Choosing A Priority

The new year brings no shortage of energy concerns, even though oil prices are much lower than last January. Instead of enumerating those that I think merit particular attention, for today I'd like to focus on an over-arching energy policy choice facing the US. The recent flurry of calls for a quick increase in the tax on gasoline highlights the need for us finally to decide whether energy security or climate change constitutes the higher priority for urgent action. Altered circumstances have undermined the natural linkages between these two problems, and the financial crisis and recession make it not just impractical, but undesirable to attempt to tackle both with equal vigor.

During the holidays I received emails from friends and other readers pointing out various op-eds calling for a big increase in US gas taxes. The arguments in favor of such a measure include reducing US oil imports from unfriendly nations and making fuel-efficient cars and other advanced energy technology more attractive for consumers and investors. The current low gas prices would allow such a tax to be imposed with much less pain than only a few months ago. Yet as Tom Friedman's New York Times column on the subject recognized, this entails an explicit choice between taxing gasoline and taxing the greenhouse gas emissions linked to climate change. Friedman has been a consistent supporter of higher gas taxes, and he still comes down on that side of the argument. For many reasons, I disagree, but it's even more important to choose one strategy or the other than to continue assuming that we can do both, if we wish.

The need for a choice between the two is rooted in our basic energy balance and the trade-offs that a carbon tax or a gas tax would stimulate, and in the potential of alternative energy sources to displace coal, oil, or both. Oil today accounts for 39% of US primary energy consumption and 15% of US energy production--more like 23% if natural gas produced from oil fields is included. Coal makes up another 22% of energy consumption and nearly 33% of production. Simply put, we can't grow the 1% of current US energy production from wind, solar and geothermal power fast enough to replace the 62% of energy consumption supplied by both oil and coal in the foreseeable future, never mind the enormous problems of technology and capital turnover involved in trying to substitute renewable electricity for the liquid transportation fuels, lubricants and petrochemicals that account for all but a small fraction of our oil consumption. Even doubling current ethanol production, which hinges on as yet uncommercial cellulosic biofuel technology, would only back out around 2% of US oil use, at 2008's reduced rates. We also need to be clear that putting a price on carbon emissions will have a much bigger impact on our coal use than on our oil imports.

Throughout 2007 and into 2008, as oil prices climbed and concerns about climate change mounted, while the economy remained surprisingly resilient, it was hard to choose between the importance of reducing oil imports and reducing greenhouse gas emissions, and it looked possible to do both. Moreover, energy security and climate change appeared positively synergistic, with reductions in oil consumption expected to reduce emissions and emissions-reducing policies seen as cutting oil consumption, as a side-benefit. But while those physical synergies still look attractive, the rapid decline in oil prices has drastically reduced the urgency and near-term economic benefits of tackling our oil dependence, particularly during what is shaping up to be the deepest recession since World War II. That makes the emissions reductions associated with reducing our oil imports more expensive, compared to other reductions.

Taxing gasoline, rather than carbon, would certainly reduce the greenhouse gas emissions from our use of petroleum, but it could easily result in largely offsetting emissions increases elsewhere, as industry turned increasingly to coal and natural gas for feedstocks, and as biofuels--which would likely be exempted from the tax increase--would mainly be produced in the near term from food crops that require significant inputs of energy-intensive fertilizer and cultivation. Sales of efficient cars would be helped, no doubt aiding a Detroit that seems certain to be forced to make more of them, as a condition of further federal assistance. However, the accompanying fleet-efficiency gains will occur slowly, as long as total car sales--and thus the total fleet turnover rate--remain depressed by a weak economy.

That brings us to the direct economic impact of a gas tax. Until a federal stimulus is passed and actually reaches consumers and businesses, cheap gas and diesel fuel are the stimulus, to the tune of roughly $37 billion/month compared to July/August 2008 prices. I take suggestions that a higher tax on petroleum products could be made revenue-neutral--that is, returned dollar-for-dollar to consumers/taxpayers through cuts in other taxes--with more than a grain of salt. With all due respect to the incoming Congress, that institution has not demonstrated the requisite spending restraint, faced with the prospect of a major new revenue source, in many years. It certainly wasn't on display in last year's debate on the Boxer-Lieberman-Warner emissions cap-and-trade bill.

Although I expect oil prices to recover, once the economy does, the recession presents us with a unique opportunity to begin realigning the entire economy, not just to use less oil as it returns to growth, but to be much less carbon-intensive, overall. With greenhouse gas emissions from the electricity sector exceeding those from transportation by at least 20%, and with renewable power sources looking much more viable and sustainable than current-generation biofuels, focusing on climate change and the gradual and systematic de-carbonization of the economy now seems like a better priority than "energy independence," which has remained unattainable for more than a generation. It will be hard enough for the Obama administration to determine how aggressively to pursue climate policies in the current environment, without the distraction of a gas-tax debate. And while energy security remains vitally important, in its broader definition, it can be achieved for now through the same strategy of supplier diversification that served us so well after the energy crisis of the 1970s-80s.