Controversial Issues in Energy Policy


Alfred A. Marcus

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  • Controversial Issues in Public Policy

    Series Editors

    Dennis Palumbo and Rita Mae Kelly

    Arizona State University


      Science vs. Economics vs. Politics





      Government and the Pursuit of Happiness









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    To the memory of my father, James Marcus, 1912–1992, who understood the value of scarce resources.

    Series Editors' Introduction

    Public policy controversies escalated during the 1980s and early 1990s. This was partly due to bitter partisan debate between Republicans and Democrats, a “divided” government in which the Republicans controlled the presidency and the Democrats controlled the Congress, and the rise of “negative” campaigning in the 1988 presidential election. In addition, highly controversial issues such as abortion, crime, environmental pollution, affirmative action, and choice in education became prominent on the public policy agenda in the 1980s.

    Policy issues in this atmosphere tend to be framed in dichotomous, either-or terms. Abortion is depicted as murder on the one hand and a woman's self-interested choice on the other. One is either tough on crime or too much in favor of defendants' rights. Affirmative action is a matter of quotas or a special interest issue. School choice is the means for correcting the educational “mess,” or the destruction of public education. In such a situation there seems to be no middle or common ground in which cooler heads can unite.

    The shrillness of these policy disputes reduces the emphasis on finding rational, balanced solutions. Political ideology and a zero-sum approach to politics and policy became the order of the day.

    Certainly, there has been no end to ideology since the beginning of the 1980s, as some believed was occurring in the 1970s. Instead “Reaganomics” contributed to a widening gap between the rich and the poor and this seemed to exacerbate partisan debate and further stymie governmental action. In 1992, controversies over health care—lack of coverage for millions and skyrocketing costs—illustrate the wide gap in the way Republicans and Democrats approach public policy controversies. The Reagan “revolution” was based on a definite and clear ideological preference for a certain approach to public policy in general: eliminate government regulation, reduce taxes, provide tax incentives for business, cut welfare, and privatize the delivery of governmental services. Democrats, of course, did not agree.

    This series, Controversial Issues in Public Policy, is meant to shed more light and less ideological heat on major policy issues in the substantive policy areas. In this volume, Alfred A. Marcus begins by describing the “Desert Storm” war with Iraq and the growing U.S. dependence on imported oil. Obviously, this is a major issue for the United States, as its economic base is so heavily tied to adequate supplies of petroleum. Dependence on petroleum and the failure of the country to develop alternative sources of energy are also very controversial issues addressed by Marcus.

    The United States is not alone in being heavily dependent on petroleum: Japan and Great Britain are in the same boat, and Marcus describes how these countries, as well as France and the European Economic Community, are reacting to the global energy crisis.

    Is nuclear energy a viable alternative? Marcus describes the history of the development of nuclear energy in the United States and concludes with the following assessment: “As more plants were built and they grew in size and complexity, scientific uncertainty surrounding nuclear power increased, regulatory requirements became more stringent and cumbersome, and the costs escalated to the point where nuclear power was even less competitive with alternative means for generating electricity than it had been at the outset.”

    Marcus's major contribution is in placing controversies in energy policy in a global economic as well as political context. We believe that he has clearly analyzed energy controversies without falling into ideological polemics.

    Rita MaeKelly


    You wake up in the morning and find the following headline in your newspaper: “Iraq Takes Control in Kuwait: Bush Embargoes Trade, Won't Rule Out Military Role.” Your heart sinks as you wonder what this development will mean. The world economy depends for its very existence on stable supplies of realistically priced energy. In an increasingly interdependent world, no nation is self-sufficient. The leading economies in the world—the United States, Japan, and Western Europe—require energy from highly unstable areas of the globe whose leaders have been prone to take rash action with unpredictable consequences. In the last 20 years major energy price shocks in 1973 and 1979 shook the world. With the decline of the cold war, energy policy issues, with their focal point in the Persian Gulf, are among the most important factors in world politics. Not that they supersede global trade, the opening up of the economies of the Eastern bloc, or emerging environmental problems, but rather that they provide for these and other issues a new context for their evolution.

    A key long-term challenge that the world faces is to break the link between economic growth and oil consumption. In so doing it would become less vulnerable to supply interruptions. The relationships between the economy and energy consumption, however, are extremely complicated, as I will show in this book. Obtaining a better understanding of these relationships is my primary aim. The ways in which we have coped with past energy shocks reveal both the shortcomings and failures and some surprising successes. Lessons can be learned so that mistakes will not be repeated.

    The role that governments and markets play in determining how nations cope with energy supply interruptions will be examined here. Both markets and governments have useful roles to play in bringing about adjustments to altered energy conditions. Markets are the main factor motivating people to change their behavior, but markets not properly corrected by governments to reflect the full social costs of energy use cannot possibly do their job. Insofar as energy prices fail to reflect the environmental damage and the national security burdens of energy use, governments will continue to play a useful role in adjusting energy prices.

    Instead of acting to keep prices artificially low, governments should impose taxes on energy use. This idea appears to be a universal panacea that will spur conservation, reduce pollution, stimulate the search for alternative technologies, and help reduce trade and budget deficits. Negative redistributional consequences are no reason for its nonadoption, as additional government revenues earned from energy taxes can aid the poor. The real question is why politicians have been so loath to accept the idea. Does the U.S. Bill of Rights guarantee low energy prices? For in comparison to all countries in the world, energy prices in the United States truly are low. A gallon of gas in other industrialized nations costs two to three times the U.S. price, and most of the differences lies in energy taxes (see Tables 1 and 2).

    Table 1 Percentage of Taxes in Gasoline Prices
    Table 2 Gasoline Prices in US Dollars/Liter

    I will introduce the current energy issues by reviewing the events that transpired in the Persian Gulf after August 1990. I will then examine trends in energy production and consumption in the United States and in the world since the first energy supply shock of 1973. Great strides ultimately were made in coping with earlier supply interruptions, but these adjustments were neither smooth, quick, nor without damage to the world economy. The peak in the adjustment process, moreover, was reached in 1986: Growing demand and weakened supply, in addition to rapidly changing geopolitical conditions and festering Arab resentments, made the world particularly vulnerable to upheaval by 1990.

    A discussion of the economics and the politics of energy policy follows. Economic doctrine maintains that in the long term energy supply shortages cannot hold, for with enough time, a commodity in scarce supply becomes more expensive. Higher prices hasten the discovery of new supplies. People adapt through conservation, switching to alternatives, and technological innovations. The negative impact of supply interruptions is in the short term. I will present evidence on the effects of past supply shocks on economic growth, inflation, and employment in the United States and the world. The slowdown in world economic growth that coincided with the period of the 1973 and 1979 supply shocks is at least partially a consequence of these events. The lesson that emerges from this examination of the economics of energy policy is that if governments do not intervene to maintain artificially low energy prices, markets can effectively achieve long-term adjustments. In the short term, however, markets are likely to have less impact because of rigidities in people's habits and ways of behaving and because of difficulties in replacing the durable capital investments (such as cars and buildings) that people have to consume energy.

    I then turn from the role of markets to that of governments. In particular, I will trace the contradictory policies carried out by the U.S. government after the supply shocks of 1973 and 1979. These policies prevented energy prices from rising, thereby slowing changes that otherwise would have taken place. If prices had been allowed to rise, the U.S. adjustment to earlier energy shocks would have been more rapid. Government policies blunted the impact of the supply interruptions at a cost to the U.S. and world economies. U.S. policymakers increased demand for energy even as they tried to encourage conservation and the development of alternative supplies. Given these contradictory purposes, the efforts were self-defeating. I will examine why the policies nonetheless were carried out. In politics, pure efficiency is not the only important value. U.S. politicians balanced what they thought to be equity and fairness along with efficiency in producing the contradictory policies the United States pursued.

    The policies of the U.S. government in coping with the supply interruptions cannot be understood in isolation from the policies of other participants in the international economy. We will look at the role of these participants, specifically the major supplier of the world's petroleum—the Organization of Petroleum Exporting Countries (OPEC)—and some of the major users of this petroleum, including Japan and the countries in Western Europe. How OPEC was formed, what it has done, and what it has failed to do will be examined in light of the economic theory of cartels. Then the role of major consuming nations outside the United States will be considered. The United States along with Canada is the most profligate user of energy in the world. In Japan and some Western European nations, demand for and supply of energy are very different, and these nations have been more successful at reducing their energy use. Different policies have also been pursued in these nations, as I will note.

    I end with an assessment of two energy technologies—shale oil and nuclear power—which, although very different, are often considered to be promising alternatives to petroleum. The historical experience with these technologies is fairly typical of the historical experience with other technological alternatives, e.g. photovoltaics (see Appendix 1). The promise of these technologies along with the pitfalls in their development will be considered. Again, understanding the role of governments and markets is critical. Governments and markets provide the context for the development of these technologies; they have at different times and in different ways both promoted and stifled their development. The history of U.S. involvement in shale oil production and nuclear power illustrates this thesis. Federal enthusiasm for these energy types, as well as their market appeal, waxed and waned. In the final chapter of the book, the challenges that the electric utility industry faces in responding to rapidly changing energy conditions are discussed; the role that nuclear power plays in this industry is also explored.

    Energy policy has broad ramifications and thus it has been hard to circumscribe the limits of this book. I have attempted to cover the economics and politics of energy policies as they have emerged in the United States and elsewhere in the world in light of the major disturbances in energy prices that the world has faced. Worldwide comparisons demonstrate that there are significant differences in the way nations and societies cope with energy crises, and that these differences have important implications. Alternative technologies to petroleum are considered—a focus at the end of the book is the decisions that have to be made by the electric power industry about nuclear power and other forms of power generation. I have only been able to touch briefly on the national security issues that affect the energy question, including the Persian Gulf and Middle Eastern politics that are ever more critical to energy policy. Other important elements, which I have been unable to consider here, are the trade-offs between energy and environmental policies and the importance of technological developments and innovation in solving energy problems.

    In the long run energy and environmental problems will be solved by technological developments and innovation. Wise governments will make sure that prices provide true signals to markets to stimulate these developments. Prices must reflect the full social costs of energy production. When they do, the market itself will compel people to conserve, innovate, and find alternatives to using fossil fuels obtainable only from politically unstable regions of the globe.

  • Appendix 1: Photovoltaics

    A photovoltaic (PV) cell produces electricity directly from sunlight (Buchholz, Marcus, & Post, 1992). When the sunlight strikes the surface of the semiconductor material of which the cell is made, it energizes some of the semiconductor's electrons enough to break them loose. The loose electrons are channeled through a metallic grid on the cell's surface to junctions where they are combined with electrons from other cells to form an electric current. Electrons of different semiconductor materials are broken loose by different wavelengths of light, and some wavelengths of sunlight reach the earth's surface with more intensity than others. Consequently, much of the effort of PV research has been to find semiconductor materials that are energized by the light wavelengths that are most intense and have the potential to provide the most energy.

    Photovoltaics are not the only way of utilizing the sun's energy. In fact, PVs are not even the major producer of electricity from sunlight. That distinction belongs to solar thermal technologies. Solar thermal systems work by using the heating rays of the sun to warm air, water, or oil for space heating or thermal power generation. Luz International of Los Angeles is the world's largest producer of solar thermal electric plants. The company's seven plants in California's Mojave Desert produce 90% of all solar-generated power in the world. Company officials estimate that solar thermal plants occupying just 1% of the Mojave could supply all of Southern California Edison's peak power requirements. Solar thermal facilities, which on sunny days can achieve conversion efficiencies twice that of some PVs, generate power at a cost equal to late-generation nuclear plants, and the cost is dropping.

    Single-crystal silicon cells were the first type of PVs widely used, powering satellite radios as early as 1958. These cells are energized by some of the most intense sunlight wavelengths and have achieved conversion efficiencies (percentage of light energy converted to electricity) over 20%. Other, non-silicon, single-crystal cells have achieved efficiencies over 27%. Although efficient, these single-crystal cells are also expensive to produce and the crystals are difficult to grow. Much of the crystal is wasted when it is sawed into pieces for individual PV cells. Because the cost is so much, use has been limited mainly to applications where electricity is necessary and there are no other alternatives, such as in the space program.

    To reduce production costs, researchers began to search for ways to fabricate silicon into cells that did not require the expensive and wasteful single-crystal techniques. One result of their efforts are polycrystalline silicon cells, which sacrifice some efficiency in return for cheaper manufacturing methods. The most efficient polycrystalline cells to date achieve better than 15% efficiencies. Together, single-crystal and polycrystalline cells account for two thirds of those sold. Perhaps the most promising PV technologies are the “thin-film” techniques, in which cells as large as 4 square feet—crystalline cells are in the neighborhood of 1/4 inch in diameter—are produced by depositing a film of PV material less than one hundredth the thickness of a crystalline cell on a suitable base, or substrate. These cells are only about half as efficient as single-crystal cells, but because they can be produced for about one fourth the cost or less, they offer the greatest potential for large-scale use. Thin-film silicon cells (called amorphous silicon) accounted for 37% of the world market for PVs in 1987. One drawback to amorphous silicon cells, however, is that they typically lose about one sixth of their power output in the first few months of use. There are other thin-film materials that do not suffer from this light-induced degradation. Two of the most promising are copper indium diselenide (CIS) and cadmium telluride (CdTe).

    The world leader in CIS technology was ARCO Solar, Inc. The company developed a 4-square-foot CIS cell with a 9% conversion efficiency, demonstrating that large-scale applications of thin-film technology are feasible. A Texas company, Photon Energy, Inc., developed an inexpensive, simple process for applying CdTe to panels as large as ARCO's, achieving 7% efficiency. The company managed better than 12% efficiencies in the laboratory and expects to do even better in the near future.

    Besides improving conversion efficiencies by developing new PV compounds, researchers have broken efficiency records by “stacking” cells. Mechanically stacked multijunction (MSMJ) cells are actually two cells pasted together. The top cell extracts the energy from one part of the light spectrum, and the lower cell uses the energy from a different part. A MSMJ cell composed of a single-crystal gallium arsenide cell and a single-crystal silicon cell has achieved a better than 30% efficiency, and researchers believe that a three-layer cell with 38% efficiency is possible. Efficiency improvements via stacking of more economical thin-film cells are also being investigated.

    The continuing improvements in conversion efficiencies are especially remarkable considering that as recently as 1982, theoretical physicists believed that the maximum achievable efficiency of a solar cell was 22%. The highest efficiency achieved at that point was 16%. Now theoreticians estimate that 38%-40% is the limit, although the physics of thin-film technology is not completely understood (U.S. Congress, Senate Committee on Energy and Natural Resources, Subcommittee on Energy Research and Development, 1987a).

    Appendix 2: Global Warming

    Human activities of the past 100 years appear to be altering the composition of the atmosphere, causing a global warming trend (Moore, 1988). Many scientists already are convinced that global warming has started and that it will worsen through the next century. In the past century, they estimate that the globe warmed between 0.5°C and 2°C. Warming occurs by means of the greenhouse effect, that is, the trapping of infrared energy, or heat, in the stratosphere. Trapping of such heat is caused by carbon dioxide and other greenhouse gases chemically interacting with additional atmospheric gases. The greenhouse gases, including carbon dioxide, are transparent to sunlight, thus letting the energy penetrate the earth. Absorbing most of the sunlight, the earth converts the light energy into heat. Any light that is not absorbed is reflected back into space by means of clouds, ice, and snow. As the heat rises from the earth, it strikes the carbon dioxide and other greenhouse gases. Some of the heat is reflected back again to the earth, causing the warming effect in the same way that a greenhouse works, with panes of glass that allow higher energy light waves to enter easily, but do not allow the heat of lower energy to escape.

    In discussing the greenhouse effect, major emphasis is placed on carbon dioxide because it makes up about 50% of the problem. In 1990, carbon dioxide was measured in the atmosphere to be approximately 344 parts per million (ppm). This amount was large considering that only 100 years ago the carbon dioxide concentration was only 293 ppm. Thus, an increase of about 15% had occurred in the last 100 years. The major cause of the increased volume of carbon dioxide is the burning of fossil fuels like oil, coal, and gasoline. Scientists tend to be pessimistic about the likely curtailment in the use of fossil fuel, thus estimating an increase in carbon dioxide emissions of 0.5% to 2% per year for the next several decades.

    The other gases making up the remaining 50% of the greenhouse effect are methane, chlorofluorocarbons (CFCs), nitrous oxides, and ozone. Currently, the atmosphere contains 100% more methane than it did during glacier periods. This increase is caused by the harvesting of rice paddies, the use of landfills, and the flaring of natural gas wells. Methane contributes about 20% of the greenhouse effect. CFCs emitted from the earth are found in the atmosphere at one part per billion. They constitute about 15% of the total greenhouse gases. Nitrous oxides, found in the atmosphere in minute traces, originate from the use of fertilizers, the natural process of the emittance of soil microbes, and the burning of fossil fuels. Nitrous oxides emissions account for about 10% of the greenhouse effect. The last major gas that contributes to the greenhouse effect is ozone. Even though the ozone layer provides ultraviolet protection at high levels in the atmosphere, at lower levels, where it is more commonly known as smog, this gas is dangerous. Ozone contributes about 5% of the greenhouse effect.

    Three known natural processes may counteract the greenhouse effect. These are the absorption of the carbon dioxide by the oceans, absorption by tropical rain forests and other vegetation, and reflection of sunlight back into space by the clouds. The oceans are considered to be the major sink for carbon dioxide gas, as carbon dioxide gas is readily dissolved into seawater; aquatic plants absorb this carbon and when these plants die they take the carbon out of the natural life cycle. It is not known how much carbon dioxide is absorbed by the oceans. Because of the oceans' vastness, scientists find it difficult to estimate the exact amounts of carbon dioxide plants absorb and how much oxygen they produce through photosynthesis. The rate of absorption by plants is estimated to be 500 billion tons of carbon dioxide annually worldwide, but this estimate is very uncertain. Because of rapid deforestation it could be decreasing rapidly.

    Clouds counteract heat retention not by absorbing carbon dioxide, but by reflecting sunlight back into outer space. If the infrared light from the sun does not reach the earth, heat cannot be created. If the heat on the earth's surface does not go up, the greenhouse effect cannot occur. When infrared light does reach the earth, clouds may then reflect the heat back toward the earth, thus warming it. Major uncertainty exists about the role of clouds in counteracting the greenhouse effect. Ultimately this matter is extremely complicated, because it depends on subtle distinctions of cloud thickness.

    There are many impacts that the greenhouse effect can have on the world (Cahan & Bremner, 1989). Some of the major consequences that have been predicted are listed below. These predictions assume that the levels of carbon dioxide and the other greenhouse gases will be emitted at the same rate as present:

    • In Greenland and the Arctic, some of the permafrost and ice will melt, causing the oceans to rise and threatening flooding along coastal areas.
    • The midwestern United States will be hit hard by drought conditions due to the warmer weather evaporating more water, causing drier soils.
    • With the increased evaporation of water, rivers will decrease in level, thus causing a shortage in water supplies, lower generation of power, and a disruption in agricultural irrigation.
    • The former republics of the Soviet Union will gain approximately 40 more days in their growing season, which could make them a net exporter of grain to the rest of the world.
    • The increased temperatures will cause a wider area of rain forest growth, moving the African rain forests north and bringing rain to Chad, Sudan, and Ethiopia, breaking their prolonged dry spell.
    • An increase in snow and frozen rain in Antarctica will create a thicker ice level that will help counteract some of the greenhouse effect by reflecting more sunlight and counteracting the sea level rise.

    Canada and the United States have the highest emissions levels of greenhouse gases per capita among the developed Western democracies. The highest level of greenhouse gas emissions per capita in the world, however, is found in East Germany. Brazil and the Ivory Coast have the highest levels of emissions per capita among developing countries, and per unit of GNP, Brazil's and India's emissions of greenhouse gases surpass the levels found in the United States.

    A first approach to limiting carbon dioxide buildup would be making energy supply and use more efficient (U.S. Congress, Senate Committee on Energy and Natural Resources, 1987b, 1989). Examples of available technology for conservation are increasingly efficient light bulbs in commercial buildings, better insulated buildings, and the manufacture of more fuel-efficient vehicles. Prototype vehicles have obtained up to 70 mpg. U.S. fuel standards for new vehicles have been set at 27 mpg. As the vehicle stock turns over, the overall fleet average is increased. A fleet average of 40 mpg with no increase in miles driven would cut U.S. auto-related carbon emissions in half.

    Another option to reduce the use of fossil fuels is to use different sources of energy. Alternatives such as nuclear power, hydropower, and natural gas produce far less carbon dioxide. The Bush administration has proposed that methanol be given serious consideration as an alternative motor vehicle fuel. Methanol made from biomass (primarily wood, organic wastes, or agricultural produce) would not contribute to greenhouse emissions as long as the biomass feedstock was replaced. Hydrogen, however, appears to be the best long-term alternative means for motor vehicle propulsion. A hydrogen-based fuel would emit only water vapor and nitrous oxides, the latter at significantly lower levels than produced by fossil fuels. Estimates of hydrogen's costs place it at $2-$4 per gallon equivalent shortly after the year 2000, which would make it competitive with gasoline if gas taxes were increased to reflect gasoline's true social cost. A big problem is fuel tank storage. Fuel efficiency gains are needed so that smaller tanks can be used without sacrificing the range of hydrogen cars. Another problem with the fuel tank is safety. A final problem with hydrogen is how to safely and efficiently manufacture it.

    Another method to reduce carbon dioxide buildup is to end the deforestation of the world's rain forests. The burning of the rain forests emits an estimated 1 billion tons of carbon dioxide a year, and at the same time the earth loses one of its major sinks to absorb carbon dioxide. Encouraging the reforestation of areas of the globe that have been denuded of their natural tree cover is a gesture of important symbolic significance, but it cannot make an important dent in carbon dioxide buildup.

    A final method to reduce carbon dioxide buildup is to concentrate future energy research and development on noncarbon-based fuels. Photovoltaics are an excellent example. If they became commercially feasible on a large scale, they could make an important dent in the greenhouse problem.


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    About the Author

    Alfred A. Marcus is Professor of Business, Government, and Society in the Carlson School of Management, the University of Minnesota. He formerly taught at the University of Pittsburgh Graduate School of Business and as an adjunct professor at the University of Washington Graduate School of Business. His Ph.D. is from Harvard (1977) in political science. He has an undergraduate degree in history from the University of Chicago and received a master's degree from the University of Chicago in political philosophy. From 1979 to 1984 he worked at the Battelle Human Affairs Research Centers in Seattle, where he was involved as an analyst in many of the energy policy issues that he describes in this book.

    Other books by Professor Marcus include Managing Environmental Issues (with Rogene Buchholz and James Post) and The Adversary Economy: Business Responses to Changing Government Requirements. His articles have appeared in the Academy of Management Journal, the Strategic Management Journal, the Journal of Policy History, the Journal of Law, Economics, and Organization, the Policy Studies Journal, Policy Sciences, Minerva, and Law and Policy. His work on airline deregulation won the Theodore Lowi award as the outstanding article in the Policy Studies Journal in 1986. Professor Marcus has carried out research and done consulting for numerous government agencies and business organizations.

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