ADDITIONAL VIEWS
On Environmental Considerations, Coordinated Energy and Environmental Policy, Federal and State Jurisdictions, and Enhanced Demand-Side Measures
Energy policy is a derivative policy—deriving from our security, economic, and environmental goals. These are often in conflict. It is therefore difficult to chart an energy policy path that is both coherent and on which consensus can be achieved. Although supportive of many conclusions in the report, we are generally more sanguine than the report regarding the ability of the market, especially under current prices, to bring forth necessary increases in supply for oil and gas. We would place primary emphasis on attending to those infrastructure and volatility issues that are principally governmental in origin and solution. We would also like to emphasize the need for government action in certain areas. These include:
• The need to focus international discussions on atmospheric concentrations of greenhouse gases.
• The development of a coordinated energy and environmental policy that includes specific attention to carbon dioxide and incentives for voluntary early action activities. Unless carbon dioxide is addressed, and addressed in a way that is credible with major domestic constituencies and with others internationally, the environmental regime will remain unstable, increasing investment uncertainty and hence raising energy costs—all this quite apart from one’s judgments about environmental impacts.
• A legislative rebalancing of the boundaries between federal and state jurisdictions to increase federal and regional influence over environmentally based standards and within the electric power sector. The purpose of such a move would be to establish and enforce a consistent and efficient transmission and reliability regime applicable to all industry participants.
• Efforts to enhance efficiency. Efficiency has a critical role in balancing supply and demand. An analysis by the President's Committee of Advisors on Science and Technology has shown that from 1970 to 2000, improvements in the overall efficiency in the U.S. energy system (measured as real GNP divided by primary energy supplied) saved two and one-half times more energy than the growth of all sources of supply combined.
• Increased federal support of research and development related to energy and environmental technologies on both the demand and supply sides in order to sustain a stable economic environment for energy, to accommodate economic growth, and to meet environmental objectives. Technology has been critical to energy development in the past and will continue to be so in the future.
• Enhanced demand-side measures, including incentives for the accelerated introduction of technology. More effective strategies for the deployment of existing technologies can in particular make a significant difference. In electric power markets, regulation must make demand sensitive to the cost of power if those markets are to work properly. In other markets, the report calls for regulatory intervention to achieve demand restraint, presumably on the unstated assumption that Americans will not tolerate the use of taxes even though, we note, taxes would often be a more efficient instrument of control.
Finally, we caution against using the "crisis" label, which in the past has been the source of much energy policy mischief. Apart from the very serious problems in the California and Western electricity markets, which largely derive from policy, current energy markets are not in "crisis," and precipitous action should not undermine thoughtful resolution of our conflicting energy, economic, environmental, and security concerns. Apart from the very serious problems in the California and Western electricity markets, most policy made, current energy markets are not in "crisis" and precipitous action should not undermine thoughtful resolution of our conflicting energy, economic, environmental, and security concerns.
Graham Allison
Joseph C. Bell
Charles B. Curtis
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On Nuclear Energy
Nuclear power is an indigenous source of energy—invented and developed in America. It is unique in having the capacity to provide enough energy to last our nation—and the world—for at least a millennium. And it can do so without emitting greenhouse gases. Nuclear energy should not be considered as an option, but as a necessity to supply electricity for the nation now and in the future. The Energy Information Administration has predicted that between now and 2020, the United States will need 300,000 megawatts of additional generating capacity, or the equivalent of three hundred large new plants of any type. A minimum of one hundred fifty of these plants should be nuclear.
Michel T. Halbouty
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On Efficiency
Between 1973 and 1986, the U.S. economy's energy intensity (energy consumption per dollar of GDP) declined by 35 percent; since then, the rate of decline slowed dramatically, amounting to only about 15 percent over the period. That slowdown raises total national energy costs by about $100 billion per year. Technologies are in hand to once again accelerate energy efficiency and associated environmental gains significantly. To realize this in a timely way requires that integrated fiscal, regulatory, and technology policies be implemented by the administration and Congress. In addition, the government should use its own procurement activities far more aggressively to develop a reasonable domestic market for new clean and efficient technologies and alternative fuels. It should also work with the private sector and international financial institutions to advance associated deployment in developing countries. Such actions, in creating stable markets adequate to permit private development of alternative technologies and infrastructure, can be an important element of energy security policy and reduce upside price volatility. They fall into the category of "public good" actions addressing market shortcomings. Opportunities are clearly available in both the transportation and electricity sectors. Such demand-side initiatives can have a substantially greater impact than supply-side initiatives on the overall supply/demand balance over the next several years. However, the importance of stability to the success of such initiatives requires a pragmatic joint administration-congressional commitment.
On Diplomacy
In regard to dealing with oil-producing nations during periods of oil price volatility, the report properly emphasizes the importance of quiet diplomatic discussion and a bedrock principle of reliance on market forces. However, the administration, confronted with non-market behavior, also needs to retain the flexibility to use all diplomatic tools of engagement, including appropriate use of public statements. For example, such diplomatic engagement during the last year saw significant production increases while holding in place key international support for use of the SPR to address inventory shortfalls and associated price volatility.
On Critical Infrastructure Protection
Protecting our energy infrastructure from being disabled is an energy security concern of increasing importance. Heightened vulnerability to physical and/or cyber disruption stems from increased infrastructure interdependence, increased risk of cascading failures, and increased reliance on information technologies and telecommunications in the energy infrastructure. An appropriate response demands new forms of cooperation between the private sector, local governments, and the federal government, including robust and timely exchange of sensitive information on both sides. The critical infrastructure protection initiative of the last few years needs substantial upgrading in order to better coordinate with infrastructure interdependencies, provide realistic evolving vulnerability assessments, develop technologies to protect control systems, develop and deploy integrated multi-sensor detection systems to warn of system disruption, and lower institutional barriers to the associated public-private coordination activities. A significant increase in Federal research and development funding for energy infrastructure protection is needed.
Ernest J. Moniz
Melanie A. Kenderdine
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On Tax Incentives, Demand Efficiency, the SPR, and Reserve Capacity
Based on the serious energy supply problems facing the United States and in view of past national energy policy initiatives (starting in the Nixon administration), the greatest emphasis has always been focused on increasing supply of traditional fuels. Also overlooked is the fact that the tax code has been extraordinarily favorable to the exploration, production, and development of oil, natural gas, and coal, and that the federal government has subsidized the development of nuclear power far more than it has solar, wind, and other clean alternatives.
It is also obvious that there is little need to provide any tax or other incentive to the oil and gas industry. The major companies are reporting record profits and prices are at very high levels. Consumers—especially low- and moderate-income consumers—are suffering from the high cost of natural gas and other heating fuels. Furthermore, many low-income households are facing utility cutoffs because of the sharp increase in heating costs. These problems require immediate solution—from sharply increasing low-income heating assistance and weatherization programs to prohibiting shut-offs.
While the report does recommend demand-side energy efficiency initiatives, I believe that such initiatives can go much further. Tax incentives for building energy-efficient homes and buildings, installing energy-efficient equipment, and purchasing energy-efficient appliances would create a vigorous market for energy-efficient products. On-the-shelf energy-efficient technologies are available. Expanding U.S. production of energy-efficient technologies will also enhance our domestic economy and provide new opportunities for exports.
While I support the report’s recommendations regarding the building of the SPR, it is also important to define clearly when it should be used. Essentially, rapid increases in price are a sign of market failure. An emergency situation calling for use of the SPR could be defined as a percentage increase in price within a specified period of time—say, 25 percent over ten or fifteen days.
It is also critical to determine a requirement for companies that refine and import petroleum to hold a certain level of stock. As the report correctly points out, deregulation and reliance on the market does not ensure supply security. Previously, companies deemed it to be in their economic self-interest to hold inventory. Now, companies seek to hold as little inventory as possible in order to lower costs. This strategy of just-in-time inventory management has been very costly to consumers and the economy, and requires intervention by the federal government. While some may argue that we should rely on market forces to determine appropriate inventory levels, experience has confirmed that market forces are not working. Requiring all companies to hold a minimum level of inventory will provide at least some cushion of supply during periods of disruption.
A similar strategy ought to be applied to suppliers of natural gas, propane, and electricity. Deregulation of the electric utility market has left utility customers at the mercy of independent electricity generators who, unlike regulated utilities, have no incentive or requirement to build reserve capacity. The lack of reserve capacity, like the low levels of oil inventories, is a growing threat to consumers and the economy.
Ed Rothschild
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On Demand Restraint
The "energy crisis" described in the report results in large part from the unconstrained growth of energy consumption. The United States is unique among the industrialized countries in that it does not use fiscal measures to limit growth in energy use. This policy must change to control growth of energy use and maintain environmental quality. The most efficient mechanism would be broad-based taxes on energy. In addition, the United States should consider imposing higher taxes on vehicles to encourage the expedited introduction of more efficient energy-using technology. These taxes should be introduced in a revenue-neutral fashion. In addition, regions such as California, which face energy disruptions due to infrastructure constraints, should consider replacing regressive sales taxes with taxes on energy designed to offset the infrastructure constraint.
On the Use of Strategic Stocks
The authors of the report are to be congratulated for their extensive discussion of the role of inventories. Industrialized countries must recognize that the increasingly competitive structure of the global economy prevents firms in the energy sector from holding reserve capacity (whether in the form of inventories or reserve generation capacity). Energy prices will be more volatile as a consequence. Governments must develop measures to compensate for this structural change if they wish to moderate the increase in the effect of price volatility. Such incentives can include more frequent use of governmentally owned inventories or the provisions of tax incentives to firms to build reserves. In planning such measures, governments should recognize that mandated stocks or imposition of reserve requirements by regulation generally are not effective. It must be understood that the cost of any measure designed to mitigate price volatility will be borne either by the taxpayer or the consumer. Efforts should be made to achieve the maximum reduction in volatility at a minimum cost.