Democrats promised to use their new congressional majorities to redirect national energy policy. Last week, Senate Majority Leader Harry Reid did his part, pushing energy legislation through a closely divided Senate. Senators wrangled over the bill’s provisions until late Thursday night before ultimately passing a bill. Now attention turns to the House, where Democrats remain divided over major energy and environmental issues.
Despite Senate Democrats’ spin, there is little new in the Senate energy bill, and even less that is worth enacting. Like prior energy bills, the Senate measure is chock full of subsidies to politically powerful energy interests. The bill includes yet another round of ever-increasing ethanol mandates and various interventions in energy markets, yet it will do little to encourage innovation, stabilize energy prices, or improve environmental protection.
A key provision of the bill increases federal automotive fuel economy standards, also known as “CAFE” standards (for “Corporate Average Fuel Economy”). The Senate bill requires automakers to produce vehicle fleets with an average fuel economy of 35 miles per gallon, a significant increase over current standards, 27.5 mpg for cars and 22 mpg for light trucks and SUVs. Automakers, both foreign and domestic, vigorously fought a CAFE increase of this size, and were able to fend off additional annual increases from 2020 to 2030.
Liberal politicians and environmental activists love CAFE standards because they can reduce gasoline consumption without imposing visible costs directly on consumers. Yet just because CAFE’s costs are hidden that does not make them any less real. Requiring vehicles to use less gasoline inevitably comes at the expense of other features that consumers value, including size, safety, and performance. The reason automobile fuel economy has not increased in the marketplace is not industry malfeasance, but a lack of consumer demand for more fuel-efficient vehicles. If, as some consumer advocates argue, the CAFE increase will pay for itself, federal mandates would hardly be necessary. Much the same can be said for other energy conservation mandates included in the bill, and others that remain on the Democratic leadership’s wish list for future legislation.
The increase in CAFE standards may capture the most headlines, but it is hardly the only important item in the bill. These days it is impossible to pass energy legislation without paying tribute to King Corn, and this bill is no exception. The Senate bill mandates the use of 36 billion gallons of ethanol and other biofuels by 2022 — more than a four-fold increase. This mandate will put additional upward pressure on corn prices, which have already doubled in the past year. And as corn prices rise, so does the cost of meat, poultry, and eggs, among other grocery items. The Senate bill requires that a portion of the mandate be met from non-corn-based biofuels, but this will not prevent the ethanol mandate from increasing the price of both fuel and food here and abroad. It is no wonder some analysts fear a politically driven biofuel boom could “starve the poor.”
Though promoted as an environmental measure, this biofuels measure could have dire environmental consequences, particularly for species habitat. Increasing subsidies and mandates for corn-based fuels increases the demand for corn production, and discourages the reversion of farmland to habitat. Higher corn prices, and the demand for millions more gallons of corn-based fuels will put tens of millions of acres under plow. Even if it becomes more economical to produce ethanol from switchgrass and other sources, the land required to produce over 30 billion of biofuels will be substantial, and land devoted to biofuel production is land that will be less suitable for waterfowl habitat and environmental conservation.
Ethanol producers are not the only beneficiary of the Senate energy bill’s largesse. The bill throws millions of taxpayer dollars at carbon sequestration research, a gift to the coal industry. There is nothing wrong with trying to promote carbon sequestration, but there is no reason the federal government needs to pick up the tab. Should the technology ever become economically viable, it could greatly reduce the net carbon emission intensity of coal-fired energy facilities. The problem is that carbon sequestration appears to be quite expensive, and federal subsidies are hardly an efficient way to encourage cost-saving innovation. If legislators really want to promote innovation in sequestration, offering patent-like prizes for successful innovations would do more than another round of direct federal subsidies.
The subsidy provisions of the bill are wasteful, but other measures are potentially pernicious, such as a provision to penalize alleged “price gouging” by oil companies and gasoline retailers. Politicians love to complain about “price gouging,” yet do little to increase the size and stability of existing energy supplies. If Congress wants to keep gas prices under control, it should stop mandating greater ethanol use, reduce the number of environmentally mandated boutique fuels, and remove regulatory obstacles to an increase in refining capacity. The answer to “price gouging” and energy-price volatility is not more federal intervention in energy markets, but less. (For more, see here.)
Though unable to muster the votes to raise taxes on oil companies to fund tax breaks for alternative energy sources, Senate Democrats still got much of what they wanted. The Democratic leadership would like to blame their failure to get more on Republican “pandering” to energy companies, yet questions of energy policy do not split the Senate on purely partisan lines. Some Republicans enthusiastically support environmental measures, including more stringent energy conservation regulations, and some Democrats are as wedded to home-state energy interests as the most industry-friendly Republicans. Senator Barack Obama, for instance, has a soft spot for southern Illinois coal.
Completely missing from the Senate energy bill is anything meaningful on global warming. As in the House, climate-change-policy measures are too controversial to attract majority support, Democratic senators like to talk about the need for an aggressive global-warming policy, but they anything-but-eager to act. They are willing to call for less energy use, but unwilling to do anything that would visibly increase prices for consumers. If passed into law the Senate bill would increase energy efficiency in government buildings and eventually lead to more fuel-efficient cars, but such measures will have no meaningful effect on the climate. Carbon sequestration sounds nice, but another round of subsidies is anything but a solution. Congressional leaders promise more comprehensive climate legislation later in the year, but with the 2008 campaign approaching, it is unlikely to contain anything too controversial.
House Speaker Nancy Pelosi has promised to match the Senate with a House bill, and soon. She wants “energy independence” legislation to pass before July 4. Unfortunately, there is little on the congressional energy agenda in either House that is at all worthwhile. Passing these bills is a waste of energy.
– Contributing editor Jonathan H. Adler is professor of law and director of the Center for Business Law & Regulation at Case Western Reserve University.