R-Squared Energy Blog

Pure Energy

Gas Taxes and Long Range Energy Planning

I consider the level of dependence of the U.S. on imported petroleum to be a very large financial risk endangering the country’s future. There are certainly other import-related risks as well, but here I want to talk about the financial risk.

I consider it similar to having a mortgage upon which you pay interest each month – but in which the interest rate can fluctuate wildly. If you typically pay 7% interest on your mortgage, but your rates quickly climb to 12%, a lot of people would find themselves in a deep financial hole. Come to think of it, a lot of people did when they found themselves in a similar situation. They gambled on the future and lost.

With respect to oil prices, we are also gambling on the future. We import a bit over 9 million barrels per day of crude oil (we also import gasoline, diesel, etc.) Each $10/bbl increase in the price of oil means that consumers pay $33 billion more each year for oil. We are now paying $100 billion more each year for oil than we were just a few short years ago, and that money comes out of all of our pockets. This acts as a tax upon the U.S. economy, albeit one that doesn’t primarily benefit U.S. citizens.

The drain on the U.S. economy is one thing, but the risk is quite another. Why do we tolerate that sort of price risk? In my opinion, it is because tolerating the status quo is viewed by politicians as the cheapest, most politically safe option. And even if they are concerned about the risks, when economists say that oil might be going back down to $30, politicians are paralyzed from taking action. The uncertainty is a killer.

A story I read this morning highlights that uncertainty, and points to some of the consequences:

Low Gas Prices Threaten Green Car Revolution

The single biggest factor determining the success or failure of high-tech fuel-efficient cars is not battery technology, legislation, tax incentives, new model introductions, or infrastructure. It’s gas prices. The price at the pumps is the elephant in the room when it comes to green cars.

I would imagine that there is general agreement on that. When gas prices raced ahead, the Toyota Prius began to outsell the Ford Explorer. When gas prices fell back to $2/gal, SUV sales surged and Prius sales plunged.

The fundamental problem is that many people don’t make long-range plans with energy prices in mind. When gasoline goes to $2/gal, some expect it to stay there and so that SUV purchase doesn’t look bad – until gasoline is back to $4/gal. And the inability to plan is compounded by analysts who give mixed messages on which way oil prices are going:

Japanese broker Ryoma Furumi said oil prices will stay rangebound at $70-$75 a barrel; analysts at Mirae Asset Securities said prices are likely to consolidate between $65 and $75; and Jim Ritterbusch, president of Ritterbusch & Associates, said crude could be pushed toward the $75 mark.

Verleger, the energy consulting firm, predicts a drop in oil this year—all the way down into the $30s. The firm bases this prediction on crude stockpiles in the US being 14 percent higher than a year ago, and gasoline supplies up by 2.2 percent. Also, OPEC is currently pumping 600,000 barrels a day more than the world needs.

Meanwhile, Christophe de Margerie, chief executive of French oil giant Total, this week said he sees a risk of oil rebounding to $100 a barrel unless there’s greater investment in exploration. He warned of a possible oil shortage between now and 2015 if immediate action is not taken to invest in exploration. “The reserves of oil are there but if you don’t invest they don’t come on the market,” de Margeries said.

Would we plan differently if we knew that oil prices were going to be $100/bbl? Of course we would. We have already seen consumers respond as oil prices went over $100/bbl. But while consumers were responding, a lot of damage was done to the U.S. economy. The airline industry and the auto industry took a beating, as did many personal budgets that suddenly had to cope with much higher weekly fuel outlays.

Enough gambling on oil prices! Let’s raise the price of petroleum via taxes so that people can make energy plans that incentivize them to become more fuel efficient. As I have argued before, you can direct that back at people in the form of a tax credit. The idea would be to trade energy taxes for income taxes.

The benefit would be that we would start moving toward a higher level of fuel efficiency without having to legislate CAFE mandates that end up being gamed. With increased fuel prices, people will demand more efficient vehicles. Automakers will know which cars they need to build. Renewable energy – particularly those varieties that aren’t heavily reliant on fossil fuels – would also see a boost. Not only would they be competing against higher priced fossil fuels, but project developers could have more assurance that oil prices aren’t going to fall to $30 and destroy their project economics.

The benefits would be substantial. Most importantly, our consumption would fall. I consider it very important to stretch our remaining fossil fuel endowment as far as we can, and we can do a better job of that if we manage it. We need to buy time, because renewables are not ready to fill the supply gap that will result if we burn through our remaining oil too quickly.

I don’t think there is any question our oil imports would fall as people started to change their transportation arrangements. Following the high prices of mid-2008, total petroleum imports over the following 12 months fell by 700,000 barrels/day over the previous 12 months (although it is hard to say how much of that was recession-induced).

I have long complained that government energy policies that vacillate every time a different political party comes into power have long been an impediment for companies trying to do long-range project planning, both for fossil fuel and renewable energy projects. Volatile prices have much the same impact. I have had my disagreements with Vinod Khosla in the past, but his call to put a floor underneath oil prices has merit (see Point 14 here).

Having a price floor would would allow companies – especially energy companies and auto makers – to do a better job of long range planning. I don’t fault automakers for getting caught with an oversupply of SUVs as oil prices skyrocketed. They were just making cars that people in a low-oil-price scenario had long demanded. With the certainty of higher prices, the auto companies needn’t gamble that SUV sales are going to come back strong. They would know that they need to shift to the more efficient vehicles that consumers will demand.

I have no problem with taking calculated risks, but I do not gamble. Living on the Gulf Coast of Texas without hurricane insurance is gambling, because the hurricane probability is too high. I don’t see that as much different than the risk we place on the economy by not taking more proactive steps to insulate the economy against price spikes. But we didn’t learn that lesson in 1973, nor in the 1974-75 recession that followed. I don’t expect we are much wiser today.

September 24, 2009 Posted by | carbon tax, gas tax, Vinod Khosla | 32 Comments

About That $72 Billion Subsidy

I am going to be pretty busy for the next few days, and probably won’t be able to put anything new up until at least mid-week. Until then, over the past few days there have been a lot of headlines about a recently released study from the Environmental Law Institute. The study concluded that over the past seven years, fossil fuels have benefited from some $72 billion in subsidies. Their headline was innocent enough:

U.S. Tax Breaks Subsidize Foreign Oil Production

(Washington, DC) — The largest U.S subsidies to fossil fuels are attributed to tax breaks that aid foreign oil production, according to research to be released on Friday by the Environmental Law Institute in partnership with the Woodrow Wilson International Center for Scholars. The study, which reviewed fossil fuel and energy subsidies for Fiscal Years 2002-2008, reveals that the lion’s share of energy subsidies supported energy sources that emit high levels of greenhouse gases.

The research demonstrates that the federal government provided substantially larger subsidies to fossil fuels than to renewables. Fossil fuels benefited from approximately $72 billion over the seven-year period, while subsidies for renewable fuels totaled only $29 billion. More than half the subsidies for renewables—$16.8 billion—are attributable to corn-based ethanol, the climate effects of which are hotly disputed. Of the fossil fuel subsidies, $70.2 billion went to traditional sources—such as coal and oil—and $2.3 billion went to carbon capture and storage, which is designed to reduce greenhouse gas emissions from coal-fired power plants. Thus, energy subsidies highly favored energy sources that emit high levels of greenhouse gases over sources that would decrease our climate footprint.

Let me be perfectly clear here. I am very opposed to policies that subsidize our usage of fossil fuels. But I am also opposed to painting with very broad brushes. In the case of the oil subsidies, three things stand out. First, the taxes the oil companies paid over that time period are about an order of magnitude higher than those so-called subsidies. Second, many of these so-called subsidies would merely be called tax deductions in any other industry. Finally, many of the so-called subsidies didn’t even go to Big Oil.

One of my diligent readers took the time to actually read the study, and broke it down:

I was a little puzzled by this ELI study. First of all, the itemized subsidies only added up to $68 bn, not $72. Maybe they were just listing the largest items – I didn’t read the fine print. I thought it would be useful to see just what was being subsidized rather than blurting out “BIG OIL Subsidy!!” I found it useful to consider 10 categories of fossil fuel subsidies.

1) 22%, or $15 billion of the $68 billion listed, was allocated to the Foreign Tax Credit you referenced. Not $72 billion.

2) 23% went to subsidize production in high cost environments, areas that may have otherwise been commercially marginal (although that of course depends on price). This seems like a legitimate use of subsidy to me, if without it most of these projects would have not been undertaken. [RR: As I have argued before, it makes sense to subsidize things that are deemed important, but otherwise uneconomic].

3) 11% went to various accounting conventions, particularly treatment of intangible costs.

4) 10% went to assumed loss stemming from lower than expected offshore lease government take. This seems very arbitrary to me. As I understand it, the ELI is assuming some globally fair government take, and calculates that the feds could get more. Maybe. But there’s no free lunch. A higher take might mean lower bids or less development.

5) 9% went to a low income housing energy assistance program. This is money paid to states to insure low income families get access to fuels. Hardly a Big Oil subsidy.

6) Another 9% went to government storage programs, the SPR and two other minor programs. This is a government initiative, not a handout to the oil industry.

7) 8% went to an accounting rule benefiting independent producers, not Big Oil.

8) 5% went to the coal industry.

9) 1% went to incentives for clean fuels.

10) 1% went to a variety of small miscellaneous programs.

So, of these

– Numbers 1 and 3 may have room for revenue take ($22 bn);

– Number 4 possibly but would have the side effect of lower US production (how could it not?) $7 bn;

– Number 2 would clearly have a negative impact on US production ($16 bn);

– Number 7 would hurt smaller companies but may be minor source of revenue ($5 bn)

– The rest are not really benefiting the oil industry very much.

I view this as $22 bn in possibly vulnerable oil industry subsidies, another $23 bn in at least partly defensible subsidies, and $27 billion (getting back to $72 bn) in subsidies that don’t benefit the large mutlinationals much at all.

Again, let me make it clear that I oppose true fossil fuel subsidies. In fact, I support “antisubsidies” – higher taxes – for fossil fuels in order to incentivize conservation and promote renewables (and again, I think it can be done in a revenue-neutral manner). But I do think the discussion should be intellectually honest, and we shouldn’t lump money destined for research into carbon sequestration into all-encompassing “oil subsidies.”

September 21, 2009 Posted by | carbon tax, gas tax, oil companies, subsidies | 47 Comments

The API on Cap and Trade

Yesterday the American Petroleum Institute conducted a blogger’s conference call to talk about various energy issues that they are focused on. I used to regularly attend these calls, but things have been quite busy and it has been a while since I participated. But I thought it would be worthwhile to check in and find out which issues they are currently occupied with. I asked one question on cap and trade during the call (see below).

The API listed three key areas that they are focused on. These are the Waxman-Markey climate bill, which they think will cost jobs (particularly in the energy industry), domestic access to petroleum resources, and taxation of the oil and gas industry. Participating from the API were:

MODERATOR: Jane Van Ryan, API

SPEAKERS:

Jack Gerard, President and CEO, API
John Felmy, Chief Economist, API
Doug Morris, API
Kyle Isakower, API

The bloggers on the call included:

The audio and transcript can be found here. In his opening statement, Jack Gerard happened to mention recent testimony of Alan Krueger, Assistant Secretary for Economic Policy and Chief Economist of the US Treasury, in which he justified higher taxes on the oil industry by suggesting that current tax policies have led to overproduction by the industry. That is simply astonishing. Yes, it must be overproduction that has caused our oil imports to increase year after year to the point that we import 60% of what we use. One wonders what the import level will reach once this domestic “overproduction” is reined in through punitive taxes. For a bit more on Krueger’s testimony, see:

Administration attempts to justify tax proposals surprise Gerard

Alan B. Krueger, assistant US Treasury secretary for economic policy, mentioned that the administration was looking at other industries’ tax breaks during a Sept. 10 hearing by the Senate Finance Committee’s Energy, Natural Resources, and Infrastructure Subcommittee on the White House’s Fiscal 2010 oil and gas tax proposals.

When a subcommittee member, Jim Bunning (R-Ky.), asked him if the administration was currently singling out the oil and gas industry as it seeks tax incentive repeals, however, the US Department of the Treasury official replied, “That is correct.”

Gerard said he continues to be amazed by Obama administration statements that oil and gas tax incentives should be repealed to prevent overproduction of domestic resources. “The Treasury Department’s Green Book says there’s too much oil and gas production in the United States. We think that’s laughable. We think there needs to be some serious dialogue about what these proposals mean and about ways to get back to producing more oil and gas,” he said.

Also see Geoff Styles’ analysis of the issue:

Overproducing US Oil?

Back to the call, I get concerned about proposals in which the price tag is vaguely defined. I would much rather see a direct tax on gasoline in which the impact can be modeled, over a new system whose overall impact on prices is uncertain. The latter is a big economic risk to me. So I asked a question about cap and trade, with Geoff Styles following-up.

11:16 MS. VAN RYAN: Another question? Robert, I know that you sent one to me by e-mail. Would you like to pose that question yourself?

11:24 MR. RAPIER: Yeah, I’ll do that. Yeah, the question was, I understand the concern about the cap-and-trade legislation; I have similar concerns. I am wondering if you have an alternative proposal; if there is any kind of legislation for cap-and-trade that you could get behind that achieves the same goals?

11:46 MR. GERARD: We haven’t. There has not been a proposal out there yet, Robert, that we have gotten behind. We think now is the time for a reset. There was a lot of focus on this early on in the Waxman-Markey bill. There was a lot of effort gone into it and it just came out in the wrong place. So what we have been attempting to do over the past few months is to point out the significant flaws in that legislation with the hope and expectation that we can help educate policymakers and the public.

And what we found is that when you begin to educate, not only does it resonate but it is clearly understood. The House exercise was focused primarily on the utility area or consumers’ bills, industrial bills that we often think of that you get at home to pay for your heating, your cooling, et cetera. But it almost totally left out the fuels question. And that is why 44 percent of all the emissions – or I should say refineries – will be held responsible for 44 percent of all the emission and yet given only 2.25 percent of allowances to transition us to a carbon-constrained world. So the net effect of that is – and I am oversimplifying this now – is that you’ve shifted the cost onto those who use fuels.

And that is why you see the farm bureau, you see the truckers, you see small business and others. When they began to see through the dust of the activity in the House, they say, well, what happened is we are looking at our utility bills and the Congress made an effort to transition us over time to a carbon-constrained world and they tried to provide some mitigating factors – in this case, allowances – to do that, but on the fuel side, we got totally forgotten. So anybody who drives a pickup truck, a car, rides the bus, the train, flies on an airplane is going to have an almost immediate impact as a result of Waxman-Markey.

And so in educating on that front, I believe we now have their attention that we have got to look at that question. And we internally, and as an industry, are developing further thoughts and ideas, if you will, as to how best address the fuel question and how it fits into the broader framework of a carbon-constrained world.

14:13 MR. STYLES: Jack, this is Geoff Styles. Could I follow up on that?

14:16 MR. GERARD: Please.

14:17 MR. STYLES: Because I certainly share your concern about the disproportionate way that Waxman-Markey doles out the free emissions allowances. In conversations with some of the folks who have been supporting the bill, I get a sense that there is a belief out there that, to some extent, maybe to a significant extent, they feel that the costs that would be imposed on the refining sector would somehow be absorbed by the refining sector and not actually passed on to consumers. Has API done anything looking at, you know, to what degree, any degree, of cost absorption by the refining sector as opposed to simply shifting the market pricing points, and in effect, pushing it on to consumers would take place?

15:11 MR. GERARD: Let me answer that generally. And I will turn to our chief economist, John Felmy, afterwards to see if he can add anything to it. My simple response would be unless you can repeal the laws of economics and supply and demand, that is the only conditions under which that thought would work because it just doesn’t make any sense.

What we are talking about here is significant costs. We are not talking about nuances around the edge. And just as I mentioned earlier, some of our analysis shows you would drive gasoline over $4 a gallon in the current environment. And so, you know, potential job loss of 2 million jobs. We are not talking a penny or two here. We are talking about quarters and dollars.

And how they could come to that conclusion might give them some political cover in trying to justify what they have asked for in the bill. But I don’t see how it makes any economic sense and frankly, it is unrealistic. Now, let me turn to an economist to give you a real answer. How is that?

16:14 JOHN FELMY: Well, if I could just add, I mean, that is absolutely right. There are two key factors. First of all, the emissions that the refiners themselves produce – they are competing on a world scale with international refiners. And we had commissioned EnSys to take a look at that. And it clearly showed that it would be a severe and negative implication for refining capacity in the U.S. because of an inability to be able to compete.

But more importantly on the consumption side and a sense of being responsible for the emissions from the tailpipes of your users, I think it is helpful to look at the current refining situation right now. In the second quarter of this year, almost every refiner lost money. And in the fourth quarter of last year, basically, there was a complete inability to pass along any cost changes.

And so with that kind of market conditions, primarily driven by international competition with a lot of, for example, gasoline on world markets from places like Europe and so on, I fail to understand how there is that ability to be able, from an economic sense, to have that happen. Analytically, you have got a weak gasoline market. You have got a lot of supply on world markets. And that competitive aspect, by most analysts, is expected to remain.

17:33 MR. STYLES: So in effect then, John, what you are saying, I think, is what I concluded a long time ago, which is if refineries are expected to absorb this, they will absorb it by going out of business.

17:44 MR. FELMY: Exactly. If you are already losing money and you raise your costs and you have no ability to address that, the margins already were low when they were positive, and when they are negative, there is nothing to give away.

17:58 MR. STYLES: Thank you.

18:00 MR. FELMY: And with, you know – we have got three broad classes of refiners in this country. You have got the big ones, which are about 50 percent; you have got about 25 percent, which are the big independent ones that are not integrated; and then a lot of very small refiners that would really take a beating in that environment.

————

Following that exchange, I got a bit distracted with juggling cats and never had a chance to ask another. But if you are interested in the rest of the discussion, you can access the transcript and audio at the link.

September 19, 2009 Posted by | American Petroleum Institute, api, carbon tax, energy policy, gas tax, politics, refining | 28 Comments

Tariffs in the Climate Bill

A number of people have written to ask why I haven’t commented on the climate bill. There are two reasons. First, the House and Senate versions are very different, so the final form may not resemble the version the House just passed. Second, I haven’t had the time to read through much of it.

There was one issue that I considered quite important, but I didn’t know whether it was in the bill. Jim Mulva was recently quoted as saying that the climate bill would impose higher taxes on domestic fuel versus imports. While we can agree that Mulva’s comments are self-serving, I also believe that most people would oppose a bill that shifts more of our fuel supply to imports.

While I know the goal here is to favor renewable energy, what happens if it can’t fill a void left if the new bill discourages domestic production? The void will be filled by imports. Prices will also rise, so some of the void will be filled by conservation. But in order to keep the playing field level, I really liked the idea proposed by Jeff Rubin: If you place a carbon tax on domestic production, you can place a carbon tariff on imports. This idea was discussed in my review of his book Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization.

I hadn’t heard any discussion of this until today. From Steven Mufson of the Washington Post:

Obama Praises Climate Bill’s Progress but Opposes Its Tariffs

President Obama yesterday said that the House took an “extraordinary first step” by passing a climate bill on Friday, adding that he hoped it will “prod” action by the Senate and predicting that the legislation could make renewable energy “a driver of economic growth.”

But he said he hopes that Congress will strip out a clause that would impose a tariff in 2020 on imports from countries without systems for pricing or limiting carbon dioxide emissions.

Obama went on to suggest that there were other protections built in that will keep the playing field level. I would like to know what those are. I can understand how tariffs would do it (although enforcement raises some sticky questions). But I have heard enough double-speak on energy policy that I want to see the fine details of how the playing field will be kept level.

Make no mistake: This bill is a tax increase. That’s the basis for the political opposition. But I have long advocated a tax increase on fossil fuels to slow the rate at which we are using them up (and to make renewables more competitive). So I don’t oppose the bill on the basis that it is a tax increase. On the other hand I can’t say that I endorse it, because I haven’t read it. I certainly believe there are more efficient ways of raising carbon taxes than this. I still think – perhaps naively – that my proposal to tilt the tax code toward higher fossil fuel taxes and lower income taxes would be more attractive than this.

June 29, 2009 Posted by | Barack Obama, carbon tax, climate change, energy policy, gas tax, global warming, Jim Mulva, politics | 30 Comments

Mulva on Replacing Oil

My former CEO Jim Mulva spoke today at the National Summit in Detroit, and had some newsworthy comments. Bloomberg reported on his talk:

Conoco Chief Says Replacing Oil May Take a Century

June 16 (Bloomberg) — ConocoPhillips, the third-largest U.S. oil company, said it may take a century for the nation to replace fossil fuels with alternative energy sources.

I don’t know of too many people who think we have a century’s worth of oil left. Natural gas and coal? I also seriously doubt we have that much of either of those, especially allowing for economic growth. What I think this means – in any case – is that we have some potentially difficult times in front of us. However, Mulva went on to give his prescription for preempting some of those difficulties:

The country will need to develop its own oil and natural- gas deposits and continue importing petroleum while developing alternative supplies in the decades ahead, ConocoPhillips Chief Executive Officer Jim Mulva said today at the National Summit economic conference in Detroit. At the same time, he said, the nation will need to address climate change.

On the issue of climate change, Mulva thinks legislation is likely, but doesn’t want to see U.S. producers punished while foreign producers are left unscathed:

The U.S. needs policy that encourages investments in all types of energy and avoids hurting the economy by making the nation less competitive than countries with cheaper energy, Mulva said. Proposed climate legislation in Congress threatens to drive U.S. refiners out of business by imposing higher carbon costs on domestic fuel than on imports, he said.

That last bit is very important. If we do get climate legislation, we need to make sure that we aren’t providing a competitive advantage to countries who don’t care about emissions – while putting our domestic producers out of business. This was a major theme in Jeff Rubin’s book Why Your World Is About to Get a Whole Lot Smaller. Rubin argued that if we put a price on carbon emissions in the U.S. we can apply a carbon tariff on imports to level the playing field. Rubin argues that this will encourage efficiency from foreign producers of all things that are energy intensive, and it will ensure that the legislation doesn’t put U.S. firms out of business. (I reviewed Rubin’s book here).

Mulva went on to suggest that oil prices had gotten ahead of themselves. That story from Reuters:

Conoco CEO: oil prices ahead of fundamentals

“We have felt that an oil price between $70 and $80 (a barrel) is a good balance to promote investment, continue to replace reserves and keep production up, as well as a balance with respect to the cost to the consumer,” he told Reuters.

But Mulva also acknowledged the price run-up — expectations of a recovery drove crude prices to $73 a barrel last week, more than double their winter lows — was “stronger than we would have expected” and was “a little bit ahead of the actual supply and demand situation and inventory levels.”

I think “expectations” is the key word here. We do seem to have a little bit of a glut of oil (and natural gas) right now. In that respect, prices seem to be too high. But take this story from Fortune, where a majority of analysts believe that prices long-term are headed much higher:

Why oil is on the rise again

NEW YORK (Fortune) — Ask a group of oil analysts about the recent surge in crude costs and here’s the consensus answer you’ll get: Prices have run up too far, too fast and they aren’t supported by the fundamentals.

Ask them about where prices will be two years from now, however, and the majority will offer this prediction: A lot higher.

So if I am an investor – and I think oil prices will be “a lot higher” in two years – I am going to invest in oil and/or oil company stocks regardless of what the supply/demand situation looks like today. And when enough people do that, you have pressure on oil prices today, which is why I think we are back to $70 oil.

Full Disclosure:
I own shares of ConocoPhillips and Petrobras.

June 16, 2009 Posted by | carbon tax, climate change, ConocoPhillips, COP, global warming, investing, Jeff Rubin, Jim Mulva | 11 Comments

Book Review: Why Your World Is About to Get a Whole Lot Smaller

Oil 101 by Morgan Downey

Jeff Rubin – the former chief economist at CIBC World Markets – has always struck me as someone who “gets it.” I have seen him do a number of interviews, both on television and in print – and he consistently sounds the alarm on peak oil. He understands very well that cheap oil is the lifeblood of the global economy, yet this is an era that will soon come to an end. His new book – Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization – goes through the peak oil story in a way that I initially thought of as “Kunstleresque“, but I changed my mind as I got deeper into the book.

Some will certainly describe Rubin as a ‘doomer.’ However, by the end of the book I had concluded that there are some significant distinctions between the overall message that Rubin is trying to convey and the message Jim Kunstler conveys in The Long Emergency. Maybe it’s because The Long Emergency really slapped me out of complacency, but I recall being mildly shocked after reading Kunstler. I did not experience that same sense of shock while reading Rubin – but those who are only mildly familiar with peak oil may be.

Rubin covers many familiar themes, such as the domestic cannibalization of exports by energy producers, the need to produce and consume more goods locally, corn ethanol (which he describes as a ‘head fake’), and the overall impact of high oil prices on the global economy. For regular readers, you will find that much of the book is familiar territory, and for a while I was thinking “There is nothing here that I haven’t seen before.” But the book ultimately grew on me, partly because there are two themes that distinguish it from other books I have read about peak oil.

The first involves a discussion of carbon dioxide emissions. In a chapter called “The Other Problem with Fossil Fuels”, Rubin started to make a argument that I have often made: Ultimately it is futile to attempt to regulate carbon emissions, because China is literally bringing several coal-fired power plants online every week. Rubin wrote that between now and 2012, over 500 new coal-fired plants are scheduled to come online. This was the theme of my essay Why We Will Never Address Global Warming. My belief has been that there really isn’t much that will convince China and other developing countries to cut back on their emissions. While I still think carbon dioxide emissions will continue to rise until we simply run out of fossil fuels, Rubin provided an interesting argument that caused me to think that a different approach might work.

Rubin argues that if we put a price on carbon emissions in the U.S., Canada, Europe, and other developed countries – we can apply a carbon tariff on imports to level the playing field. Rubin states that energy usage per GDP in China is four times that of the U.S. economy. By putting a carbon tariff on Chinese steel, for instance, two things are accomplished. First, the Chinese then have a much greater incentive to become more efficient. Second, domestic energy intensive industries (like steel production) suddenly become much more competitive. The flip-side of course is that it makes energy-intensive products more expensive.

The second theme that distinguishes Rubin’s book is that it is ultimately a hopeful book. About half way through the book, you won’t have that impression. Sometimes when I read books on peak oil, the message is essentially “Abandon all hope; all exits are closed.” I was 116 pages into the book and still thinking that this was standard peak oil fare. But then it started to become apparent that although Rubin sees and understands that this is a very serious and unprecedented challenge, he sees a world emerging with some distinct advantages. He also expects that there will be some technical breakthroughs that we simply can’t anticipate that will likely make our landing into this unfamiliar territory bumpy, but survivable.

Make no mistake, Rubin’s overall message will be sobering to the uninformed. The world Rubin foresees will contain less convenience than today’s world. Gone are fresh fruits and vegetables out of season, cheap Brazilian coffee, and New Zealand mutton. Replacing them will be more expensive, but more locally produced goods. There will be new opportunities and benefits in this changing world. Because of that, I think this book will be important for scaring people into action without causing them to simply abandon hope.

Conclusion

A couple of years ago, I took a road trip from Montana to Texas (described in My Last Long-Distance Car Trip). In that essay – described by some readers as gloomy – I mused about a world in transition. In the concluding chapter of his book, Rubin does the same. He is on a fishing trip in Canada, and he discusses what higher oil prices will mean for 1). The ability of people to fly to remote locations for holidays; 2). The impact on those who depend on those tourist dollars; 3). The future of entire populations in remote areas (much like I did when I drove through Wyoming). While fishing trips to Canada aren’t something most of us can relate to, we can certainly all relate to the idea that expensive energy is going to fundamentally change our lives – and that is the message he conveys.

The last chapter is a melancholy chapter in which Rubin sees an era coming to an end – with huge global implications. He admits that he doesn’t know how this is going to play out, but he thinks that our world is once again going to become a whole lot smaller. And that’s not all bad.

May 24, 2009 Posted by | book review, carbon tax, global warming, Jeff Rubin | 18 Comments

Book Review: Why Your World Is About to Get a Whole Lot Smaller

Oil 101 by Morgan Downey

Jeff Rubin – the former chief economist at CIBC World Markets – has always struck me as someone who “gets it.” I have seen him do a number of interviews, both on television and in print – and he consistently sounds the alarm on peak oil. He understands very well that cheap oil is the lifeblood of the global economy, yet this is an era that will soon come to an end. His new book – Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization – goes through the peak oil story in a way that I initially thought of as “Kunstleresque“, but I changed my mind as I got deeper into the book.

Some will certainly describe Rubin as a ‘doomer.’ However, by the end of the book I had concluded that there are some significant distinctions between the overall message that Rubin is trying to convey and the message Jim Kunstler conveys in The Long Emergency. Maybe it’s because The Long Emergency really slapped me out of complacency, but I recall being mildly shocked after reading Kunstler. I did not experience that same sense of shock while reading Rubin – but those who are only mildly familiar with peak oil may be.

Rubin covers many familiar themes, such as the domestic cannibalization of exports by energy producers, the need to produce and consume more goods locally, corn ethanol (which he describes as a ‘head fake’), and the overall impact of high oil prices on the global economy. For regular readers, you will find that much of the book is familiar territory, and for a while I was thinking “There is nothing here that I haven’t seen before.” But the book ultimately grew on me, partly because there are two themes that distinguish it from other books I have read about peak oil.

The first involves a discussion of carbon dioxide emissions. In a chapter called “The Other Problem with Fossil Fuels”, Rubin started to make a argument that I have often made: Ultimately it is futile to attempt to regulate carbon emissions, because China is literally bringing several coal-fired power plants online every week. Rubin wrote that between now and 2012, over 500 new coal-fired plants are scheduled to come online – just in China. This was the theme of my essay Why We Will Never Address Global Warming. My belief has been that there really isn’t much that will convince China and other developing countries to cut back on their emissions. While I still think carbon dioxide emissions will continue to rise until we simply run out of fossil fuels, Rubin provided an interesting argument that caused me to think that a different approach might work.

Rubin argues that if we put a price on carbon emissions in the U.S., Canada, Europe, and other developed countries – we can apply a carbon tariff on imports to level the playing field. Rubin states that energy usage per GDP in China is four times that of the U.S. economy. By putting a carbon tariff on Chinese steel, for instance, two things are accomplished. First, the Chinese then have a much greater incentive to become more efficient. Second, domestic energy intensive industries (like steel production) suddenly become much more competitive. The flip-side of course is that it makes energy-intensive products more expensive.

The second theme that distinguishes Rubin’s book is that it is ultimately a hopeful book. About half way through the book, you won’t have that impression. Sometimes when I read books on peak oil, the message is essentially “Abandon all hope; all exits are closed.” I was 116 pages into the book and still thinking that this was standard peak oil fare. But then it started to become apparent that although Rubin sees and understands that this is a very serious and unprecedented challenge, he sees a world emerging with some distinct advantages. He also expects that there will be some technical breakthroughs that we simply can’t anticipate that will likely make our landing into this unfamiliar territory bumpy, but survivable.

Make no mistake, Rubin’s overall message will be sobering to the uninformed. The world Rubin foresees will contain less convenience than today’s world. Gone are fresh fruits and vegetables out of season, cheap Brazilian coffee, and New Zealand mutton. Replacing them will be more expensive, but more locally produced goods. There will be new opportunities and benefits in this changing world. Because of that, I think this book will be important for scaring people into action without causing them to simply abandon hope.

Conclusion

A couple of years ago, I took a road trip from Montana to Texas (described in My Last Long-Distance Car Trip). In that essay – described by some readers as gloomy – I mused about a world in transition. In the concluding chapter of his book, Rubin does the same. He is on a fishing trip in Canada, and he discusses what higher oil prices will mean for 1). The ability of people to fly to remote locations for holidays; 2). The impact on those who depend on those tourist dollars; 3). The future of entire populations in remote areas (much like I did when I drove through Wyoming). While fishing trips to Canada aren’t something most of us can relate to, we can certainly all relate to the idea that expensive energy is going to fundamentally change our lives – and that is the message he conveys.

The last chapter is a melancholy chapter in which Rubin sees an era coming to an end – with huge global implications. He admits that he doesn’t know how this is going to play out, but he thinks that our world is once again going to become a whole lot smaller. And that’s not all bad.

May 24, 2009 Posted by | book review, carbon tax, global warming, Jeff Rubin | 46 Comments

Raise Wages, Cut Carbon Bill

I don’t normally post press releases that are e-mailed to me (I get 4 or 5 every day), but this one is important to me. (See my essay The Case for Higher Gas Taxes for my revenue-neutral proposal which is along the same lines as the bill that has now been filed).

On this topic, I am also currently reading Jeff Rubin’s new book Why Your World Is About to Get a Whole Lot Smaller and Rubin makes the argument that with a tax on carbon emissions, you can then put carbon tariffs on high emitters like China. In this way, many of the high energy industries – such as steel manufacture – will become much more competitive back in the U.S. because we are able to do it a lot more efficiently. This will also incentivize developing countries to become more efficient. I will elaborate when I review the book.

————————————–

Bill Raises Wages and Cuts Carbon, Improves National Security and Spurs Innovation

Better bipartisan approach to energy, climate legislation

Saying the last thing the economy needs now is a tax increase, U.S. Rep. Bob Inglis (R-SC) along with lead co-sponsors Reps. Jeff Flake (R-AZ) and Daniel Lipinski (D-IL) filed the Raise Wages, Cut Carbon Act of 2009 (H.R. 2380) Wednesday as a revenue-neutral approach to energy innovation and environmental stewardship.

The bill is a bipartisan alternative to the cap-and-trade legislation working through the Energy & Commerce Committee.

The bill calls for a reduction in payroll taxes for employers and employees in exchange for an equal amount of revenue from a carbon tax, resulting in a net-zero change in taxes and a “double dividend” in efficiency.

Inglis is hopeful the RWCCA bill will attract bipartisan support with the idea of lowering payroll taxes, creating jobs by allowing markets to work and improving our national security by addressing energy and environmental challenges. The measure has the advantage of providing predictable pricing over time to encourage technological investment.

“Let’s lower taxes on something we want more of—income, labor, industry—and shift the tax to something we want less of—carbon dioxide,” Inglis said. “By doing so, we’d do far more than just clean the air—we’d create jobs and we’d improve the national security of the United States by breaking our addiction to oil.”

The bill starts with revenue-neutrality by reducing payroll taxes and putting more money into the hands of American workers. Social security benefits to seniors would be increased to help pay higher energy costs. The Social Security Trust Fund would not be touched and the tax swap would be handled in the General Fund of the Treasury.

A proposed carbon tax of $15 per ton of CO2 would be applied in 2010, increasing to $100 by 2040, adjusted each year for inflation. The bill includes a clear schedule of rates, allowing businesses to plan accordingly. Fossil fuels would be taxed as they enter the economy, at the mine mouth, the oil refinery and the natural gas pipeline, making it easy to implement and minimizing administrative costs.

Problems with the Waxman bill include: it amounts to a massive tax increase in the midst of a recession; it puts carbon credit trading in the hands of the Wall Street traders (who brought us mortgage-backed securities and the banking crisis); it lacks a WTO border-adjustment, which could hurt U.S. companies compete in a global economy; and it has no Republican support.

The advantages of the Raise Wages, Cut Carbon bill include: it’s not a tax increase—it’s a revenue-neutral tax swap; it fixes the underlying market distortion of unrecognized negative externalities, and thereby unleashes the power of free enterprise to solve the problem of energy security; and it gives American manufacturers a level playing field.

May 13, 2009 Posted by | carbon tax, energy policy, gas tax, politics | 25 Comments

Raise Wages, Cut Carbon Bill

I don’t normally post press releases that are e-mailed to me (I get 4 or 5 every day), but this one is important to me. (See my essay The Case for Higher Gas Taxes for my revenue-neutral proposal which is along the same lines as the bill that has now been filed).

On this topic, I am also currently reading Jeff Rubin’s new book Why Your World Is About to Get a Whole Lot Smaller and Rubin makes the argument that with a tax on carbon emissions, you can then put carbon tariffs on high emitters like China. In this way, many of the high energy industries – such as steel manufacture – will become much more competitive back in the U.S. because we are able to do it a lot more efficiently. This will also incentivize developing countries to become more efficient. I will elaborate when I review the book.

————————————–

Bill Raises Wages and Cuts Carbon, Improves National Security and Spurs Innovation

Better bipartisan approach to energy, climate legislation

Saying the last thing the economy needs now is a tax increase, U.S. Rep. Bob Inglis (R-SC) along with lead co-sponsors Reps. Jeff Flake (R-AZ) and Daniel Lipinski (D-IL) filed the Raise Wages, Cut Carbon Act of 2009 (H.R. 2380) Wednesday as a revenue-neutral approach to energy innovation and environmental stewardship.

The bill is a bipartisan alternative to the cap-and-trade legislation working through the Energy & Commerce Committee.

The bill calls for a reduction in payroll taxes for employers and employees in exchange for an equal amount of revenue from a carbon tax, resulting in a net-zero change in taxes and a “double dividend” in efficiency.

Inglis is hopeful the RWCCA bill will attract bipartisan support with the idea of lowering payroll taxes, creating jobs by allowing markets to work and improving our national security by addressing energy and environmental challenges. The measure has the advantage of providing predictable pricing over time to encourage technological investment.

“Let’s lower taxes on something we want more of—income, labor, industry—and shift the tax to something we want less of—carbon dioxide,” Inglis said. “By doing so, we’d do far more than just clean the air—we’d create jobs and we’d improve the national security of the United States by breaking our addiction to oil.”

The bill starts with revenue-neutrality by reducing payroll taxes and putting more money into the hands of American workers. Social security benefits to seniors would be increased to help pay higher energy costs. The Social Security Trust Fund would not be touched and the tax swap would be handled in the General Fund of the Treasury.

A proposed carbon tax of $15 per ton of CO2 would be applied in 2010, increasing to $100 by 2040, adjusted each year for inflation. The bill includes a clear schedule of rates, allowing businesses to plan accordingly. Fossil fuels would be taxed as they enter the economy, at the mine mouth, the oil refinery and the natural gas pipeline, making it easy to implement and minimizing administrative costs.

Problems with the Waxman bill include: it amounts to a massive tax increase in the midst of a recession; it puts carbon credit trading in the hands of the Wall Street traders (who brought us mortgage-backed securities and the banking crisis); it lacks a WTO border-adjustment, which could hurt U.S. companies compete in a global economy; and it has no Republican support.

The advantages of the Raise Wages, Cut Carbon bill include: it’s not a tax increase—it’s a revenue-neutral tax swap; it fixes the underlying market distortion of unrecognized negative externalities, and thereby unleashes the power of free enterprise to solve the problem of energy security; and it gives American manufacturers a level playing field.

May 13, 2009 Posted by | carbon tax, energy policy, gas tax, politics | 19 Comments

Does This Look Familiar?

Regular readers know that I am a proponent of a carbon tax with income tax offsets. See my essay The Case for Higher Gas Taxes for details.

A bill proposing that has now been proposed:

Revenue-Neutral Carbon Tax: The Raise Wages, Cut Carbon Act of 2009

I’m Bob Inglis from South Carolina’s Fourth District. Thank you for being part of this virtual hearing on our bill—The Raise Wages, Cut Carbon Act of 2009. I’m here to talk about—and give you the opportunity to talk about—how to make this bill even better.

Let me start by describing where I think we are. Polling data shows for the first time in a number of years that people are actually valuing the environment below economic recovery. The challenge before us is to come up with something that works for both: accomplishes good economic progress and recovery, but also addresses the problem of climate change.

What if we start with a reduction in taxes? We chose the payroll tax. You pay 6.2% on the first $106,800 worth of income; your employer pays 6.2%. What if we reduced that tax, and then in its place imposed a tax for the first time on carbon dioxide? There would be no additional take to the government. There would be a tax reduction followed by a new tax, in equal amounts, so that it is truly revenue neutral.

Greg Mankiw also has something up on the issue:


A Letter to the Pigou Club

From Congressman Bob Inglis:

Dear Pigou Club Members,

A revenue-neutral carbon tax could set up a bi-partisan triple play of this American century. We can clean up the air, create jobs, and enhance our national security.

My Raise Wages, Cut Carbon Act of 2009 cuts payroll taxes and, in equal amount, imposes a tax on carbon dioxide emissions. The tax is border adjustable and is designed to be WTO compliant.

We’re conducting a “Virtual Hearing” on the Raise Wages, Cut Carbon Act of 2009 in the hopes of improving the bill before I actually file it. I’ve kicked off the “hearing” with an opening statement, which you can find here, along with a copy of the bill, a summary, and various white papers addressing different portions of the bill. I’d love for you to look over these materials, and then tell me what you think by posting a YouTube response to my opening statement. You can do that here.

Thank you, and I look forward to benefitting from your expertise and insights!

Sincerely,

Bob Inglis
Member of Congress (R-SC4)

Where do I sign up?

Hat tip to a reader for flagging this to my attention.

April 16, 2009 Posted by | carbon tax | 100 Comments