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Energy Policy: Obama's Double Vision

Lee Lane & Paul Bernstein

In his state of the union speech, President Obama announced his new climate and energy policy. Last year’s top priority, greenhouse gas cap-and-trade, is gone. In its place stand two new technology goals. The first is that “…by 2035, 80 percent of America’s electricity will come from clean energy sources.” The second is that the US will “…become the first country to have a million electric vehicles on the road by 2015.”

By the time that the debate on last year’s Waxman-Markey Bill was over, most of the public still did not know how cap-and-trade was supposed to work, but they had figured out that it meant higher energy prices and slower economic growth, and at least in the states that produce or use a lot of coal, the concept had become electoral poison.

Thus, the president needed something new to offer the green segment of his base, and, politically, his latest proposals seem more promising than the old. ‘Clean energy’ sounds good to the many Americans who are concerned about greenhouse gas emissions, and the country may be on the brink of another spasm of worry about oil imports. The new approach seems to speak to both of these concerns.

For all the eye-appeal of the president’s new plan, though, it is far from clear if it can work as energy policy. Think about what it would take to reach the goal of 80% clean power. It is true that lowering emissions from the power sector is likely to be less costly than making equally large cuts in other sectors. Just how costly it will be to lower power sector emissions in the way that the president proposes will depend on how narrowly ‘clean energy’ is defined and how quickly the cuts must be made.

Yet even if such CO2-free sources as nuclear and hydro power turn out to qualify as ‘clean energy’, reaching the target would still mean boosting the output of all such sources from where it stands today, at just over 30% of the total, to the president’s goal of 80%. This transition would require replacing over 60% of existing fossil-fired power plants with non-fossil fuel based energy; further, it would mean doing so within just 25 years.  Analysis of policies like those that Mr. Obama proposes shows that the costs of so large a change in so short a time span could more than double electricity prices. 

Seen in this light ‘clean energy’ may lose some of its luster, but there is still another hitch. Higher electricity rates work against the president’s other goal rapid spread of electric vehicles. In deciding whether to purchase an electric vehicle or one powered by an internal combustion engine, car buyers will compare the estimated life cycle costs of each. The vehicles’ purchase prices will affect the choice; thus Mr. Obama backs subsidies for the purchase of such vehicles. Buyers, though, will also consider operating costs. And the rate hike from the president’s clean power plan would raise the lifecycle costs of an average electric vehicle by about 25% or around $10,000 per vehicle. The president’s plan to force utilities to adopt renewable power sources, and to do so quickly, must, therefore, cast a dark shadow over hopes of realizing his other vision, a great surge in the use of electric vehicles.

Many state of the union speeches tout some new energy technology that the president, in his wisdom, decides is in the national interest. Remember George W. Bush’s scheme for hydrogen vehicles by 2020. Mr. Obama, though, has not one dream technology, but two. Nor is he content merely to research these options; rather he seems determined to use mandates and subsidies to push his favorites into the marketplace. Alas, his two visions do not mesh at all well, and the fact that he seems not to have noticed the conflict raises still more doubt about whether the president should seek to act as the nation’s chief technology officer.

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