News - American Energy Alliance

Second Thoughts on Electric Vehicles

May 10, 2012 by AEA 1 Comment

One of the problems with making purchases based on “the greater good”—as opposed to the direct benefits and costs—is that your estimate might turn out wrong. For example, many people simply assumed that electric vehicles were “good for the environment” and so were willing to spend more, and put up with more hassles, thinking that they were helping future generations. Yet some recent studies suggest that the environmental case for electric vehicles is more dubious.

Electric Cars Can Create More Carbon Dioxide Emissions Than Gas Cars

In June 2011, an auto-enthusiast blog found a British study finding that electric cars may not necessarily reduce carbon dioxide emissions:

[E]lectric cars can create higher emissions over the car’s lifetime than their gasoline-powered equivalent, partly due to the pollution created from the factories that manufacture electric car batteries…

[The study] found that while in the past, tailpipe emissions have been used as the main measure of an electric car’s carbon footprint, when the emissions from the car’s total lifespan are taken into consideration, including the car’s production and disposal, some of the CO2 savings made from driving the car are offset. The study contends that “overall electric and hybrid vehicles still have lower carbon footprints than normal cars.”

…

The study found that compared with 24 metric tons for a gasoline-powered car, a mid-size electric car produces 23.1 metric tons of CO2 over its lifetime. But an electric car would have to drive about 80,000 miles before it would start saving more CO2 than a gasoline-powered car. Many electric cars will never reach 80,000 miles in their lifetime[;] electric cars get less than 90 miles on a charge, so they’re typically driven only short distances…Additionally, electric car batteries must be replaced after about four years. When the emissions connected with replacement batteries are added in, the total CO2 from producing an electric car increases to 12.6 metric tons, compared with 5.6 metric tons for a conventional car. Because recovering and recycling the metals in the battery consumes a great deal of energy, disposal produces double the emissions.

We may be witnessing the beginning of a process similar to what happened with ethanol: Initially beloved by environmentalists, ethanol soon fell into disfavor once people took into account the full consequences of turning food into fuel.

Alt-Energy Analyst Admits: “I Was Wrong About Lithium-Ion Batteries”

In addition to new doubts on the superior environmental bona fides of electric vehicles, it seems that consumers just aren’t that eager to support a transformation of the vehicle sector. An alternative energy analyst, in a refreshingly candid post, admitted recently that he had been wildly optimistic in his assessment of the demand for batteries for electric vehicles:

In February 2010 I wrote an article titled “Why I Don’t Expect A Lithium-Ion Battery Glut” that’s shaping up as one of the worst predictions in the history of my blog. This week Lux Research published a report titled “Using Partnerships to Stay Afloat in the Electric Vehicle Storm” that has me convinced that the capacity glut in lithium-ion batteries will be massive for at least a decade.

I humbly and sincerely apologize to any readers who bought shares in lithium-ion battery developers based on my starry-eyed optimism for the EV battery market.

The basic premise of my February 2010 article was that while plug-in electric vehicles would almost certainly die a slow and agonizing death from the congenital birth defects that have doomed every generation of EVs to the scrap heap of history, booming sales of electric two-wheeled vehicles, or E2Ws, and Prius-class hybrid electric vehicles, or HEVs, would be enough to absorb the slack. With eighteen months of history to look back on, it’s just not working out the way I thought it would.

As I expected, plug-in vehicles are drawing breathless reviews from the press and EVangelicals, and indifference or outright scorn from the car buying public.

…
Can you believe it? Cheap is beating cool. Who could have predicted such an outcome in the depths of the worst financial crisis since the 1930s?

Here too we see a familiar pattern: Proponents of electric vehicles (as well as energy sources such as wind and solar) keep assuring everyone that they just need government support to get over the next little hump…then they will be profitable and self-sufficient. Yet they’ve been saying that for thirty years.

Why Don’t Consumers Like Electric Vehicles?

The simple fact is that electric cars right now are very inconvenient compared to gas-powered cars. Consider the journal entry of the BBC’s Brian Milligan who drove an electric car from London to Scotland, charging it only at public stations:

It took 4 days, some serious thermal underwear, and copious amounts of waiting.

But my electric car and I finally made it to Edinburgh.

There were plenty of nervous moments, and a rather low-key entry to the Scottish capital.

After all, I was driving at 30mph and was shivering with cold.

On the last leg I’d got suddenly over-confident, and had a serious dose of range anxiety.

It has been a slow journey but Brian and the mini finally made it to Edinburgh

At one point my range indicator showed 48 miles charge left on my battery, with 50 miles still to go.

Hence the slow speed, and the lack of heater.

…

Including the time spent both charging and driving, I managed an average speed between London and Edinburgh of just 6mph.

With reports such as these, we can see why electric vehicles need a shot in the arm from a carbon tax or other government policy.

Government Can’t Pick Winners and Losers

The point here isn’t to relish in the floundering of a particular sector—people make mistaken forecasts all the time. A market economy works when investors try to pick the most profitable area to plow their money. Sometimes they hit it out of the park, and other times they strike out. Successful investors will make more money, and will have more influence over time on the allocation of scarce resources. On the other hand, investors who consistently make bad calls will eventually run out of money and will no longer pose a threat.

The one exception to this rule is government. When resources are directed through the political process, we have little reason to expect success. After all, policymakers haven’t earned their position through past profitability (the way rich investors in the private sector have). Even worse, the political authorities don’t stand to personally gain or lose, based on the success or failure of their “investments.” This is why government spending is so often seen as a corrupt boondoggle.

To take one example, consider the fate of Green Vehicles:

A Salinas car manufacturing company that was expected to build environmentally friendly electric cars and create new jobs folded before almost any vehicles could run off the assembly line.

The city of Salinas had invested more than half a million dollars in Green Vehicles, an electric car start-up company.

All of that money is now gone, according to Green Vehicles President and Co-Founder Mike Ryan.

The start-up company set up shop in Salinas in the summer of 2009, after the city gave Ryan a $300,000 community development grant.

When the company still ran into financial trouble last year, the city of Salinas handed Ryan an additional $240,000. Green Vehicles also received $187,000 from the California Energy Commission.

Salinas Mayor Dennis Donohue said he was “surprised and disappointed” by the news. City officials were equally irked that Ryan notified them through an email that his company had crashed and burned.

Conclusion

We don’t know what the efficient vehicle will be 20 years down the road. Perhaps at that point, most new cars really will be electric or hybrids. Yet we ostensibly live in a free society with a market economy. Government officials aren’t supposed to make these choices for us; let consumers spend their money without being influenced through the tax code or direct subsidies. Finally, if consumers are basing their decisions partly on feelings of saving the planet, they should do some research first to make sure their actions really are helping.

Filed Under: Facts, News, Products and Power Tagged With: CAFE

Rising Gas Prices and the U.S. Refining Industry

May 9, 2012 by AEA 1 Comment

WASHINGTON D.C. — The American Energy Alliance released a white paper today detailing the factors that contribute to the rising cost of gasoline — a combination of crude oil costs, taxes, distribution and marketing, refining costs, infrastructure issues, and regulations. The white paper, entitled “Rising Gasoline Prices and the U.S. Refining Industry” combines the scholarly research of the Institute for Energy Research with the public policy advocacy of the American Energy Alliance as a part of the two organization’s joint initiative, “American Products. American Power.”

“Gas prices today are more than double the national average in January 2009, the beginning of President Obama’s administration and the reversal of bipartisan-backed policies that promised to expand energy development on federal lands. The non-partisan Energy Information Administration now predicts that administration policies will result in 90,000 barrels per day lost in the Gulf of Mexico this year, and Alaskan fields are projected to fall by 20,000 barrels per day in 2013. These domestic supply shortages will doubtlessly continue to apply upward pressure on gas prices,” AEA President Thomas Pyle noted.

“Instead of opening new areas for production,” Pyle continued, “the Obama administration’s new five year plan for offshore drilling has closed the majority of the Outer Continental Shelf and essentially imposes an embargo on energy development when an abysmal 3 percent of our offshore lands are currently leased. Add President Obama’s rejection of the Keystone pipeline, reduced leasing activity, and the frantic pace of regulations aimed at crippling the domestic energy and refining industries, and the agenda becomes clear — an all-out war on fossil fuels that is driving the retail costs up for American consumers.”

Included in the white paper’s assessment of gas price factors are:

Crude Oil Prices: According to the Energy Information Administration (EIA) 67 percent of the price of gasoline is a direct result of the price of crude oil.
Taxes: According to EIA, federal, state, and local taxes make up 11 percent of the price of gasoline.
Distribution and Marketing Costs: Transporting the oil and refined products along with the cost of sell the productions amount of 5 percent of the price of a gasoline according to EIA.
Refining Costs: EIA reports that refining costs—which include all manufacturing costs like wages and benefits, operations costs, and taxes— amount to 12 percent of the price of gasoline, but refining is a low‐profit margin industry and refineries are closing.
Infrastructure Issues: Prices vary from region to region in the U.S. because of where oil is produced domestically, the availability of pipelines to transport the oil, and because of the location of refineries.
The Impact of Regulations: Regulations play a huge role in the price of gasoline. Despite the fact that air quality in the United States is now the best since EPA starting keeping records, U.S. refiners have spent $128 billion complying with federal environmental regulations since 1990.

To read the white paper, click here.
For the executive summary, click here.

###

Filed Under: News, Products and Power Tagged With: EIA, gas prices, gas refineries, Gulf of Mexico, Keystone XL pipeline, Obama energy plan, oil production, regulations

Parsing Obama’s Remarks on Fuel Standards

May 8, 2012 by AEA Leave a Comment

In July 2011, President Obama announced yet another federal intervention into the economy: increased fuel-efficiency mandates for vehicles. Although his speech was jocular and peppered with humor, it was also filled with very misleading “facts” about energy markets. In the present piece I’ll address some of the biggest whoppers.

The President Agrees: Rising Oil Prices Are Bad!

Although we won’t have many kind things to say about the speech, at least the president acknowledged what many interventionists refuse to concede: rising oil prices hurt Americans, in particular working families with kids. Here is the president on this presumably obvious point:

Now, for the last few months, gas prices have just been killing folks at the pump. People are filling up their tank, and they’re watching the cost rise — $50, $60, $70. For some families, it means driving less. But a lot of folks don’t have that luxury. They’ve got to go to work. They’ve got to pick up the kids. They’ve got to make deliveries. So it’s just another added expense when money is already tight.

We’ll be sure to place this quotation in the file, to deploy it the next time someone from the Obama Administration touts the wonders of a carbon tax or cap-and-trade scheme.

Are Tax Hikes the Way to Boost Production?

Although he started strong by acknowledging the importance of lowering fuel prices for Americans, Obama then strayed into trouble when diagnosing the causes of this dire situation:

[T]his is not a new problem. For decades, we’ve left our economy vulnerable to increases in the price of oil. And with the demand for oil going up in countries like China and India, the problem is only getting worse. The demand for oil is inexorably rising far faster than supply. And that means prices will keep going up unless we do something about our own dependence on oil….

At the same time, it’s also true that there is no quick fix to the problem. There’s no silver bullet here. But there are steps we can take now that will help us become more energy independent….

So I’ve laid out an energy strategy that would do that. In the short term, we need to increase safe and responsible oil production here at home to meet our current energy needs. And even those who are proponents of shifting away from fossil fuels have to acknowledge that we’re not going to suddenly replace oil throughout the economy. We’re going to need to produce all the oil we can.

But while we’re at it, we need to get rid of, I think, the $4 billion in subsidies we provide to oil and gas companies every year at a time when they’re earning near-record profits, and put that money toward clean energy research, which would really make a big difference. (Applause.)

We at IER agree that the federal government shouldn’t be subsidizing oil and natural gas production; it was the first plank in our recommendations to the new Congress early this year. But neither should the government be subsidizing solar, wind, biomass, electric vehicles, or any other energy technology. Also, when it comes to the matter of subsidies, people need to remember that adjusted for the energy output, subsidies to oil and natural gas are dwarfed by those to the politically-favored techniques. According to new data from the Energy Information Administration, solar is being subsidized by over 1200 times more than coal and oil and natural gas electricity production, and wind is being subsidized over 80 times more than the more conventional fossil fuels on a unit of production basis (ie. the amount of energy output per dollar of subsidy).

Yet if we put aside the principled issue of whether the government ought to be picking winners and losers, there is an inconsistency in Obama’s rhetoric. On the one hand, he argues that the supply of oil is having trouble keeping pace with increases in demand, and that the government should do everything it can to encourage domestic oil production. Then he states matter-of-factly that raising the tax bill on U.S.-based energy companies is the right thing to do.

Just because a firm is having a profitable year, doesn’t mean that the laws of economics suddenly stop applying. By effectively raising taxes (through ending the “subsidies” in the tax code etc.) on oil and natural gas companies, President Obama would reduce their incentives to find and develop new deposits to meet the rising demand. By the same token, if the government suddenly imposed a 50% surcharge on the incomes of Hollywood actors, they would make fewer movies per year, even though their after-tax income would still make them “obscenely rich” compared to most Americans. Incentives matter.

Obama: Taking Credit for Something Companies Would Have Done Anyway?

Let’s return to Obama’s speech and specifically the role of fuel economy standards:

And that’s why we’re here today. This agreement on fuel standards represents the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil. Think about that. (Applause.)

Most of the companies here today were part of an agreement that we reached two years ago to raise the fuel efficiency of their cars over the next five years. And the vehicles on display here are ones that benefited from that standard….

And today, these outstanding companies are committing to doing a lot more. The companies here today have endorsed our plan to continue increasing the mileage on their cars and trucks over the next 15 years. We’ve set an aggressive target, and the companies here are stepping up to the plate.

By 2025, the average fuel economy of their vehicles will nearly double to almost 55 miles per gallon. (Applause.) So this is an incredible commitment that they’ve made. And these are some pretty tough business guys. They know their stuff. And they wouldn’t be doing it if they didn’t think that it was ultimately going to be good business and good for America.

Think about what this means. It means that filling up your car every two weeks instead of filling it up every week. It will save a typical family more than $8,000 in fuel costs over time. And consumers in this country as a whole will save almost $2 trillion in fuel costs. That’s trillion with a T. [Bold added.]

We’ve asked this before and we’ll repeat the question: If a government intervention into the energy markets is supposed to be so good for business…then why does the government have to force the businesses to do it? Obama should simply fax his suggestions to these “pretty tough business guys” and then, once they see the light (that it took government officials to discover), they’ll gladly produce the more fuel-efficient vehicles without government prodding. After all, it’s good for business, right? Why would the government have to force companies to do something that is profitable, especially if they agree with the claim, as the president is here saying?

CAFE Standards Kill

What Obama is ignoring with his claims of saving trillions of dollars is that there are downsides to raising fuel efficiency standards. The automakers aren’t dumb. They know that gasoline is expensive and that, other things equal, a more fuel-efficient car is more desirable to their customers.

Yet other things aren’t equal. Engineers have already plucked the “low hanging fruit” when it comes to vehicle design. In order to make vehicles more fuel efficient, the increase must come with a sacrifice in some other desirable feature, such as size or weight of the vehicle. That is why interfering with the optimal tradeoff—as it would be determined in a free market—will lead to undesirable consequences, such as more traffic fatalities.

Writing for The American Thinker last year, J.R. Dunn summarized the lethal legacy of CAFE standards:

Fuel standards are the longest-lived of an entirely futile array of attempts to address 1970s oil shortages. They first went into effect in the 1975 Energy Policy and Conservation Act as the Corporate Average Fuel Economy program, better known as CAFE. Under the CAFE standards, domestic and foreign automobile manufacturers had to meet a certain mileage standard in their cars and light trucks. They were allowed a very short time to carry this out before fines were levied, so they met the challenge in the easiest way possible: by designing small engines that used less fuel while lowering the size and weight of new vehicles to preserve performance.

…

The new regulations did accomplish one thing — they killed drivers and passengers in large numbers. By lightening cars and removing material, auto companies were inadvertently discarding the armor that protected motorists in the event of a crash. Similarly, the compressed new models lacked space for impact forces to attenuate before causing damage and injury. Drivers in lightweight cars were as much as twelve times more likely to die in a crash. It was once said about American autos that they were “built like tanks.” Many of the new models from the late ’70s onward more closely resembled go-carts — and proved to be about as sturdy.

…

How many deaths have resulted? Depending on which study you choose, the total ranges from 41,600 to 124,800. To that figure we can add between 352,000 and 624,000 people suffering serious injuries, including being crippled for life. In the past thirty years, fuel standards have become one of the major causes of death and misery in the United States — and one almost completely attributable to human stupidity and shortsightedness.

Conclusion

Consumers desire fuel efficiency in their vehicles, but that isn’t their sole criterion—if it were, we’d all be riding bicycles or skateboards to work. The president’s claim that higher fuel efficiency mandates will be good for business is absurd on its face, because if that were true, no mandate would be necessary. In order to comply with the new regulations, automakers will produce vehicles that will be more dangerous. Americans may save money at the pump, but fewer of them will be alive to enjoy the savings.

Filed Under: CAFE, Facts, News, Products and Power, Renewable Fuel Standard Tagged With: CAFE

EPA’s Absurd Defense of Its Greenhouse Gas Regulations

May 7, 2012 by AEA 1 Comment

The Environmental Protection Agency (EPA) filed a court brief in 2011 in its ongoing litigation over the regulation of greenhouse gas emissions. Amazingly, they are saying it would be absurd to follow the law. I’m not joking, as I will demonstrate below. The Institute for Energy Research (IER) has consistently opposed granting the federal government even further intervention into the operation of the economy and specifically of energy markets. Ironically, EPA’s own court documents are evidence of just how burdensome and unrealistic their stated objectives are, and why our opposition is sound.

The Context

In 2009, EPA had to decide whether or not greenhouse gases such as carbon dioxide endanger public health and welfare and therefore needed to be regulated using the Clean Air Act. At the time, IER and other groups warned EPA that Congress never intended EPA to regulate greenhouse gases. We warned EPA that if they went forward, the Clean Air Act would require EPA to not only regulate large sources of carbon dioxide emissions, but also 260,000 office buildings, 150,000 warehouses, 100,000 schools, 92,000 health care facilities, 58,000 food service buildings, 37,000 churches, 26,000 places of public assembly, and 17,000 farms. IER argued that these regulations would be incredibly expensive, that the regulations would be required by law, and that Congress never intended to regulate greenhouse gases from these, or any other sources, with the Clean Air Act.

EPA, however, announced steps to regulate greenhouse gases. To sidestep the clear letter of the law, EPA came up with two rules explaining why it was avoiding what the law required. The first is commonly referred to as the “timing decision,” with the official title of “Reconsideration of Interpretation of Regulations that Determine Pollutants Covered by Clean Air Act Permitting Programs,” 75 Fed. Reg. 17,004 (April 2, 2010). The regulation is known as the “tailoring rule,” or more officially, “Prevention of Significant Deterioration [PSD] and Title V Greenhouse Gas Tailoring Rule,” 75 Fed. Reg. 31,514 (June 3, 2010).

The tailoring rule in particular is an obvious attempt by EPA to avoid regulating smaller sources of carbon dioxide emissions, despite what the law states. In the tailoring rule, EPA states that it couldn’t follow the plain text of the law because that would lead to “absurd results.” At the time, we argued that EPA was getting it backwards. The only reason that following the law would lead to “absurd results” is because Congress never intended EPA to regulate greenhouse gases in the first place. In truth, it was EPA’s absurd decision to regulate carbon dioxide that now produced the predictably absurd results.

EPA is now in court because they deliberately violating the Clean Air Act.

They are asking the Court to allow them to implement the parts of the Act they want, and avoid the parts they know will cause political upheaval from sea to shining sea, proof that their decision to grant themselves more governmental powers was a political one. In the present post, we’ll concentrate on the sheer size and absurdity of the regulatory burdens of the EPA’s announced position, using the EPA’s own brief as our source.

Be Careful What You Wish For

On pages 48–49 of the EPA’s brief, EPA admits what we told them two years ago—that the Clean Air Act forces EPA to regulate over a million carbon dioxide sources and doing so will be incredibly expensive. Here’s what EPA’s brief says:

EPA studied and considered the breadth and depth of the projected administrative burdens in the Tailoring Rule. There, EPA explained that immediately applying the literal PSD statutory threshold of 100/250 tpy (tons per year) to greenhouse gas emissions, when coupled with the “any increase” trigger for modifications…would result in annual PSD permit applications submitted to State and local permitting agencies to increase nationwide from 280 to over 81,000 per year, a 300-fold increase…Following a comprehensive analysis, EPA estimated that these additional PSD permit applications would require State permitting authorities to add 10,000 full-time employees and incur additional costs of $1.5 billion per year just to process these applications, a 130-fold increase in the costs to States of administering the PSD program….Sources needing operating permits would jump from 14,700 to 6.1 million as a result of application of Title V to greenhouse gases, a 400-fold increase.…Hiring the 230,000 full-time employees necessary to produce the 1.4 billion work hours required to address the actual increase in permitting functions would result in an increase in Title V administration costs of $21 billion per year. [Bold added.]

These are astounding figures. And remember—these are the government’s costs in handling the new paperwork. The above estimates do NOT take into account the economic burden on the people who would be affected by the rules—building owners, hospitals, large nursing homes, large churches, as well as industry and regular consumers. But EPA’s argument here is that it’s really, really expensive and difficult to follow the law, therefore, EPA should not be forced to follow the law. We would like to remind EPA that we told them that this was the foreseeable outcome two years ago when they decided to regulate greenhouse gases.

EPA Is Reasonable?

The defender of the EPA might object, arguing that the purpose of the timing and tailoring rules is to mitigate the immediate impact of the new burden. So why are people still complaining? EPA recognized the absurdity of a brute-force application of the law, and so will exempt itself for a while.

But wait just a moment. Here’s where EPA states that it will move ahead with its plans to regulate millions of emitters of carbon dioxide (e.g. buildings, hospitals, churches, etc.), even though the administrative costs might still be prohibitively high in 2016. From page 83 of the brief:

While EPA acknowledges that come 2016, the administrative burdens may still be so great that compliance at the 100/250 tpy level may still be absurd or impossible to administer at that time, that does not mean that the Agency is not moving toward the statutory thresholds. To the contrary, through this regulatory process “EPA intends to require full compliance with the CAA applicability provisions of the PSD and Title V programs….”…(explaining that EPA will implement the tailored approach “by applying PSD and Title V at threshold levels that are as close to the statutory levels as possible, and do so as quickly as possible….”).

EPA admits that it is “absurd or impossible” to follow the law. That should give EPA and the courts pause. It if is “absurd or impossible” to follow the law, that’s because Congress never intended EPA to regulate greenhouse gases in the first place. That’s the most obvious conclusion. The US public is now seeing the corruption implicit in legislation which invites an agency like the EPA to make a determination whether it should be given more powers over our economy or not. Should we be surprised that they cunningly declare a serious national problem exists that requires their immediate exercise of power, but that they also choose a political answer, regardless of the law, since Congress has avoided the hard choices by giving them these powers?

Conclusion

The EPA’s brief is yet another example of the Kafka-esque world in which Americans now find themselves. When the Clean Air Act was passed, nobody would have possibly thought it would one day be used to regulate the emission of carbon dioxide—what plants breathe!—as a pollutant harmful to human health. The very notion would have struck most Americans as absurd—and indeed the EPA’s analysis confirms that intuition.

It seems that the only thing preventing the enforcement of absolute absurdity right now is the government recognizing that it itself wouldn’t be able to keep up with its own paperwork. That is small reassurance indeed. With private investment stalled and unemployment unacceptably high, the American economy needs regulatory certainty and lower energy prices, not ever more constraints and hurdles placed on job creators.

Filed Under: News, Products and Power Tagged With: greenhouse gases

Greenhouse Gas Regulations are Stealth Taxes

May 3, 2012 by AEA 1 Comment

In late March the EPA proposed new rules limiting carbon dioxide emissions from new power plants to 1,000 pounds per megawatt-hour. This move spells a death-blow to the coal-fired power plant, as the New York Times admits in its coverage of the announcement:

The Obama administration’s proposed rule to control greenhouse gas emissions from new power plants — the first ever — could go far toward closing out the era of old-fashioned coal-burning power generation.

…

Recently built power plants fired by natural gas already easily meet the new standards, so the rule presents little obstacle for new gas plants. But coal-fired plants face a far greater challenge, since no easily accessible technology can bring their emissions under the limit.

There is so much wrong with this approach, that it’s hard to know where to begin.

For one thing, note the implicit picking of winners and losers. The EPA’s proposed rule clearly would deliver market share not only to the pet technologies (such as solar and wind) favored by the environmental left, but would primarily benefit natural gas-fired power plants, since they are currently the major commercial rival to coal. (According to the EIA, in 2011 coal provided 42 percent of the nation’s electricity, while natural gas accounted for 25 percent and nuclear 19 percent.) By issuing a rule that so clearly cripples one technology, the EPA opens the floodgates to special interest lobbying behind the scenes, giving it a great carrot-and-stick over private industry.

We also must never forget that government restrictions on activities act very much like a stealth tax. Indeed, at a formal level environmental economists find little difference between a “cap and trade” system, limiting carbon dioxide emissions by quantity, versus an explicit tax on carbon emissions. By calibrating the numbers, the government can achieve largely the same results tackling either the quantity of emissions or by taxing them. Therefore, if the American public understands that slapping a massive new tax on new coal-fired power plants would be a bad idea, then they should also oppose the EPA’s new rules.

Finally, the EPA’s proposal is horribly inefficient because it is so specific. There are many problems with an explicit tax on carbon, or on a functionally-equivalent cap and trade program. Yet the reason many economists support these plans as a way of tackling climate change, is that they are “market-based.” This term (which is admittedly a misnomer, since government officials implement the schemes) refers to the fact that under an explicit carbon tax, people in the private sector figure out where to cut back on emissions. They do so, naturally, in the least costly manner, and so the macro result is that society achieves the government-mandated emissions reduction in the cheapest way possible.

In stark contrast to these “market-based” schemes, it is far costlier for the government to directly mandate particular areas where emissions reductions must occur. The EPA’s rule—limiting only new power plants to a very specific maximum of 1,000 pounds of carbon dioxide per megawatt-hour—is incredibly arbitrary in this regard. Even using the standard theoretical framework that justifies government policies to reduce emissions, the EPA’s proposal is incredibly inefficient, achieving its stated targets at higher costs than necessary.

Obviously what is happening is that the Obama Administration could not push through a full-blown cap-and-trade program, let alone an explicit carbon tax. The American public is too smart to embrace a massive tax on energy, especially in the midst of a severe recession. The EPA’s proposed emission rules on new power plants is simply a stealth tax that will have similar effects on electricity prices.

Filed Under: News, Products and Power Tagged With: greenhouse gases

Breaking Down EPA’s Light-Duty GHG Emission Standards

May 2, 2012 by AEA 4 Comments

On February 13, 2012, IER submitted its comment on EPA’s proposed light-duty truck greenhouse gas emissions standards. As we will see, even relying on the EPA’s own analysis shows just how absurd federal intervention into energy markets has become. The debate would be funny, if it didn’t have such serious consequences in terms of economic welfare and indeed traffic fatalities.

Takeaway Messages

For those readers with a busy schedule, the following bullet points summarize the main issues raised in IER’s comment:

EPA’s proposed regulation:

Would force 6 million drivers out of the market, according to one estimate.
Would increase the price of a new car by thousands of dollars.
Assumes that Americans are too dumb make good decisions about fuel economy, even when those mistakes add up to billions of dollars per year.
Is supposed to do something about global warming, but according to EPA itself the rule would, at most, reduce global temperatures by 0.02 degrees C in the year 2100.

From the Introduction of IER’s Comment

On December 1, 2011, the Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) proposed light-duty vehicle greenhouse gas emission standards and corporate average fuel economy standards for light-duty vehicles for model year 2017–2025. In other words, EPA is proposing to regulate carbon dioxide emissions from cars and trucks.

This comment explains that EPA, and by extension NHTSA, fail to justify increasing the greenhouse gas emissions standards for light-duty vehicles. According to EPA, the entire reason it is regulating carbon dioxide emissions from cars and trucks is to reduce global warming and climate change, but EPA’s rule does not affect the pace of climate change in any meaningful way. Therefore, this rule is fatally flawed or the endangerment finding is fatally flawed.

EPA’s cost-benefit analysis for this rule is also fatally flawed. EPA’s cost-benefit analysis shows positive net benefits only because EPA omits the cost to consumers of limiting consumer choice. Instead, EPA credits forced fuel savings as a benefit. Because the rule increases the upfront cost of buying a car, the rule forces 7 million drivers out of the car market. This means that 7 million people will not be able to enjoy the fuel savings calculated by EPA because they will not be able to afford a car in the first place.

Furthermore, EPA’s cost-benefit analysis utilizes the “social cost of carbon.” The “social cost of carbon” is a metric developed to try to estimate the impact of emitting on ton of carbon dioxide. The estimates developed through EPA’s social cost of carbon analysis, however, are arbitrary and capricious. In reality, the social cost of carbon is an unsupportable metric for use in federal rulemaking. Even on its own terms, the social cost of carbon estimate is inapplicable for EPA’s analysis, because of what is called “leakage” in the climate change literature. Specifically, EPA ignores the possibility that its rule will increase greenhouse gas emissions outside of the United States, through mechanisms such as a lower world price of oil due to restricted American demand.

For these reasons, EPA should not regulate greenhouse gases from vehicles using the Clean Air Act.

Consumers Massively Dumb?

Perhaps the most revealing aspect of the paternalism underlying the EPA’s position is how thoroughly it relies on massive consumer error. It’s true, standard economic theory allows a role for government intervention to correct “market failures” arising from the negative externalities of greenhouse gas emissions. However, that’s not what EPA’s case focuses on. Instead, depending on the parameters, anywhere from 56 to 73 percent of EPA’s claimed “net benefits” from its rule, derive from EPA’s assumption that motorists irrationally fail to understand how much money they could save by buying more fuel-efficient vehicles.

For example, in the year 2040 alone, EPA’s analysis estimates that American car buyers—in the absence of the farsighted rule on light-duty trucks—will miss out on $104 billion in savings they could have reaped, had they paid higher sticker prices for vehicles that would get better fuel economy. In contrast, EPA’s estimate for the total gains from avoided climate change damages as well as other factors (such as reduced macroeconomic volatility from reduced reliance on oil imports), might yield as little as $29 billion in the year 2040, in the scenario where the “social cost of carbon” is relatively low.

The reader should not be fooled that EPA is promulgating this rule in order to combat climate-change damages. When trying to justify the higher sticker prices its methods will impose on vehicle buyers, EPA’s analysis rests primarily (again, 56 to 73 percent, depending on the other assumptions) on the view that it will be directly doing these buyers a favor, by making them buy more fuel efficient cars that will pay for themselves.

EPA Rule Will Lead to More Traffic Fatalities

Besides the generic harm to consumers coming from government intervention, a specific consequence of the new rule will be increased traffic fatalities, relative to what the trend otherwise would have been. EPA’s analysis (from which it derived estimates of the impact on vehicle prices) assumed that all other vehicle attributes would be held constant, and that the increased cost of production (to meet the higher fuel economy standard) would be passed entirely on to the final buyer.

However, in reality what will happen is that in the new equilibrium, manufacturers will produce vehicles that are lighter than otherwise would have been the case, and hence they will not need to be as expensive as EPA assumes. In other words, in practice consumers will not choose to have the full brunt of the new rule show up merely in higher sticker prices, but they will spread the pain around to other dimensions, such as vehicle safety.

As we document in the comment (pp. 14-15), estimates of excess traffic fatalities attributable to the introduction of CAFE standards in the 1970s range from 42,000 to 125,000 deaths.

But At Least the Rule Will Halt Climate Change, Right?

The most alarming and yet humorous piece of IER’s comments revolves around EPA’s own discussion of the rule’s effect on climate change. Here is EPA making the case for its rule:

The results of the analysis demonstrate that relative to the reference case, projected atmospheric CO2 concentrations are estimated by 2100 to be reduced by 3.29 to 3.68 part per million by volume (ppmv), global mean temperature is estimated to be reduced by 0.0076 to 0.0184 °C, and sea-level rise is projected to be reduced by approximately 0.074–0.166 cm, based on a range of climate sensitivities.

Yes, you read that right: EPA itself suggests that the upper range of the likely impact of the proposed rule will slow global warming by less than 2 hundredths of a degree Celsius…by the year 2100. It is for this social goal (as well as the free money EPA will give to ignorant consumers who can’t calculate fuel savings on their own) that justifies—again, according to EPA’s own numbers—imposing aggregate costs on vehicle buyers of $36 billion in the year 2030 alone (to pick just one year’s figure).

Conclusion

As a cursory examination of IER’s formal comment shows, the proponents of government intervention into the energy sector simply cannot make a decent case, when they are asked to come up with actual numbers. As IER’s analysis of EPA’s own table shows, the only way to ensure that the purported benefits of the rule exceed the admitted costs is to invoke massive and systematic consumer irrationality. The innocent layperson may have thought that looming climate change damages would be enough, but that isn’t the case for the lower range of sensitivity estimates, again as EPA’s own table shows.

Rather than imposing new regulations that will stifle the manufacturing sector and lead to a higher rate of traffic deaths, the government would be better advised to remove other interventions and let the market work.

Filed Under: CAFE, News, Products and Power Tagged With: CAFE

Correcting Krugman on Ozone

May 1, 2012 by AEA 2 Comments

Nobel laureate and New York Times columnist Paul Krugman has been known to say some wacky things. After the 9/11 attacks, he opined that they “could even do some economic good.” In 2002 he wrote that only a housing bubble could rescue the U.S. economy. After the tsunami, Krugman argued that the Japanese nuclear disaster “could end up being expansionary.” And this past August, Krugman went on CNN to claim that a fake alien invasion could pull the world out of recession in 18 months — 8 months later and there still remains a lot to be desired in terms of economic growth.

In this context, it’s not surprising that Krugman thought that the EPA should have gone forward with its plan to tighten ozone regulations—in order to create jobs. That’s right, Krugman wasn’t arguing (as an environmentalist economist might) that the benefits in human health outweighed the direct economic costs in terms of reduced output (and hence lower employment). No, Krugman actually claimed that it would stimulate the economy if businesses had been forced to spend money complying with the more stringent regulations.

Krugman on How to Fix the Economy

Let’s quote Krugman in his own words:

Let’s talk about the economics. Because the ozone decision is definitely a mistake on that front.

As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.

This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.

Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.

And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.

There are (at least) two main problems with Krugman’s analysis. First and most important, he is neglecting the (obvious) fact that adding new constraints on economic activity is hardly the way to jumpstart a stalled economy. Second, he is wrong when he claims that business investment to comply with the new regulations would largely come out of “idle” cash. On the contrary, much of their spending would come at the expense of other investments—assuming the firms in question didn’t go out of business or relocate out of the country.

Kicking the Economy When It’s Already Down

Although he acknowledges the “Broken Window” fallacy (which I discuss at length in this article), Krugman nonetheless violates its commonsense lesson: It doesn’t “help the economy”—certainly not in any meaningful sense—to force businesses to spend money just in order to get back to their original starting position. Contrary to Krugman’s earlier analyses, the 9/11 attacks, the Japanese nuclear scare, and a hypothetical alien invasion hoax would not help us out of recession.

In the case of the proposed ozone regulations, Krugman doesn’t even discuss the disastrous impact on the “supply side.” Instead, he narrowly focuses on demand. Krugman thinks the problem with the economy right now is that people aren’t spending enough; he doesn’t realize that the EPA would have seriously hampered the economy’s ability to produce enough.

The EPA had proposed to reduce ozone standards down to 0.06 parts per million, or 60 parts per billion. That concentration works out to less than a cup of water in an Olympic-sized swimming pool. To understand just how draconian that threshold would have been, consider that the EPA itself conjectured that up to 96 percent of the monitored counties in the nation would have been in non-attainment. One study estimated that the tighter threshold would cost more than $1 trillion.

Environmental economists can argue about the pros and cons of such regulations. (Even the EPA’s own numbers, however, make a dubious case.) Yet Krugman hasn’t even attempted such a balancing act. What if the EPA banned the use of all fossil fuels? Imagine the huge burst of investment spending, as Americans loaded up on bicycles and skateboards!

This suggestion isn’t merely intended for humor. It is the same principle as that espoused by Krugman; the difference is merely one of degree. It would obviously be economic suicide if the EPA banned the use of fossil fuels. By the same token—though of course not nearly to the same extreme—it would be economically damaging if the EPA had gone through with its tighter ozone regulations.

“Idle” Cash Isn’t Really Idle

Krugman commits a subtler mistake in his analysis when he says that new spending on regulatory compliance wouldn’t come at the expense of other investment spending. He claims that because firms are currently sitting on huge balances of “cash” (which means short-term, liquid assets, such as Treasury bills, and not paper currency in a piggy jar), they would have no reason to curtail other expenditures if the EPA foisted new rules on them.

Krugman is simply wrong on this count. Just like households, firms hold liquid assets for a reason. They are currently holding large sums not because they “did all their spending” and had a bunch left over. Rather, when determining the optimal composition of their portfolios, firms have decided—because of the tremendous economic uncertainty—that it is prudent to carry a much larger share of their wealth in the form of “cash” than they normally do.

The EPA certainly wouldn’t make firms more relaxed about the future, if it tightened the screws on ozone regulations and thereby rendered the firms even more financially precarious. It’s true, firms might pay the compliance expenses partially by drawing down their cash balances, but they would also spread the pain around their other investments too. Ironically, Krugman has to agree with me, because I am merely repeating the same analytical framework that he deployed to (erroneously) criticize Eric Cantor’s position on hurricane disaster spending.

Conclusion

Contrary to the views of Nobel laureate Paul Krugman, shackling the economy is not the way to grow out of a recession. Rather than imposing new regulations that would drive up the prices of energy and other goods, the government should remove constraints on production.

Filed Under: Emissions Standards, News, Products and Power Tagged With: Krugman, Ozone

EPA Should Do “Impact Assessment” of Tier 3 Regulations

April 30, 2012 by AEA Leave a Comment

Those familiar with federal regulations know that when an owner seeks to do develop his or her property—perhaps by clearing a marsh in order to build a shopping mall—there must often be an “impact” assessments (relating to the local environment, economy, etc.), which can cost a pretty penny. In addition to the direct burden of taxes, such regulations stifle innovation and job creation.

In an interesting twist, in late March Rep. Ed Whitfield (R-Ky.) proposed that the EPA get a taste of its own medicine. Whitfield introduced

new legislation that would require a presidential commission to investigate the impact of Environmental Protection Agency regulations on consumer gas prices. A discussion draft of the bill would also clamp down on any new regulations until six months after the commission issues a report to Congress.

…

The bill would specifically stop the agency from issuing so-called Tier 3 regulations to reduce sulfur in gasoline, new source performance standards for petroleum refiners, renewable fuel standards, ozone standards and some greenhouse gas regulations. [Bold added.]

As explained in this post, the EPA is moving ahead with its efforts to impose a “Tier 3” tightening of standards that would reduce the permissible levels of sulfur in refined gasoline. According to a study by Baker & O’Brien, Tier 3 standards would impose upfront costs on refiners of just under $10 billion, and cause a permanent increase in refining costs of 6 to 9 cents per gallon of gasoline. These economic harms would come with only a relatively small reduction in sulfur content, because previous regulations have already greatly reduced the sulfur content in gasoline.

Regardless of the specifics in the bill, the concept behind Whitfield’s proposal is refreshing because it underscores the fact that there are always tradeoffs. The reason refiners don’t currently meet the stringent new Tier 3 guidelines (which technically haven’t been formally announced yet, making it even harder for industry to plan) is that it is more expensive to produce gasoline with such low concentrations of sulfur.

Government officials have the power to issue new edicts, and to levy fines on private-sector producers who are caught violating the regulations. Yet not even the federal government has the power to repeal economic law. Imposing an artificial constraint on refiners—by forcing them to produce gasoline with lower sulfur concentrations than they otherwise would have chosen—necessarily raises costs of production. Since refiners are in business to make money, ultimately motorists will see higher prices at the pump.

Just because a policy is costly, doesn’t mean it’s a bad idea; we have to compare the costs with the benefits. Yet since sulfur concentrations have already come down more than 90 percent since the late 1990s, the marginal benefits become ever more elusive. Particularly when Americans are groaning under high gas prices, EPA needs to offer a much stronger case for the tighter Tier 3 standards.

Filed Under: News, Products and Power, Tier 3 Standards Tagged With: Tier 3

AEA Statement on EPA Administrator’s Resignation

April 30, 2012 by Benjamin Cole Leave a Comment

WASHINGTON D.C. — American Energy Alliance Senior Vice President Daniel Kish released the following statement on the resignation of EPA Region 6 Administrator Al Armendariz, announced earlier today:

“Like a shamed Roman soldier who dishonored Caesar in battle, EPA Administrator Al Armendariz fell on his own sword today, hoping that professional suicide would save the EPA and the Obama White House from more political fallout. But there is no indication that the regulatory crucifixions that Al Armendariz’s proposed will stop, despite damage control efforts being coordinated from the Obama campaign and the White House.

“The loss of one rogue regulator will not change the culture of arbitrary enforcement and politicized rule making that has developed at Lisa Jackson’s EPA. Congress must continue its vigilant oversight efforts to determine how pervasive Administrator Armendariz’s views are at the agency, and how consistently his proposed enforcement strategy has been applied. How many other EPA political appointees hold similar views, but have yet to be caught on tape advocating them so brazenly?

“From discredited studies attacking hydraulic fracturing to phony science behind the agency’s regulatory assault on conventional energy sources, there’s overwhelming evidence that the fish rots from the head. The American people deserve answers, especially given President Obama’s public assurances that his administration would find more ways to ‘skin the cat’ after the failure of his cap-and-trade policies.”

###

Filed Under: Press Releases

National Survey: Wrong Direction for Obama Energy Policies

April 30, 2012 by Benjamin Cole 2 Comments

Americans see Direct Connection Between Domestic Energy Production and Lower Prices

WASHINGTON D.C. – As a part of an ongoing multi-million dollar initiative to educate the American public about energy issues, the American Energy Alliance (AEA) released today results of a national survey of likely voters that reveals overwhelming support for increased energy production and widespread acknowledgment that a healthy energy industry – which not only provides us with our basic energy needs, but also is responsible for hundreds and hundreds of products we use every day – is a critical link to lower energy prices and an improved economy.

“Americans see a clear connection between a robust energy industry and lower energy prices here at home,” said Tom Pyle, President of AEA. “A solid majority of likely voters want our government to promote policies that increase energy production and help guarantee energy security. Americans overwhelmingly agree that more production from U.S. lands will reduce our level of imported oil and help moderate gasoline price spikes,” Pyle added.

Highlights of the survey include:

Almost three-quarters of respondents (77%) said yes when asked whether increasing U.S. production could help moderate gasoline prices. 4 in 5 said that such an increase in production could help either “some” (32%) or “quite a lot” (57%). Even 52% of moderates and 38% of liberals think that additional production of oil would help moderate gas prices ‘quite a lot’. Additionally, 83% of total respondents agreed that increased U.S. production would reduce our dependence on imported oil.
Respondents rejected the Obama Administration’s approach that emphasizes making the economy less dependent on fossil fuels versus increased production. In that hard test, more than half (51%) preferred increased American production, while 38% said that the right answer was to reduce our overall dependence on fossil fuels.
Respondents think that the federal government can do more. When asked (on a scale of one to ten, with ten being “quite a lot”) how much the federal government could do to affect the price of gasoline, the mean response was 6.5 (and the median response was 7). When asked what the President was actually doing, the mean response was 3.6 (and the median was just 3). Voters perceive a fairly significant gap between what can be done and what is being done.

Respondents are clear that the President is not as committed to traditional fuels as he is to alternative fuels. Almost two thirds (64%) agreed that the President would rather focus on alternative energy instead of oil and gas. It appears that the President has been branded as an alternative energy fan; that means that his efforts to seem to be in favor of more oil and gas production ring hollow (which is probably why respondents rate his efforts so low).

The national telephone survey of 1000 likely voters was conducted by MWR Strategies on April 6^th through April 13^th, 2012, and has a margin of error of 3.1%.

To view the actual survey questions, click here.

###

Filed Under: Press Releases