Arnold Kling  

Energy Diversification

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I thought that the most disagreeable part of the Bush State of the Union Address was on energy. If you want to reduce gasoline consumption by 20 percent, then join the Pigou club and tax gasoline. If you assume that the long-run elasticity of demand is about 0.2, then you need to double the price of gasoline. So go for a $2.50 tax increase. If that seems too high (as do most members of the Pigou club), then bear this in mind: the $2.50 tax increase is the least costly way to achieve the goal of reducing gasoline consumption by 20 percent.

Glenn Reynolds points to a piece in Popular Mechanics that compares the cost of alternative fuels for cars. Electricity comes out the cheapest, even today.


At the average price of 10 cents per kwh, it costs around 2 cents per mile. Electric cars can be recharged at night, when generating plants are under-utilized...

Case Against: Pure electric cars still have limited range, typically no more than 100 to 120 miles. In addition, electrics suffer from slow charging, which, in effect, reduces their usability. When connected to a dedicated, high-capacity recharger, some can be recharged in as little as an hour, but otherwise such cars are essentially not driveable while they sit overnight for charging.

The key to energy diversification is not biofuels, which Reynolds derides as "pork marinated in ethanol." The key is battery technology.

Or perhaps ultracapacitor technology.


A secretive Texas startup...claims that its system, a kind of battery-ultracapacitor hybrid based on barium-titanate powders, will dramatically outperform the best lithium-ion batteries on the market in terms of energy density, price, charge time, and safety. Pound for pound, it will also pack 10 times the punch of lead-acid batteries at half the cost and without the need for toxic materials or chemicals...

Ultracapacitors have many advantages over traditional electrochemical batteries. Unlike batteries, "ultracaps" can completely absorb and release a charge at high rates and in a virtually endless cycle with little degradation.

Where they're weak, however, is with energy storage. Compared with lithium-ion batteries, high-end ultracapacitors on the market today store 25 times less energy per pound.


I am skeptical of any secretive company. In Under the Radar, I had harsh things to say about start-ups that operate in "stealth mode." In my experience, they have a failure rate of 100 %.

By the way, this pointer also came from Professor Reynolds.

Back to batteries: I believe that batteries are the energy technology with the greatest leverage. If a car can run on ordinary electric power, then we have a diversified energy base. We also have a path by which cars ultimately can derive their power from the sun, indirectly via the electric grid.

My guess is that in 10 years we'll be getting more car mileage from the electric grid than from biofuels.


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COMMENTS (12 to date)
pj writes:

I agree that if we really want to reduce gasoline use, a gasoline tax is the best way to do it. But the question Pigou clubbers don’t seem to address is why we would want to reduce gasoline use. There’s lots of vague talk about externatilities, but the only externality that I count as a positive cost is congestion. But that isn’t cause by too many people driving cars, but from a shortage of roads due to political failure. Pollution isn’t even an issue anymore. By my calculations the costs imposed on me from pollution is essentially zero. At the very least, it doesn’t come close to the benefits derived from owning a car.

Climate change? To set the appropriate taxes to address climate change don’t we need to know what the optimal global temperature is? Uh, Uh, Uh.

The Pigou club is just the same old phenomenon of economists coming up with the most efficient way to do stupid things.

Dezakin writes:
Climate change? To set the appropriate taxes to address climate change don’t we need to know what the optimal global temperature is? Uh, Uh, Uh.

Sure, but we can still do some huge things essentially for free. Banning all new coal municipal power is free if you streamline nuclear licensing. Considering coal is a full 40% of CO2 emissions from fossil fuel use, thats huge.

Boonton writes:

Agreed, with a simple gas tax you let the market figure out on its own how gas consumption can be reduced. It could decide on better batteries, bio-fuels or even more intelligent commuting.

I once pointed out to a Peak-Oil advocate that if a person who lives 20 miles from work decides to move to a location 10 miles away you automatically have cut fuel consumption by 50% without any fancy technology. If workers could telecommute 1 day a week that's your 20% right there long before you start deploying ethanol, electric cars or whatnot. There's millions of ways to cut down on oil use but neither you or I will think of them unless we have a powerful economic motivator in front of us.


Why reduce gas consumption?

1. National security
2. Pollution
3. global warming

No we do not need to know the 'optimal temperature'. What we know right now is that CO2 probably makes global warming, there is a chance that global warming can become very expensive.

From this POV reducing consumption now is like buying an insurance policy. It will start the market thinking of alternatives to gas. If it turns out that global warming will be a massive problem (large externality) then taking more drastic steps will be less painful if we already have a few decades of modest pushing. If global warming isn't much of a problem after all then you could treat it simply as insurance expense.

Fundamentalist writes:

I would love to play chess with members of the Pigou club, since they seem unable to think more than one step ahead. If we taxes gasoline enough to reduce consumption by 20%, what would happen next? The world price oil would fall dramatically, which would require another round of tax increases to keep the price high enough to keep a lid on usage. Also, the lower price of oil would encourage usage in the rest of the world, unless everyone else raised taxes, too. In a sense, we would be subsidizing the burning of oil for the rest of the world.

Of course, China and India would thank us for destroying our own economy so that they could have cheap oil/gasoline to grow their economies.

Mike Moffatt writes:

"I would love to play chess with members of the Pigou club, since they seem unable to think more than one step ahead. If we taxes gasoline enough to reduce consumption by 20%, what would happen next? The world price oil would fall dramatically"

Dramatically? How do you figure that?

The U.S. consumes 20.73 bbl/day, about 25% of the world total of 83 bbl/day. A 20% reduction is U.S. consumption would reduce consumption by 4 bbl/day. That represents a 5% reduction in world consumption.

Why would a 5% reduction in consumption cause a huge drop in world prices, particularly when OPEC can imperfectly control how much oil they release onto the market at any time?

But th3 5% assuming that the rest of the world keeps their consumption static. But you're arguing that their consumption would go way up.

"Of course, China and India would thank us for destroying our own economy so that they could have cheap oil/gasoline to grow their economies."

Compared to the economic destruction caused by 1 trillion dollars of unnecessary military spending for a war to gain more oil supplies? Give me a break.

Fundamentalist writes:

Mike: That represents a 5% reduction in world consumption.

You act as if that's a small figure. The price of oil is very sensitive to small changes in production/consumption. It jumped $5 yesterday just on the hint that Bush would add to the petro reserve. The Saudi's influence the price with very small changes in their output. Also, remember that prices are set at the margin, not based on total usage.

Compared to the economic destruction caused by 1 trillion dollars of unnecessary military spending for a war to gain more oil supplies?

Absolutely! A $2.50 tax on gasoline would be far worse. Besides, the idea that we attacked Iraq for their oil is an old piece of candy only leftists love to suck on. Please explain to me how we've benefite, oil-wise, from Iraq.

Mike Moffatt writes:

"A $2.50 tax on gasoline would be far worse."

Firstly, no one has advocated a $2.50 increase in gasoline prices. That's predicated on the assumption that the long-run price elasticity of demand for gasoline is 0.2. Given the hundreds of papers calculating it, a more reasonable estimate is 0.6, which requires a much smaller gas tax. That's also if you believe that a 20% reduction should be our goal, which I don't.

"Besides, the idea that we attacked Iraq for their oil is an old piece of candy only leftists love to suck on. Please explain to me how we've benefite, oil-wise, from Iraq."

I'm not a leftist and I sure believe it.

I'm a small government advocate that doesn't like spending trillions of dollars on projects with dubious, at best, value.

You mean Bush and his colleagues in the oil industry haven't benefited at all from this war? Does anybody believe this?

pj writes:

Boonton,

So you are willing to impose a trillion dollar climate policy on the world on the chance, for which there is no evidence, that climate change could be expensive? There’s also a chance that climate change will be beneficial. The point of my post is that we don’t know if a little warming will be harmful or beneficial. Unless we know what the “optimal temperature” is, we have no basis upon which to formulate policies.

Dezakin writes:
So you are willing to impose a trillion dollar climate policy on the world on the chance, for which there is no evidence, that climate change could be expensive?

I sure wouldn't. But I would impose a free one on the chance that changing the CO2 makeup of the atmosphere by a significant percentage could have some undesirable consequences. Fastrack nuclear and restrict coal to synthetic fuel production is free, and keeps coal avaliable and cheap for coal liquefaction should oil enter serious depletion.

It wont happen because it makes none of the seriously powerful political lobbies happy. The left has a significant number who are reactionarily anti-nuclear and the right has huge influence from the coal lobby.

Its fine to argue against stupid policies that are expensive, but you can do serious emissions reduction for free.

Boonton writes:
So you are willing to impose a trillion dollar climate policy on the world on the chance, for which there is no evidence, that climate change could be expensive? There’s also a chance that climate change will be beneficial. The point of my post is that we don’t know if a little warming will be harmful or beneficial. Unless we know what the “optimal temperature” is, we have no basis upon which to formulate policies.

So you won't buy home insurance unless you know for sure whether or not you'll have a fire, theft or other diaster in the upcoming year?

It's not like the gas is going anywhere. If 20 years down the line it turns out that climate change is wonderful and we shoudl burn as much gas as we can every barrel of oil we didn't burn today will still be there to use.

dave writes:

before reducing gas use, we must have a good alternative. Otherwise it would not be feasible to do so. The government and people perfer not to reduce economic growth for the gas reduction. I believe it must be a good technology which can make it happen soon in the future.

cnj writes:

I understand that a tax on gasoline would in the long run be good but saying it and paying it are two different things! A slow increase would be less of a shock to consumers but not as effective to getting the consumption down quickly. The question is: if such a drastic tax were imposed on gasoline would people turn to other alternatives or just travel less? This would hurt everyone in almost all fields of resources if travel was affected. The other alternative would of course be the electric car or what ever technology throws our way in the passing years. But the problem there is that those cars are so expensive, rather than buying a new car people will only see the short term pay off and purchase their tank of gasoline and be on their way. Low income families with bad credit and no means of getting tens of thousands of dollars to buy electric cars will still be purchasing gasoline at this high price. The money needed to run heat in the winter time would then come into play and applying for emergency assistance would become the norm for families in these situations. It’s amazing that this one problem unravels into so much more but the fact remains that putting a tax on gasoline would cause consumption to go down and with it a drastic reduction in energy consumed.

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