Energy consumption is critical to economic growth and quality of life. America’s energy system, however, is malfunctioning. The status quo is characterized by a tilted playing field, where energy choices are based on the visible costs that appear on utility bills and at gas pumps. This system masks the “external” costs arising from those energy choices, including shorter lives, higher health care expenses, a changing climate, and weakened national security. As a result, we pay unnecessarily high costs for energy. New “rules of the road” could level the energy playing field. Drawing from our work for The Hamilton Project, this paper offers four principles for reforming U.S. energy policies in order to increase Americans’ well-being.
The United States was remarkably complacent about energy policy until the Arab oil embargo of 1973. Since then, we have relied on unnecessarily costly regulations and poorly designed subsidies to mandate or encourage particular forms of energy production and use.
Emissions of greenhouse gases linked with global climate change are affected by diverse aspects of economic activity, including individual consumption, business investment, and government spending. An effective climate policy will have to modify the decision calculus for these activities in the direction of more efficient generation and use of energy, lower carbon-intensity of energy, and a more carbon-lean economy.
Public opinion about energy can be understood in a unified framework. First, people evaluate key attributes of energy sources, particularly a fuel’s cost and environmental harms. Americans, for example, view coal as relatively inexpensive but harmful, natural gas as less harmful but more expensive, and wind as inexpensive and not harmful. Second, people place different weights on the economic and environmental attributes associated with energy production, which helps explain why some fuels are more popular than others.
Shale gas is a new energy resource that has shifted the dominant paradigm on U.S. hydrocarbon resources. Some have argued that shale gas will play an important role in reducing greenhouse gas emissions by displacing coal used for electricity, serving as a moderate-carbon “bridge fuel.” Others have questioned whether methane emissions from shale gas extraction lead to higher greenhouse gas emissions overall.
The innovation system has interrelated components of invention, translation, adoption, and diffusion. Energy technology innovation has lagged that in other domains, and there is a compelling public interest in picking up the pace through appropriate government action.
Historically, energy transitions have occurred gradually over the span of several decades, marked by incremental improvements in technologies. In recent years, public interest in accelerating the next energy transition has fueled a clean-energy policy agenda intended to underpin the development of a decarbonized energy economy.
The world is entering a new energy era marked by concerns over energy security, climate change, and access by the poor to modern energy services. Yet the current energy path is not compatible with sustainable development objectives. Global demand for energy will continue to grow; so will CO2 emissions. Achieving a low-carbon energy world will require an unprecedented technological transformation in the way energy is produced and used.