Energy policy in the United States is fatally flawed both in the process by which problems are identified and in the solutions that are chosen. It relies too heavily on subsidies, tax credits, grants, and mandates, when what is needed are price-based policies that encourage technological innovation and will achieve the goals of keeping energy reasonably cheap, but also reasonably clean and secure

Griffin, James M.

Texas A&amp;M Repository

A Smart,  Price-Based  Energy Policy  JAMES M. GRIFFIN Bush School of Government and Public Service VOLUME 8 | ISSUE 1 | 2017 Energy policy in the United States is fatally flawed both in the process by which problems are identified and in the solutions that are chosen. It relies too heavily on subsidies, tax credits, grants, and mandates, when what is needed are price-based policies that encourage technological innovation and will achieve the goals of keeping energy reasonably cheap, but also reasonably clean and secure.  In his recent confirmation hearing, former Texas Gov-ernor and newly minted US Energy Secretary Rick Perry, stated that he would, “advocate and promote en-ergy in all forms, and that certainly includes our re-newables.” He also went on to state, “I am committed to helping provide stable, relia-ble, affordable, and secure sources of American ener-gy.”1 Unfortunately, cheap, clean, and secure energy are fundamentally in conflict. Cheap energy is essential to the continued health and WHAT’S THE TAKEAWAY?  Congress should not be picking winners and losers, supporting some alternative technologies over others.  An environmental investment fee should be used to make the price of fossil fuels higher and reflect their true social cost.  Such a fee will level the playing field stimulating new technologies and innovations. 2 prosperity of all nations. Clean energy is not typically cheap but must be part of the goal. Secure energy also is not cheap, but it is es-sential to economic stability. Competitive markets and new technology hold the best promise of limiting these in-herent conflicts. For example, fracking tech-nology, pioneered by another Texan, George Mitchell, has revitalized the US oil and natu-ral gas industry. Fracking has both increased US oil security and brought world oil prices down from their $100 per barrel range in 2014. Additionally, fracking has unlocked vast reserves of domestic natural gas, prompting cheaper natural gas prices. An environmental bonus has been that natural gas-fired combined cycle power plants emit about 60% less CO2 than their coal fired counterparts. Thanks to fracking unlocking vast oil reserves outside of the troubled Mid-dle East, oil security is now much less of a concern.  Nevertheless, the scientific community tells us that there exist serious climate conse-quences from cheap fossil fuel energy.2 Both in the United States and worldwide, fossil fuels account for a dominant portion of CO2 emissions and of total energy consumed. Un-fortunately, carbon-free energy sources are much more expensive than their fossil alter-natives. Yet, cheap energy is important for maintaining high standards of living. Never-theless, concern for future generations ar-gues for a gradual transition to a low-carbon fuel mix. The question then becomes, “How do we balance over time the two conflicting goals of cheap and clean?”  INEFFECTIVE SOLUTIONS In the past, the answer has been to give cer-tain favored technologies like wind power subsidies big enough to allow them to com-pete. Another answer was to change con-sumer behavior by command and control mandates from Washington. Corporate Av-erage Fuel Economy (CAFE) standards on cars and light trucks and mandates on etha-nol content of gasoline come to mind. Etha-nol mandates resulted in all kinds of unin-tended consequences—most alarmingly causing increases in world food prices that disproportionately affect the poorest—while achieving little of the hoped for price, energy security, and environmental benefits.3 An-other fiasco was Solyndra, a government fi-nanced company ostensibly designed to pro-duce low cost solar panels. Ultimately, the company failed after costing US taxpayers over $500 million.  Note that both these solutions, whether sub-sidies for favored technologies or command and control mandates, are not free. Subsi-dies diminish tax revenues (contributing to our deficit) and mandates distort consumer choices. Congress should stop picking winners, choosing to boost selected alternative tech-nologies. Its members aren’t any good at recognizing the most promising ones. They don’t have the expertise, and the process looks too much like a flawed beauty-contest determined by lobbyist and home-state in-Clean energy is not typically cheap but must be part of the goal James M. Griffin | A Smart, Price-Based Energy Policy | Volume 8 | Issue 1 | March 2017 terests. If all new technologies enjoyed a more level playing field, not just the pageant winners, the market would decide which technologies become the winners.  SETTING A NEW PLAYING FIELD USING A PRICE-BASED POLICY Using an analogy from sports, let government set the dimensions of the football field on which all energy forms must compete. Then government should get out of the way. If a particular energy form can compete on that playing field, well and good. If it cannot, it should not be subsidized, nor its use mandat-ed by government fiat. Basically, this is the free market mantra that applies to virtually all the products we buy. The best energy poli-cy for balancing the often-competing goals of cheap, clean, and secure energy would use the price system to alter consumer behavior, business behavior, and the incentives to de-velop alternative-energy technologies.  Unfortunately, the current price system fails to incorporate the true social cost of fossil fuels—the costs primarily associated with climate change. Absent subsidies and man-dates, fossil fuels would dominate the playing field. There would be no role for wind power, electric cars, etc. New low-carbon technolo-gies simply cannot compete. A smart energy policy raises the playing field on which new energy technologies compete by incorporat-ing into the price of fossil fuels their external-ly borne costs associated with CO2.  By creating a new playing field where fossil fuel prices reflect their true cost, technology and innovation can flourish. Furthermore, the role of government would be relegated to being a tax collector—something that it is pretty good at. We have no idea what tech-nologies will dominate in thirty or fifty years. Instead of policymakers attempting to socially engineer the outcome, it is far better to create market conditions under which un-known and unknowable technologies will flourish.  The Department of Energy does have a legit-imate role in funding research and develop-ment, but not in manufacturing solar panels like Solyndra. A smart energy policy does use government research and development funds to stimulate advances in basic energy research and high cost initial development projects. R&D funding decisions should be made by knowledgeable professionals in the energy department, not Congress. AN INVESTMENT IN THE FUTURE In today’s tax shy political landscape many will say introducing even a modest carbon fee that would raise gasoline prices by $.10 per gallon is unacceptable. But, an environ-mental investment fee differs fundamentally from the usual tax designed to redistribute income from one group to another. A fee on carbon is an investment in the future that will create a new, more level playing field for alternative energy sources and encourage conservation. It is an investment in the world our children and grandchildren will inherit. When viewed as an investment in the future, suddenly, it looks much more at-tractive. Too, the revenues could be used to help alleviate the current fiscal imbalance that will also affect those grandchildren. Global warming and oil security are not just US problems, they are world-wide problems. Reductions in US carbon emissions will be of 3 James M. Griffin | A Smart, Price-Based Energy Policy | Volume 8 | Issue 1 | March 2017 James M. Griffin is Professor of Economics and Public Policy and holds the Bob Bullock Chair at the Bush School of Government and Public Service at Texas A&M University. He is the author of A Smart Energy Policy: An Economist’s Rx for Balancing Cheap, Clean, and Secure Energy and the leading energy economics text, Energy Economics & Policy. He also has seven grandchildren. Notes: 1 Nomination hearing of the Honorable Rick Perry for Secretary of Energy (January 19, 2017).  2 Climate Change 2014 Synthesis Report, Summary for Policymakers, IPCC  3 Griffin, J.M. and Cifuentes-Soto, M. (2012, Feb.). US ethanol policy: The unintended consequences. The Takeaway, 3(1). Available at http://bush.tamu.edu/mosbacher/takeaway/TakeAwayVol3Iss1.pdf 4 Stern, N. (2007). The economics of climate change: The Stern review. Cambridge University Press. little consequence if emissions in China and India continue to grow at prodigious rates. Opponents of any policy to reduce US emis-sions would argue that without internation-al cooperation, such policies are futile and would only hurt the United States. These same opponents would point out that such international cooperation seems unlikely in today’s fractured world. This is an argument against a high fee, not for a zero fee. Obvi-ously, one would not want to impose a car-bon tax of $100 per ton as advocated in the Stern Review,4 but a modest carbon fee of say $10 per ton (implying $.10 per gallon) would not have significant effects on the US economy or individual well-being. But if on this new playing field major technological advances emerged, these technologies could be exported to the rest of the world. World emissions could be significantly reduced and American innovators rewarded. With Energy Secretary Rick Perry’s under-standing of how technology revitalized oil and natural gas production in Texas, he has 4 James M. Griffin | A Smart, Price-Based Energy Policy | Volume 8 | Issue 1 | March 2017 ABOUT THE MOSBACHER INSTITUTE The Mosbacher Institute was founded in 2009 to honor Robert A. Mosbacher, Secretary of Commerce from 1989-1992 and key architect of the North American Free Trade Agreement. Through our three core programs–Integration of Global Markets, Energy in a Global Economy, and Governance and Public Services–our objective is to advance the design of policies for tomorrow’s challenges. Contact: Cynthia Gause, Program Coordinator Mosbacher Institute for Trade, Economics, and Public Policy  Bush School of Government and Public Service 4220 TAMU, Texas A&M University College Station, Texas 77843-4220 Email: bushschoolmosbacher@tamu.edu  Website: http://bush.tamu.edu/mosbacher The views expressed here are those of the author(s) and not necessarily those of the Mosbacher Institute, a center for independent, nonpartisan academic and policy research, nor of the Bush School of Government and Public Service.  To share your thoughts on The Takeaway, please visit  http://bit.ly/1ABajdH  an opportunity to use sound scientific and market-based economic principles to guide decision making. Prices should reflect real costs and an environmental investment fee should be used to make the cost of fossil fuels higher. With energy prices continuing to be fairly low, this is the perfect time to level the playing field for new technology and innova-tion.  

A Smart, Price-Based Energy Policy

Texas A&M University

A Smart,  
Price-Based  
Energy Policy 
 
JAMES M. GRIFFIN 
Bush School of Government and Public Service 
VOLUME 8 | ISSUE 1 | 2017 
Energy policy in the United States is fatally flawed both in 
the process by which problems are identified and in the 
solutions that are chosen. It relies too heavily on subsidies, 
tax credits, grants, and mandates, when what is needed 
are price-based policies that encourage technological 
innovation and will achieve the goals of keeping energy 
reasonably cheap, but also reasonably clean and secure.  
In his recent confirmation 
hearing, former Texas Gov-
ernor and newly minted US 
Energy Secretary Rick Perry, 
stated that he would, 
“advocate and promote en-
ergy in all forms, and that 
certainly includes our re-
newables.” He also went on 
to state, “I am committed to 
helping provide stable, relia-
ble, affordable, and secure 
sources of American ener-
gy.”1 Unfortunately, cheap, 
clean, and secure energy are 
fundamentally in conflict. 
Cheap energy is essential to 
the continued health and 
WHAT’S THE TAKEAWAY? 
 
Congress should not be picking 
winners and losers, supporting 
some alternative technologies 
over others. 
 
An environmental investment 
fee should be used to make the 
price of fossil fuels higher and 
reflect their true social cost. 
 
Such a fee will level the playing 
field stimulating new 
technologies and innovations. 
2 prosperity of all nations. Clean energy is not 
typically cheap but must be part of the goal. 
Secure energy also is not cheap, but it is es-
sential to economic stability. 
Competitive markets and new technology 
hold the best promise of limiting these in-
herent conflicts. For example, fracking tech-
nology, pioneered by another Texan, George 
Mitchell, has revitalized the US oil and natu-
ral gas industry. Fracking has both increased 
US oil security and brought world oil prices 
down from their $100 per barrel range in 
2014. Additionally, fracking has unlocked 
vast reserves of domestic natural gas, 
prompting cheaper natural gas prices. An 
environmental bonus has been that natural 
gas-fired combined cycle power plants emit 
about 60% less CO2 than their coal fired 
counterparts. Thanks to fracking unlocking 
vast oil reserves outside of the troubled Mid-
dle East, oil security is now much less of a 
concern.  
Nevertheless, the scientific community tells 
us that there exist serious climate conse-
quences from cheap fossil fuel energy.2 Both 
in the United States and worldwide, fossil 
fuels account for a dominant portion of CO2 
emissions and of total energy consumed. Un-
fortunately, carbon-free energy sources are 
much more expensive than their fossil alter-
natives. Yet, cheap energy is important for 
maintaining high standards of living. Never-
theless, concern for future generations ar-
gues for a gradual transition to a low-carbon 
fuel mix. The question then becomes, “How 
do we balance over time the two conflicting 
goals of cheap and clean?”  
INEFFECTIVE SOLUTIONS 
In the past, the answer has been to give cer-
tain favored technologies like wind power 
subsidies big enough to allow them to com-
pete. Another answer was to change con-
sumer behavior by command and control 
mandates from Washington. Corporate Av-
erage Fuel Economy (CAFE) standards on 
cars and light trucks and mandates on etha-
nol content of gasoline come to mind. Etha-
nol mandates resulted in all kinds of unin-
tended consequences—most alarmingly 
causing increases in world food prices that 
disproportionately affect the poorest—while 
achieving little of the hoped for price, energy 
security, and environmental benefits.3 An-
other fiasco was Solyndra, a government fi-
nanced company ostensibly designed to pro-
duce low cost solar panels. Ultimately, the 
company failed after costing US taxpayers 
over $500 million.  
Note that both these solutions, whether sub-
sidies for favored technologies or command 
and control mandates, are not free. Subsi-
dies diminish tax revenues (contributing to 
our deficit) and mandates distort consumer 
choices. 
Congress should stop picking winners, 
choosing to boost selected alternative tech-
nologies. Its members aren’t any good at 
recognizing the most promising ones. They 
don’t have the expertise, and the process 
looks too much like a flawed beauty-contest 
determined by lobbyist and home-state in-
Clean energy is not 
typically cheap but must 
be part of the goal 
Ja
m
es
 M
. G
ri
ffi
n
 |
 A
 S
m
ar
t,
 P
ri
ce
-B
as
ed
 E
n
er
gy
 P
o
lic
y 
| 
V
o
lu
m
e 
8
 |
 Is
su
e 
1
 |
 M
ar
ch
 2
0
1
7
 
terests. If all new technologies enjoyed a 
more level playing field, not just the pageant 
winners, the market would decide which 
technologies become the winners.  
SETTING A NEW PLAYING FIELD USING 
A PRICE-BASED POLICY 
Using an analogy from sports, let government 
set the dimensions of the football field on 
which all energy forms must compete. Then 
government should get out of the way. If a 
particular energy form can compete on that 
playing field, well and good. If it cannot, it 
should not be subsidized, nor its use mandat-
ed by government fiat. Basically, this is the 
free market mantra that applies to virtually 
all the products we buy. The best energy poli-
cy for balancing the often-competing goals of 
cheap, clean, and secure energy would use 
the price system to alter consumer behavior, 
business behavior, and the incentives to de-
velop alternative-energy technologies.  
Unfortunately, the current price system fails 
to incorporate the true social cost of fossil 
fuels—the costs primarily associated with 
climate change. Absent subsidies and man-
dates, fossil fuels would dominate the playing 
field. There would be no role for wind power, 
electric cars, etc. New low-carbon technolo-
gies simply cannot compete. A smart energy 
policy raises the playing field on which new 
energy technologies compete by incorporat-
ing into the price of fossil fuels their external-
ly borne costs associated with CO2.  
By creating a new playing field where fossil 
fuel prices reflect their true cost, technology 
and innovation can flourish. Furthermore, 
the role of government would be relegated to 
being a tax collector—something that it is 
pretty good at. We have no idea what tech-
nologies will dominate in thirty or fifty 
years. Instead of policymakers attempting to 
socially engineer the outcome, it is far better 
to create market conditions under which un-
known and unknowable technologies will 
flourish.  
The Department of Energy does have a legit-
imate role in funding research and develop-
ment, but not in manufacturing solar panels 
like Solyndra. A smart energy policy does 
use government research and development 
funds to stimulate advances in basic energy 
research and high cost initial development 
projects. R&D funding decisions should be 
made by knowledgeable professionals in the 
energy department, not Congress. 
AN INVESTMENT IN THE FUTURE 
In today’s tax shy political landscape many 
will say introducing even a modest carbon 
fee that would raise gasoline prices by $.10 
per gallon is unacceptable. But, an environ-
mental investment fee differs fundamentally 
from the usual tax designed to redistribute 
income from one group to another. A fee on 
carbon is an investment in the future that 
will create a new, more level playing field for 
alternative energy sources and encourage 
conservation. It is an investment in the 
world our children and grandchildren will 
inherit. When viewed as an investment in 
the future, suddenly, it looks much more at-
tractive. Too, the revenues could be used to 
help alleviate the current fiscal imbalance 
that will also affect those grandchildren. 
Global warming and oil security are not just 
US problems, they are world-wide problems. 
Reductions in US carbon emissions will be of 
3 
Ja
m
es
 M
. G
ri
ffi
n
 |
 A
 S
m
ar
t,
 P
ri
ce
-B
as
ed
 E
n
er
gy
 P
o
lic
y 
| 
V
o
lu
m
e 
8
 |
 Is
su
e 
1
 |
 M
ar
ch
 2
0
1
7
 
James M. Griffin is Professor of Economics 
and Public Policy and holds the Bob Bullock 
Chair at the Bush School of Government and 
Public Service at Texas A&M University. He is 
the author of A Smart Energy Policy: An 
Economist’s Rx for Balancing Cheap, Clean, 
and Secure Energy and the leading energy 
economics text, Energy Economics & Policy. He 
also has seven grandchildren. 
Notes: 
1 Nomination hearing of the Honorable Rick Perry for Secretary 
of Energy (January 19, 2017).  
2 Climate Change 2014 Synthesis Report, Summary for 
Policymakers, IPCC  
3 Griffin, J.M. and Cifuentes-Soto, M. (2012, Feb.). US ethanol 
policy: The unintended consequences. The Takeaway, 3(1). 
Available at http://bush.tamu.edu/mosbacher/takeaway/
TakeAwayVol3Iss1.pdf 
4 Stern, N. (2007). The economics of climate change: The Stern 
review. Cambridge University Press. 
little consequence if emissions in China and 
India continue to grow at prodigious rates. 
Opponents of any policy to reduce US emis-
sions would argue that without internation-
al cooperation, such policies are futile and 
would only hurt the United States. These 
same opponents would point out that such 
international cooperation seems unlikely in 
today’s fractured world. This is an argument 
against a high fee, not for a zero fee. Obvi-
ously, one would not want to impose a car-
bon tax of $100 per ton as advocated in the 
Stern Review,4 but a modest carbon fee of 
say $10 per ton (implying $.10 per gallon) 
would not have significant effects on the US 
economy or individual well-being. But if on 
this new playing field major technological 
advances emerged, these technologies could 
be exported to the rest of the world. World 
emissions could be significantly reduced and 
American innovators rewarded. 
With Energy Secretary Rick Perry’s under-
standing of how technology revitalized oil 
and natural gas production in Texas, he has 
4 
Ja
m
es
 M
. G
ri
ffi
n
 |
 A
 S
m
ar
t,
 P
ri
ce
-B
as
ed
 E
n
er
gy
 P
o
lic
y 
| 
V
o
lu
m
e 
8
 |
 Is
su
e 
1
 |
 M
ar
ch
 2
0
1
7
 
ABOUT THE MOSBACHER INSTITUTE 
The Mosbacher Institute was founded in 2009 to honor Robert A. Mosbacher, Secretary of Commerce from 1989-
1992 and key architect of the North American Free Trade Agreement. Through our three core programs–Integration 
of Global Markets, Energy in a Global Economy, and Governance and Public Services–our objective is to advance the 
design of policies for tomorrow’s challenges. 
Contact: 
Cynthia Gause, Program Coordinator 
Mosbacher Institute for Trade, Economics, and Public Policy  
Bush School of Government and Public Service 
4220 TAMU, Texas A&M University 
College Station, Texas 77843-4220 
Email: bushschoolmosbacher@tamu.edu  
Website: http://bush.tamu.edu/mosbacher 
The views expressed here are those of the author(s) and not necessarily those of the Mosbacher Institute, a center for 
independent, nonpartisan academic and policy research, nor of the Bush School of Government and Public Service.  
To share your thoughts 
on The Takeaway, 
please visit  
http://bit.ly/1ABajdH  
an opportunity to use sound scientific and 
market-based economic principles to guide 
decision making. Prices should reflect real 
costs and an environmental investment fee 
should be used to make the cost of fossil fuels 
higher. With energy prices continuing to be 
fairly low, this is the perfect time to level the 
playing field for new technology and innova-
tion.  


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A Smart, Price-Based Energy Policy

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A Smart, Price-Based Energy Policy

Abstract

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Texas A&amp;M Repository

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