In his speech on Tuesday night, President Obama called for the country to move towards more renewable sources of energy and for limiting our dependence on oil. That call has a “Groundhog Day” quality to it, as every president since Richard Nixon has essentially made the same plea, and the same promise to do something about it. However, ever since the days of Nixon, our use of oil, and particularly imported oil, has done nothing but go up.
The simple fact is that we use carbon-based fuels because they are the cheapest form of energy around. Cheap if you only count the direct costs of extraction and getting the energy to the consumer. There are, however, vast costs that are not captured in the price. The recent and ongoing BP (BP) oil spill disaster in the Gulf of Mexico is simply one aspect of it.
The gains from drilling for oil in deepwater go mostly to the companies that drill for it, and indirectly to consumers of the fuel. The costs are largely borne by the wider society. The recent agreement by BP to put $20 billion in escrow to cover the costs of those who have been harmed by the spill are a good first step, but that only applies to this one aspect of the high costs of depending on oil (and coal and natural gas) for most of our energy needs.
Of the three fossil fuels, natural gas is by far the least harmful. It is also abundant and domestic. It is an excellent fuel to use as a bridge to a more renewable-based future.
There is also the cost of air pollution, the lives lost in mining for coal, either quickly and dramatically as in the Massey Energy (MEE) disaster early this spring, and from the far larger number who die each year from black lung disease.
There is also the issue of global warming. While some may disagree, I think the evidence that Man caused global warming is pretty overwhelming. If what the overwhelming majority of climate scientists say is correct, the costs of global warming will dwarf the costs of the Gulf oil spill.
Even if you think that there is no guarantee that global warming will occur, given the scale of the damage that happen if it does, isn’t some insurance called for? After all, I am far from sure that my house will burn down this year, but I still have homeowners insurance.
The consequences of the planet figuratively burning are far more serious than the consequences of my house burning. The glaciers are accelerating on Greenland, and if they were to all melt, the sea level would rise by 21 feet. Goodbye New York, goodbye London, goodbye Amsterdam, goodbye all of South Florida, good bye the entire country of Bangladesh. Yeah, as bad as the disaster in the Gulf is, global warming could make it seem pretty darned insignificant by comparison.
$1 Billion per Day on Oil Imports
Of course, we only get a tiny fraction of the oil we use from the Gulf of Mexico. We spend about $1 billion a day importing oil. Our oil habit is responsible for half of our trade deficit. The trade deficit is slowly but surely bankrupting the country. Many of those funds end up going eventually to those who wish to destroy our nation. A huge portion of the Pentagon budget is dedicated to protecting the oil supplies of the Middle East and the sea lanes to them.
Clearly past approaches to reducing our dependence on oil have not worked. The reason is that we have not really been serious about doing so. One of the cardinal rules of economics is that if you tax something you get less of it, and if you subsidize something you get more of it. Does the price of a gallon of gasoline reflect the part of the Pentagon budget that goes to protect the oil supply? No. Does it reflect the cost of people who get asthma from poor air quality? No. The taxes on gasoline do not even cover the full cost of keeping up the roads that people drive on.
In effect, we subsidize consumption of gasoline. Is it a surprise that we still use a lot of it?
A Price on Carbon Emissions
If we are going to be serious about moving away from fossil fuels, we need to put a price on carbon emissions. Since coal has the highest carbon content per BTU, it would face the heaviest burden. Oil has significantly less carbon per BTU than does coal, but far more than natural gas.
Essentially there are only two ways of putting a price on carbon. One is a direct tax, and the other is a cap and trade system. Cap and trade was first used under the first President Bush to reduce Sulfur emissions that were responsible for acid rain. It has been a resounding success, and acid rain is no longer a serious environmental threat in this country (it still is in places like China and India). The cost of reducing the amount of sulfur in the atmosphere proved to be far less than any of the estimates of its cost made at the time.
Once a price is put on carbon emissions, entrepreneurial activity will increase dramatically to help bring our overall energy consumption down and to develop new sources of energy that don’t emit carbon. With the implicit subsidy to carbon based fuels removed, other sources of energy will become more cost effective. That is using current technology, but the technology of alternative energy sources will continue to improve.
Personally, I would favor the more direct carbon tax approach. It is more straightforward than placing a limit on overall carbon emissions and then having companies bid on the right to have a share of the overall total. It also avoids the political gamesmanship of having some industries get some of the permits for free, while others have to bid on them in the open market. That smacks too much of the government trying to pick winners, or as is more likely the case, protect the interests of existing powerful industries.
Another approach would be to put a tariff on imported oil, although that would simply encourage the oil industry to drain America first, and would probably lead to higher consumption of coal.
Economically, a cap and trade system where all permits have to be bid for is really indistinguishable from a carbon tax, it is just a lot harder to administer. The bill the House passed a year ago is based on a cap and trade approach. It has been stalled in the Senate in the face of united GOP opposition, joined by several Democratic senators from coal states.
Are these senators arguing that the cap and trade system should instead be replaced with a carbon tax? No. Their plan is to do nothing at all. Oh sure, some of them will be in favor of this pilot program or that, or a change in regulations that will cause us to be more energy efficient, but that is essentially a continuation of the absolutely impotent approach that we have had for the last 37 years when we got our first wake up call.
Carbon Tax Would Raise Much Needed Revenues
A carbon tax, or a fully bid cap and trade system would raise a lot of revenue, and that revenue would come from the private sector. The argument is made that in a very slow economy like we have now, this is not the time to raise taxes. That is a fair enough criticism.
The answer would be to offset the tax revenue raised by a price on carbon with tax cuts elsewhere. I think a very good candidate would be the employer side of the payroll tax. That would make it much more attractive for employers to hire people and get people back to work. Again, remember if you tax something you get less of it. Does it make any sense to be taxing employment and not be taxing carbon emissions? No.
Another thing that could be done would be a doubling or a tripling of the standard exemption and lowering everyone’s income taxes, and for the vast majority making their taxes much simpler to figure out. There are lots of good ways we could return the money to the economy through lower taxes.
No Other Practical Solutions
Essentially anyone who says they are concerned about our energy use, but who does not support either a carbon tax or a robust cap and trade system is simply not being honest with you. Raising the price of energy consumption, particularly carbon based energy consumption, is the only thing that will be effective in bringing carbon based energy consumption down.
Therefore, those who are opposing the cap and trade system (without arguing for going the more direct carbon tax approach) is really saying that they are in favor of slowly (or not so slowly) bankrupting the country by sending a $1 billion a day overseas. Even if a large amount of that money eventually finds its way into the hands of al-Qaeda.
They are in favor of spending vast amounts of blood and treasure to defend the sources of oil and the trade routes to bring it here. They are in favor of having to drill in ever more difficult and dangerous locations to get more oil, and thus risk future oil spills like the one in the Gulf.
While it may sound like hyperbole, it really isn’t. Either you favor putting a price on carbon, or you are in favor of keeping the status quo on energy. The status quo on energy involves all of those nasty things.
If people really care about the future of the country and of the world, they will favor putting a price on carbon emissions. It really is that simple. Everything else is just tinkering at the edges and is not going to make a real difference, although some things like higher fuel economy standards would be helpful at the margin.
President Obama has already done more on moving us towards a new energy economy than any president since Carter. However, it has mostly been in the “tinkering around the edges” area. What he has done has been useful, particularly increasing investment in clean energy research, but it they have just been baby steps in the right direction.
A price on carbon emissions would, however, render such command and control methods superfluous. If the price of a gallon of gas were high enough, people would start to buy more fuel efficient cars, and the automakers would rush to build ever more efficient vehicles. If there were a significant price on carbon, you would not have to tell utility executives not to build new coal fired plants and build wind farms instead — they would do so because it would be in the clear self interest of their shareholders.
It is time for the country to get serious, and not just fall back on the same rhetoric and policies that have been an abject failure since the days of Tricky Dick.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
