Short-Term Pain Needed to Resolve Energy Issues

Posted June 24, 2008 at 2:51pm

Energy is at the top of the news these days, for the obvious reason — with oil at $140 a barrel and gas at $4-plus per gallon, the issue has moved to No. 1 for Americans, crossing the threshold where the price is deeply affecting average Americans’ lives. Thus it is not surprising that both Sens. John McCain (R-Ariz.) and Barack Obama (D-Ill.) have been hammering away at the energy issue and hammering each other for their positions. Nor is it surprising that their surrogates and supporters in Congress are echoing their talking points.

[IMGCAP(1)]I don’t want to get into the weeds of discussing whether offshore drilling is a better option than regulating oil speculation on the commodities markets, or any of the other specific differences between the two presidential candidates, even though the different approaches are very interesting, even though none of them — none — would have any appreciable effect on gasoline prices in the short-run, meaning in the next couple of years. Rather, I want to deal with the larger question of why we don’t have a coherent or functional energy policy.

No issue or area is more frustrating, or more clearly manifests all the warts of our democratic republic and all the dysfunction of our current politics. Why is energy more frustrating than, say, health? In our hybrid health system — half private, half government, some parts run through employers, others not — reform has no straightforward answer. Try to cut costs in one area and they balloon in another. Have success at extending life expectancy, and it leads to larger costs. Add to those dilemmas the deep ideological divisions over the fundamentals of how to run a health care system, and it is no wonder that it is hard to find common ground or make serious progress.

To be sure, there are few easy, specific answers on the energy front, and there are serious ideological divisions. But similar to the issues surrounding Social Security, there are fundamental answers of an arithmetic variety to the energy question. Two things need to be done: Cut demand and raise supply. It is nothing short of amazing how difficult Congress has found it to do either or both in a serious way.

Of course, I am not going to pretend that either cutting demand or raising supply is cheap or easy; every initiative has winners and losers. But clear avenues to achieve a better energy future are there and have been there for a long, long time.

They start with cutting demand, which is both better and less costly than raising supply (remembering that both have to be done). Many years ago, a serious tax on energy, either via a British-thermal-unit tax, a carbon tax or a gasoline tax, was a no-brainer in terms of efficacious policy. Imagine if 15 years ago we had put a 50 cent or $1 tax on a gallon of gasoline and used half of it to finance tax relief in other areas, subsidizing those with little income and from rural areas, while also financing conservation measures and research into alternative fuels and more fuel-efficient automobiles. Money that is now going directly into the coffers of our biggest adversaries, like Iran’s Mahmoud Ahmadinejad, Venezuela’s Hugo Chávez and Russia’s Vladimir Putin, would have stayed in America and made us safer, stronger and more prosperous.

But our aversion to taxes and to short-term pain made that course impossible. Instead, we had the farce during the 1993 debate over the Clinton economic plan in which Sen. Herb Kohl (D-Wis.) stood at the barricades with a non-negotiable demand that any gasoline tax be limited to 4.9 cents a gallon.

A carbon tax makes even more sense now, given our combined environmental and energy challenges; the best approach would be to have a major tax reform that would replace a solid slice of the income tax or payroll tax with a carbon tax. But it is not even on the table. And it would be impossible to achieve with gas at four bucks a gallon in a way it would not have been when the price was half that.

Of course, there are other ways to cut demand for energy. Higher Corporate Average Fuel Economy standards, if implemented some years ago, especially without the loopholes built in for SUVs, would have been met with innovation by automobile companies. Early incentives for hybrids and hydrogen technology might have accelerated the commercial feasibility and availability of such alternatives. And simple changes in things like roofing standards and insulation could actually have a major impact.

Conservation is not enough. We do need to expand supply and innovate in that regard as well. We need to build more refineries. We need a major investment in clean-coal technology. It is crazy not to find ways to expand nuclear power, if we are serious about moving away from carbon-based energy sources; if the problem is disposing of nuclear waste, we need a crash program to find a viable approach even as we start the long process of working to get nuclear plants online. And we need to make serious investments in alternative energy sources, including alternative sources of oil such as shale and oil sands, as well as solar, wind and the kinds of biofuels that do not create havoc with food supplies and prices.

Getting the kinds of investments we need cannot be done simply by government. The private sector is imperative, but the key there is to have some sense of certainty about the stability of oil prices that makes major long-term investments in alternatives feasible. One way is to develop a floor price for oil, using taxes to maintain it, as New York Times columnist Tom Friedman has suggested. Another is to use the market mechanism of puts and calls; my colleague Kevin Hassett has developed an elegant model for doing so that has attracted bipartisan interest but, like most ideas in this area, has gone nowhere.

Building a bipartisan compromise that blends serious efforts at conservation and the demand side with serious efforts at expanding supply should be a slam-dunk. That it has been anything but is a sad reflection of our current political state. Put together partisan rancor, weak leadership from Congress and the White House, and the chronic inability to require any short-term pain for manifest long-term gain, and you have the explanation. That doesn’t make it any easier to take.

Norman Ornstein is a resident scholar at the American Enterprise Institute.