Sustainable Growth: Common Sense and Compromise vs. Ideological Purity

Director, Economic Policy Studies
October 2012

I am honored that President Anderson * has asked me to give the Inaugural Lecture in what I am certain will be a constructive series of discussions well, if not certain, hopeful. After all, energy policy is a field in which even constructive engagement, which is rare, does not always produce a triumph of light over heat.

My goal today is to attempt to find common ground
in the battle over policies to produce “sustainable growth.”
That involves finding the reasonable people among those for
whom “sustainable” compels at
tention to the importance of
environmental goals, and the equally reasonable people who
believe that “growth” is an important key to rising material
standards of living. Unfortunately, this means writing off the possibility
of bridging the differences between those for whom
“sustainable” means regulation-
at-all-costs, and those for
whom growth is such an over-ridi
ng necessity that they have
enlisted as foot soldiers in a
war against the regulation-mad,
chanting “drill, baby, drill”. Unfortunately, many in this lat-
ter group have been too long
away from their dog-eared
copies of Adam Smith’s
Wealth of Nations
to recall how he
felt markets should work—the
pre-conditions he laid down
for effectively functioning markets—which include a role
for government. I have been around the energy/environmental debates
for too many decades to believe
that progress can be made if
we include in the discussion
those who refuse to credit the
validity and sincerity of their opponents’ motives, views and
goals. I prefer to preach to
utility executives who can at least tolerate John Rowe’s
recognition that nuclear plants
cannot be built and operated wit
hout bilking the tax payer or
the consumer, or both, and to environmentalists like Peter
who recently wrote that policymakers “should
focus on implementing policies like carbon taxes (for cli-
mate) or oil import fees (for security) and accept the mar-
ket’s verdict as to which energy sources fit the resulting
and energy-wise policy wonks like Roger Sant,
continually gropes for a policy
that balances commercial ne-
cessity, environmental preservation, and intergerational jus-

We must grope for
a policy that bal-
ances commercial
necessity, environ-
mental preserva-
tion, and inter-
gerational justice.

So let me tell you those to whom these remarks are
not addressed. First, there ar
e the environmental absolutists
who believe that economic growth is an evil—a way of sat-
isfying wants that are created by greedy corporations in or-
der to keep the proletariat’s noses to the grindstone, and that
environmental regulations are costless.
To environmental
irreconcilables, fossil fuels are an unmitigated disaster; nu-
clear power is so risky that its development is to be prevent-
ed by making waste storage impossible; and even wind (kills birds and is ugly) and solar (gobbles land and water)
are to be tolerated at best, used
as ploys to forestall develop-
ment of the greater evil, fossil fuels. Next, there is the afore-me
ntioned “drill, baby drill”
crowd, which does not recogni
ze that development of our
energy resources might have an
impact on the environment,
local and global. To this de
velopment-at-all-costs crowd—
damn the environment, full
speed ahead—anyone suggest-
ing that we need to balanc
e development with considera-
tions of sustainability (I use that term despite an uncertainty
as to its meaning)
and environmental awareness is for tree-
hugging hippies who mistakenly failed to accept the dye-
polluted rivers of Victorian Manchester and the smoke-
stacks of 20
century Pittsburgh as signs of economic
vitality. For those groups I have nothing to offer but a contin-
uation of their sweat and tears
as they go at each other in
whatever forum they can conjur
e. But for the great mass of
policymakers, scholars on the
cutting edge of new technolo-
gies—the sorts of reasonabl
e people who have always flocked to John Rowe’s banne
r and I understand will be in-
vited to this series of lectures—I would like to suggest a
path through their differences. The obvious point of depa
rture is climate change,
once known as global warming,
but with its name changed
so that it can cover more con
tingencies, perhaps even the
advent of a new ice age. In a
world that seems to be divided
into believers and
non-believers, I am an
agnostic. I cannot
sign on with the believers becau
se I have less faith in mod-
els of all sorts than perhaps I should. But remember: my re-
cent experience with models has
been watching some of my
colleagues attempt to forecast
the course of the economy,
and others—the famous quants—
trust their models to man-
age risk with some success. So you might want to discount
my skepticism when I
translate that experience to the cli-
mate models that purport to pr
edict not only the direction of
change but its causes, and in
which their creators and fol-
lowers place so much confiden
ce that they are willing to
spend billions of other people’
s money on policies that as-
sume the models are accurate. But neither am I prepared to sign on with the non-
believers for a very simple reason: they might be wrong,
and, if they are, we will ha
ve inflicted gr
eat and probably
irreversible harm on future
generations, a cohort we are
leaving debt-ridden so that we can enjoy what we have
come to believe are our entitle
ments, and uneducated lest
we antagonize the teachers’ unions. The simple fact is that we have to make energy policy—
and environmental policy is a subset of energy policy, or
vice versa if that is your pref
erence—as if we are all agnos-
tics, which for policymaking purposes means that:

Policy paralysis,
although perhaps
less dangerous
than excessive
zeal, is to be

  • We can’t afford to assume that the world is on the brink of disaster, because we might adopt policies that do a great deal of costly harm, but very little good.
  • But neither can we ignore that fact that it is senseless to make huge expenditures now in pursuit of future benefits without doing our best to (1) factor in the time-value of money, and (2) give some weight to the possibility that by the time the future rolls around the fertile and well-honed brains represented in this room will have solved what seem today to be insoluble problems.
  • We can’t forget that if the globe is warming there will be winners as well as losers , and that the interests of potential winners cannot reasonably be ignored.8
  • We can’t afford to assume that uncertainty justifies doing nothing. Policy paralysis, although perhaps less dangerous than excessive zeal, is nevertheless to be avoided.

Now this is the point at
which I would dearly like to
say that we should leave the ch
oices of the rate of develop-
ment of energy supplies, a
nd the form those supplies
should take, to the market. But
I fear I cannot—the market
for energy is a highly imperfect market:

    • It does not send honest price signals to consumers to guide their choices among different energy sources, or inform them of the environmental costs of their decisions.
    • It does not send valid price signals to producers, guiding them to invest in this or that source of energy, or inform them when to do so, in the interests of maximizing efficiency.9
    • It is not free of distortions created by governments, including those that participate in the OPEC oil cartel.

The production
and use of energy
involve what econ-
omists call exter-

Now, there are many markets th
at are imperfect. Indeed, few
are perfect. And we should learn
to live with rather than at-
tempt to correct every market imperfection in every market:
government cures are often wors
e than the disease they aim
to treat. Unfortunately, energy is so crucial to the economy,
and the imperfections so pervas
ive, that is not an area in
which government can sensibly stay its hand. Very few doubt that the production and use of energy
involve what economists call ex
ternalities—costs of produc-
tion that are not reflected in the price paid by consumers. If,
for example, the burning of coal to generate electricity has
consequences for the health of the surrounding population,
absent some penalizing mechanis
m the costs associated with
the poorer health will not be borne by the coal producer or
consumer, or reflected in the pr
ice the utility pays for coal or
the consumer for electricity. Or
if a wind machine destroys
the view plane of homeowners, reducing the value of their
property, the cost of that loss would be borne neither by
the producer of wind energy, nor by the consumer of the
electricity generated, absent
some mechanism to require
payment. I won’t bore you with the
theoretical controversy over
how such externalities should
be treated. Some economists favor deals between the partie
s involved, others government
“The problem,” concludes
R.H. Coase, “is to pro-
vide practical arrangements wh
ich will correct defects in
one part of the system without
causing more serious harm
in other parts.”
Right. So let’s explore how that might
happen. Take the case of oil and
gas exploration and produc-
tion. It seems clear that if
the negative effects of drilling on
private lands are confined to
the landowner, we haven’t
much of a public policy problem: the landowner and the de-
veloper negotiate a mutually
satisfactory deal, and develop-
ment proceeds. At this stage, government intervention is un-
necessary, although it is not unlikely that revenue-hungry
governments will seek to exact at least an ounce of flesh by
taxing the income from royalties, and proceeds from the
purchase of drilling equipment. A minor annoyance for practical policy purposes. The dealing-between-consenting-adults works, as the relative speed with which energy resources on private lands are being developed testifies. So far, I hope I have all parties to energy/environ-
mental policy nodding approval—or at least insufficiently
antagonized to interrupt. Unfortunately, life is not as simple
as I have thus far described.
In the case of fracking, there
just might be threats to the e
nvironment, in this case the wa-
ter supply. Left to their ow
n devices, landowner and devel-
oper would strike a bargain that
does not include the cost of
damage, if any, to that supply.
The simple solution would be
to include in the deal any private or public body that might
be affected—give the holder of
water rights a cut of the deal to compensate for the risk of contamination.

The economic
and security impli-
cations of energy
supply are
national, not

But as a practical matter
most politicians prefer regulation to taking a share of the risk of development in return
for compensation. Which raises several policy questions.
The first is the locus of the regulation—federal, state, local?
At first blush, it would seem that since the environment being affected is the local area dependent on the water supply,
and feeling the impact of construction associated with development, the locality should take the lead. That is the solution Governor Andrew Cuomohas until recently been pro-
posing for the regulation of fracking in New York State—
until he responded to pressure
to conduct still another state-
government-led review.
It is also the policy Governor
Romney is proposing for
permitting drilling on onshore
sites, including on federal lands. The Romney proposal
builds on the idea, “States have crafted highly efficient and
effective permitting and regulatory programs that address
state-specific needs.”
13Small problem: the economic and security implications of energy supply are national, not state-specific. If
small towns in upstate New York and some western states
decide against developing our
shale-gas resources, they create problems for all Americans. And if, conversely, they opt
for lax environmental standards,
the consequences might not
stop at state lines. So as a practical matter, when it comes to most issues surrounding the development of our energy re-
sources, the decisions must be
made at the national level,
or to state the matter
in its most unpleasant way
Washington, D.C. Of course, moving policy making to a national venue
to circumvent NIMBY politics does not always solve our
problems and produce a result that
is in the national interest.
The state of Nevada does not want to be home to a nuclear
waste repository. But moving the debate to the national
stage puts me in mind of the great musical,
Guys and Dolls
in which the gamblers can’t find a location for their craps
game because, “things being ho
w they are” (the heat was
on), the back of the police station was out. Well, things being how they are in the U.S. Senate, Yucca Mountain is
out—the majority leader hails
from Nevada, and for him all
politics is local. He has in effect vetoed the opening of Yucca Mountain, with consequences that extend far beyond his
state. (Whether the utility industry has been as vigorous as it
might be in making alternative arrangements with areas or
even countries that would accept nuclear waste for a fee, I
do not know.)

We are in important respects
a government of
men, with laws
having only a marginal effect on

So far, so unpleasant—most energy regulation must
be on a national level. This is true even of green sources of
energy, such as wind machines
. For in addition to creating
eyesores that affect only local
inhabitants, they can impair
scenic views that are national treasures, destroy bird life, interfere with the operation of radar installations, and require
the construction of high-voltage
transmission lines that traverse an entire region or several states. On the positive side
of the cost:benefit ledger, if their political sponsors are to be
believed, these machines have
an important positive externality: they create jobs,
surely a national as well as a merely local benefit, and one to be included in the tallying of
costs and benefits. Which brings us to the next question: who is to do the
job of regulating when regulation is the least inefficient
means of balancing various policy goals? We like to say that
we are a government of laws
, not men. But I would like you
to consider that the opposite is
the case: that we are in
important respects a government of
men, with laws as they
are now written having
only a marginal effect on the course
of regulation. This has been demonstrated most recently by
government agencies that feel bound neither by the intent
nor the language of the laws they are created to administer.
Or, to put it more kindly, find that vaguely drafted legislation gives them license to pursue agendas more extreme
and at times very different from
that the legislator had anticipated. Doubt that, and ask yourself whether the Environmental Protection Agency staffed by the Obama administra-tion is having no different an impact than its predecessor; or
whether a Homeland Security Agency that will not detain
suspected illegal immigrants is behaving as did its predecessor; or whether the regulations being put in place by the Department of Health and Human Services to implement
Obamacare are the same as they would be were there a differently inclined President in
the White House; or whether
regulations to implement Dodd-Frank are being affected by
just who is doing the drafting. Also, consider how one ma
n was able to change the
course of decades of regulation. Alfred Kahn, first as chair-
man of the New York Public Service Commission and later
as chairman of the Civil Aeronautics Board, changed the
way utilities were regulated and worked mightily to end regulation of the airline industry.
Post-Kahn, utility regulation
was a very different creature than it was before he decided
to apply his academic insights to the practical world of regulation.
16 Note: It is not necessary to
decide that these agencies
are on the wrong track, although I
believe some of them are,
to believe that their staffing matters, that different regulators, all honorable men and women, would create wildly different regulatory regimes, even though operating under the
same set of laws. This realization that staffing matters is especially important when it comes to energy and environmental policy.
Investments in energy projects are long-lived, in the case of
nuclear plants perhaps half-a-century or more. And the industrial adjustments made in response to energy and environmental policies are difficult
if not impossible to reverse.
Fuel efficiency standards, once enacted, can be reversed on-
ly at a high cost in wasted investment; banning of incandescent light bulbs in favor of lamps that make reading of
books difficult-to-impossible—you remember books, the pa-
per things that preceded backlite-readers—put an end to an
industry that is unlikely to re-e
merge if the law is repealed;
manufacturers are unlikely to gear up to produce high-flush
toilets should limitations on
their sale be reversed. There’s more, but you get the idea: like diamonds,
which we are told by DeBeers
are forever, environmental
regulations are forever, or at
least highly costly to reverse,
just as failing to regulate can
in some circumstances be costly. It is one thing to call for
policies that are easily adjustable, reversible if experience
so dictates, as John Rowe sensibly suggested in his introductory remarks. It is quite another
to get that job done, as he would be among the first to admit.
Environmental policies must be
framed with the long-run in
mind—they can’t be turned on
and off like a light switch. So investors in the energy and environmental industries face three hazards. The first is the imposition of sense-
less regulations, crafted in pursuit of some political agenda
that is insensitive to cost:benefit considerations. The second
is that very often the least sensible regulations are cast in
concrete, while others become the victim of a change of personnel at the regulatory agency, wiping out investments
made in good faith. The third is that some regulations
change faster than a facility ca
n be depreciated, leaving the
company with unrecoverable investment.

The best way
to avoid both
energy and
regulation is
to impose a
carbon tax.

All of which points in one direction, a direction I am
hoping will become more attractive when the alternatives—
regulation, often irreversible,
always affected by a changing
of the guard or minds at the regulatory agency, and massive
subsidies—are considered. The
best way to avoid both energy and environmental regulation,
and the subsidies that often
waste taxpayer money and corrupt
the political process, is to
correct the basic problem: the failure of prices to reflect the
true cost of production and consumption. And the best way—
not a perfect way, by any means,
but the best available—is to
impose a carbon tax.
17Now, before you point out that I seem to be abandoning my plan to stick to the practical, consider this. No matter
who occupies the White House
for the next four years, no
matter what the mix of Tea Party and Pelosi Party, the government will have to do something about the deficit. If not,
the bond markets will. And no matter how adamant the Re-
publicans now say they are that taxes should not go up, how
wedded they are to the energy industries that tend to concentrate in Republican states,
taxes will go up.
And no matter
how determined the Democrats
say they are to confine tax
increases to millionaires and
billionaires, aka any families
earning more than $250,000, other taxes will go up as part of
any deal to prevent Washington from becoming the next Athens. Whether that comes from an
increase in tax rates, or
from plugging what liberal politicians like to call loop-
holes, I have no idea. Equally painful, spending will have to
come down. As politicians reluctantly conclude, even after
finding some politically acceptable spending cuts, that they
must find money somewhere,
carbon taxes will again be on
the table.

As politicians
conclude that they
must find money
somewhere, car-
bon taxes will
again be on the ta-

And properly so: better to tax a pollutant than in-
comes that are the product of work and risk-taking. As Cornell professor Robert Frank recently put it, “If new taxes
are unavoidable, why not adopt ones that not only help balance the budget but also help
make the economy more efficient? By reducing harmful emissions, a carbon tax fits that
18 I should add here that John Rowe believes I am
wrong in thinking that carbon taxes might once again find a
place on the policy agenda, or as he put it in his more chari-table way, “Irwin, you are
way ahead of your time”—the
sort of criticism that any economist welcomes. John has
been as bloodied as I have, more
so if fact be known, in the
war to develop some semblance of a sensible energy/
environmental policy. So his views should carry great
weight with all of you. However, I find it not at all unnerving to consider that I might be wrong. But it is possible that I might be right. When the hunt
for revenues begins in earnest, it is possible that the intellectual basis for carbon taxes—that they would gradually force
the prices energy consumers pa
y to reflect something approximating the full social costs of consuming energy—
combined with sound arguments
for not raising income taxes
in the midst of painfully slow
growth, would tilt politicians
towards carbon taxes.
And even if such taxes proved to be a
highly imperfect reflection of the uninternalized costs of consuming carbon-based fuels, they would still provide a source
of revenue that would have less of a dampening effect on the
willingness to work and take risks than would almost any
conceivable alternative, with the exception of the imposition
of very high inheritance taxes on the winners of the sperm

Such a tax on carbon would:

      • reduce uneconomic consumption of energy,
      • get more bang for the buck than “substitute policies, such as mandates to use this fuel or install that piece of equipment…”,21
      • improve the economic prospects of carbon capture and storage,22 and
      • level the playing field on which oil, gas, coal, wind, solar, nuclear and other energy sources joust for consumer favor, eliminating much of the justification for subsidies of one source or another, which totaled some $37 billion in fiscal year 2010, the most recent for which data are available.23

Let’s spend a moment on subsidie
s. Parties eager to tax the
U.S. Treasury, aka taxpayers, ju
stify their demands for sub-
sidies by citing what the other guy gets from direct govern-
ment hand-outs, or the advantage some competitors have be-
cause the environmental costs they create are not included in
the prices they charge consumers.

      • Advocates for renewables and such associated gear as batteries say they need subsidies to level the playing field with an under-taxed oil industry;
      • Operators of nuclear plants justify their special subsidies—government subsidized insurance, for example by citing the benefits heaped on their competitors, and uninternalized costs created by competing technologies but not by nuclear plants;
      • Proponents of conservation measures claim that the savings from such measures are under-estimated because energy prices do not reflect the full costs incurred in the production of energy; and
      • Advocates of subsidies to promote the sale of electric vehicles cite the fact that gasoline-powered vehicles rely on an uneconomically under-priced polluting fuel, subsidies that take from the poor to give to the rich.24

If carbon taxes
force prices of
fossil fuels to
costs involved
in their use,
subsidies be-
come unneces-

And on and on. If carbon taxes force the tax-inclusive
prices of fossil fuels to reflect
of the costs involved in
their use, including the currently
uninternalized social costs,
the claims for subsidies for wi
nd and solar, for example, be-
come less defensible, a
nd bonuses for buying energy-
efficient appliances become unnecessary,
as do such
measures as arbitrary CAFE st
andards. Get the prices right,
and let the market do the rest. Would that life were so simple. We are left with the
question of whether a complete energy/environmental policy
should include special subsidies for new technologies, perhaps those that have costs that will decline as technologies
are refined and scale achieved. In
short, there are times when dynamic analysis leads to results quite different from those
produced by accepting current cost and other conditions as
eternal. So energy policy, if it is to be complete, must find
some balance between Solyndra and its uneconomic and
corrupting brethren, on the one hand, and elimination of all
subsidies to energy technologies that just might have a role
to play in our futures. If we are to have subsidies,
my suggestion is that we
leave allocation of that taxpayer investment in future energy
technologies to the robust venture capital industry. If it is
decided that subsidies are essential for some reason or other,
the funds set aside should be put up for bids, with the entrepreneur with highest ratio of skin-in-the game to the amount
of subsidy being requested
declared the winner. Surely some such scheme
would be far better at producing winners than would relying on government agencies
that are prisoners to political considerations and the corruption created by politicians’ insatiable appetites for campaign
funds, and playing with some
one else’s money. The Secretary of Energy can calmly ignore the cost of his largesse to
taxpayers when he makes imprudent loans to rich investors
and lenders because it isn’t hi
s money that is at risk. Congressmen can mandate the use of
expensive blends of gasoline because the billions of cost
will be spread across all motorists and will not appear on anyone’s tax bill. Of course, as
experience in California teaches,
when the cost of some environmental regulation becomes steep and obvious consumers (aka voters) will react with
sufficient anger to force suspension of the regulation on gasoline types that produced $5
gasoline and shortages at the pump. Federal and state governments can without consequence to themselves set goals
for the use of renewables because the cost will show up on
the bills of utilities, and not
appear as higher taxes.

I recommend
reliance on
venture capitalists to optimize
the use of sub-sidies.

I recommend reliance on venture capitalists to optimize the use of subsidies, this
in recognition of the fact that
there will be subsidies even
though recent developments seriously weaken the case for subsidies in the energy industries.
The principal such development is our entry into an era of
the availability of abundant domestic supplies of oil and gas,
so abundant in the case of the latter that one wonders why
the government is still offering
financial encouragement to
utilities willing to build new nuclear plants that no less an
authority than GE CEO Jeff Immelt says are so costly that it
is “really hard” to defend them financially.
Or to developers of wind and solar power, neither of which can efficiently
play more than a minor role
in our total energy supply picture without massive subsidies
if natural gas supplies prove
as abundant and natural gas prices remain nearly as low as
they now are,
so low that natural gas use by power companies jumped 32% in the first half of this year while their
coal demand dropped 18%,
and that natural gas now ac-
counts for about as large a portion of power generation as
But the prospects for coal
would brighten if Romney
succeeds Obama and if —this is a big “if”, since rolling
back environmental regulations, and killing those in the
pipeline, are no easy tasks—he succeeds in getting the emissions regulations changed.
Those regulations and their post
-election tightening by a re-elected Obama administration,
relieved of its desire to carry coal-producing states notwith-
standing, a few utility companies are planning to proceed
with the construction of ha
lf-dozen, long-planned coal-
burning plants. Construction must start by April 2013 before
new curbs on greenhouse-gas emissions take effect, but new
regulations on mercury emissions are making it difficult for
the utilities to meet that target.

We are on the
verge of becoming less dependent on hostile
and unstable
energy sources.

There is another dimension of policy that cannot be
ignored: energy/environmental policy does not stop at the
oceans’ shores. There is the small matter of energy security,
of not allowing our foreign policy to be held hostage by the
bad guys on whom we still rely
for much of our oil, either directly or indirectly—Iran,
Saudi Arabia, Venezuela. Although domestic energy
independence, promised to us by politicians from the days when Ri
chard Nixon stalked the White
House corridors, remains a myth
, we are on the verge of be-
coming less dependent on hos
tile and unstable energy
sources. The “peak oil crowd”
, although not routed, is receiving less of an audience since new drilling techniques in-
creased estimates of domestic oil resources. And it is generally agreed that abundant, in
expensive natural gas now has
the potential to substitute for gasoline in portions of the fleets
of such companies as Federal
Express, and in busses. Once
again, impending scarcity has been routed by advances in
technology, in this case with the delicious result that, to cite
Lawrence Mone, president of
the Manhattan Institute, “The
United States has accessible energy stores that could not only
help resuscitate the American
economy, but also transform
global politics by taking energy leadership away from the
perennially troubled Middle East.”
That’s a bit of stretch,
since there is more to Middle
East policy than developments
in energy markets, but it is a view not to be dismissed out-of-
hand. But policy problems remain. The substitution of clean-
er domestic natural gas for imported oil in mobile uses—
with gains to our national security—would obviously be has-tened if a relatively complete
infrastructure for refueling were in place.
Assuming that safety considerations can be
met, part of that infrastructur
e can be created right at home,
at least in homes that have garages or some connection to
the gas mains. As a practical ma
tter, we can leave it to indi-
vidual consumers to decide whet
her the investment is worth
the saving on gasoline costs.
But the construction of re-
fueling stations on major highways, to service the large
trucks and busses that are curre
ntly the likeliest market for
natural gas, and the electric cars
that just might grow out of
their present need for massive s
ubsidies, is another matter. If
it is indeed in the national inte
rest to reduce the use of gaso-
line for security reasons, shou
ld the government subsidize
the construction of those facilitie
s, thereby internalizing this
positive externality?

Absent some clear
theoretical guide-
line, we are reduced to common
sense and an analysis of the

Absent some clear theoretical guideline, we are reduced to common sense and an analysis of facts. The first
fact is that such
facilities are already
being put in place by
profit-seeking private parties. The second is that major
truckers have a real incentive
to expand the network of natural gas stations. The third fact
is that the government’s re-
sources are limited: no government that borrows almost 40
cents for every dollar it spends should take on a burden that
the private sector is capable of
bearing but prefers to have
the taxpayer fund. So I would leave this chore to the private
sector. Another international aspect of our energy policy is
that to enhance our energy security we must draw on sup-
plies from friendly—well, not
unfriendly—neighbors to our
north and south. The private sect
or stands ready to make the
necessary infrastructure investment. It remains for government to decide that the benefits of drawing on Canadian re-
sources—less reliance on the Middle East—exceed any possible environmental costs, and
that it would be a good idea to
clear obstacles that prevent American companies from
providing technical and financial assistance to Mexico to halt
the decline in production resulting from decades of under-
investment. Policymakers are torn between the need for energy security and fear of the environmental consequences of the
production processes used to
extract oil in Canada. Once
again, making policy means injecting common sense into the
process. Delays in allowing this oil to flow south might allow it to end up in the hands of
state-operated enterprises in a
China that is increasingly belligerent and challenging our position in Asia, and prevent us from further decreasing our dependence on Middle East oil. So,
even if we agree that production of Canada’s oil afflicts
the environment in ways that
are unfortunate, America’s refusal to purchase that oil would
not prevent its production. That
oil will be produced whether
or not we are the purchasers, with whatever consequences to
the environment might result.
Equally clearly, the purchase
of Canada’s oil would contribute to a policy of North American energy independence and
reduced reliance on oil from
hostile and unstable regimes. Th
at advantage is, in effect,
purchased at no cost to the environment. That is why the position environmental groups w
ill adopt on the Keystone pipe-
line, in limbo while the President
campaigns, is in my view a
test of their willingness to climb down from their ivory tower
and confront the world as we find it. There is more, and perhaps worse. Policymakers who
have decided that security is paramount, and who favor the
further displacement of Middle East oil with domestic sup-
plies, now potentially available in abundance, have to vie with others who insist that
development of domestic re-
sources be slowed, lest the switch to renewables be derailed
by our reduced security concerns and by increased use of
natural gas. Where one stands on this issue is very much a
function of just how high a value one places on national security, broadly construed to include both the reduced vulnerability to disruption of the macroeconomy by oil shocks,
and the stifling of growth by car
tel pricing, on the one hand,
compared with the value of
retaining pressure on the government to constrain the use of fossil fuels. The trade-off is
starkly illustrated by what is mo
re than a coincidence: our
recent increase in imports of crude oil from Saudi Arabia,
700,000 barrels per day, exactly
equals the decline in output
from the Gulf of Mexico due
to permitting problems since
the BP oil spill.

These are only some of the policy problems. New ones pop up with unnerving regularity.

      • If we are to have a thriving solar industry, are we best served by buying the equipment the Chinese government subsidizes, so as to make solar power cheaper, or should we pursue the current policy of complaining to the World Trade Organization so as to protect domestic manufacturers, at the price of making solar power more costly?35
      • Should the government bow to the wishes of the several environmental groups that are preparing to fight the use of thousands of acres of federal land on which the Bureau of Land Management pl ans to allow massive solar installations because, get this, “no scientific evidence has been prepared to support the claim that these projects reduce greenhouse emissions?”36
      • Should the Navy continue to use diesel from chicken fat and algae at $27 per gallon, or be allowed to abandon that experiment and revert to conventional military fuels at $3.50 per gallon, increasing the funds available for national defense?37
      • Should we seek the jobs and revenues that would come with a rapid increase in our exports of natural gas, and the increase in our bargaining power with trading partners,38 or restrain those exports39 so as not to increase incentives for wider use of fracking to supply export markets, and to keep domestic prices from rising40 o the benefit of consumers and increase the competitiveness of domestic manufacturers such as Dow Chemical? 41
      • Should we relax permitting policies42 so as to step up drilling for domestic supplies of fossil fuels, or support the Obama administration’s current go-slow permitting policy so as to force more rapid development of renewables and electric vehicles?
      • Should we encourage fracking, or at least fail to discourage and delay it?

The interesting point about fracking is this: there are
positive externalities, not reflected in the price of natural
gas, that should be included in
any cost:benefit analysis. Environmentalists are always pressing to include negative externalities such as pollution, but I doubt that they will be as
enthusiastic about factoring in the value of increased independence from oil supplies in the hands of bad guys, or the
jobs that might be created by
the return of some manufacturing processes to the United States if energy costs drop like a
43At this point I am reminded of the cheers that greeted
Bill Clinton, when, during hi
s over-long introduction of
Mike Dukakis in 1988, he said, “In conclusion…” Suffice it
to say that I have merely skimmed the surface of the diffi-cult policy issues we face as
we try to achieve sustainable
development, growth that produces full employment without
doing violence to our environment.

I do hope that I have persuaded you of several principles that narrow the range of differences among the various combatants in the energy and environmental policy arena:

1. Sensible policy must involve a balancing of the need for economic growth and the need to minimize the impact of that growth on the environment. Neither growth at all costs, nor environmental absolutism, would serve us well.

2. The markets for energy have sufficient imperfections to require more government intervention than free-market enthusiasts are comfortable with.

3. Regulation is needed, but can be kept to a minimum by a policy of getting the prices of energy products right incorporating in them the costs imposed on society but not reflected in the prices consumers pay.

4. Adequate supplies of energy are a national need, suggesting that much regulation must be at the national level.

5. The quality and direction of regulation is very much a function of the quality and political predilections of the men and women appointed to staff the regulatory agencies.

6. It would be economically efficient to price carbon and eliminate subsidies for all energy sources, but absent that it would be well to have available funds allocated by bidding from parties with skin in the game rather than determined by bureaucrats with only taxpayers’ money to lose.

7. Energy policy does not stop at the oceans’ shores. National security considerations must be factored into any policy decisions.

8. Most of all, common sense, applied to available facts, must trump ideology. Common sense tells us that “all of the above” is not a policy—it’s not even a coherent bumper sticker. It is a slogan designed to make every contestant in the energy or environmental policy feel he has won, and to avoid making choices or even creating a frame-work within which choices can be made.

As Alfred Kahn, my former teacher and colleague, and perhaps the regulator who best understood the need for pragmatic application of solid theoretical principles to policy- making, wrote:

When we turn from the normative question of what we want to the institutional question of how we get it, we find ourselves launched into the baffling arena of social and political as well as economic behavior and organizations, into the real world of ignorance, error and corruption, where all institutions are in varying degrees imperfect. In that world, compromise and balance must be embodied in all the plans that are formulated.44

Thank you for your attention.
October 19, 2012

Irwin Stelzer

Irwin Stelzer is a Senior Fellow and Director of Hudson Institute’s Economic Policy Studies Group. Prior to joining Hudson Institute in 1998, Stelzer was resident scholar and director of regulatory policy studies at the American Enterprise Institute. He also is the U.S. economic and political columnist for The Sunday Times (London), a contributing editor of The Weekly Standard , a member of the Advisory Board of The American Antitrust Institute and a member of the Visiting Committee of the Harris School of Public Policy Studies at the University of Chicago.

Stelzer founded National Economic Research Associates, Inc. (NERA) in 1961 and served as its president until a few years after its sale in 1983 to Marsh & McLennan. He also has served as a managing director of the investment banking firm of Rothschild Inc., a director of the Energy and Environmental Policy Center at Harvard University, and has been a member of the board of the Regulatory Policy Institute (Oxford) and an advisor to the U.S. Trade Representative.

As a consultant to several U.S. and United Kingdom industries with a variety of commercial and policy problems, Stelzer advises on market strategy, pricing and antitrust issues, and regulatory matters.