Thursday, November 16, 2006

A new energy policy

The democrats, so far as I’ve heard, are not considering any sweeping changes to our energy policy. The few action items they’ve discussed, like repealing tax breaks to oil companies and extending incentives for renewables and biofuels are certainly sensible steps. Unfortunately we need much more aggressive action.

Why do I think we need aggressive action? Like it or not climate crisis and peak oil will transform our economy within 30 years. For readers not familiar with peak oil theory, the idea is simply that there is a finite amount of oil in any given oil field (and in the world) and that once roughly half the oil has been removed future extraction rates will fall. Drilling more wells, using better technology and any other way of throwing money at the problem may extend/smooth out the peak into a plateau but only makes the future rate of decline that much faster. Many believe the world is on the brink of peak oil today. Unfortunately a peak in oil extraction, much like the top of a stock market bubble, is only obvious after the fact. There is a heated debate about when global peak oil will occur. Some say it has happened or is happening as we speak, others say it is five, ten, or twenty years off, nobody thinks it is more than 40 years away. The point is that once we are sure global oil production has peaked (i.e. at some point after the peak) it will be too late to make the changes we need to make to avoid economic collapse. Similarly once we have pinned down global warming with absolute certainty and have the proof (beyond a reasonable doubt) in hand, it will be too late to avoid environmental collapse.

It is far wiser to invest the resources today to make our economy more efficient and resilient to future oil and environmental shocks. One serious problem is that our “free market” does not incorporate CO2 pollution costs or the risks of peak oil into the price of energy today. Since energy prices don’t capture these external costs, we invest less money than we should in using energy efficiently.

If fossil fuels (coal, oil and natural gas) were to cost 25% more tomorrow (and everyone expects they would remain more expensive) we would change our behavior to use less energy. All of the technologies that use energy more efficiently like CFL/swirl bulbs, hybrid cars, alternative fuels (ethanol and bio-diesel), solar, wind and wave power would have faster payoffs for those who invest in them. If more people invest these energy saving technologies they will become even cheaper leading to a virtuous circle of more adoption.

Any “big solution” like a CO2 cap and trade system or a carbon tax will take years to implement, once we’ve taken the time (potentially years) to discuss and analyze it. For example, I believe a carbon tax (for payroll swap) should be phased in over 5-10 years to prevent major market disruptions.

All the more reason to start putting forward bold ideas, and passing aggressive legislation (even if it gets vetoed by Bush) during the next two years to kick start the discussion and analysis.


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