McCain’s Energy Policy

John McCain gave a speech on energy policy today. It reminds us that while McCain’s energy policies are much better than Barack Obama’s–Obama wants the price of gasoline to remain high so that Americans can’t afford to drive their cars–McCain’s policies are still an ill-assorted jumble.

McCain thinks the federal government has a key role to play in encouraging people to buy more fuel-efficient vehicles, and in forcing automakers to produce them:

Ninety-seven percent of transportation in America runs on oil. And of all that oil, about 60 percent is used in cars and trucks. Yet the CAFE standards we apply to automakers — to increase the fuel efficiency of their cars — are lightly enforced by a small fine. The result is that some companies don’t even bother to observe CAFE standards.

So McCain wants to toughen the CAFE standards. But automakers produce the cars that they think they can sell. If consumers want more fuel-efficient cars, automakers are happy to produce them; the CAFE standards are irrelevant. And with gasoline at $4 per gallon, consumers are, indeed, demanding fuel efficiency, which is why, to take just one example, General Motors has announced “drastic cuts in production of sport utility vehicles and pickups … and stepped up plans for smaller cars and engines.”

Likewise, McCain thinks that consumers need government incentives to buy vehicles that emit less carbon:

For every automaker who can sell a zero-emissions car, we will commit a 5,000 dollar tax credit for each and every customer who buys that car. For other vehicles, whatever type they may be, the lower the carbon emissions, the higher the tax credit.

A vehicle will emit less carbon, and thereby qualify for tax credits, by getting better mileage. But Americans don’t need the government to offer them money to buy fuel-efficient cars; they are already flocking to do exactly that, out of self-interest. Hence the demand for hybrid vehicles. McCain proposes to use government power to force consumers and automakers to do exactly what they are already doing.

McCain is a fan of “flex fuel;” he wants to force American automakers to convert all of their vehicles to flex fuel in a few years:

Instead of playing favorites, our government should level the playing field for all alcohol fuels that break the monopoly of gasoline, lowering both gasoline prices and carbon emissions. And this can be done with a simple federal standard to hasten the conversion of all new vehicles in America to flex-fuel technology — allowing drivers to use alcohol fuels instead of gas in their cars. Brazil went from about five to over 70 percent of all new vehicles with flex-fuel capacity. It did all that in just three years.

I’m not an expert on flex fuel vehicles, but you can read about them here. The problem with demanding that automakers convert all their cars to flex fuel, I think, is that there isn’t enough alcohol fuel available to do much good. Currently, what we have in the U.S. is ethanol made from corn, and even if we starved every cow and pig in America and converted our entire corn crop to ethanol, it wouldn’t be enough to put a very sizable dent in our need for oil.

In Brazil they use sugar cane, I believe, and here in the U.S. we could use switch grass. But it would take some years for large quantities of switch grass to be grown, and I’m not sure whether the many ethanol plants that now dot the Midwest can easily be converted to accept switch grass. The bottom line is that, while it would be great if American farmers could produce enough cellulose to fuel our cars, it doesn’t appear that requiring all American vehicles to be flex fuel–as many already are–will break the bottleneck and allow that to happen.

Finally, McCain wants to offer a $300 million cash prize to whoever can develop a battery-powered automobile that will meet certain specifications. In general, I’m a fan of offering prizes as opposed to funding government research, but the demand for cheaper forms of transport is so overwhelming that I doubt a government prize is needed to incentivize such research. No doubt a great many brilliant scientists are now working feverishly on fuel cell and battery technology for motor vehicles.

A basic tension is at work whenever McCain talks about energy policy. He wants oil to be cheaper so that Americans’ budgets will not be pinched and our economy won’t go into the ditch; hence his call for drilling in the outer continental shelf and elsewhere. Producing more oil and reducing its price will, of course, result in more oil consumption, and more CO2 emissions.

This is where McCain runs into trouble. He has bought into the anthropogenic global warming myth, so he has to advocate less CO2 emission, not more. Hence his call for the government to subsidize technologies that use less, or no, oil, and his advocacy of a “cap and trade” system for CO2. McCain’s energy policies are fundamentally in conflict.

A cap and trade system treats CO2 as a pollutant. Existing air and water pollution regulatory schemes provide clear precedents for this approach. Regulation of pollutants is based on the concept of “externalities.” Typically, it costs a company money to control or properly dispose of a pollutant. On the other hand, if it emits the pollutant into the air or water, it may impose a cost on the society at large, but not on itself. So, absent regulation, there will be a tendency to emit pollutants rather than controlling them. This is the fundamental rationale for using government regulation to impose the cost of pollution control on the potential polluter and its customers.

But the situation with petroleum is entirely different. “Externalities” are not the issue. The high price of petroleum is borne by the consumers, individual and corporate, who use energy. Thus we have every incentive to conserve and to minimize our petroleum consumption. This is not a scenario in which the government has much of a role to play. A commodity is expensive; that expense is borne by the consumers of the commodity; so they make their operations more efficient or look for substitutes. The market, not government, will deal with the problem.

Faced with this reality, environmentalists have tried, quite successfully, to move the energy issue from the private enterprise model to the government regulation model by classifying CO2 as a pollutant. Carbon dioxide is not a pollutant by any normal standard. It is a natural part of the atmosphere. It does no harm to humans and is essential for plant life and, in fact, virtually all life on earth. But the left seized on the anthropogenic global warming theory to give it a basis to declare that emitting carbon dioxide–much like second-hand smoke–is everyone’s business.

You can see the residue of AGW theory in McCain’s plan to cap and trade CO2, and, in today’s speech, in his proposals to subsidize consumers and car manufacturers who buy and produce more fuel-efficient vehicles. It is also present in the priority he attaches to moving from a petroleum economy to a switch grass economy. If McCain would study the current climate research and realize that AGW is a myth, he would be liberated to follow the market.

The main thing the federal government needs to do is eliminate irrational barriers to recovering oil here in the U.S. Beyond that, there may be a role to play in encouraging research, in facilitating the transition from, say, corn to switch grass, and so on. But all of these developments will be driven primarily by the market. It is only the bogus AGW theory that obliges the government to put its thumb on the scale, not on the side of American consumers, but on the wholly arbitrary side of reducing CO2 emissions.

If McCain realizes this basic fact, he can assemble a pro-consumer, pro-America energy plan that will not stop with drilling in the outer continental shelf, and will enable him to win a decisive victory in November.

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