End of Energy Policy (2)

Looking at the over of the most recent New York Review of Books, the rather high-brow publication read mainly by academics and academic wannabes, you might trip over the headline, "Energy: Friend or Foe?" It looks more like something you'd expect to see in a London tabloid, or maybe a cheap sci-fi thriller. Actually the reference is to a review article by William D. Nordhaus of Yale University, an economist well known as an expert on the costs and benefits of alternative climate policy approaches.

My first assumption was the the headline was the work of an over-zealous editor (somebody, that is, like me), but No: the question is a literal rendition of Nordhaus's own first sentence.

His point is that while modern life would be inconceivable without ample energy, in recent decades its production and consumption has also come to be seen as a menace, because of all its sundry negative effects on the environment and public health, first and foremost the accumulation of greenhouse gases steadily aggravating the risks of dangerous climate change.

Taking his cues from Michael J. Graetz of Columbia University, a top expert on tax law, and a National Research Council report, "The Hidden Costs of Energy," Nordhaus argues that U.S. energy policy since 1973 has consistently failed because U.S. political leaders always shy away from the one essential thing, which is to make basic energy prices fully reflect social costs. (The shortcomings of U.S. energy policy have been especially glaring of late, I recently argued here.)

Drawing on figures from the NRC report, Nordhaus that if prices reflected those costs, coal-generated electricity would cost on average 70 percent more, natural gas used for heating 42 percent more, and oil in transportation 25 percent more.

Nordhaus is far from the first to make that point, of course. Perhaps the more interesting and provocative part of his article draws on his own research, which has shown that the world market for oil is almost perfect from an economist's point of view: Any change in the price for any kind of oil any place in the world is almost immediately and fully reflected in the global price.

It follows, he argues, that gasoline prices in the United States have nothing to do whatsoever with how large a fraction of their oil Americans import. The prices depend exclusively on the global price of oil. His conclusion is that "oil policy should focus on world production and consumption and not on the portion we import, and should focus as well on the externalities from our consumption  the [social costs] in the form of pollution and global warming."

That argument deserves serious consideration. Those consulting the print article should not be put off, early on, by a rather hilarious error: The average American, it said in the hard copy, consumes the equivalent of 40 million tons of  coal per year. Whether it was an over-zealous editor or Nordhaus himself who committed that blooper, it's been corrected online. The intended number is 40 tons per year. 

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