The Trump administration’s energy policy, as we consider the two candidates for our nation’s highest office, has been very clear. It rests on three conceptual pillars. Remove regulatory and governmental obstacles to the development of fossil fuels. Roll back environmental restrictions on emissions from both energy production and transportation. Reverse government policies to reduce consumption of fossil fuels. This is a policy of unfettered development significantly deemphasizing environmental concerns while encouraging increased fossil fuel consumption. Despite what we might call the “all clear” signal for energy development, these policies have yielded mixed results. During the years 2017-2019 US GDP rose 7.8% while domestic fossil fuel production rose only 2.2%. At the same time renewable energy production increased 7.5%. But it seems the real problem for the US energy sector is the tepid usage of consumers. Energy consumption increased only 3.0% overall, less than 50% of the rate of GDP growth. Coal usage also fell 20.4% while natural gas consumption increased 13.0%. Oil use fell also 2.8% perhaps reflecting modest EV penetration, increased public transportation usage and trends in tele-commuting.
The Trump administration opened the door, removed as many government obstacles to the industry as possible but provided little direct support to energy companies. However despite all this, consumer behavior has not changed in response.
The Biden campaign has trotted out a comprehensive energy policy not unexpectedly dependent on government initiatives and directives. We will not obsess here about programmatic detail. We suspect the Progressive wing of the Democrats, which showed considerable support during the primary season, will continue to advocate for more aggressive policies and targets. In the interest of party unity they may to a degree be placated. Horse trading of policy to garner support is as old as politics itself.
The Democrats’ present energy program targets 2050 as the year to achieve zero net carbon emissions. It also encourages innovation, makes polluters pay, commits to a world-wide effort to limit carbon emissions and proposes aid for displaced workers hurt by the coming changes. The program calls for $1.7 trillion of government spending that will hopefully elicit another $3.3 trillion from the private sector for a total of $5 trillion over the coming decade.
In order to fund energy innovation the Biden campaign proposes another government agency, ARPA-C, modeled after ARPA-E and the original DARPA, founded during the Eisenhower administration, which funded such innovations as the internet. ARPA-E, an Obama administration innovation, funded and attracted capital for several billion dollars of energy projects. APRPA-C would invest in energy storage, modular nuclear, decarbonization processes, hydrogen technologies and carbon capture and sequestration.
The Biden program is what one expects from a moderate Democrat who spent decades in Washington. It is heavy on government directives but light on the ways incentives and disincentives encourage or distort the energy policy process. Given its inclusivity (no lobbyist seems to be left behind) it is probably do-able. Also the leisurely pace of zero carbon implementation is one which many energy firms have themselves already embraced. So why our skepticism?
First, the unambitious time table itself. We doubt that Green New Dealers will accept a 2050 date for zero carbon emissions. Their time horizon for implementation looks more like ten to twenty years, not thirty. Energy firms on the other hand like that date three decades in the future because It provides ample time to adjust without the unpleasantness of asset write downs and other so called stranded costs. But environmental activists argue the world’s degrading climate situation does not permit us 30 years to slowly adjust in accordance with present asset depreciation schedules.
Candidate Biden, although presently ahead in the opinion polls, we suspect will seek the enthusiastic support of the party’s Green New Dealers. In an increasingly polarized electorate, appealing to moderates of the other party has been a losing strategy. It is difficult to see why the Biden camp would object to an acceleration of its environmental program. Why alienate its potentially most fervent supporters?
Second, let’s look at the size of this climate related program. Green New Dealers are clearly thinking big. They want a combined infrastructure-jobs-decarbonization effort that lifts the country. Biden’s effort talks about $5 trillion over 10 years of which “only” $1.7 trillion would be funded directly by the government. All sector capital expenditures in the US were close to $6 trillion in 2019 alone. As explained previously, decarbonizing and modernization of the US electricity sector would cost $7-8 trillion over 20 years which translates into about $4 trillion for the coming decade. Electric sector spending, then, could account for the balance of the $5 trillion. There are a lot of other needs out there. So we expect the platform plank’s price to go up. As former Senate Minority Leader, Everett Dirksen, once quipped to Johnny Carson regarding the Congressional budgetary process—this was back in the quaint days of the early 1960s when a dollar could purchase two cups of coffee—“A billion here, a billion there, and pretty soon you’re talking about real money.” Related: Three Reasons Oil Prices Are Bouncing Back
So, expect an election program plank with more money and a shorter time frame. What Congress does if Biden is elected is another matter.
We have not discussed the “polluter pays” sliver of the party’s platform because it seems so vague. Presumably this means a carbon tax. How much? Let’s say $10 per metric ton, way below cost to remove carbon but a start. That translates to about 10 cents per gallon of gasoline and a 4% hike in the electric bill. It would bring in over $60 billion per year ($200 per American) and politicians have already promised to return it as an annual dividend to us all. The real question is efficacy: how much would it move energy suppliers to actually reduce carbon emissions? Would it induce consumers to actually reduce energy consumption or simply switch to less expensive fuels? Or at a modest level would it become like a nuisance tax, just one more cost of doing business? We should add that the real beneficiary of a carbon tax at a meaningful level is the nuclear power industry. The higher the carbon tax the better its economics appear relative to fossil fueled competition.
The Obama administration did a study showing that the social cost of carbon was closer to $40 per metric ton. Cost to remove carbon in the electric sector probably exceeds $100 per metric ton. Let’s not kid around. This is a political third rail. But without a fairly hefty carbon tax (or whatever it may be called) the Biden climate plan will consist mainly of a revived commitment to regulatory enforcement along with grants and subsidies to favored endeavors.
What else? If we need a green infrastructure plan why not incentivize the US electricity sector to step up and start spending money to decarbonize and modernize? This is a huge shovel-ready project that would require no federal government money. Also, the research and development arm, designed to commercialize new technology, shuts ordinary Americans out of the process. We believe that making opportunities available to the general public would encourage a buy in by the public. The Kennedy administration set up COMSAT to develop communications satellites and ordinary people could buy the stock. Bill Gates and venture capitalists will get to invest in new technologies financed in part by government money. Why not the rest of us?
Overall, the Biden plan should make the legacy energy industry mildly uncomfortable because it may mainly limit profitability by dampening demand and raising compliance costs. But a revised energy plan from the Democrats’ Progressives will make the energy industry even more uncomfortable. But like most policy changes this creates greater opportunities for agile operators with less commitment to the status quo.
By Leonard Hyman and William Tilles for Oilprice.com
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