Skeptonomics

The EU is preparing make even more costly mistakes in its carbon emissions reduction program. Reuters reports that draft legislation will increase offsets to fully a fourth of (paper) reductions. If past experience is a guide, this means that the true cap has just been lifted again, and that billions more euros will be made in profits at the ultimate expense of consumers. (The difference between the increase in revenues companies get by charging more for carbon-intensive products and the cost of manufacturing an offset is the source of rents divvied up by buyers, sellers and financial packagers of offsets.) Will the US legislation we enact next year be equally corrupt and ineffectual?

My fellow Americans,

In the last year the price of energy, and especially gas at the pump, has gone way up. While it has come down a little in recent weeks, it is still much higher than before, and it is squeezing the budgets of families all across the country. This expense is all the more difficult to bear at a time when the economy is sputtering and paychecks are stagnating. People are looking for answers.

What I am going to say today will surprise you – but I will get to that later. First, I want to clear up the issue that everyone is talking about right now, offshore oil drilling. What’s my position on that?

If you listen to the energy experts, they all agree that drilling for more oil off our coasts will have little effect on the prices we pay for gasoline and other energy products. First, it will take many years before exploration uncovers productive oil fields, and more years to build the platforms and transportation systems to bring this oil to the market. So no matter what we do about this issue today, it will not have an effect on today’s prices. But the experts also say that the potential output of these fields, compared with global supply and demand, is simply not enough to move prices more than one or two percent. If we had another Saudi Arabia lying off our coast it would make a big difference, but we don’t. So, while I wish there were a simple decision we could take that would bring immediate and substantial relief to families struggling with energy costs, I don’t think offshore drilling is the answer.

But the issue won’t go away. This is an election year, and the polling companies are working overtime to tell us what the public thinks about every topic. And if we can believe their numbers, a large majority of Americans think that we should give offshore drilling a try anyway, on the principle that if you have a problem you should do everything you can.

We live in a democracy. If a substantial majority favors a policy, and if the policy does no harm, we should respect the will of the people. So, even though I’m not optimistic about what more drilling can do, I’m willing to reverse the ban we’ve had in recent decades.

Democrats in the House and Senate are preparing legislation along these lines. To keep to the requirement of “do no harm”, this legislation will see to it that any offshore oil production adheres to strict environmental standards, so that we don’t have oil spills fouling our beaches — the problem that led to the ban in the first place. We will also have controls on the ability of big oil companies to reap windfall profits from these finds: their oversized profits are part of the problem and cannot be part of the solution. Together, these stipulations will guarantee that a change in policy on offshore drilling, whatever its benefits, will not impose significant costs. If Republicans agree to a careful, responsible shift in regulation we can move forward quickly.

But as I said, whether we drill a little more or a little less will not have much impact on sky-high energy costs. If we are serious about addressing this issue, we must move beyond the debate over drilling and address the underlying causes. That is my real purpose today.

We should begin with a sobering fact: while energy prices will continue to fluctuate unpredictably, in the long run they are headed up, up, up. In part this is because the supply of scarce resources like petroleum is starting to reach its limit. Experts disagree about just when this peak supply will occur, but they agree that the day is not far off. In the meantime, the demand for oil and other energy products is rising quickly in countries like China and India. We are happy to see anyone anywhere move out of poverty and into a more comfortable lifestyle, but we should also recognize that this means they will be able to afford to buy more cars, heat their houses to a more comfortable temperature and in general use more energy. Between a plateau of supply and a rising curve of demand, we are facing a future of scarce and expensive energy.

But there is another side to energy prices. In previous speeches I have talked about the urgent necessity of weaning America from its dependence on oil and other fossil fuels. Avoiding conflict over oil supplies is central to our national security, whether it is about getting drawn into battles in oil-producing countries like Iraq and Iran, or finding a way to end warfare where oil fields and oil pipelines are at stake, as is now the case in the conflict between Russia and Georgia. The less reliant we are on these supplies, the more we can focus on the true threats to our security, like groups that would commit wanton acts of terror against our population. The fixation on oil is distorting our priorities and fomenting violence around the world.

Just as urgent is the demand to prevent catastrophic climate change. Already the concentration of carbon in the earth’s atmosphere is entering the danger zone, and every day our factories, power plants and automobiles are pushing that number up higher and higher. No one knows where the tipping point is, the level of greenhouse gases that can trigger a process of self-reinforcing climate change that we will be powerless to stop. We must drastically reduce our consumption of fossil fuels, and quickly, if we are to keep faith with future generations that will inherit whatever world we leave them. And there is little we can do as a country that would more restore our standing in the world than to shoulder our share of the burden in preserving a liveable planet.

For all these reasons, we have to kick the fossil fuel habit. And this will mean higher prices, much higher than today. So, not only are we unable to repeal the law of supply and demand to bring down these costs, in fact we need higher prices to achieve our core national objectives. What then can we do?

Here is where I will ask you to think outside the box. What I will propose to you today is that the problem is not the price of oil and other energy products as such, but where the money goes. When you pay four dollars or more at the pump for a gallon of gas, your hard-earned money is on its way to a foreign country or a fabulously profitable oil company. It’s gone: you will never see it again.

But suppose we did something different. Instead of paying high prices to far-off governments or oil profiteers, suppose we paid it to ourselves, so that we could actually get it back. This is what I’m going to suggest.

The way to do this is by actually raising the price of oil. You could do it through a tax. The way I’ve proposed, in my climate change plan, is to have a limited number of permits for bringing fossil fuels into the economy, and to make energy companies pay for every one of these permits. Of course, they will pass this cost along to you, the consumer. This is how a market economy works. It will lead to innovation, as businesses and households find new ways to conserve energy. But the bottom-line result is that, to kick the fossil fuel habit, we will be paying a lot more for whatever we continue to use.

Yet here is the key point: the extra cost you will pay will not go to a foreign government or an oil company. It will come right back to you. Specifically, I am proposing to put all of these revenues from higher energy prices into a big pot, and then pay out the money in equal amounts to every American citizen. This is the simplest and fairest solution. I want to be very clear: this money will not be kept by the government. It is yours. I promise, here and before all of you, that at least 95 cents of every dollar collected in selling fossil fuel permits will be given back to the people, quickly, efficiently, fairly. Economists who have studied this idea estimate that the amount each of us would receive would be something like $1000 per year. Any additional public programs for energy research or conservation would be financed out of tax revenues as they are, or more accurately as they should be, today. The extra money you pay for energy would be earmarked, virtually all of it, to return to you.

This plan has many benefits. It will do more for our national security than any other single step we can take. It will restore America’s leadership role in the fight against climate change. It will be an added benefit for the most vulnerable Americans, those who are at the bottom of the economic ladder and use the least energy already: they will get back much more than they pay. But what I want to emphasize is that this is the only meaningful long run solution to the problem of runaway energy costs. Energy costs will rise, and in some respects we even need them to rise. But the problem is that, under the current system, every dollar we pay for energy is a dollar lost. The solution is to change the system so that we get this money back, literally, every one of us. It is the responsibility of government to set up this system and then get out of the way, so that the money can return to the public in the simplest, fairest and most direct manner. On the international front, if we can convince enough other countries to take a similar stand, and I think we can, the overall effect will be to bring down global demand substantially, so that much less of our energy bill ends up in foreign or corporate hands.

Unlike offshore drilling, the proposal I’ve just outlined is not in the news. The pollsters aren’t asking you what your position is on it. But, also unlike offshore drilling, it gets to the heart of the problem. We can’t legislate energy prices down and we shouldn’t try. But we can protect the budgets of our families and our economic health as a nation by turning Americans into recipients of energy money as well as payers of it. So this is my answer to out-of-control energy costs: let’s get this money back. Let’s take control of our energy problems and protect our standard of living at the same time. Let’s have a future in which, when you read headlines about higher energy prices you think, “That’s more money in the bank, for me.” Let’s get the energy money back.

If you want to hear what I have to say about child labor, here’s a link to Against the Grain, a KPFA (Berkeley) radio show that interviewed me today. CS, the show’s host, really does his homework; he’s great at cutting through the distractions and getting to the point. In another life I used to do what he does now (for WORT in Madison) and can appreciate what it takes to do it well.

It’s good to see that Paul Krugman is channeling Marty Weitzman on the urgency of preventing catastrophic climate change. Here is what the Weitzman analysis means for economists.

Weitzman argues forcefully that in the face of extreme risk and great uncertainty, the quest for “optimal” policies is futile. The point is simply to insure against the worst, and that will mean very aggressive programs to stabilize greenhouse gases at a tolerable level. (Bill McKibben wants us to memorize 350 ppm.) It turns out that stopping runaway climate change is at heart an ecological problem, not an economic one.

Meanwhile, a whole industry of economists, financed by clueless foundations, are barking up the wrong tree. They assemble and run dubious CGE models estimating marginal costs and benefits, as if anyone in a position to make decisions really cared. In fact, not only is there no reason to believe this line of research has anything to offer, there is no evidence that the advice of economists, even heavy hitters like Nordhaus, have or will have any effect on the main policy parameters, like carbon targets and timetables.

So what should we do with all the economists freed from the quest for the true dollar value of a ton of carbon? Put them to work anticipating the impact of an impending carbon cap and coming up with measures to adapt as painlessly as possible. What regions and industries will be most affected? What policies can smooth their transitions? How much of the capital stock will be written off before amortization and with what affect on employment and the financial system? What are the most cost-effective ways to increase the elasticity of demand for carbon-intensive goods? That is, how can we foster substitutes, fast?

Why are hundreds of economists laboring night and day to answer questions no one with any sense asks any more, while the critical issues of economic adaptation are almost completely ignored? Why are we about to walk blindly into a carbon-constrained world?

That’s the economic wisdom behind an op-ed piece in today’s NYT by Victor Davis Hanson, a former classics professor and current columnist for the National Review (where he extolled the “humane treatment” of Guantanamo inmates in a recent offering). Far be it from me to defend the current level and especially pattern of subsidies, which go largely to the wrong people for growing the wrong things in the wrong way, but I’d love to see the economic model that shows how agricultural subsidies lower food output in a hungry world.