Toward a New National Energy Policy: Assessing the Options

The Project

Resources for the Future (RFF) and the National Energy Policy Institute (NEPI) have agreed to produce a comprehensive study entitled “Toward a New National Energy Policy:  Assessing the Options.”  The George Kaiser Family Foundation has granted funds to NEPI to underwrite the project.

The Vision

America’s dependence on imported oil and other fossil fuels is a serious threat to our national security and a significant contributor to global climate change. Yet America has so far failed to respond to this dual challenge with a comprehensive and coordinated national energy policy.

For 35 years, U.S. political leaders have espoused a goal of energy security, and yet today, America imports more than half the oil it consumes and relies upon countries that are often politically unstable and hostile to U.S. interests.  Meanwhile, the international scientific community now issues near unanimous warnings about the danger of unchecked accumulations of greenhouse gases, particularly carbon dioxide, in the atmosphere, largely a result of burning fossil fuels.

Against the backdrop of a devastating oil spill in the Gulf of Mexico and a call from the Obama Administration for urgent action to jumpstart the transition away from fossil fuels, the time is ripe for a rigorous, wide-ranging analysis of energy policy options. To move toward a new energy policy that addresses the overarching twin challenges of this new century will require policymakers to select a broad portfolio of strategies that reduces both the use of oil and GHG emissions, and takes account of other environmental damages.

The Study – A Distinctive Approach

Numerous valuable research studies have explored alternative fuels, new technologies, and future energy scenarios. Our project utilizes these studies, while also going beyond what others have done to allow for a focused, consistent ranking and analysis across specific policy options, and along a range of dimensions.

Several important features of this study distinguish it from other assessments of U.S. climate and energy options.

• First, this research focuses explicitly on policy design and evaluation. Many previous stud­ies have examined the technical feasibility of alternative fuels, new technologies, and future pathways to reduce oil use and CO2 emissions. However, it is essential to look beyond engi­neering estimates or availability of particular fuels and technologies, and consider the mechanisms that will bring about those reduc­tions, namely, the specific government policy instruments that will drive changes in private markets, the key focus of our study.
• Second, we use a consistent economic model­ing approach, which is the backbone of the study. This model, which we call NEMS-RFF, is an RFF version of the U.S. Department of Energy/Energy Information Administration’s National Energy Modeling System (NEMS). We developed this version with the assistance of OnLocation, Inc. By using the same model with the same underlying assumptions, we can score different poli­cies based on apples-to-apples comparisons.

We based our scores on two effectiveness metrics—reduction in barrels of oil consumed1 and reduction in tons of CO2 emitted—as well as the cost of each policy.

• Third, the study is wide-ranging, taking into account a broad menu of policies. We examined 35 policy scenar­ios, including four crosscutting policy options, against a reference case.
• Fourth, a hallmark of this report is its examina­tion of economic or “welfare” costs, based on fundamental microeconomic principles in which cost is the value of the resources that society gives up to achieve a given reduc­tion in oil use and/or CO2 emissions. Many studies calculate direct expenditure changes from scenarios in which one fuel substitutes for another, or one energy-efficient technology replaces another less efficient one. Others, particularly those looking at broad-based policies such as carbon taxes or cap-and-trade programs, assess changes in gross domestic product. Although such metrics provide some information, they may not reflect the true economic burden of the policy. Welfare cost, on the other hand, fully represents this overall economic burden. 
• Fifth, for relevant policies, we consider three cases as possible explanations for the “energy paradox”, the observation that con­sumers appear reluctant to make investments in energy efficiency unless they see a pay-off well before the lifetime of the investment. We distin­guish these cases by degree of market failure: complete, partial, and none. The study’s main report discusses costs for all three cases, while the Executive Summary reports data for the partial market failure case only.

Two additional aspects of the study deserve mention. First, it calls upon the best available experts for analysis of each of the policies, along with an intense peer review. Second, it builds upon RFF’s legacy of over 55 years of independent, scholarly, and objective research and policy analysis.