February 1, 2011 | WebMemo on Energy and Environment
Gasoline prices are steadily rising toward $4 per gallon, the price that triggers public outcry and congressional response. In a recent interview, Senator Lindsay Graham (R–SC) said that at $4 gasoline, “everybody is tripping over themselves to find an energy policy.” Graham then mentioned he would start work on his clean energy standard (CES) bill that would mandate that a certain percentage of our nation’s electricity come from carbon-free sources. In a recent speech, Senate Energy and Natural Resources Committee chairman Jeff Bingaman (D–NM) renewed his interest in introducing a clean energy standard bill and for the first time supported nuclear’s inclusion so long as the bill provided additional incentives for renewable energy.
There are prudent ideas to lower gas prices, but implementing a CES is not one of them. The only thing it would do is significantly increase Americans’ electricity bills. What America does need is a market-based energy policy that opens supply and prudently balances economics with environmental benefit.
A Clean Energy Standard: No Effect on Gas, Real Effects on Electricity Prices
Implementing a CES in response to high gas prices is a non sequitur, because a CES affects electricity generation. And since only about 1 percent of America’s electricity was generated from petroleum in 2009, it is misleading to suggest that one would affect the other.
Indeed, a CES would do almost nothing to affect petroleum consumption or prices. The only thing it would do is drive up electricity prices, which ironically, would make electric vehicles less enticing. A CES would force Americans to use more expensive energy sources. If these energy sources were cost-competitive, they would not need a government-guaranteed share of the electricity market. The mandate may reward certain energy producers in the short term but would hurt both producers and consumers in the long run because it eliminates competition, reduces the incentives to lower costs, and encourages government dependence.
If Congress really wants to tackle the rising prices of energy, it should focus on policies that would increase the supply of petroleum produced and coming into the United States and open the electricity market to competition, allowing consumers and producers to determine what type of power to buy.
At the Pump. The price of gasoline in the U.S. is gradually climbing and could rise to uncomfortably high levels, largely due to inflated crude oil prices in the face of strong demand for gasoline. Recent turmoil in Egypt could increase that upward pressure on crude oil prices if it causes shipment disruptions through the Suez Canal. Increasing access to oil reserves in the U.S., both onshore and offshore, would not only help offset rising demand but also increase jobs and stimulate the economy. A Heritage Foundation analysis found that increasing domestic supply by 1 million barrels per day would create an additional 128,000 jobs and generate $7.7 billion in economic activity. The U.S. currently produces 5.3 million barrels of crude oil per day, so producing an additional 1 million barrels per day would be a nearly 20 percent increase.
At the Plug. If Congress wants to create pro-energy legislation, it should also focus on reforms that would produce affordable electricity without mandates, special tax breaks, or subsidies. This would allow companies to rely on innovation and market signals, not government handouts, to remain competitive. Such an approach to promoting new, cleaner energy sources and increased energy production should include:
Gas Prices as an Excuse
Congress should be wary of Members using steadily rising gas prices as an excuse to pass energy legislation that would not address the problem, such as a CES. A CES would only cause Americans more economic pain as they see the costs of their electricity prices rise. If Congress wants to pass an energy bill that is economically and environmentally sensible, it should refrain from increasing subsidies and create a regulatory framework that allows free enterprise to increase the supply of energy in the U.S.
Nicolas D. Loris is a Research Associate in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Katherine Ling, “Rising Gasoline Prices Will ‘Reignite’ CES Debate—Graham,” E&E News, January 5, 2011, at http://www.eenews.net/public/eenewspm/2011/01/05/1 (January 21, 2011).
Frederic J. Frommer, “Key senator backs nuclear in clean energy proposal,” The Washington Post, January 31, 2011, at http://www.washingtonpost.com/wp-dyn/content/article/2011/01/31/AR2011013103812.html (January 31, 2011).
David Kreutzer, “The Economic Case for Drilling Oil Reserves,” Heritage Foundation WebMemo No. 2093, October 1, 2008, at http://www.heritage.org/research/reports/2008/10/the-economic-case-for-drilling-oil-reserves.
Western Energy Alliance, “Western Oil and Natural Gas Dashboard,” December 9, 2010, at http://westernenergyalliance.org/resources/dashboard (January 22, 2011).
David W. Kreutzer, “Three Policy Changes to Help with Gasoline Prices,” Heritage Foundation WebMemo No. 3096, January 12, 2011, at http://www.heritage.org/Research/Reports/2011/01/Three-Policy-Changes-to-Help-with-Gasoline-Prices.
Jack Spencer, “Pitts Bill Could Be Nuclear Energy Game Changer,” Heritage Foundation WebMemo No. 2571, July 31, 2009, at http://www.heritage.org/Research/Reports/2009/07/Pitts-Bill-Could-Be-Nuclear-Energy-Game-Changer.
For instance, pending EPA rules—including the Cooling Tower Rule, the Maximum Available Control Technology Rule, the Clean Air Transport Rule, and the Coal Combustion Residuals Rule (coal ash)—could unreasonably increase compliance costs for existing coal plants, which would increase the cost of electricity and kill jobs. Power-Gen Worldwide, “EPA Rules Could Spark $180bn in Upgrades, 67,000 MW of Coal-Fired Retirements,” October 26, 2010, at http://www.powergenworldwide.com/index/display/articledisplay.8008682880.articles.powergenworldwide.emissions-and-environment.regulation.2010.10.NERC-EPA-assessment.html (January 24, 2011).