The energy system that fuels our 20th century economy exemplifies such progress through partnership. Most of this system is built upon innovations of the 19th century, when coal was industrialized and oil commercialized, electricity was harnessed, and the automobile invented. From wildcat drillers to John D. Rockefeller to oil companies today, savvy deals, roughneck work, public subsidies--and sometimes military might--have pumped petroleum from wells worldwide to neighborhood gas stations. Government investments in roads and transit then enabled us to get to work and school, shop and visit family and friends, and convey goods to and from market. Thomas Edison's inventions were connected to public and private investments in power plants and power lines. From city to farm and from home to factory, Americans benefit from reliable electricity plus the appliances and machinery it powers, providing light in the night and air-conditioning in the summer.
Today's energy systems did not arise just through the hidden hand of market forces, though markets have played an important role. They are as much a product of strategic visions, wherein private investments melded with government incentives and policies to create the complex networks and industries that dominate the energy scene. Public policy guidelines were developed to ensure that benefits are broadly shared, to minimize the side effects of energy production and use, and to prevent undue harm. Such is the case with a fuel and power supply system now dominated by fossil sources.
Three concerns--our environment, our economy, and our security--compel us to rethink U.S. energy strategy.
Burning fossil fuels harms our health and damages the planet. Oil and coal combustion in particular contribute to smog and acid rain, and are the largest source of sooty fine particles that lodge in our lungs and shorten the lives of tens of thousands of Americans each year.
Fossil fuel consumption is also the chief source of the pollutants that are disrupting the earth's climate. Carbon dioxide (CO2) is the inherent by-product of burning coal, oil, and (to a lesser extent) natural gas. As a result, concentrations of this gas have increased by 30 percent since the industrial revolution, and scientists have concluded that a human influence on global climate is already discernible. Continued buildup of carbon dioxide and other greenhouse gases threatens human health and well-being with many adverse consequences, including increased spread of infectious diseases, more frequent and severe heat waves, storms, droughts, and floods, rising sea levels and coastal inundation, and damage to ecosystems, risking serious social and economic disruptions.
Governments from around the world are currently negotiating an agreement to set binding limits on emissions of CO2 and other greenhouse gases. These talks are scheduled to conclude in December 1997, at the Kyoto Climate Summit. As the world's largest contributor to global warming, the United States must take the lead in forging an international agreement that will put the world on track toward achieving the goal of the Rio Climate Treaty--preventing dangerous climate change. Because natural processes are very slow to remove excess CO2 from the atmosphere, a commitment to substantial, timely, and continuous emissions reductions is essential. This study provides an independent analysis of policies that can reduce U.S. greenhouse gas emissions over the coming decades in order to help inform policy makers and the public in evaluating the wide variety of proposals that are on the table.
In addition to causing environmental damage, America's use of fossil fuels is costly. Our national energy bill amounts to over $500 billion per year, or more than $5400 per household (all costs are given in constant 1993 dollars). Too much of this bill is paid to foreign corporations and governments; little trickles back to provide jobs in our communities. The net energy import bill last year was $56 billion, almost all of which was for oil. Energy waste and over-reliance on fossil resources now past their prime imply economic inefficiency, with lost opportunities for higher employment as well as inequitable distributions of income and wealth.
Moreover, the economic and security risks--particularly of oil dependence--are very real. Oil price shocks have already provoked two major recessions. Since the time of the first oil crisis, the monopoly cartel nature of the oil market has cost the U.S. economy over $4 trillion, nearly equal to a year's worth of economic income. With our oil import share now at nearly 50 percent and rising, and with burgeoning demand in Asia and elsewhere around the world, a continued failure to enact prudent energy policies places our nation at an ever greater risk of future economic crises and perhaps military conflict over oil.
Thus, the 19th century contrivances that seemed to serve our parents and grandparents so well are causing problems for us today. Without a new direction our children and grandchildren will be less prosperous, healthy, and secure than they can and should be. The fact is, the way we use energy today is not sustainable. Now is the time to choose a new path, marrying private innovation with public leadership to invest in new ways of producing and using energy.
The Energy Innovations study analyzes a balanced national strategy that can put the United States on an innovative, prosperous path leading to an economically and environmentally sustainable energy future. This Innovation Path is marked by a set of programs and policies that would guide our economy toward lower cost, less polluting, more secure, and more sustainable ways of producing and using energy. The approach involves setting fair performance standards, creating incentives, providing better information, and reducing transaction costs in order to foster investments in clean and efficient technologies. Policy packages tailored to each economic sector would provide the push to get us onto the Innovation Path.
The policy set on which this report's results are based does not include an economy-wide carbon tax or energy tax. Rather, sector-specific market mechanisms would guide consumer and business decisions toward greater efficiency. Examples include an electric generation emissions allowance and tradable permit system; a revenue-neutral industrial investment tax credit, which can offset increases in energy costs by reductions in the cost of capital; and transportation pricing reforms such as pay-as-you-drive insurance, which would shift a portion of auto insurance premiums to a cost that varies with miles driven. Each such policy reallocates costs in order to motivate higher energy efficiency and lower emissions while avoiding a net increase of taxes or fees within the sector.
KEY ENERGY INNOVATIONS POLICY APPROACHES
Renewables Content Standards. These provisions would require an increasing percentage of electricity and motor fuels to come from renewable resources, such as wind, biomass, geo-thermal, and solar. The standards would be implemented through a credit-trading market mechanism that allows each producer flexibility to meet the standard or buy credits from another source that has a higher renewables content than required.
Emissions Performance Allowances. These provisions would establish a level playing field for competition in the electricity market by establishing appropriate caps on emissions of sulfur dioxide, nitrogen oxides, and carbon dioxide, with emission allowances allocated to generators in proportion to their electrical output. Flexibility is provided with an emissions credit trading system similar to that for renewables content.
Advanced Vehicles Initiative. This initiative includes a balanced set of programs, anchored with stronger fuel economy and emissions standards, to move advanced clean and efficient vehicle designs into the showrooms and onto the road.Standards would be backed by rebates on efficient vehicles paid for by fees on gas guzzlers, plus market introduction programs and technology research and development.
Investment Tax Credit. This incentive would speed up the process of modernizing the industrial capital stock by providing a 10 percent tax credit for investments in new manufacturing equipment, paid for by fees on purchased energy. Fees collected would be rebated to firms, so the system would be revenue neutral, while encouraging investment in new efficient production equipment that would increase productivity while reducing energy consumption and pollution.
Market Introduction Incentives. Technology demonstrations would be combined with manufacture incentives, consumer education, and market innovations to reduce transaction costs, lowering a key hurdle between potential and realized energy savings by helping to move products from prototype designs into mass production. Once markets are established, minimum efficiency standards would improve the performance of similar products.