This is the fourth article in our “issues week” series being written in conjunction with Dave Schuler’s series at The Glittering Eye. The first article in the series, on Foreign Affairs, can be found here. The second article, on Fiscal Policy, can be found here. The third article, on Economic Policy, can be found here. The fourth article, on Health Care Policy, can be found here.

Image Credit: Keith Syvinski

There is no quesiton that the energy basis of our economy is simply unsustainable going into the future.  The environmental challenges caused by the burning of fossil fuels are substantial, threatening the health of our oceans as well as the climate. The economic costs are also problematic, as a recent study indicates that environmental destruction costs the world trillions of dollars per year. With that in mind, it becomes imperative to have a sensible policy that removes market distortions so that environmental costs are rightfully captured and removes restrictions on environmental technologies. This is important now because environmental technology offers a golden opportunity for the United States to experience a manufacturing resurgence.

The McCain Plan - “Drill Baby Drill”

At the Republican Convention, as well as in McCain/Palin rallies across the nation, you can frequently hear Senator McCain or Governor Palin or both chanting “Drill Baby Drill”–a reference to the McCain campaign’s desire to open the outer continental shelf for drilling, in the hopes of tapping the estimated 18 billion barrels of oil that lie beneath the seabed. The problem with this idea is that the 18 billion is just that–an estimate. As Christopher Joyce notes:

Geologists have identified reservoirs or undersea “structures” that might contain oil. But Simmons says that’s guesswork. “We don’t have any idea whether any of it is there,” he said.

But first, the government has to lease the offshore sites to oil companies. The companies then have to probe the seabed to find out what’s there. Then there are years of exploratory drilling, says Simmons — if anyone can find rigs to do the drilling.

“The problem is that the worldwide capacity to build rigs now has a backlog going out until about 2013, and we won’t add enough rigs to even start to replace the very old rig fleet that we have,” he said.

In other words, it would take decades to extract this oil–assuming it’s where we think it is in the first place. And with oil prices sinking below $78 a barrel this week while the financial sector freezes up, this also begs the question as to whether oil companies will find it worth it to start doing exploratory drilling, rather than working on improving extraction in known sites.

The McCain campaign also focuses on tax credits for alternative energy–tax credits for clean coal, tax credits for alternative energy development, and tax credits for research and development. Which is all well and good, although one has to wonder about McCain’s actual commitment to such policies given his history of opposition to same in Congress. The McCain energy plan also features a “cap and trade” system for carbon emissions, with said emissions being slowly phased out over time.

In general, the McCain proposals, with the exception of the emphasis on drilling, are on pretty solid ground. Tax credits are a nice, minimally distortive way to incentivize alternative energy, provided that they’re not too targeted. Of course, they will be targeted. And of course, they will distort the market. But given today’s politics, that’s about as good as it gets.

The Obama Plan

Barack Obama’s programs are similar to John McCain’s, only much more aggressive. In the short term, Obama proposes a “windfall profits” tax on oil companies, and using that money to provide an “energy rebate” to American taxpayers. It’s difficult to determine exactly how this would provide any benefit apart from some feel-good populism. Especially with the price of oil now having declined steadily from its peak earlier this summer. This just doesn’t seem like a sustainable solution. In addition to this rebate, Obama also proposes opening up the Strategic Petroleum Reserve to lower prices and curbing “speculation” in order to attempt to lower oil prices. Again, this is irrelevant given the state of the economy now.

In the longer term, Obama proposes a cap and trade system that is similar to McCain’s, only with much more aggressive targets. While McCain proposes getting emissions down to 60% below 1990 levels by 2050, Obama proposes they be 80% lower than 1990 levels in the same timeframe. Another difference in the proposals is that McCain plans on simply giving away carbon emission credits, the Obama plan proposes auctioning them off and using some of the revenues to develop further alternative energy technology. Most economists I’ve read suggest that auctioning them off is the superior policy, and I’m inclined to agree–let the market value the credits even from the very beginning.

Another interesting part of Obama’s proposals is the use of grants (taken from the selling of carbon emissions) to deliver to companies who promise to modernize existing or previously closed manufacturing plants for the use of green technology. I’ve suggested using tax incentives to do the same thing and either way is a fairly inexpensive way to help out communities that have been damaged by the decline of manufacturing in the U.S. through the development of new technology.

There is more–much more to Obama’s energy proposals, including grants to weatherize houses and other government intensive initiatives. In general, I find that I prefer Obama’s goals but McCain’s methods of tax incentives over direct subsidies.

Conclusion

One of the easiest and simplest methods of spurring the development of environmental technology that both campaigns ignore is the carbon tax. As Megan McArdle points out:

Theoretically, cap and trade is indistinguishable from a tax provided that you know either the true externality cost of emissions, or what level of emissions is socially optimal. Since we know neither, and cap-and-trade so far looks pretty weak, I vote for a tax instead.

Unfortunately, a carbon tax is a political non-starter, so cap and trade it will be. Which is too bad, because in theory you could just offset a carbon tax with other tax cuts, thereby creating a great tax incentive to use less energy and develop non-carbon energy in a manner that is transparent and distorts the market as little as possible.

I know some conservatives and libertarians–even environmentally minded ones–will object to all of these proposals as “interfering with the free market.” But the fact of the matter is that every infrastructure policy of the past century has been made by government, and all of them distort the market. The Interstate Highway system effectively subsidizes automobile travel. Zoning boards promoting sprawl make it more expensive to build an efficient grid. The lack of public transportation increases emissions, etc. And since the government’s role in infrastructure isn’t going away anytime soon, some involvement to capture the externalities of carbon emissions is necessary. This is especially true because the environmental damage caused by carbon energy is a threat to human health and safety, and it needs to be dealt with.

Both McCain and Obama have similar energy policies, and both are likely to have a much better record than President Bush. However, although I generally prefer the McCain program of tax credits over Obama’s direct government meddling, McCain’s record on energy policy makes it difficult to judge how hard he would actually push for energy policies. Additionally, his primary program of “Drill Baby Drill” just isn’t an idea that is practical for the time being. Given this, I have to give the edge to Obama, even though neither has an ideal policy.