James Trainham, James Bartis, David Dayton, Michael Roberts, and Daniel Weiss
Let’s continue our discussion on the use of renew-ables and alternative energies for energy security.
James Trainham: As an engineer, I work with bal-ances: charge balances, mass balances, momentum balances. I also work with cash balances because en-gineers do take economics into account. One of the things we talked about a lot today is the market. I’d like the panel to discuss the real cost of our existing energy infrastructure. A number of studies note the hidden costs of our existing energy supplies. For ex-ample, just recently a Harvard Medical School report stated that coal is costing healthcare in the United
States between $140 and $300 billion a year. That is not reflected in the pump price.
Likewise, some suggested today that “we could pull our military back.” If you are trying to find out how many military installations the United States has in the Middle East and Africa, you’ll find that the list covers a page, not counting what’s in Afghanistan and Iraq. That also covers a page. There’s a website that will show you where all these military installa-tions are. So you have to ask, “What does that cost and who’s paying for it?” It’s obviously the American taxpayer who’s paying for that to keep oil flowing.
Thus we have a lot of hidden cost, and we can as-sign that cost a number. Shouldn’t we also be look-ing at the alternative energy costs? They are always being criticized on the grounds that they’re being subsidized. Let’s look at the hidden subsidies and see what it really costs to produce various energy sources.
Let’s look at the human costs and the societal costs we’re paying for the existing infrastructure, and com-pare the total balance of cash and costs. That real cost should influence our decisions as we make our moves toward alternative energy.
Do we institute various taxes to influence the en-ergy market? How might we address the total cost so that we actually make the right economic decisions instead of making economic decisions just because we have institutionalized our current energy sources?
Michael Roberts: I mostly do work on agricultural commodity prices, and I’m doing some work on the effects of ethanol on commodity prices worldwide. To answer your question, in general the economist solu-tion to problems like this is to think in terms of ex-ternalities. An externality is some kind of effect from a market transaction that affects someone besides the
people trading something on the market, say, oil. In other words, I buy my gasoline and drive my car. The gasoline is going to cause pollution that affects every-one, but I’m not paying for the price of pollution. So the economist’s solution to this is to put a number on the external social cost and factor that into the price of gasoline.
Gregory Mankiw, a conservative senator who was a leading advisor to President Bush, and a lead-ing economist at Harvard, has written the best-selllead-ing text book on the principles of economics.1 He started something called the Pigou Club, so called after the Pigouvian tax. The idea behind this tax is that we should put a tax on these external costs.2 So if we think that carbon emissions are causing global warming and that there are external costs related to that, we should put a price on it. We can tax these externalities, and then perhaps even lower income taxes or other sorts of taxes. We should tax the things that have social costs and thereby increase efficiency rather than reduce it.
Even this fairly conservative economist highly recom-mends these kinds of taxes, and I think that’s a rather standard economist answer to that problem.
Of course, there are other ways of doing it. Cap and trade is another way of putting a price on exter-nalities, and we did that with sulfur dioxide markets.
We introduced tradable permits for sulfur dioxide around 1995-96, and this effectively put a price on sul-fur emissions. This mechanism very rapidly lowered the costs of reducing sulfur emissions. This approach is in contrast to command and control mechanisms where you order the electricity plant to employ scrub-bers or other particular techniques. Instead of forcing their hand, you simply put a price on the offending pollutant and then let the markets work it out.
That’s the standard economist answer to your gen-eral question, and I favor that sort of thing. It can be politically challenging to do, as we’ve seen time and again. But in cases where it has been done, it’s been, for the most part, fairly successful.
James Bartis: When I look at just gasoline—not coal, for the moment, but just gasoline—I see four as-sociated externalities that are not being accounted for.
In other words, there are four additional costs that should be factored into the price of gasoline. I’ll just list them here and try to provide some numbers.
In the first place—and this is the most egregious example—the gasoline tax doesn’t pay for the high-way infrastructure in any state of the United States.
Instead, we subsidize drivers by taking money from the general funds of the states and the general fund of the federal government. The gas tax needs to be 25 to 50 cents higher per gallon to break even on the infrastructure requirement. Then there is the energy security problem that goes along with having a cartel at play. We at RAND and some others have looked at that externality and calculate it at about 25 to 50 cents a gallon. There’s also a smaller externality called the supply risk. A recent paper by two reputable econo-mists suggests that’s about 15 cents a gallon. Then there is the greenhouse gas problem. We often hear proposals suggesting that there should be a charge for releasing carbon dioxide into the atmosphere. For each $10 charged for emitting a ton of carbon diox-ide emissions, the price of gasoline would go up by roughly 20 cents per gallon. Finally, gasoline use has health costs. Even though we have much cleaner cars, there is still a particulate problem. I don’t know what the size of that externality is. My very rough guess is that it is at least 10 or 15 cents per gallon. If you put all
these externalities together, you ought to have a gaso-line tax that’s about $1 to $1.50 higher than it is today.
In effect, we subsidize gasoline to that extent.
There are other subsidies directed at promoting domestic production of oil, and the administration is trying to address those right now. Our failure to effec-tively address the externalities associated with oil use is one of the key problems of our current national en-ergy policy. If we had a gasoline tax $1.50 higher than the one we have now, we would be using less gasoline and we wouldn’t drive such large cars. After all, the Europeans live very well. They use half the petroleum we use on a per-person basis. So there are benefits to increasing the gas tax to reflect externalities.
The reason we don’t do this is that there’s a lot of wealth associated with the current system. There’s a lot of money to be had, and there’s a lot of inertia that gets in the way of our doing anything that moves us toward a rational energy policy. Instead, we continue to rely on the hope that there’s some magic research solution out there, that some new technology is go-ing to come in and solve all our energy problems. We make our problem worse by subsidizing the wrong fuels. If we look at some of the renewable fuels be-ing pushed by the federal government, we’ll find that there are also significant externalities associated with them.
David Dayton: That was a very good segue into what I want to say. Unfortunately, for things like al-ternative fuels, you have to consider the entire value chain from the start—the feedstocks, biofuels feed-stocks, all the way to transportation, marketing, and distribution to get the fuel to the pumps.
It’s going to be hard to develop new technologies, at least in the current environment in which the
in-frastructure is geared to fossil fuels. Until we do, we won’t be able to determine what those externality costs are. That’s because we’ve got such an uphill bat-tle to fight. How can alternatives compete with cost-competitive fuels like petroleum-derived distillates, especially given that these alternatives are inherently higher in cost to start with? There’s really no economic incentive yet to adapt to new technologies.
There are some known externalities. In particular, there are issues connected with feedstock distribution.
Biomass inherently is much less energy dense than all the other fossil fuels that are being consumed in the country.Therefore, you’ve got a huge logistics prob-lem. Leaving aside farming practices for a second, you’ve got to move material from the farm or growing site to a processing plant. There are associated costs with that are more challenging than pipelining and having supertankers sail through the Straits of Hor-muz filled with fairly cheap crude oil.
Then you’ve got to consider conversion technology options. Right now, the only biofuel that really is in the marketplace is corn ethanol, on the order of about 10 to 12 billion gallons per year. There’s a smaller market for biodiesel from vegetable oils, about a billion gal-lons per year. But the scale of the fuel infrastructure, just for motor gasoline, is about 149 billion gallons per year. At 10 percent ethanol, we’ve already maxed out on the permissible fraction of ethanol in gasoline (i.e., the “blend wall”). We’re looking at new policies to raise that fraction.3 But even if new technologies were developed, let’s say, for ethanol, which may or may not be a good fuel, there’s no market for it. That’s be-cause there are not enough flex-fuel vehicles to use it nor a higher blend wall.4
I am an advocate of looking into advanced biofuels as a way to replace hydrocarbons. The energy balance for those fuels is even more challenging than it is for ethanol because you can’t retain any of the oxygen that’s in biomass in your fuel. You’ve got to get rid of all of it. That means you must go from 40 percent oxy-gen in your biomass down to 0 percent in your fuel. So you are going to be dealing with a 50 percent weight loss when you go from starting material to fuel. Fortu-nately, your energy density can be upwards of 50 to 80 percent, depending on your conversion technology.
One of the additional advantages of looking at ad-vanced hydrocarbon replacements is that you get to use the existing infrastructure. I think that’s one of the keys for developing these alternative technologies.5 We’ve already got a trillion dollars of capital invested in refineries, pipelines, and marketing and distribu-tion infrastructure for hydrocarbon fuels. It would be rather silly not to take advantage of this, at least in the near term. We have an opportunity here.
Daniel Weiss: I just want to add one thing to what James Bartis was saying, and that is that the National Academy of Sciences did try to put a dollar figure on the healthcare costs of combustion of fossil fuels. It found that the added cost is approximately 50 percent for oil and 50 percent for coal, give or take. The Acemy came up with a figure of $120 billion a year in ad-ditional healthcare costs due to premature deaths, lost productivity, hospital visits, etc. That’s a good starting point for trying to figure out how to integrate those costs.
James Bartis: I will address the issue of how far biomass or biofuels can go in addressing our national energy needs. It’s important to understand where we are today as well as where we might be able to go in
the future. Right now, we get almost a million barrels a day from ethanol. That’s a significant amount of al-ternative fuel. The question is: How much farther can we go? To answer that question, we can look at the different options available.
One option—the nearest-term option—available to us is to use seed oils. At RAND we looked at us-ing seed oils like soybean, camelina, or jatropha.6 We asked, “How far can seed oils take us?” We found that the productivity of seed oil per acre is fairly low. It turns out that to get 200,000 barrels a day of oil from seeds—which is 1 percent of national oil/petroleum use—we’d have to use 10 percent of the cultivated land in the United States.
One of the companies that advocates for camelina-derived seed oil calculates that the maximum sus-tainable national production for that seed oil is about 45,000 barrels a day. That’s fine if you’re in that busi-ness, but from a national perspective, that’s not going to solve any of our problems. The National Academy of Sciences and others have also looked at using biofu-els where not just the seed but the whole plant can be used, as in the case of wood or grasses. Their estimates vary. Oak Ridge came up with a billion tons a year.
When the National Academy looked at that figure, they knocked it down to 400 million tons a year. They did say that over time that figure could reach a half a billion tons a year. If we used all of that biomass to make liquid fuel, we could make about two million barrels per day. Now, that’s an appreciable amount, on top of the million barrels per day already from ethanol.
Biomass also offers us some other opportunities.
We can co-fire it with coal in power plants. Also on the horizon are some interesting technologies associated
with algae and certain microbes. These organisms produce oil through photosynthesis.7 There’s a fairly strong consensus that algae-to-fuel approaches are still in the research stage. They are potentially impor-tant in that they free us up from dedicating massive amounts of our land to energy crop production, be it poplar trees or certain varieties of grasses. So the pos-sibility is out there that, with these genetically modi-fied microbes and algae, we could produce substantial amounts of liquid fuels.
Right now we can estimate the extent to which biomass can take care of our energy security. We use almost 20 million barrels a day of oil. Maybe we can meet 10 percent of our needs from alternatives. We al-ready meet 5 percent by using ethanol. Maybe we can get another 5? Or even 10? Altogether, 10 or 15 percent of our petroleum consumption might be met with bio-fuels that are emerging now or are already available.
In another 10 years, I might be telling you a very dif-ferent story, if we’re lucky and if our researchers are successful. But it’s important to put that in context.
Biofuels do not get us off oil, but they help. Having two million barrels a day of lower demand just from the United States will do something. Hopefully, other nations will also reduce their use of conventional pe-troleum. It all adds up. Reduce demand for Organiza-tion of the Petroleum Exporting Countries (OPEC) oil.
by five or six million barrels a day worldwide, and it makes a difference in what the world oil price will be.
CLIMATE VS. ECONOMICS: SECURITY