Sentiment about Energy Policy Changing

Trend: Conservative, capitalistic individuals are starting to question US energy policy and the underlying motives, which could stimulate investment in energy-saving and clean technology.

Brett Arends at The Street summarizes a report by Cheney's fund manager criticizing US energy policy in a rant called While America Slept, 1982-2006. Excerpts below.

Link: Cheney's Fund Manager Attacks ... Cheney.

From Jeremy Grantham -- Cheney's investment manager:

"What were we thinking?' Grantham demands in a four-page assault on U.S. energy policy mailed last week to all his clients, including the vice president.

Titled "While America Slept, 1982-2006: A Rant on Oil Dependency, Global Warming, and a Love of Feel-Good Data," Grantham's philippic adds up to an extraordinary critique of U.S. energy policy over the past two decades.

"Successive U.S. administrations have taken little interest in either oil substitution or climate change," he writes, "and the current one has even seemed to have a vested interest in the idea that the science of climate change is uncertain."

Yet "there is now nearly universal scientific agreement that fossil fuel use is causing a rise in global temperatures," he writes. "The U.S. is the only country in which environmental data is steadily attacked in a well-funded campaign of disinformation (funded mainly by one large oil company)."

That's Exxon Mobil.

As for Massachusetts Institute of Technology professor Richard Lindzen, who appears everywhere to question global warming, Grantham mocks him as "the solitary plausible academic [the skeptics] can dig up, out of hundreds working in the field."

And for those nonscientists who are still undecided about the issue, Grantham reminds them of an old logical principle known as Pascal's Paradox. It may be better known as the "what if we're wrong?" argument. If we act to stop global warming and we're wrong, well, we could waste some money. If we don't act, and we're wrong ... you get the picture.

As for the alleged economic costs of going "green," Grantham says that industrialized countries with better fuel efficiency have, on average, enjoyed faster economic growth over the past 50 years than the U.S.

Grantham says that other industrialized countries have far better energy productivity than the U.S. The GDP produced per unit of energy in Italy is 50% higher. Fifty percent. Japan: 60%.

And China "already has auto fuel efficiency standards well ahead of the U.S.!" he adds. You've probably heard about China's slow economic growth.

Grantham adds that past U.S. steps in this area, like sulfur dioxide caps adopted by the late President Gerald Ford, have done far more and cost far less than predicted. "Ingenuity sprung out of the woodwork when it was correctly motivated," he writes.

There is also a political and economic cost to our oil dependency, Grantham notes. Yet America could have eliminated its oil dependency on the Middle East years ago with just a "reasonable set of increased efficiencies." All it would take is 10% fewer vehicles, each driving 10% fewer miles and getting 50% more miles per gallon. Under that "sensible but still only moderately aggressive policy," he writes, "not one single barrel would have been needed from the Middle East." Not one.

Grantham is the chairman of Boston-based fund management company Grantham, Mayo, Van Otterloo. He is British-born but has lived here since the early 1960s.

Grantham is, like most fund managers, prudent, conservative and inclined to favor the free market and smaller government. He has even said he supported Bush-Cheney in 2000. That doesn't make him particularly political. He also manages a portion of the Heinz-Kerry fortune, as well as those of many other wealthy types.

There is an investment angle to Grantham's argument. He says he is "certain" that "oil substitution, energy conservation, and related environment issues will be the biggest investment issue of at last the next several decades." He adds: "It is clear there is no single solution so investment opportunities will be spread very broadly, especially in energy conservation."

Grantham blames three decades of political cowardice for America's backward energy policy. As he dryly notes, "U.S. drivers -- the world's richest and some of the best behaved -- would, it was said, never accept increased taxes, where Italian drivers would! Even tax-neutral policies, such as taxing high mileage cars at purchase and subsidizing efficient cars, were never seriously considered."

The result: the fuel efficiency of U.S. cars has actually gone backward since 1982.

The irony is that this isn't, or shouldn't be, a partisan issue. Grantham singles out the Ford administration for his strongest praise on environmental matters. Everyone since, of both parties, has been a failure, he concludes. "The past 26 years have been such a wasted opportunity," Grantham writes. "This country had previously shown leadership in this field. President Ford got us off to a running start in energy efficiency... With a succession of President Fords, we would have ended up as an environmental leader and a great model."

Comments

[Taylor]

It is not the proper purpose of government to be dealing with 'oil substitution' or climate change; That is the domain of the market and science. When it does become involved, inefficient, expensive and ridiculous alternatives like Ethanol are the result. The market is shifting to become more interested in efficiency and the technology is progressing to meet that need; the government need not and should not morally meddle in these affairs.

This "nearly universal scientific agreement" only makes sense with regard to the government funded research. There are many dissenters, though you dismiss them as merely a result of a big 'evil' oil company. Of course, the Czech Presidents' upcoming book, Bjorn Lomborg's Skeptical Environmentalist, State of Fear and more must be a result of corporate lies? That brushing off of the debate is what partisanship is, not the fact that there is another side to the debate to critically evaluate.

As far as Pascal's Paradox, take it to the logical full implementation and we would have to act on every half-baked hypothesis that has potential wide ranging consequences, disregarding that fact that many would be in contradiction to each other. Let's not forget this debate was Global Cooling in the 1970s.

[Myke]

Taylor,
Governments often distort markets inappropriately. So I'm going to quote an expert about when it is appropriate.

From Markets Make Sense, Except When They Don't Charles Wheelan, Ph.D. who writes The Naked Economist column at Yahoo! Finance:
If you believe in markets when they work well, then you have to understand how they need to be tweaked when they don't. If page 10 of any introductory economics text explains the wonders of supply and demand, page 12 usually explains that markets don't deliver an efficient outcome when eager buyers and sellers impose some harm, or negative externality, on a third party.

If I can change the oil in your car more cheaply than the competition by dumping the old oil in Lake Michigan, that's not the kind of market transaction that got Milton Friedman so excited. Yes, I make profits and you save money -- a mutually beneficial, voluntary exchange -- but anybody who cares about Lake Michigan is not happy at all, and they aren't represented in our little transaction.

When the price of some activity is artificially cheap because society is picking up part of the tab, people do too much of it. That's not the economically efficient outcome that markets usually deliver. One standard economic fix is to impose a tax on whatever private activity imposes the social cost; when the price of the activity goes up, people do less of it.

That's exactly what a carbon tax or a higher gas tax would do. There's nothing voluntary about me breathing your tailpipe emissions. If we raise the private cost of driving, people will be less likely to commute 60 miles alone in a Chevy Tahoe.

The optimal market outcome isn't always synonymous with doing nothing; in this case, the market works best when the government does something. That something happens to be a tax, or anything else that raises the cost of the polluting behavior.