Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
Russia’s invasion of Ukraine has amplified the importance of national security objectives when Western nations formulate energy policy. At the same time, they should not take their eye off the ball of reducing environmental damage and, in particular, slowing down greenhouse gas emissions. Both goals, geopolitical and environmental, are urgent. The national security and environmental objective should be evaluated together, rather than via separate “stove pipes.”
Some talk as if the two goals are necessarily in conflict — because, for example, fighting back against Moscow by boosting domestic US oil production would contribute to air pollution and global climate change. But there are plenty of steps that would benefit the environment and simultaneously further the geopolitical objective. The most obvious steps, especially for the EU, are sanctions that cut demand for imports of fossil fuels from Russia.
A review of different areas of energy policy can reveal more such steps. The account that follows emphasizes those choices that seem clearly win-win, as opposed to policy decisions where tradeoffs are acute and reasonable observers may come down on either side.
Here are some things to do and not to do.
- Don’t prolong the life of coal. Most clearly, end coal subsidies. The IMF has estimated that global energy subsidies (including oil and natural gas, along with coal), at either the producer or consumer end, run more than $5 trillion per year. Direct US fossil fuel subsidies alone have been conservatively estimated at $20 billion per year.
- Regulate natural gas. Continental Europe, unfortunately, has made itself dependent on gas pumped in from Russia. US shipments of LNG can help substitute in part for Russian gas. Reasonable people can disagree on whether there is a role for gas as a transition fuel – it emits half the carbon that coal does — and whether the geopolitics warrant building more long-lived LNG terminals. But if there is to be a renewal of the fracking boom — which reduced total US carbon emissions from 2007 to 2012 — careful regulation should drastically reduce the amount of methane released into the atmosphere as part of the process. This regulation need not be expensive.
- Don’t subsidize oil. Petroleum subsidies have been estimated at $1 ½ trillion per year, globally. If the US must open more federal lands to drilling, it should reverse the history of offering the leases to drillers at below-market rates.
- Go ahead and release emergency oil reserves. US President Joe Biden has announced releases from the Strategic Petroleum Reserve, a million barrels per day over the next six months. Presidents have in the past sometimes used the SPR for political purposes. But this time it has a genuine national security use. The release can help a bit to bridge over a temporary shortfall, giving suppliers and consumers of energy more time to adjust to the loss of Russian oil.
Some say the SPR isn’t big enough to put a dent in global oil prices. But one must take into account that the US move has been accompanied by similar releases of emergency stockpiles held by the UK, Germany, and many other countries, in particularl, coordinating members of the International Energy Agency, totaling 240 million barrels over the next six months.
Some economists also say the US does not need a SPR, especially now that the country is no longer a net importer of oil. But, even if one buys this view, it would not be an argument against a release of reserves; it would, rather, be an argument against refilling the SPR when the crisis has passed.
- Raise, don’t lower, taxes on retail petroleum products, such as the US gas tax, which should fund highway maintenance and other infrastructure “Gas tax holidays” have recently been declared by several US states, to cushion consumers from the painful effects of high global oil prices. Other countries are similarly trying to shield their consumers from energy price increases. These measures are understandable politically, but are terrible economics: they undermine drivers’ incentive to economize on their fuel consumption, benefiting Russia and hurting the environment. They are also bad for the budget.
- Keep up the momentum for renewables. Continuing the recent trend toward wind and solar power is important to both the geopolitical goal and environmental goal. Government subsidies can play a role, for example, to support research into storage technology. But another measure is less popular. The US and EU should lower, not raise, their tariffs and other protectionist barriers to imports of solar panels and turbines, imports that have helped bring down the costs of solar and wind power, respectively.
- Prolong nuclear power. One of the most misguided of energy policies anywhere currently is the choice by Germany to go ahead with plans to close its three remaining nuclear plants this year. The original decision in 2011, in response to the Fukushima disaster, to shut down all German nuclear power over the course of the intervening decade has led directly to increased reliance on coal, worsening carbon emissions, and increased dependence on fossil fuel imports from Russia. It is surprising that Germany would close its last three nuclear power plants later this year, rather than extending their lives and even trying to re-open the three that it closed in December.
Other countries assess the pros and cons of nuclear power differently. Fewer deaths resulted from the Japanese nuclear accident than arise from coal on average per day (in mining or burning it). Britain now plans to build eight new nuclear power plants this decade, partly to reduce dependence on oil imports in the wake of the invasion of Ukraine.
Of course, the best way to reduce demand for fossil fuels would be a carbon tax or system of auctioned tradeable permits (with the revenue used, e.g., to reduce distortionary taxes). Currently, such price mechanisms are impossible politically in the US. But 20 years ago we thought the same of the European Union, and today it has the Emissions Trading System.
Cutting demand for hydrocarbons hurts the earnings of all oil exporters, not just Russia. Some are innocent bystanders. But some are petrostates that are not entirely worthy of support from the United States and allies. (The perceived need to deploy US armed forces in the Gulf, for example, has had enormous costs.)
Is it coincidence that so many oil-exporting countries are autocracies? Not entirely. Studies of the natural resource curse conclude that societies built on the wealth of commodities in general, and oil in particular, tend to develop authoritarianism and other bad institutions One could speculate that, in the long run, perhaps it might be better all around, if the fossil fuel sector were to shrink worldwide.
This post written by Jeffrey Frankel.