Glibertarians.com 2017 Archive

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  • Modeling U.S. Energy Policy

    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.

  • A Brief History of Energy Regulation, Part One

    “What can you do with thorium?  It’s sort of like garbage in a way… but it might save the world.”

    – Jon Kutsch[1]

    Introduction

    Inexpensive access to energy is a requisite for a functional modern economy.[2]  The stability of the global economy is tied to the stability of oil exports.[3]  The bulk of global oil reserves are held by politically volatile nations.[4]  This combination is a serious threat to national security which has gradually fostered a desire for the United States to gain independence from the global energy market.  However, the contemporary and historic legislative efforts toward independence do not fully address the threat and entail politically undesirable externalities.  While the United States has become the World’s third largest producer of fossil energy,  our costs in production are significantly higher than our competitors.[5]  The underlying economics of this position call into question the ability of the United States energy sector to supply domestic demand without imposing tariffs sure to have wider economic consequences.

    The scale of the problem is immense and, presuming legislators are driven toward action rather than inaction, several strategic questions arise.  Is energy independence in the United States really possible?  If so, can it be done without increasing tariffs, levying a carbon tax, or increasing carbon emissions in the process?  Are regulators and industry adequately equipped with the policies to implement such a change?  In the following sections, the author will attempt to answer each in turn.

    Our journey begins with a history of United States energy policy from which we develop a model of our present policy.  Understanding this model provides appropriate framing for the subsequent discussion.  The issues are then analyzed within the framework of the Obama era sociopolitical environment.  Particular focus is placed on how the United States sources primary energy and the impact that selection has on consumer use of energy carriers.  Ultimately, emplacing a uniform and efficient structure for energy independence is a collective action problem.  Presuming energy total energy independence is the desired outcome, a series of recommendations are presented for legislators and policymakers to consider.

    Policy Background

    The United States has a rather patchwork history when it comes to energy law and legislation.  At the turn of the 20th century, legislative control over energy production rested primarily in the hands of State and local governments.[6]  As the country transitioned from wood fuels to coal and oil, the market for energy expanded from local to national and eventually international markets.[7]  Driven by the developments in the energy market, energy law and regulation underwent a similar transition from local to federal control.[8]  Increasing concentration of market power amongst the largest energy and energy transport firms prompted the Hepburn Act and the Elkins Act designed to reign in their power.[9]  The market disruptions of World War I led to the passage of the Food and Fuel Control Act (FFCA).[10]  The FFCA created the first federal energy agency with broad power to regulate prices across energy markets, the Federal Fuel Administration (FFA).[11]

    The origin of the phrase "pulling a train."Though it was given broad regulatory powers, the FFA did not exercise its authority to any great extent and relied instead on soft power.  Instead of fulfilling its appointed goal of coordinating and establishing a national energy plan, the FFA’s existence was characterized by “a muted form of corporatism.”[12]  Specifically, those individuals charged with regulatory control often had direct financial interest in industry being regulated.[13]  Thus, federal regulation tended to respond only to particular market disturbances within a particular industry.[14]  This tendency to focus on a narrow market segment (e.g. coal or oil) rather than treating the United States demand for energy as an integrated whole has persisted to the present day.[15]  Regulating parallel to a given industrial segment has demonstrated advantages in lowering transaction costs, but it has a critical limitation in that it imports intra-industry conflict to the regulatory process.[16]  The process effectively only takes into account the segment cost to the public, which is concerned with the price of energy carriers or secondary energy and cannot effectively optimize for a given requirement of primary energy because to do so requires trading against particular segments.[17]  Conversion losses are the ultimate driver of public cost between primary energy and energy carriers.  Legislators and policy makers tend to confuse the relationship between primary and secondary energy when developing their objectives and policies.  Simply put, United States energy policy is currently unconcerned with developing an optimized system level energy infrastructure.

    New Deal Ice Palace for FDR. Subtle, understated, and not at all Hitleresque.

    The policies introduced through Roosevelt’s New Deal did little to alter this situation.  Further federal regulations were imposed on particular segments of the energy market through various new agencies and powers but there was no effort directed at engineering the market as a whole.[18]  In fact, due to labor’s political ties, much effort was directed at propping up the residential coal market where the conversion losses had become uncompetitive with energy carriers like electricity and heating oil.[19]  New Deal regulation aimed at stabilizing the coal industry was developed by the industry itself and largely ineffective.  The coal market was finally stabilized through technical means by its use as primary energy for commercial production of electricity.[20]  The siloed and industry-driven response of New Deal regulation left “little room for either energy planning or redistribution of wealth from producers to consumers.”[21]

    The first major attempt at overhauling this patchwork system was undertaken by the Carter Administration but was ultimately unsuccessful. Responding to the lingering effects of the 1970’s Oil Crisis, President Carter sought to centralize federal control over the energy markets, break the United States of dependence on Oil imports, and jumpstart an energy transition from oil to alternative sources.[22]  The Department of Energy (DOE) was established as a cabinet-level position in an effort to provide the right level of central authority.[23]  The National Energy Act of 1978 attempted to alter the balance of domestic fuel away from exports use by promoting use of indigenous energy reserves, conservation, and alternative energy through various tax credits, rate structure shifts, and subsidies.[24]  Coal, in particular, was regarded as a critical source of primary energy to break the hold of foreign oil.[25]  The final piece of legislation to emerge from the Carter administration was the Energy Security Act of 1980 which promoted the use of coal as a feedstock for synthetic fuels (energy carriers) while attempting to drive the overall market toward geothermal and solar primary energy with alcohol as a dominant energy carrier.[26]

    Unfortunately, these legislative efforts were destined to be half measures and failures. Authority had not been fully centralized in the DOE because “energy decisionmaking and policymaking responsibilities were scattered over several branches of the federal government, and even within the DOE itself authority was fragmented.”[27]  The analysis behind the National Energy Act and Energy Security Act together failed to take a systems view of conversion efficiency and sunk costs ultimately relying on the market to shift itself to other sources of primary energy.[28]

    With centralized control an ostensible failure, the reciprocal policy of the Reagan administration seems a natural response.   Reagan had campaigned on a promise to deregulate the energy markets and abolish the DOE.[29]  Price controls on crude oil which had existed in one form or another since the Nixon administration had grown increasingly complex and economically untenable under Carter.[30]  To some extent, the new administration was successful in dismantling the regulation supported under Carter.  January 28, 1981, signaled the beginning of this reversal with President Reagan’s signature of the executive order for Decontrol of Crude Oil and Refined Petroleum Products.[31]  Predictably the Carter era synthetic fuels programs failed as, without price controls, they were no longer cost competitive with foreign oil producers.[32]

    Arguably Reagan’s efforts were equally as unsuccessful.  For example, the contemporary theory of State and Federal energy regulation treats transmission elements as monopolies but generation elements and producers as a competitive market.[33]  The DOE is still a critical component of the President’s cabinet, and its authority is still fragmented demonstrating that “government regulation of energy is well embedded in the country’s political economy.”[34]  Little wonder that to date policymakers have been unable to coordinate an integrated national energy plan….

     

    To be continued.

    [1] Alex Pasternack, The Thorium Dream, Motherboard (Nov. 9, 2011), http://motherboard.vice.com/read/motherboard-tv-the-thorium-dream

    [2] Eden S. H. Yu and Been-Kwei Hwang, infra note 37.

    [3] Anthony H. Cordesman, American Strategy and US “Energy Independence,” Center for Strategic & International Studies (Oct. 21, 2013) http://csis.org/files/publication/131021_AmericanStrat_EnergyIndependence.pdf.

    [4] John Browne, The Energy Crisis and Climate Change, Global Economic Symposium, http://www.global-economic-symposium.org/knowledgebase/the-global-environment/the-energy-crisis-and-climate-change/proposals/the-energy-crisis-and-climate-change (last accessed Feb. 23, 2015).

    [5] Steven Mufson, How Low Can Oil Prices Go? Welcome to the Oil Market’s Old Normal, The Washington Post (Jan. 12, 2015), http://www.washingtonpost.com/blogs/wonkblog/wp/2015/01/12/how-low-can-oil-prices-go-welcome-to-the-oil-markets-old-normal/; Steve LeVine, The Real Reason Saudi Arabia Can Afford a Price War Against US Shale, Quartz (Dec. 12, 2014), http://qz.com/311179/the-real-reason-why-saudi-arabia-can-afford-a-price-war-against-us-shale/.

    [6] Joseph P. Tomain, The Dominant Model of United States Energy Policy, 61 U. Colo. L. Rev. 355, 357 (1990).

    [7] Id.

    [8] Id. at 358.

    [9] Id. at 359.

    [10] Food and Fuel Control Act, Wikipedia (May 9, 2014), http://en.wikipedia.org/wiki/Food_and_Fuel_Control_Act.

    [11] Tomain, supra note 6, at 360.

    [12] Id.

    [13] Id.

    [14] Id. at 361.

    [15] Id.

    [16] Id. at 361-62.  Tomain offers the conflict between “major and independent firms, producers and refiners, and producing and consuming states” as an example.

    [17] Primary Energy, Wikipedia (May 5, 2015), http://en.wikipedia.org/wiki/Primary_energy.

    [18] Tomain, supra note 6, at 363.

    [19] Id. at 364. Great quantities of coal had been used for both commercial and residential heating and cooking in boilers, stoves, and furnaces.  Residential conversion of primary energy to heat simply could not match the efficiency and economies of scale offered by a switch to commercial production of inexpensive energy carriers.

    [20] Id. at 364-65.

    [21] Id. at 365.

    [22] Id. at 370.  Global economies

    [23] The Department of Energy Organization Act of 1977, 42 U.S.C. § 7101 et seq (2015).

    [24] Id.

    [25] Not only does coal feature prominently in the statement of purpose for the Powerplant and Industrial Fuel Use Act of 1978, a legislative component of the National Energy Act, the Fuel Use Act actually went so far as to generally prohibit construction or operation of “a base load powerplant without the capability to use coal or [capability to be modified to use coal].”  Powerplant and Industrial Fuel Use Act, 42 U.S.C. § 8311(a)-(b) (2015).

    [26] Tomain, supra note 6, at 371.

    [27] Id. at 370.

    [28] Id. at 371.

    [29] Sheldon L. Richman, The Sad Legacy of Ronald Reagan, Mises Institute (Oct. 1, 1988), https://mises.org/library/sad-legacy-ronald-reagan-0.

    [30] The inefficient Federal central planning of both prices and allocation of petroleum resources effectively magnified the objectively small supply shortage caused by OPEC and the Iranian revolution into the Gas Crisis of the 1970’s. Ben Lieberman, A Bad Response to Post-Katrina Gas Prices, The Heritage Foundation (Sept. 1, 2005), http://www.heritage.org/research/reports/2005/09/a-bad-response-to-post-katrina-gas-prices.

    [31] Exec. Order No. 12,287, 46 Fed. Reg. 9909 (Jan. 28, 1981).

    [32] Tomain, supra note 6, at 372.

    [33] The Regulatory Assistance Project, Electricity Regulation in the US: A Guide (2011)

    [34] Tomain, supra note 6, at 372.

  • Thorium Edge

     

    So fusion, you say, is like the wayward little brother of fission – full of promise for a clean energy future but just needs a little help and guidance from the government to get on his feet.  We should all help our little brothers right? Let me tell you about my little brother.  He’ll show up to the party late and talk a big game but, then drink too much and promptly pass out in the shower with the water running.  Once people get the water damage bills they’re reluctant to invite him back.  I don’t know about you, but my little brother is an idiot – and fusion power is the idiot little brother of fission.  It promises the world and talks a big game but then utterly fails to deliver, passing out in a shower of research dollars too drunk to make it to work in the morning.  I’m not saying that it will never work but effectively you’re trying to contain a tiny sun and, from a thermodynamic perspective, the more energy you demand from it the less it wants to work.  If the objective is a carbon-free alternative energy future I want a solution that doesn’t involve my great-grandchildren becoming physicists.

    Thorium!

    If you’re serious, and I mean really serious, about solving the primary energy/carbon problem then there is only one winner and it isn’t fusion, wind, wave, solar, hydro, or geothermal.  Sorry Hippies, it’s good ol’ baby killin’ fission that fixes Mother Earth.  Wait!  I see you readying your empty bottles of patchouli, so before you throw them up here or drench me in bong-water let me walk that back just a little.  The atomic fission I’m referring to isn’t baby killing or actually related in any way to the fission which gave us Megadeth, i.e. the kind most of us know and love.  It’s special.  Different.  So radical that Nixon killed it.  Why?  Because he couldn’t turn it into a weapon, man.

    Just ask Alvin Weinberg about Thorium-232 and the Molten Salt Reactor Experiment.  Except you can’t because he’s dead.  The Atomic Energy Commission killed him, probably with Nixon’s help.  And then they got Clinton to hide the body.  What, my hat?  You can’t read it in the back?  Its mesh backed and has “Miller High Life” embroidered on the front, and no, a tin-foil lining would be inelegant so stop interrupting.  Nixon did actually kill the program, the AEC fired Weinberg to shut him up, and Clinton buried everything when he terminated all funding for advanced nuclear research in this country.

    Let’s do a thought experiment.  I want you to imagine an America where the cost of energy is decoupled from the global price of oil.  Imagine that the gas you pump into your car is so pure that it doesn’t need a catalytic converter.  Imagine that same gasoline is made from seawater and is therefore carbon neutral.  Imagine carbon neutral plastics, lubricants, sealants, solvents, fertilizers, oils and generally the materials which make up the modern world.  Imagine a machine that could pull all the carbon we’ve put in the air back in the ground.  What does that world look like?  That was the dream Alvin Weinberg had about Thorium-232 when he designed the Molten Salt Reactor Experiment – The Thorium Dream.  Now do you want on this ride?

    A lifetime supply

    I’m mainlining straight truth and Kirk Sorenson is my Kid Charlemagne.  He found Weinberg’s body decaying in some cellar at Oak Ridge National Lab and has been spreading the gospel to anybody who’ll listen.  Right now that’s the Chinese and Indian governments and they’re throwing billions at Thorium Molten Salt Reactors because they actually work.  America invented this technology and, for reasons to maddening to dive into in a short article, abandoned then effectively forgot it ever existed.  America is a land of dreamers, thinkers, builders, and doers – aren’t we?  Surely someone around here with money and vision would want to reap the benefits of our previous research.  I mean, we worked out the bulk of this stuff on the taxpayer dime back in the 60’s, so, naturally, the Chinese and Indians are asking our labs for help.  We’re just giving it all away on the gamble they’ll share their breakthroughs with us.  We can step up our game or we can stumble drunkenly into a future defined by other countries where people are willing to take risks and dream big.