Cheap energy has for decades been the energy policy of the United States and is once again. This is no surprise as cheap energy is very popular with everyone except environmentalists, who dislike it because higher prices encourage efficiency and accelerate the shift toward cleaner technology.
Two events have conspired to defeat any momentum toward raising the price consumers pay for energy. The first was the recession and rising unemployment, which at a minimum makes the timing bad. The second event was the shift in power in the Senate resulting from the election in Massachusetts. There is now a belief widely expressed in the Senate that cap and trade or any other scheme that raises the price of energy during the recession is dead. The focus of policy has shifted mainly to the supply side – cheap natural gas, nuclear power, renewables and, of course, off shore oil – all justified mainly by energy security rather than climate change.
Cheap energy misaligns incentives and undermines any effort to meaningfully deal with climate change. There are two options left:
- Regulating efficiency does work as we have seen, particularly in California. Tough and rising standards make it harder to be inefficient. But they are also politically difficult to achieve.
- Senator Maria Cantwell has proposed something else that just might fly, Cap and Dividend. The idea is that the money made by selling permits under the cap would be sent as dividends to consumers to compensate for the higher price of energy. It is not piece of rhetorical twist and might be more popular. For an excellent overview on Cap and Dividend, see this February 4th article from the Economist.
Unfortunately, however, for the near future cheap energy will encourage demand and extend the time horizon needed to recover investments in efficiency and new technology.
