When I organized a course on energy economics at the Naval Postgraduate School in 2012, I put on the syllabus the story of how I became an energy economist early in my career. I won’t repeat all three paragraphs of the story, but here’s the first one:
In the late 1970s, I became an energy economist because I saw just how destructive price controls on oil and gasoline were. President Nixon’s price controls on oil, which were later affirmed by President Ford and then affirmed by President Carter, caused shortages and line-ups. They also caused the government to intrude heavily in our decisions about energy use. While the price controls were slowly phased out by Carter in his last year in office and then abruptly ended by Reagan in his first month in office, many controls on usage remain. The particularly notable ones are on appliances and, most important, cars and trucks.
That interest in energy economics led me to become the senior economist for energy policy with President Reagan’s Council of Economic Advisers.
If I were my 27-year-old self today, I would have even more motivation to become an energy economist. The reason is similar: I see both the federal government and various state governments, especially California’s, implementing energy policies that will impose huge costs on people and that will have little effect on what many of those regulations are purported to achieve: reducing or slowing global warming. And, like price controls, these regulations fly in the face of basic economic wisdom.
What Economics Has to Say About Global Warming
First let’s consider the reason given for most of the current and proposed regulations: to forestall global warming. I will take as given that global warming will be a problem by the end of this century, although there are reasons to doubt even that.
But with the assumption that it will be a problem, what does economics have to say? A lot, actually.
Many economists argue that the most efficient response to global warming is to tax the use of carbon because burning carbon creates carbon dioxide. But they have taken as given something that they can’t: namely, that reducing carbon usage is the lowest-cost way of dealing with global warming. In “A Carbon Tax is Not a Slam Dunk,” Defining Ideas, August 20, 2019, I laid out in detail why reducing carbon might be much more expensive than “geoengineering.” I won’t repeat the argument here.
What I didn’t mention in that 2019 article and should have mentioned is that another response to global warming, adaptation, could well be cheaper than carbon taxes.
One thing we know from about two centuries of experience is that if governments don’t hobble economic growth with high taxes, heavy regulation, heavy restrictions on property rights, and large incursions on the rule of law, we will get economic growth. Adam Smith, whose 300th birthday we celebrate this week, put it succinctly:
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.
With regular economic growth over even a few decades, virtually all economic classes, including the poorest, are better off. In their 2020 book, Leave Me Alone and I’ll Make You Rich, economists Deirdre McCloskey and Art Carden estimate that standards of living today in rich nations are thirty times what they were in 1800. The wealthier people are, the more resources they have to allow them to adapt.
Consider, for example, one potential effect of global warming: rising ocean levels. For the past three decades, writes physicist and former Caltech provost Steven E. Koonin in his 2021 book, Unsettled, sea levels have risen by 0.12 inches per year. If sea levels continued to rise at that rate, then, by the year 2100, they would be about ten inches higher than now. That is not a large problem, and we have a lot of time to adjust.
Moreover, even in the Netherlands where, a thousand years ago, the vast majority of people were poor by modern standards, people had the resources to build dikes to keep the ocean out. Since then, technology has no doubt improved and, as noted above, standards of living are a huge multiple of what they were a few centuries ago. That means that it should be even easier and more affordable to build dams in, say, Miami, and other low-lying areas.
Another way to adapt is to change where we grow food. Economist David Friedman recently quoted the EPA’s statement that “Overall, climate change could make it more difficult to grow crops, raise animals, and catch fish in the same ways and same places as we have done in the past.” That, he noted, is not the end of the story because although global warming will make currently cultivated land somewhat less productive, it will make land that is closer to the poles more productive. Friedman also points out that people will adjust crops, change the amount of irrigation, and adjust in several other ways. His whole detailed analysis is worth reading, but if you don’t have time, here’s his summary statement about what’s wrong with the EPA’s approach:
If there is substantial climate change, we will not continue to “raise animals and catch fish”—or grow wheat—“in the same ways and same places as we have done in the past.” As I commented on the same problem decades ago in response to the book Limits to Growth, it is like trying to extrapolate the path of an automobile on the assumption that the driver has his eyes closed.
Why Regulation of Energy Uses is Such a Bad Idea
Where economists are united, whether or not they believe in carbon taxes, is on the issue of regulation. When the government dictates which fuels may be used, which fuel usages should be regulated or outright banned, and which technologies should be allowed, it imposes solutions that are costlier than even carbon taxes. The reason is that the government cannot know the value people place on various uses and cannot know all the unintended consequences that will result from its regulations and mandates.
The federal government and the California government, the two I know best, have gone far in the direction of regulation. I’ll highlight and point out some problems with a few of the most extreme regulations.
Furnaces, Water Heaters, and Gas Stoves
In 2022, California’s state government announced its plan to ban, effective in 2030, sales of new natural gas water heaters and furnaces. The government wants people to replace natural gas furnaces with heat pumps that are run on electricity. The stated purpose is to reduce emissions. As the article cited in this paragraph notes, though, one advocate of heat pumps admitted that installing his cost him a cool $27,000. Moreover, because it runs on electricity, which is very expensive in California, due in part to, you guessed it, regulation, running the heat pump can cost more than using natural gas.
Similarly, if we can’t buy natural gas water heaters, we are stuck with using heaters powered by electricity. Do you see a problem here? I do. What happens if your electricity is cut off? That’s not merely a hypothetical. In my part of California there are many trees. When we get a lot of rain, trees with shallow roots become unstable and a heavy wind can push them over onto power lines. Then our power goes down. This last winter, I calculated, my wife and I were without power for over a week’s worth of hours. At one point, we had no power for three days. If Pacific Gas & Electric had been allowed to cut down healthy trees near power lines, there’s a good chance that we would have had less outage.
This gets to a more general point: diversification, whether in the stock market or in fuel sources, is generally a good idea. Because we have a gas-fired stove, which regulators in California also want to ban, we could at least use a lit match to light the burner and heat soup and other foods. That made the difference between cold food (although less cold than if the refrigerator had been powered on) and warm food.
Electric Vehicles
I wrote last month about the problems with mandating electric vehicles. Both the California state government and the federal government have put themselves in the position of choosing what kind of vehicles we may have in the long run. Those governments don’t have information about our individual circumstances and so they cannot make a good choice for most of us. If they choose EVs for people who would buy them already, then they have no effect. But by choosing EVs for the rest of us, they are overriding all of our considerations and replacing them with their own preferences.
Also, EV mandates will substantially increase the demand for rare minerals that go into battery production. That will drive the cost of EVs even higher. In a market where people are free to choose, the higher price of EVs would discourage their purchase, causing people to buy more gasoline-powered vehicles than otherwise. But a mandate blunts that natural market constraint. It’s true that in a market where EVs are mandated, higher EV prices will cause fewer EVs to be purchased. But people won’t have good alternatives.
One issue I didn’t mention in my discussion of EVs is that a cheaper market alternative seems to be coming about naturally: electric bicycles. They cost a small fraction of what EVs cost and, going by the traffic I see in Monterey, are enormously popular for people who have short commutes. This is an example of how people come up with solutions that fit their circumstances, solutions that the government didn’t even think to come up with.
Energy Sources
In the United States and especially in California, governments have used regulation to reduce the role of coal, natural gas, and nuclear power to generate electricity and to increase the role of solar and wind power. Specifically, in 2006, the California legislature passed the Global Warming Solutions Act. This act required 33 percent of electricity consumption in California to be generated by renewable sources by 2020. In 2018, the California legislature upped the ante, requiring electric utilities to purchase 50 percent of their electricity from renewable sources by 2026. Under the 2018 bill, this will rise to 60 percent by 2030 and a whopping 100 percent by 2045. Of course, term limits on legislators’ times in their jobs mean that virtually none of the people who voted for this will be in office in 2045.
What do coal, natural gas, and nuclear energy have in common? They’re incredibly reliable. What do solar and wind power, the two main forms of renewable energy, have in common? They’re not. Solar works well during the daytime and not at all at night. Wind works well when there’s a lot of wind and works badly when there’s little wind. Those aren’t the only problems with solar and wind. Solar uses up a lot of land. Wind generators are a Cuisinart for birds. Moreover, because wind and solar are intermittent, we still need a substantial amount of standby capacity that uses natural gas to generate electricity.
A much better solution is to quit mandating how electricity is produced and, furthermore, to radically deregulate nuclear power. Nuclear power is very expensive now, but one of the main reasons is that it’s so highly regulated. The intensive regulation of nuclear power seems to be due to people’s fear of a nuclear accident. At this link you can see one example of how the Nuclear Regulatory Commission reacted to shut down nuclear power plants in response to a software error. Yet, the actual experience with nuclear power shows that it’s one of the safest forms of power.
Conclusion
The main problem with government regulation of energy uses and of the forms of energy production is that the government puts itself in the role of central planner. It has neither the information about individuals’ values and circumstances nor the incentive to make good decisions. That’s why we have such an energy mess in the United States and, especially, in California.
If I don’t get my way and we don’t try geoengineering and don’t depend on adaptation to deal with global warming, then it could make sense to impose a carbon tax. A carbon tax’s big advantage over regulation is that it doesn’t put the government in the role of picking and choosing uses and sources of power. Those who want to bear the tax and have a gas guzzler can do so. Electricity producers who want to pay the tax to have a steady source of inputs into power production rather than depending on intermittent wind and solar, can do so. This is not controversial among economists. Unfortunately, as with price controls during the 1970s, not enough policy makers are paying attention to economists. The results are, and will be, at a minimum, pricy and intermittent electric power and very expensive cars, furnaces, and water heaters.
