Friday, July 17, 2009

Palin's Energy Proposal

Recently former candidate for Vice President of the United States and soon to be former Governor of Alaska wrote in the Washington Post that current President Obama's a cap and trade energy program (reprinted in the Daily Iowan) is not the solution to our energy problems. While some have taken current Governor Palin to task for reversing her position on energy policy as she stated while running for Vice President, that to me is the lesser of the problems with this position. See segment from the Rachel Maddow show below.

I am much more concerned about the implications that arises from this new direction of energy policy. In my opinion energy economics has one major question, and that is whether consuming fossil fuels leads to negative externalities or not.

Notice, I am not really all that concerned about the domestic vs. foreign question, since most of this argument seems to be a front for protectionism or the banner standard for those that buy into a mis-guided view that we as American's can continue to "have our cake and eat it too". I am also not really addressing whether consuming fossil fuels is a significant contributor to global warming or not. I will rely on the atmospheric physicists and others in the scientific community that have in large part agreed that the planet is warming and burning fossil fuels is a large part of that increase.

So let's look at how the externality question leads to differing energy policy proposals. If one believes that drilling oil and natural gas, or mining oil from sand pits and mining coal or generating nuclear energy does not lead to: global warming, increased air and water pollution such as acid rain caused by sulfur dioxide released in the air from burning coal to generate electricity, and decreased health - especially for student in schools near industrial plants such as refineries, (check on your school here) and other external costs then Governor Palin's proposal makes a great deal of economic sense, since the unfettered market is more efficient than a cap and trade policy.

Unfortunately, extracting, transporting and refining many fossil fuels do result in negative externalities; and here is where I think Governor Palin's proposal takes us in the wrong direction. Given that we agree that producing and consuming energy generated by fossil fuels leads to negative externalities, the issue is how do we as a society take into account these external costs, such as increased health problems to school children living near petroleum refineries? Here is a short video about health problems caused by industrial pollution.

Well, as I see it, we now have four general solutions. One is to regulate these industries that produce negative externalities. The big advantage of regulation is that the amount of pollution would be set, and with monitoring, we can end up with an acceptable level of pollution. The cost to meet the regulation will be very high relative to other options. I would agree that regulation is the right course of action for pollutants that are lethal or in which the marginal benefits of allowing in our environment are less than the marginal costs.

A second is taxation. Using acid rain as an example, we could tax the pollutant - sulfur dioxide - (which would be best - and difficult to implement) or tax the input (coal), or tax the output (electricity) which is also known as a Pigouvian tax, or tax products that use the output (such as electric cars). The benefit of taxation is that it tends to be less costly than regulation, and the problem is that we will not know the amount of pollution that it emitted to the environment with a great deal of certainty.

The third solution is to create a cap and trade program that combines the best features of regulation and taxation. As an economist, the thing I really like about a cap and trade program is that it is lower in cost than the other two. Not all economists agree that a cap and trade is better than taxation, especially for gasoline. What a cap and trade energy policy does is that the government (EPA) sets a maximum amount that can be polluted (similar to a regulation) and offers firms permits that are tied to a specific amount of pollution. Then a market is created in which firms can buy or sell permits, depending on whether they are polluting more or less. What a cap and trade program does is that it gives firms an incentive to reduce polluting, since reducing polluting now reduces that firms costs, where under regulation there is no economic incentive and under a tax the firm cannot benefit from selling reduced pollution. A cap and trade program has been a politically difficult policy to get passed, as outlined in this New York Time article; but change is coming nearly fifty years after it was first proposed.

The final one seems to be Governor Palin's approach, which is to ignore the whole externatity question altogether, and just allow energy firms to produce energy.

What do you think?

1 comment:

Mike said...

If we're talking about externalities we cannot leave out the effect of not drilling and utilitzing our energy resources on our foreign and economic policy. There is also a 5th solution that makes a heck of lot more sense to me than bankrupting our economy to save the climate: tax incentives.