EU Energy Policy Blog

The key to an effective energy policy is to understand that climate stability and energy security are twin challenges—though not identical. As discussed below, both challenges are global and suffer from the “free-rider” problem.

[...] Unfortunately, those interested in one challenge generally have little interest in—and sometimes have antagonism towards—the other. My position is that the two challenges are not only compatible, but that solving either requires solving both.

Twin global challenges. Global warming requires a global solution, but [...] energy security also requires a global solution. In 1974, the United States recognized the need for a global response to OPEC, and Secretary of State Henry Kissinger organized what the New York Times called “A counter-cartel of the major oil-consuming countries.” That organization, the International Energy Agency (IEA), still exists and includes 27 countries. But it has forgotten its original purpose.

In 1979, after OPEC doubled oil prices again, the seven industrialized nations held a “world economic summit.” They issued a communiqué, which the New York Times again said “amounts to a consumers’ cartel.” This effort also fell apart; nevertheless, the global response to high oil prices eventually did crush OPEC—but not for good.
Now [...] people think the United States can achieve energy security on its own. But, even if Americans cut oil imports to zero—say by driving hybrid cars that drink ethanol—we would not achieve independence. The price paid at the pump for American corn ethanol would still be controlled by the global oil market—just as that market now controls the price of ethanol. Of course we will not cut oil imports to zero for decades, and independence will remain a doubly global problem. Imported oil will be insecure and domestic fuels will be subject to global price shocks.

So America faces twin global challenges, climate stability and energy security. Both are dangerous. OPEC’s market share is rising again as it did before 1973, and OPEC is again short on production capacity. China and India are rapidly expanding their demand for oil. Greenhouse gases are increasing faster than ever and China has passed the United States and is the largest emitter of CO2. No one country, not even America, can meet either challenge on its own.

By curbing our use of oil we could force down its price on the world market. This makes some sense, but the job is much harder if we go it alone. First, any price decrease we cause will benefit all consumers worldwide. Second, those other consumers will take advantage of the lower price to use more oil—partly counteracting our effort to reduce oil use and the price of oil.

Climate change presents a parallel problem. No country, acting alone, can do much to stop climate change. Any country that tries will find that most of the benefit accrues to other countries. The more we do to reduce global warming on our own, the less others will worry about global warming, and the less they are likely to do.

Economists call these problems free-rider problems, because when someone helps out, others take advantage and go for a free ride. Both challenges are global in nature, both require global solutions, and both are plagued by the free-rider problem. They are not identical twins, but they have much in common besides an addiction to oil.

Although the twin challenges are closely related, some proposed solutions that help with one challenge conflict with the other. Joint solutions, however, help with both challenges. One proposed solution for energy independence conflicts with climate change most intensely. Unfortunately it is the favorite of Big Oil and Big Coal.

Coal companies like the idea of making gasoline from coal for obvious reasons—it takes a lot of coal. But oil companies are just as enthusiastic because they would build and operate the coal refineries. The problem is, these refineries use far more fossil energy than oil refineries, which is terrible from a global-warming perspective.
Fortunately, conservation, the main activity that crushed OPEC in the early 1980s, is an ideal solution for both challenges. In fact, conservation is also much better for energy security than producing gasoline from coal. Of course, the oil companies hate conservation—shorthand for not using their product. Gasoline made from coal keeps us addicted and keeps us paying prices that are determined by the world oil market. Conservation helps break the habit.

The chance of achieving a sound energy policy is now better than ever, because we have a double motivation. OPEC is again breathing down our necks, and climate change has become the number one national concern on the ecology front. But there are two camps in America, with relatively little overlap. One sees the problem of energy security and the other sees the problem of climate stability. If one camp adopts a policy that conflicts with the goal of the other camp, the double motivation will provide no benefit, and the two camps could cancel each other out.

On the other hand, adopting a cooperative strategy could produce a complementary alliance between the two groups. The ecology camp could provide the staying power and the link to popular international concern about energy issues that the energy security camp is lacking. The energy security camp could provide the motivation that comes from the short-term tangible gain that is possible in the oil market. It took only about six years to bring about a huge reduction in world oil prices after OPEC doubled oil prices in 1979-80. It will take much longer to have any impact on climate change. [...]

Steve Stoft

These are excerpts from the introduction (Chapter 1) of my forthcoming book Carbonomics. You can read and download the entire chapter at http://stoft.com/p/carbonomics.html

This entry was posted on Sunday, December 31st, 2006 at 9:06 am and is filed under Carbonomics, Energy Policy, English. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.