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Price Is A Better Climate Commitment
The Economists' Voice
January, 2010

Carbonomics

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Energy Science

Page Under Construction

  • Which Alt Energy is Best?
  • How much money will climate policy save us by reducing oil prices?
  • Does making a barrel of ethanol really stop a barrel of oil from being pumped?
  • When will fossil use peak?
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Alternative Energy

Nothing about climate/energy policy proves more fascinating than the game of guessing what alternative energy source will replace the most fossil fuel and when this will happen. An no guessing game has ever produced more wrong answers.

In spite of this track record, and the well-founded view that the government should not try to pick winners, the government cannot exit this guessing game entirely. So alternative energy spawns two policy questions:

  1. How can the government best induce private industry to pick winning alternative energy technologies.
  2. How should the gaps in the private sector be filled in?

But since everyone loves predictions and the second question will need some answers, the GEP Center discusses the predictions of the best soothsayers here: alternative energy predictions. Alternative energy policy is here, under National Policy.

Energy Security Benefits

Global Energy Policy contains a remarkably useful but entirely ignored alignment:
  • Climate policy requires that the use of oil be reduced. 
  • The best policy for increasing energy security is to reduce oil use.

The use of this alignment is discussed in the Global Policy section under "Energy / Climate," but that discussion relies no certain aspects of the world oil market, which will be discussed here.

The Global Rebound Effect

Biofuels are part of the world oil market, or more accurately, part of the world liquid-fuels market. This means that producing biofuels shifts the supply curve for liquid fuel out, reduces the world price of liquid fuel (including oil), and increases the consumption of liquid fuel. That's the global rebound effect.

The global rebound effect, reduces the usefulness of all alternative liquid fuel, but probably by only about 20 to 30 percent. Still, this can be quite important for marginally useful fuels.

The same set of changes occur when more oil is produce, say from offshore drilling. So pumping oil is governed by the same global rebound effect as producing ethanol. See the global-rebound page (just getting started), or read the rebound policy brief.

Peak oil / peak fossil 

The U.S. Department of Energy has been fairly accurate about oil consumption over the years, although their projection for world consumption in 2025 dropped from 117.6 to 101.1 in just two years, from 2007 to 2009. That's a fairly remarkable drop and makes a peak-oil date in the early 2020's seem entirely possible. But this does not mean catastrophe, it just means high oil prices will force Americans to be less wasteful and force China and India to shift expand auto-use more slowly.

The GEP Center will track these developments here.