Before Saving the Planet,
Could We Please Get the Bill?
By W. David Montgomery & Henry Sokolski
Last week, Secretary of Energy Rick Perry tried to satisfy those gunning for energy security with nuclear, natural gas, and coal and those trying to skirt global warming with more renewables. America, he insisted, was driving down emissions globally exporting natural gas and developing nuclear and renewables.
His critics were quick to reject this gloss but the Secretary was hardly worried. Why? No matter how much the environmental left or the national security right might criticize him, he can silence them by dangling before them what they both want — a government program for their preferred solutions. Thus, the bipartisan saw officials most often retreat to — an “all-of-the-above energy” strategy that offers handouts to energy options no matter how uneconomical.
A hit since America’s first energy crisis in 1971, this strategy is getting pricey. Early on, the US took up energy price deregulation and efficiency measures that remedied true market failures. Then, state and federal governments turned to subsidies, mandates and crash “commercialization” funding of virtually every kind of energy type.
Never mind oil and gas supplies have increased so America now exports both. Supports for biofuels and clean coal continue as if we might soon run out. Renewables’ costs have plummeted. Yet, government subsidies and mandates continue now mostly to pump up profits. As for nuclear and ethanol, they too enjoy government backing even though no private investor would touch them with a barge pole.
Our government, we are told, must override these market signals. Our national security and global survival demand it. Yet, recent studies show our nation’s electrical system is hardly running out of reliable electrical power, much less oil or gas. As for global warming, balancing alarmist claims against reckless dismissiveness calls for comparing costs more, not less.
Certainly, if we are serious about lowering green house gas emissions, we would want to do so as quickly and cheaply as possible. A decade ago, The McKinsey Green House Gas Cost Abatement Curve focused on this point and ranked measures to reduce emissions in terms of cost. It spotlighted clean options that would actually make their adopters money — e.g., increasing efficiencies, replacing old coal with new gas plants, etc. Unfortunately, great deal less attention was paid to the other end of the curve, where McKinsey placed, in order of increased expense, options that would not turn a profit.
Current supporters of carbon-free fuels (mostly nuclear and renewables) now push national and environmental security arguments that are nearly impossible to quantify. What’s worse, the solutions they advocate require moving far into the most costly portion of the McKinsey curve and having the public pick up the tab. What McKinsey’s analysis makes clear is that choosing options from the high cost portion of the curve — as governmental mandates, subsidies and commercialization programs have done — is far more expensive and time consuming than focusing on the least costly ones first.
Unfortunately, the loudest national security and environmental energy voices all but ignore this insisting the dire risks of inaction make comparing costs and risks irrelevant. Yet, it is impossible to eliminate all climate or security risks and any major intervention can bring risks of its own.
Nuclear power produces relatively little carbon emissions and affords substantial supplies of base-load electrical production. Yet, the costs of new plants now under construction in the US are off the charts. Off-site liabilities near Fukushima, meanwhile, are running far north of $200 billion. What might another nuclear accident cost? What might the costs of decommissioning reactors and storing their spent fuel be? What might be required to defend friends’ planned power reactors in the Middle East and Asia if they are struck militarily?
Finally, there are the opportunity costs of being inattentive to potentially sounder alternatives. New processes, for example, are being developed privately that promise to tap plentiful natural gas to produce cheap electricity with zero atmospheric emissions. Meanwhile, private firms are investing in grid battery concepts that may make any base-load generators less competitive.
To get a fix on how real these and other promising developments might be, we need to listen to market signals more, not less. Toward this end, it would be useful to:
- hold off on any new energy commercialization subsidies, bailouts or mandates and back away from any “national security” imperatives that cannot be quantified.
- encourage The McKinsey Company and its competitors to release their latest economic ranking models to help clarify what steps might reduce undesirable emissions quickest most cheaply.
- get our government and schools to do much more to quantify what energy subsides cost.
- consider alternative institutions and arrangements to incentivize private energy research and development and commercial adoption and conduct historical research of past errors and current failures to deepen our judgement about likely future energy project costs and risks.
To get the ball rolling, Mr. Perry might even take the first step by funding such efforts. That would save money.