Part One

“The fact that the polynomial is an approximation does not necessarily detract from its usefulness because all models are approximations. Essentially, all models are wrong but some are useful. However, the approximate nature of the model must always be borne in mind.”

– George Box*

  • Modeling U.S. Energy Policy

Professor Tomain

By observing the impact of the Carter and Regan administration’s reciprocal attempts to affect national energy policy with a historical understanding of the FFCA as the genesis of Federal energy policy, we develop a model of energy policy in terms of legislative goals. Then, with an appropriate model, we are able to undertake realignment toward new political ends. Fortunately, much of the heavy lifting has been done via Professor Tomain’s “Dominant Model of United States Energy Policy,” a handy tool to explain past and current trends in energy policy and regulation.[1]  Inherent in this model are the economic assumptions that: 1) the Gross National Product (GNP) is linked to energy production, and 2) economies of scale in energy production are achievable.[2]  These assumptions are well supported, in as much as energy is necessary input for Gross Domestic Product (GDP) growth, although the direction of causality between energy production and GDP growth has been difficult to ascertain and appears unidirectional for certain periods.[3]  Importantly, these two assumptions suggest a national energy policy which “favors large-scale, high technology, capital-intensive, integrated, and centralized producers of energy.”

According to Tomain, the Dominant model has six goals, but, for our purposes, these are better distilled into two primary objectives for the lawmaker: 1) ensure an abundant supply of both primary and secondary energy 2) ensure reasonable and stable prices for energy.[4]  There are many legislative options to achieve these objectives, but only a few selections appear to be currently supported.  Consider, as evidence, the other goals Tomain identifies as complimentary mechanisms: i.e. limiting market power of large firms, promoting competition between fuels and between producers, generally subsidizing only mainstream energy sources, and allowing for both federal and state control of energy policy.[5]  Whether legislators identify these as the means to the end of stable energy prices and abundant energy supplies or as ends – in and of themselves – has determinative impact on what objectives are actually achievable.  If the real objective of Federal energy policy is to achieve carbon free energy independence in the United States, then a transition to non-carbon primary energy sources is a necessary condition. Policy ends which limit market power of firms, allow for decentralized control, increase competition, and subsidize current producers would, therefore, sit in conflict with that objective.

  • Contemporary Legislation Does Little to Support a Transition Toward Energy Independence

For all the talk of an energy independent or carbon free future, the most recent series of energy policy acts, the Energy Policy Act of 2005, the Energy Independence and Security Act (EISA) of 2007, and the American Recovery and Reinvestment Act (ARRA) of 2009, all conform to the Dominant Model.  The Energy Policy Act of 2005 contains significant subsidies and incentives for traditional carbon primary energy producers.[6]  Coal producers receive $1.6 billion of assistance.[7] They receive a further $1.7 billion for upgrading generation equipment and emplace advanced combustion processes.[8]  Oil and gas producers are offered large production incentives and suspensions of royalty payments.[9]  Tax incentives are provided to an array of carbon primary energy including coal projects,[10] oil and natural gas,[11] and biofuels.[12]  All in all, some $85 billion of appropriations and relief is provided for in the acts with the bulk of funds directed at carbon based primary energy producers.[13]  This support is consistent with Dominant Model goals of subsidies for mainstream energy, promoting abundant energy supplies, favoring large producers, and large capital projects.

Several steps omitted

The EISA, by attempting to promote competition between fuels and between producers in order “to move the United States toward greater energy independence and security” and “increase the production of clean renewable fuels” with hopes to secure secondary energy supplies, is predicated on Dominant Model goals.[14]  To achieve these goals, the EISA adopts the dual mechanisms of emplacing production quotas for carbon dependent biofuels and subsidizing US biofuel producers to the point that blending biofuels with traditional fuels becomes affordable to consumers.[15]  Unfortunately, this does nothing to address the very real difference in the costs of production between biofuels and traditional fossil fuel producers.[16]  Setting aside the questionable economics of biofuel subsidies, foreign oil producers will remain profitable at price levels where expenditure for biofuel subsidies is politically unjustifiable.  It is also important to note, by focusing legislative effort on biofuel, the EISA targets sources of secondary energy without addressing the primary energy input inherent in the manufacture of biofuels, the origin of that primary energy, or the conversion rate of primary energy to secondary energy.  Without looking at primary energy sources, there is little hope of any affecting energy independence through legislative means.

Fortunately, both the Energy Policy Act of 2005 and later amendments added by the ARRA do make efforts at addressing primary energy.  For example, the 2005 Act eased certain requirements of the federal licensing process for hydroelectric dams.[17]  The 2005 Act extended and enhanced tax credits to ‘renewable’ primary energy sources such as hydropower, wind, solar, and geothermal.[18] Importantly, the 2005 Act sets an objective of “increasing the conversion efficiency of all forms of renewable energy through improved technologies.”[19]  In support of this objective, the 2005 Act provides $2.227 billion for “renewable energy research, development, demonstration, and commercial application activities.”[20]  These provisions are buttressed by the ARRA which amends Title XVII of the 2005 Act to provide an additional $6 billion of loan guarantees for renewable energy projects.[21]

Furthermore, the 2005 Act provides support for the largest alterative producer of non-carbon primary energy, in the event of construction delays caused by regulators or by litigation, by extending funding to builders of nuclear generating stations to cover regulatory costs.[22]  Additionally, the 2005 Act sets aside $1.25 billion for a prototype hydrogen generating nuclear reactor and reauthorizes the limitation of liability on nuclear plant operators provided under the Price Anderson Act.[23]  Between the 2005 Act and the ARRA, some $41.7 billion are allocated across energy markets and technologies with the bulk of subsidies going to the largest producers.[24]  While stimulus helps shift the competitive landscape to make minor producers and alternatives to carbon primary energy more attractive to consumers, the allocations are simply too diffuse to tip the balance in favor of any producer or technology thus preserving the current competitive landscape.  This outcome suggests achieving energy independence entirely on non-carbon sources using policy and legislation keeping with the mechanisms of the Dominant Model will be ineffective and will require a reordering and rebalancing.  Owing to the favorable economics of oil prices under the Dominant Model it appears that US energy independence “is more a political slogan than an actual policy objective.”[25]  If however there were sincere efforts at achieving energy independence in the US what might they look like? We will explore this question in our next installment.

 

* George Box and Norman Draper, Empirical Model-Building and Response Surfaces 424 (1987).

[1] Joseph P. Tomain, The Dominant Model of United States Energy Policy, 61 U. Colo. L. Rev. 355, 355 n. 4 (1990).

[2] Id. at 374-75.

[3] The authors note, unsurprisingly, that the differing results are influenced significantly by the differing regulatory environments.  Jaruwan Chontanawat et al., Causality Between Energy Consumption and GDP: Evidence from 30 OECD and 78 Non-OECD Countries, SEEDS 113 (June 2006), http://www.seec.surrey.ac.uk/research/SEEDS/SEEDS113.pdf; see also Eden S. H. Yu and Been-Kwei Hwang, The Relationship Between Energy and GNP, 6 Energy Economics 186 (1984).

[4] Tomain, supra note 1, at 375

[5] Id. at 375-76.

[6] Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (2005).

[7] Id at  § 401.

[8] Id at § 3103.

[9] Id at § 341-57.

[10] Id at § 1307.

[11] Id at § 1321-29.

[12] Id at § 1342-47.

[13] Michael Grunwald and Juliet Eilperin, Energy Bill Raises Fears About Pollution, Fraud, The Washington Post (Jul. 30, 2005) http://www.washingtonpost.com/wp-dyn/content/article/2005/07/29/AR2005072901128.html.

[14] Energy Independence and Security Act of 2007, Pub. L. No. 110-140, 121 Stat. 1492, 1492 (2007).

[15] Id at § 201-48.

[16] Jonathan Kingsman, Oil Price Fall Adds to Biofuel’s Woes, The Financial Times (Jan. 9, 2015), http://www.ft.com/cms/s/0/22bbd5ba-975f-11e4-be9d-00144feabdc0.html#axzz3csqAQnGr.

[17] Energy Policy Act, supra note 6, at § 241.

[18] Id. at § 202-03.

[19] Id. at § 931.

[20] Id.

[21] American Recovery and Reinvestment Act, Pub. L. No. 111-5, 123 Stat. 115, 140, 145 (2009) (codified as amended 42 U.S.C. § 16516).

[22] Energy Policy Act, supra note 6, at § 638

[23] Id. at § 601-10, 645.

[24] American Recovery and Reinvestment Act of 2009, Wikipedia (May 23, 2015), https://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009#Energy_infrastructure; Energy Policy Act of 2005, Wikipedia (Sept. 23, 2014), https://en.wikipedia.org/wiki/Energy_Policy_Act_of_2005.

[25] The Oil Drum, China Energy Outlook: China’s Energy Strategy for the Future, Oilprice.com (Nov. 18,2012), http://oilprice.com/Energy/Energy-General/China-Energy-Outlook-Chinas-Energy-Strategy-for-the-Future.html.