On Energy Issues, Candidates’ Funding Priorities Are Fueling the Debate

U.S. presidential candidates John McCain and Barak Obama clash over tax and foreign policy, but their energy proposals are more alike than their campaign rhetoric suggests. Both offer to reduce global warming with a cap-and-trade program, “clean coal” technology and expanded use of wind and other renewable energy. But no matter who wins, energy prices are likely to climb.

There are some differences: Obama emphasizes renewable energy to reduce dependence on foreign oil, while McCain puts more faith in drilling. Obama is less enamored of nuclear power than McCain. Obama supports subsidies for ethanol production while McCain would cancel them and open the market to foreign competitors. Environmentalists tend to favor Obama, while business groups favor McCain.

Wharton professor Eric Orts discusses the differences in the candidates’ energy platforms

“The big differences, frankly, are where they want to push the money rather than one campaign pushing things that are feasible and the other pushing things that are not,” notes Matthew White, a professor of business and public policy at Wharton.

Still, their positions do raise questions. Which energy strategies are most promising? Is it really possible to dramatically reduce reliance on oil and coal? Despite all the talk of clean energy, some facts are inescapable, says Wharton legal studies and business ethics professor Eric W. Orts, an Obama supporter and adviser. “You’re not going to get away from fossil fuels,” he notes. “You need to have coal in the mix. You need to have oil in the mix…. I don’t think there are any silver bullets out there.”

Energy experts say reducing the country’s carbon footprint will have a consequence the candidates rarely mention: Energy prices would surely rise, probably substantially. And some experts say the candidates put too little emphasis on simple conservation efforts that are feasible today and cost effective. “The potential for conservation is huge,” notes Noam Lior, professor of mechanical engineering and applied mechanics at Penn’s School of Engineering and Applied Science. Simple technologies like improving insulation and relieving traffic jams can have big payoffs he says, arguing that a successful attack on global warming may require that Americans settle for smaller homes and fewer gas-guzzling vehicles and toys.

Counting on Technology

Both candidates want to dramatically reduce or eliminate American dependence on oil from the Middle East and Venezuela. Obama wants one million plug-in hybrid cars on the road by 2014, and 10% of electricity to come from renewable sources by 2012, 25% by 2025. He aims to cut greenhouse gas emissions to 80% below 1990 levels by 2050 by auctioning carbon-production credits and spending $150 billion of the money raised over 10 years to spur private clean energy efforts. He would impose a windfall profits tax on oil companies to fund energy advances and provide $500 to individuals and $1,000 to couples to offset higher energy prices.

He would raise vehicle fuel economy standards by 4% a year and offer a $7,000 tax credit for purchase of “advanced technology vehicles,” providing a $4 billion tax credit and loan guarantees for vehicle makers to produce new fuel-efficient cars built in the U.S. Through efficiencies like stricter building standards, better appliances and weatherizing one million homes a year, he aims to cut electricity demand to 15% below projected levels by 2020.

McCain would lift restrictions on domestic oil production, especially on the continental shelf, where the sea floor slopes gently for hundreds of miles from the coastline to the deep ocean. He would better enforce existing vehicle-mileage requirements. He would eliminate subsidies and tariffs that support corn-based ethanol production in the U.S. and open the market to cheaper sugar-cane ethanol from Brazil and other countries.

He would ask automakers to speed production of flex-fuel vehicles that can use ethanol instead of gasoline, and he would offer a $5,000 tax credit to people who buy zero-emission vehicles as well as a $300 million prize for the developer of an all-electric or hybrid battery costing 70% less than today’s. He would spend $2 billion a year to develop clean-coal technologies, and he would promote construction of 45 nuclear power plants by 2030, with 55 more to follow.

He would “rationalize” the current patchwork of tax credits to better encourage wind power and other renewable energy sources. He wants greenhouse gas emissions cut to 60% below 1990 levels by 2050. He would have the federal government lead by example by improving energy efficiency in its buildings, and he would reform the oil futures market to prevent speculation that boosts prices. He opposes a windfall profits tax on oil and other energy producers.

Rewarding Efficiency

At the heart of each candidate’s policy is a “cap-and-trade” system that would reduce carbon emissions by allowing polluters who beat government clean-up targets to sell carbon-producing permits to companies that find pollution cutbacks too expensive. Over time, the emissions caps would be lowered, gradually reducing carbon production. Advocates say this approach encourages cuts by those who can make them most efficiently.

Obama would auction the permits to carbon producers, using some of the revenue to subsidize clean energy development. McCain would initially provide the permits for free but says they might eventually be auctioned. He also would allow greenhouse gas producers to satisfy requirements by purchasing “offsets” from other industries, such as agriculture. Many environmentalists say this would make the carbon cuts less expensive but harder to verify, possibly delaying improvements.

“Cap-and-trade is probably the single best way to reduce carbon emissions, both domestically and globally,” White notes, adding that it already has worked well in reducing sulfur-dioxide emissions from coal-fired power plants and other polluters. Though a carbon cap-and-trade system has had a rocky start in Europe, White says that’s because of too many loopholes. Both candidates’ cap-and-trade goals are “extremely aggressive” and would be challenging to meet, according to White. “If they are achieved, they will increase energy costs for the economy substantially.” But exactly how much would depend on too many factors to pin down, he says, estimating that the extra cost probably would be more than the $75-per-year household increase some experts have projected if the country met the candidates’ 2025 targets for renewable electricity sources. “Everything on cap-and-trade depends on how aggressive the targets are.”

A 2007 U.S. Department of Energy study found that a cap-and-trade bill introduced by McCain and Sen. Joseph Lieberman could raise electricity prices by 10% in 2020 and 21% in 2030. That bill, which has not passed, would cut emissions to 1990 levels by 2020, and to 60% below 1990 levels by 2050. Cap-and-trade would increase electricity costs by requiring coal-burning plants, the heaviest carbon emitters, to install expensive equipment, most likely involving underground storage of carbon dioxide that now goes up the smokestack. The cost would be high but is impossible to predict because this technology is untested on the enormous scale that would be required. White believes cap-and-trade likely would reduce reliance on coal in favor of natural gas, which burns cleaner, and renewables such as wind. Energy prices would probably rise enough that wind and some other alternatives would be profitable without subsidies, he calculates.

Orts, who also directs Wharton’s Initiative for Global Environmental Leadership, argues that a carbon tax might be preferable to cap-and-trade. A tax, such as a per-gallon charge on gasoline, would be simpler to administer than the complex trading system in cap-and-trade and it would efficiently spread the clean-up cost to all carbon users, not just the producers. “A significant number of economists who have looked at the problem would prefer a tax,” he says. Still, he acknowledges, cap-and-trade may be easier to sell to the public than a new direct tax, even though both would raise energy costs.

The candidates agree that the U.S. should reduce its dependence on foreign oil, which accounts for more than 60% of the country’s oil consumption, up from less than 30% in the early 1970s. McCain presses harder on increasing oil production by opening most of the continental shelf off the U.S. coast to exploration. “Drill, baby, drill,” is a common refrain for McCain and supporters at campaign rallies. Obama instead emphasizes encouraging exploration in coastal areas where it already is permitted by threatening to rescind existing permits that are not used.

Little Impact from More Drilling

Neither approach is likely to produce enough new oil to significantly reduce dependence on foreign sources or dramatically cut prices, says White. New offshore sources could produce about 700,000 barrels per day, enough to reduce foreign imports by only 7%, he estimates. “That’s not insignificant, but it will have essentially no impact on the price at the pump, which is set on world markets.”

To further cut oil needs, both candidates would encourage production of more efficient vehicles. “The United States is now significantly behind most of the rest of the world in terms of efficiency standards for cars and trucks,” Orts notes.

White questions whether it’s necessary for taxpayers to subsidize this research through the tax credits each candidate proposes, noting that many car makers are working feverishly on the problem already. Making plug-ins or plug-in hybrids more affordable will require battery breakthroughs, White says, but he’s optimistic this will happen soon. “We’re on the order of years away from this, not decades away,” he predicts. Meanwhile, Lior warns that offering tax credits does not assure that more Americans will find high-tech vehicles more affordable as car makers and dealers may raise prices to offset the credits.

The candidates differ on ethanol, the alcohol gasoline additive that in the U.S. is produced primarily from corn.

Obama backs the government subsidies that have produced dramatic growth in ethanol production in recent years. McCain generally opposes such subsidies and says the U.S. should drop tariffs that prevent import of cheaper ethanol made from sugar cane in Brazil and elsewhere.

White suggests that ethanol no longer looks like a promising alternative to oil. While it burns cleaner, that is offset by the carbon produced to make it — from tractors, trucks, fertilizer production and other sources. And use of corn to make ethanol has boosted food prices. “I think today there is much more skepticism” about ethanol’s benefits, he says. Obama talks about promoting ethanol production from grasses, sawdust and other waste containing cellulose, but this technology has not moved from the laboratory to commercial scales, and there is significant doubt about whether that can be done cost-effectively, according to White. “There’s no obvious win-win with the use of ethanol, except for the American farmer.”

While both candidates talk about improving gas mileage, Lior notes that this will not necessarily reduce carbon emissions, because when fuel costs are less severe, people may drive more. Or they might spend their fuel savings on some other energy-using product.

McCain calls for 45 new nuclear power plants, pointing out that this carbon-free power source has been used safely on Navy ships and overseas for decades. Obama says he supports new nuclear plants but that waste storage and other problems must be resolved first. Those problems are so difficult that this may mean little or no nuclear expansion under Obama. And while nuclear power doesn’t produce greenhouse gasses, it is very costly. “I don’t really see the economic case for pushing nuclear so strongly,” Orts says. Lior adds that “all the problems that stopped nuclear 30 years ago in the United States are still there.” He lists safety, cost and waste disposal issues as the chief barriers. “Nothing has been solved in a definitive manner.”

According to White, Obama is more specific and aggressive about developing renewable energy sources, such as wind. Of all the renewables, which include solar electricity, geothermal and bio-fuels like ethanol, wind is the most promising, suggest both Orts and White. “I think T. Boone Pickens is right that wind power has reached a stage that a significant amount invested in wind turbines would make a dent,” Orts says, referring to the Texas oil man turned wind advocate and wind-power investor. “It’s viable technology. It’s been proven in Europe.”

Even with the high cost of building transmission lines, wind requires the smallest subsidy to be profitable, White notes. “Wind is close to economic at today’s energy prices,” and will be even more practical if a cap-and-trade system increases coal-electricity costs.

Because solar electric panels are inefficient and most of the U.S. has too little sunshine, solar requires enormous subsidies to be profitable, according to White, who says its true production cost is about 40 cents per kilowatt hour, while electricity sells in much of the country for less than 10 cents a kilowatt hour. Other renewables, such as systems to make electricity from tides, currents and waves, are still experimental and far from offering a practical electricity source, White believes. Hydroelectric power is proven and economical but is fully developed already.

Conservation: Low Cost, Big Impact

Aside from the high-tech and expensive energy policies, both candidates advocate a range of simpler strategies, from weatherizing homes to improving electric appliances. “There’s a huge amount of savings that you can have in taking some energy-efficiency measures,” says Orts. He estimates that greenhouse gas emissions could be cut as much as 30% through weatherization, insulation, mandates for appliance efficiency and other simple conservation efforts. “That can be easily done. It’s pretty low-tech.”

Lior notes that many of today’s energy-efficiency standards are voluntary. The government’s Energy Star program, for instance, provides efficiency ratings for appliances that may appeal to some consumers, but it does not mandate improvements. Simple policies like charging bridge and road tolls in only one direction, and improving traffic flow for vehicles and aircraft could cut fuel consumption in some areas by as much as 25%, he says. Out-dated production techniques in many industries, such as steel and chemical production, rob many American producers of the energy efficiencies enjoyed in other countries, he argues.

Ultimately, he states, cleaning the carbon footprint will involve sacrifice that neither candidate talks about: Energy costs will rise and Americans may need to settle for smaller homes and vehicles. “A somewhat more modest lifestyle is not going to put us out,” Lior suggests.

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