Thursday, October 04, 2012

Election 2012: Romney on Energy

After last week's review of President Obama's energy record and campaign materials on energy, Governor Romney's energy plans present a sharp contrast. They are based on a fundamentally different view of energy and the economy, relying on markets to allocate capital to the most productive opportunities, rather than on government to guide a mix of public and private investments along specific paths towards designated ends. They also emphasize technologies that are already deployed at scale today, not those still under development or striving to attain scale. Implicitly, the Romney plan prioritizes supplying the energy for a robust economic recovery over programs designed to address long-term environmental challenges like climate change. These positions present voters with a serious and consequential choice on November 6th.

The Romney campaign's website on energy arrays the candidate's ideas mainly in words, rather than with the kind of images and interactive features that dominate the Obama campaign's sites. Energy is the first plank of Governor Romney's five-point "Plan for a Stronger Middle Class", though it requires a little work to explore the details of his energy program. A list of bullet points  is backed up by a lengthy policy paper with numerous references to external sources, but you have to look for it.

The Romney energy plan focuses mainly on oil, gas, coal and nuclear energy, which together meet 91% of current US primary energy demand and which the Department of Energy projects will still provide nearly 90% in 2020 under the policies in place today. You won't find much on his campaign's website about the new renewables that generated electricity equivalent to 2% of our energy use last year, beyond a critique of the administration's investment in Solyndra and a commitment to R&D on new energy technologies.

Among the details of his plan are support for expanded offshore drilling, including areas such as offshore Virginia that were originally in the Obama administration's early-2010 offshore development blueprint, along with a comprehensive assessment of US resources using current technology, rather than further extrapolations based on 1980s technology. Governor Romney proposes expanding energy cooperation with both Canada and Mexico and would approve the entire Keystone XL pipeline. His goal of attaining North American energy independence is aggressive, yet recent analysis by Citigroup puts it within the realm of possibility. It appears to be based on an assessment by Wood Mackenzie, a top-notch energy consultancy, indicating that US oil and natural gas liquids output could expand by 7.6 million barrels per day, with 6.7 million of that coming from federal lands and waters currently off-limits to development. That compares to US net petroleum imports of 8.5 million barrels per day in 2011.

Another aspect of the plan aimed at streamlining the permitting of energy projects could be just as useful for utility-scale renewable energy projects as for oil and gas exploration and production. Regulatory and permitting delays are among the key reasons it takes longer and costs more to develop crucial energy and infrastructure projects here than in many of the countries against which our competitive standing has been slipping. Governor Romney also proposes giving states greater control of permitting on their non-park federal lands. That could substantially increase energy access and output, especially in the west, where the federal government owns over 280 hundred million acres, or 37% of those 11 states, net of tribal lands.

There are also some missing elements. I would have liked to see more about how renewables fit into Governor Romney's vision. He apparently supports the Renewable Fuels Standard but is silent about the increasingly urgent need to reform it. He is on record against the extension of the wind Production Tax Credit (PTC), a 20-year old subsidy roughly equivalent to the current price of natural gas, yet misses the opportunity to explain how all types of energy would be treated under his proposal to reduce corporate income tax rates while broadening the tax base--policy-speak for closing loopholes and eliminating incentives. In last night's debate he said, referring to the $2.8 billion in annual tax incentives for oil and gas identified by the Department of Energy, "... if we get that tax rate from 35 percent down to 25 percent, why that $2.8 billion is on the table. Of course it's on the table. That's probably not going to survive (if) you get that rate down to 25 percent." I'd also like to hear more about how Governor Romney would address greenhouse gas emissions once the economy returns to stronger growth.

Superficially, much of the Romney energy agenda evokes a return to the pre-2008 status quo: heavy on oil, gas and coal, light on renewables, and largely ignoring climate change. I see it from a different perspective: When Barack Obama began running for President in 2007, the US was considered by many to be tapped out on conventional energy, with domestic oil and natural gas production exhibiting signs of deep and permanent decline. In that context it made sense to look beyond those resources to the potential of renewable energy and vehicle electrification, even if the transition involved would be lengthy. That approach also appeared synergistic with reducing greenhouse gas emissions, and a strategy was born. In the meantime, however, it turned out that US oil and gas were far from exhausted, and the most productive new energy technology of this decade wasn't wind, solar or biofuels, but the combination of hydraulic fracturing ("fracking") and horizontal drilling that has unlocked hundreds of trillions of cubic feet of shale gas and tens of billions of barrels of shale oil or "tight oil" resources. Since 2008 the expansion of shale gas drilling has added as much new US energy production as over 250,000 MW of wind turbines or solar panels--8x the wind and solar power added in the same interval. To the surprise of many, the big global energy opportunity of the 20-teens is US hydrocarbons. The Romney plan reflects the unexpected energy transformation we're experiencing.

As in 2008, this blog isn't in the business of endorsing candidates. Energy remains an issue that, like the Cold War, demands bi-partisan cooperation and some level of consistency from one administration or Congress to the next. However, that doesn't prevent me from observing that the energy agendas of the two campaigns are not equally well-suited for a period of serious US fiscal constraints and shrinking federal discretionary expenditures, in which our energy security and economic growth will still depend largely on fossil fuels. In that context, it's highly relevant that the "all of the above" credentials of one candidate depend on oil and gas outcomes that his policies did little to support. Of course, energy isn't the only issue that matters, but then you wouldn't be reading this if you didn't think it was important.

13 comments:

Ed Reid said...

Geoff,

While you did not mention it, I suspect a Romney Administration would "rein in" an EPA which seems to want to become a government unto itself.

Geoffrey Styles said...

Ed,
That's a safe bet. This EPA has been asked to implement numerous changes that the administration couldn't get done legislatively, starting with climate policy, courtesy of Mass. vs. EPA.

FIJI80 said...

I wonder where this election will leave the sunset of renewable energy tax credits in 2016. I guess that depends upon where our economy is in 2015, but can't help but think that Romney would add the elimination of these to his tax reform initiatives.

Geoffrey Styles said...

FIJI80,
Repeal would be hard, but developers and manufacturers should certainly plan on the basis that 12/31/16 represents true sunset for the renewable investment tax credit.

Here's one reason why:
Assume 5,000 MW of solar installed per year @$2/W by then. That's $3B/yr in tax credits--roughly equal to the entire current oil & gas tax incentives--for an energy stream equivalent to about 30,000 bbl/day of oil, but less flexible.

Doug said...

In most respects Romney seems to offer a more credible and realistic plan. As you say, though, he doesn't even acknowledge climate change as an issue, probably because the GOP base is still in denial about it. I am skeptical that solar and wind can do more than dent the problem, absent a solution to the energy storage problem. What Romney might be able to do is acknowledge the possibility of a climate problem and propose funding for research into things like energy storage. I guess it's too much to ask for a carbon tax, but a courageous candidate could make the case that, unlike regulations or picking winners and losers from among alternatives, it's a market-based approach consistent with the core economic tenets of the GOP.

Geoffrey Styles said...

Doug,
The experience of the last several years has shown that a healthy US economy is a prerequisite for climate policy consensus. Whatever Romney's views on climate, putting the economy first looks like the A answer. As for a carbon tax, promoted as an end in itself it looks like another third rail. It seems likelier to me that it would emerge as a revenue component of comprehensive tax and budget reform than on its own merits.

Ed Reid said...

Doug,

I would be very interested in your explanation of a carbon tax as a "market-based approach". I would grant that it is an approach which would distort the market and then rely on the market to adjust to the distortion.

I would also point out that every dollar collected by government, through a carbon tax or the sale or auctioning of emissions allowances is a dollar which is no longer available to the emitter to fund the installation of lower emissions facilities and equipment, or emissions control equipment, which could actually REDUCE emissions. Therefore, these taxes merely increase the costs of emissions reductions. However, I understand that the government has a virtually limitless supply of "rat holes" down which to lose the resulting revenues.

Doug said...

Sure, I'll try. It's easiest to start by looking at obvious non-market-based approaches. CAFE regulations, ethanol mandates, ethanol, wind, solar, and EV subsidies, and CO2 regulations are all, IMO, examples of non-market mechanisms because they work against market forces rather than leveraging them. CAFE is perhaps the clearest example: forcing carmakers to build fuel-efficient cars didn't cause consumers to want them. But high gas prices in 2008 sure as heck did. So a carbon tax would leverage market forces by giving consumers an incentive to avoid or reduce use of higher-carbon energy sources, but without the problem of having the government pick winners and losers from among alternatives. For example, perhaps the best choice for vehicles is to stick with powerful gas-powered cars but drive them less, instead of forcing consumers to buy small cars and take their current number of miles as a given. Perhaps nuclear power should replace coal, rather than wind. You may quibble that the tax is in and of itself a violation of the free market, but it at least aligns with market forces rather than pushing against them. I would also point out that if you accept the premise that CO2 emissions are a probable long-term problem, then they represent an economic externality that is uncompensated, and leaves alternatives (e.g. solar power, nuclear, or whatever) at an unfair disadvantage that the tax simply corrects.

Ed Reid said...

Doug,

"I would also point out that if you accept the premise that CO2 emissions are a probable long-term problem, then they represent an economic externality that is uncompensated, and leaves alternatives (e.g. solar power, nuclear, or whatever) at an unfair disadvantage that the tax simply corrects."

A carbon tax only "corrects" if it is set at the correct level. I don't know what the correct level is; and, I don't believe anyone else does either. I have seen numbers from $20 - $300 per ton, though I am not even sure the correct number lies within that range.

Some economists believe that the externality is actually positive for the next 50-60 years, largely because of the impact of elevated CO2 concentrations on the growth of field crops. That means that a carbon tax to pay for externalities would be a current tax to pay a potential future cost. Using history as a guide, this likely would mean that the US fe(de)ral government would collect this “designated” tax and create a (dis)trust fund, similar to the SS and Medicare (dis)trust funds, to hold the funds in anticipation of indeterminate future liabilities. History would also suggest that those funds would almost immediately be used to fund new or expanded programs having nothing to do with climate-induced damage, leaving a “lockbox” full of “special treasury instruments” (IOUs) to be redeemed at some time in the future. Ultimately, the argument would likely be made that the climate-induced damage was worse than expected, thus requiring an increase in the carbon tax.

Of course, the big question which draws the attention of our congresscritters is: "What will we do with the revenues?"

Geoffrey Styles said...

Ed,
The best answer to that may be to recycle them back to taxpayers, as one of the briefer climate bills a few years back proposed doing. Of course this kind of consumption tax would give rise to new controversies about how to allocate--redistribute?--such benefits.

Ross Taylor said...

Excellent article, In most aspects romney seems to provide a more reliable and genuine strategy. As you say, though, he doesn't even recognize global warming as a problem, probably because the GOP platform is still in refusal about it. I think it's too much to ask for tax, but a nice applicant could create the situation that, as opposed to rules or choosing winners and nonwinners from among solutions, it's a market-based strategy constant with the primary financial tenets of the GOP. I would be very excited about your description of a as well as tax as a "market-based approach". A as well as tax only "corrects" if it is set at the appropriate stage. Energy

Jimmy Reynhart said...

I always thought that Obama was the great saviour of the sustainable systems in the US, but Romney's policies are becoming more interesting by the day. There should be more focus on having the public embrace it within their home though (like here http://www.wdsgreenenergy.co.uk/how-to-use-green-energy-within-your-home/) because I don't think that the States will sign off on huge systems without experiencing it domestically.

Geoffrey Styles said...

Jimmy,
Thank you for your comment. Just to reiterate my policy on links, they should be to known media sites or if to corporate sites directly germane to the subject of the posting on which you are commenting. I'll give you the benefit of the doubt this time.