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Free Markets Mean Cheaper Energy

by Rupert Darwall

True 60 years ago, and true today

When a president wraps his energy policy in the mantle of national security, it’s a sure sign that he has a bad energy policy.

Concern about energy imports often goes hand in hand with feelings of insecurity and economic vulnerability. Similarly, a president’s rhetorical linkage of energy policy to national security is an indicator of lack of confidence in America’s global power. In a speech in March lauding his Energy Security Trust, a proposal to transfer offshore-drilling profits to a green-energy research fund, President Obama hewed to this formula and invoked national security, citing the support of General Paul Kelley, a former commandant of the Marine Corps, for his idea. In so doing, he was invoking the same rationale that had supported Jimmy Carter’s war against oil imports and George W. Bush’s push for biofuels (which, incidentally, helped propel food prices higher around the world and led to rioting across the Middle East). All three were following in the footsteps of Richard Nixon’s Project Independence, which was announced in November 1973 in response to the Arab oil embargo and failed to achieve any of the objectives Nixon had set for it.

The post–World War II generation took the diametrically opposite approach. In 1951, President Truman appointed a Materials Policy Commission, headed by CBS president William S. Paley. It would have been understandable if the members of the Paley Commission had succumbed to paranoia. After all, the Korean War was still raging, China had fallen to Mao’s Communists two years earlier, and the Soviet Union was on the threshold of exploding its first H-bomb. But the commission’s 819-page report, Resources for Freedom, turned out to be a comprehensive and intelligent rebuttal of fears about resource depletion and reliance on imports, and a rejection of pleas that America hoard its natural resources. “In developing America,” the commission said, “our forebears consumed resources extravagantly, but we are certainly better off in materials than they were. It would be unreasonable for us, their posterity, to suggest that they should have consumed less so that we might consume more.”

Resources for Freedom outlined an approach that, applied today, would make Americans unambiguously better off. It urged the U.S. to reject the goal of self-sufficiency, which it derided as amounting to a “self-imposed blockade and nothing more.” Tariffs and other barriers to trade should be removed, it declared, because these were adding to the free world’s material problems.

Belief in private enterprise, the profit motive, and the price system were fundamental convictions of the Paley Commission. Based on its examination of history, the commission rejected the idea that there was a fixed lump of resources that, once used up, would be gone forever; and it embodied this view in its projections — projections that turned out to be far closer to reality than later, more famous doomsday predictions, such as those of the Club of Rome’s report The Limits to Growth (1972) and the Carter administration’s alarmist Global 2000 Report to the President (1980). The latter made the absurd suggestion that, by 2000, the trend of longer life expectancy might reverse, with hunger and disease claiming more lives, and that more of those surviving infancy would be physically and mentally stunted.

President Reagan swept away the controls and regulations that had created the energy shortages of the Carter years, but, by the beginning of the 21st century, fears about global warming were again pushing the U.S. away from reliance on the free market as the best means of discovering the lowest-cost sources of energy. For sure, that is not the means most favored by environmentalists lobbying for high-cost renewable-energy sources.

Onshore wind farms typically produce only about one-fifth of their theoretical capacity, and thus require fossil-fuel or nuclear standby capacity; furthermore, connecting windswept hillsides to places where people live and work involves higher transmission costs than do conventional power stations. A December 2012 study by the American Tradition Institute, a rare pro-market environmental-policy think tank, estimated that Americans pay $8.5 to $10 billion more a year for wind energy than they would for the same amount of electricity generated from natural gas — before factoring in wind’s higher transmission costs.

Clearly the free market won’t support wind. In this regard, Europe, lashed to the mast of the Kyoto Protocol, stands as a warning. Despite being the poster child for wind power, Denmark has not solved the fundamental problem of generating electricity from wind economically. Because there is no means of matching output to demand, sometimes Denmark has to literally give away its electricity to neighboring countries; on a few occasions, spot prices have even fallen below zero. The same could happen to American states and municipalities that have come to rely heavily on wind. They too might end up paying their neighbors to take away their surplus electricity.

A further justification made for energy autarky is that it would insulate Americans from movements in world energy prices. In reality, the only way to remove energy-price volatility is to adopt policies that mandate permanently high prices. This is the approach that the British government is taking under David Cameron: replacing the energy market with an unworkable cat’s cradle of government contracts and price supports. Britons are going to learn the hard way that central planning doesn’t work.

Thanks to the Senate’s 95–0 adoption of the Byrd-Hagel resolution in 1997, the U.S. is the only developed country not bound by the emissions cuts required under the Kyoto Protocol. When emissions cuts were debated in the 1990s, the Bush 41 and Clinton administrations both thought emissions targets would be difficult and expensive to meet. Senior economic advisers in the Clinton administration scoffed at Al Gore. “Al has discovered it’s a lot easier to write a book about the subject than to grapple with the economic costs,” one of them told the New York Times.

Then, in 2008, something totally unexpected happened: America’s carbon dioxide emissions started to fall. According to numbers compiled by Raúl Estrada Oyuela, the Argentine diplomat who chaired the Kyoto negotiations, the U.S. is on course to meet its Kyoto emissions-cut target even though it did not ratify the protocol. Because the economy has remained weak since the recession, emissions of carbon dioxide are lower than they otherwise would be. Electricity generation last year was still 2.5 percent below its peak in 2007. If electricity output had continued to grow at the same rate as it had since 1990, it would have been over 12 percent higher last year than it actually was.

But there has been another big factor: the switch from coal to natural gas, which accounts for around half the fall in carbon dioxide emissions from energy consumption since 2007. Even on the unrealistic assumption that all solar- and wind-generated electricity displaced electricity generated from natural gas (unrealistic because power stations can’t be turned on and off in step with the variability of the weather), these sources contributed at most 6 percent of the decline in carbon dioxide emissions. Put another way: If America had relied on wind and solar to cut emissions from energy consumption, emissions would have fallen by 0.7 percent from their 2007 peak rather than the actual 12 percent.

No one anticipated that the shale-gas revolution unleashed by hydraulic-fracturing technology would enable the U.S. to reduce emissions without the federal government’s having to do anything. America’s de facto compliance with Kyoto might tempt liberals to argue that America can sign on to future rounds of emissions cuts with impunity — and to encourage extremely costly legislative interventions and even more investment in their favored renewables (whose trivial contribution to lower emissions will be conveniently ignored).

That’s not the right direction for U.S. policy. Lower carbon dioxide emissions are an unintended by-product of America’s shale-gas bonanza — a vindication of the approach advocated by William Paley, a Democrat, and his commission’s Resources for Freedom. The free market can provide Americans with cheap, abundant energy, just as Paley and his commission said it would six decades ago — so long as the federal government lets it.

– Mr. Darwall is the author of the recently published book The Age of Global Warming: A History.

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