, is to tax fuels in the appropriate order. Tax coal first, because that is the most carbon intensive source – also the most plentiful, unlikely to see natural spikes the way we do with oil and gas. Tax oil secondly, and natural gas last. (In all cases allow credits for user who remove and sequester the carbon from fossil fuel burning; but don't allow offset elsewhere – especially from carbon plantations. We don't really know what net carbon sequestration by plants is after cultivation emissions, and after plant methane releases.)
Note that my object to green taxes as the primary means of change is not distributional justice but effectiveness. Steering green taxes towards subsidizing efficiency and green sources is at minimum distributionally neutral, probably even mildly progressive. Besides, regulation imposed costs have exactly the same distributional problem taxation does. It is simply that regulations and public works funded out of general taxation will impose a lower cost on the economy than green taxes alone will.
Lastly I'll point out that neither regulation nor green taxes will be fully effective on the national level. If it is expensive for the local steel plant to burn coal, and coal remains cheap in other nations, they will simply move their plant. Companies will import carbon intensive components and keep their own emissions clean. One solution, in violation of the WTO as it tends to currently interpret treaties, would be to tax goods (domestic and imported) based on full life cycle carbon emissions. Note that public works which compete with carbon intensive imports will also violate the WTO. In short the WTO, as it currently exists, is a major obstacle to reducing carbon emissions.
This leads to the politics of global warming and phasing out fossil fuels. As you can see from this far from comprehensive blog post, the scope of what needs to be done politically is enormous. It is too big to be won by the environmental movement, or by a movement led by environmentalists. While I don't agree with everything in the Death of Environmentalism argument, the key point of this essay was 100% correct. The environmental agenda can only flourish in the context of a larger left victory. The old Green slogan of "Neither right nor left but forward" never did make sense.
Environmentalists need to become part of a larger progressive movement, help to advance a general agenda of liberty, equality and solidarity – demanding support from other left groups and offering it in turn. And in that context we have a lot to offer. To start with environmental groups still have a fair number of boots on the ground. And as to issues…. You want good jobs at good wages? Boy, have we got a public works program for you. You want to undermine the market worship which sabotages the fight for health care and educational reform? Oy, have we got a market failure for you.
Two last points outside the main post:
A) I want to second Max on "Energy Independence" and say it louder. "Independence" in the modern world is impossible. If we phase out fossil fuels in the U.S. we will still be "dependent" on other imports – Vanadium for flow batteries, catalytic metals for fuel cells, something. Just because it is often misused does not mean "comparative advantage" is without merit. Thirty years from now, even if we have the natural resources to do everything ourselves, somebody somewhere will be able to do some things for us better than we can for ourselves; hopefully we won't completely piss away our economy and will still be able to return the favor.
Politically "energy independence" is dishonest wicked pandering to the far right zeitgeist for short term political gain. No doubt it polls higher than any other way to frame the argument for renewables (or nuclear energy or coal). "Those big bad foreigners lured us with their seductive foreign oil. They made us overthrow them, starve them, bomb them, invade them, occupy them. Their poison contaminated our precious bodily fluids."
B) The answer to the peak oil question is nobody knows, but it doesn't matter. Nobody sane doubts that peak oil will happen someday. The current crop of theorists who think they know when it will happen/ has happened may be right, though I doubt it is as certain as they imply. However we need to reduce fossil fuels by significant percent every year for the next thirty years – at a faster rate than most supply curves drawn by Hubbert bunch. If we do the right thing about global warming, that will solve the peak oil crisis - if it exists.
Endnotes
1 Stacey C. Davis and Susan W. Diegel, TRANSPORTATION ENERGY DATA BOOK: - Edition 22, ORNL-6967 (Edition 22 of ORNL-5198). Sep 2002. Center for Transportation Analysis Science and Technology Division of the Oak Ridge National Laboratory for the U.S. DOE, 23/Sep/2005; Table 2.11 Passenger Travel and Energy Use in the United States, 2000
2 Dermot Gately and Hillard G. Huntington RR#: 2001-01:The Asymmetric Effects of Changes in Price and Income on Energy and Oil Demand Economic Research Reports; January 2001 p23. Tables 6 & 7.
3 Though not zero. A ten percent increase in oil prices does not reduce demand by 10%. Also the very high elasticity for oil (-.6) given is based on the fact that once someone gets off a fuel they tend to stay off; reductions are "sticky". In short, if you switch to coal because of an oil shock, you are not likely to switch back to oil when prices fall, because you no longer trust oil as reliable source. However, if you look at elasticity in terms of what it takes to make the switch in the first place it will probably be around -0.4, meaning that a fifty percent price rise is likely to only result in a 20% drop in usage.
4 A certain percent of carbon neutral supply (as opposed to demand reduction) may be provided at prices comparable to fossil fuels – for example 65% of space and hot water heating, wind electricity, and fuel from waste. But to provide three quarters or more of power from carbon neutral sources you have to move beyond these to things like storage of heat or electricity, and deliberate cultivation of crops to produce fuel. (Nuclear electricity as documented previously is included in the "more expensive" list. )
5 Note that even in cases where "bounceback" prevents absolute reductions, efficiency improvements are essential to avoid a recession as we switch to more expensive sources. But the idea that reducing the energy inputs to goods and services will reduce their cost to such an extent that we make up the reductions by driving more and buying more stuff mostly does not apply in rich nations. If we multiply auto efficiency three to eight times, should we really expect drivers in rich nations to travel three to eight times further to get to their jobs? That would not leave much time to actually work. Given insulation and solar heat, maybe we will turn thermostats up a bit, but as a German study showed, we will still save 80% or more of climate control and water heating costs
Jürgen Schnieders, CEPHEUS - Measurement Results from More Than 100 Dwelling Units in Passive Houses. May 2003. Passive House Institute, 23/Dec/2003.
The 80% saving is documented on the first pdf extract page (page 341 of the printed document).
That thermostats were turned up, but 80% savings still resulted can be seen on page 8 of the pdf extract (348 of the printed document).
Where a real "bounceback" is likely is in poor nations. China, in spite of tremendous market power, is still extremely poor on a per-capita basis and wants to change this. This by the way, is what is wrong with the "live and be happy with less" trope. Whatever arguments you make about the rich nations, the poor nations are poor on a per capita basis. Cuba, in spite of being a dictatorship, is an example of how a poor nation can divide that poverty more or less evenly to prevent it becoming absolute – so that people get enough to eat, a decent education, decent health care. But you will note that this poverty is a result of embargo, not voluntary choice, and that everyone in Cuba from Castro on down is trying hard to make Cuba a richer nation. Cubans don't even get the increased leisure time Tom Walker often talks about as an ideal on this blog; increased travel time via an under-funded transit system, and queuing for scare goods take up time saved by working fewer paid hours than in the U.S.
In poor nations, unlike rich ones, energy was a major limiting factor on growth even at pre-Bush era prices. For the poor nations to squeeze more GDP out of a unit of energy, and thus be able to afford to increase both the amount of energy used, and GDP produce is desirable so long as that new energy is carbon neutral – something the savings from greater efficiency will make possible.
6 For example, Manhattan with one of the nations worst traffic and parking, and access to Americas best mass transit systems has an automobile ownership rate less than one fourth the national average
Manhattan Car ownership rate: Parsons Brinckerhoff Quade & Douglas; Cambridge Systematics, Inc.;NuStats International, RT-HIS Regional Travel -Household Interview Survey GENERAL FINAL REPORT. Feb 2000. New York Metropolitan Transportation Council (NYMTC); North Jersey Transportation Planning Authority (NJTPA), 24/Feb/2004. p83. Table 51
National car ownership rate at around the same time: Stacey C. Davis and Susan W. Diegel, TRANSPORTATION ENERGY DATA BOOK: - Edition 23, ORNL-6970 (Edition 23 of ORNL-5198). October 2003,. Oak Ridge National Laboratory for the U.S. Department of Energy Office of Planning, Budget Formulation and Analysis Energy Efficiency and Renewable Energy, 24/Feb/2003;page 8-6; Table 8.5: Demographic Statistics from the 1969, 1977, 1983, 1990, 1995 NPTS and 2001 NHTS