What is energy security? That’s what Maximilian Auffhammer at the Energy Institute at Haas asks and tries to answer, and he starts by saying what it is not and what solutions should not be used. Not importing won’t help because prices are global. “Energy security” can’t be taxed as an externality for much the same reason. Subsidising high prices for consumers decreases the value of energy efficiency investments. Instead, Auffhammer says the policies that can improve energy security are, most obviously, cutting fossil fuel use, diversifying the portfolio of fuels, and investing in alternatives like renewables. Add to that, cutting energy intensity and raising efficiency. And investing in long-distance transmission and pipelines to support areas with regional shortages.
After incredulously watching Russian military shoot at Europe’s largest nuclear facility, which supplies 20% of Ukraine’s electricity, I am having a hard time concentrating on anything like writing a blog post. The suffering of the people of Ukraine is beyond measure and completely unprovoked. The damages imposed by war, which populations across the world continue to experience – the loss of life, violence and destruction of infrastructure – was vividly relayed to me by my grandparents. They lived through World War II in central Europe and it scarred them to their dying days. My thoughts are with the people of Ukraine. If you want to help, a Cal alumna (and rockstar) is organising a number of meaningful efforts. If you want to send some money, there are resources here and here.
As a consequence of this aggression, energy security is on everyone’s mind. My father in Northern Bavaria hoarded heating oil last week, folks in Europe are asked to turn down their furnaces and put on sweaters, and prices for natural gas and gasoline are skyrocketing. Why is that? It’s pretty simple, the fossil fuels so many economies rely on, no matter how free or democratic they are, are often found in places that are not. Countries develop infrastructure to transport fossil fuels (e.g. pipelines, shipping routes and processing facilities) to get the carbon molecules their citizens and firms depend on. But it’s important to remember that if a despot sits at the other end of that pipeline and gets pissed off at you, he may cut you off. So you’re a bit like a junkie who depends on their dealer (who is rarely a nice person) for your next dose. If your dealer cuts you off, you’re in trouble. In the case of energy security you start worrying about keeping the lights on and the furnace warm.
Conceptually this is easy to understand, but how should we value this “energy security”? When I do my careful reading about the social cost of carbon it often appears alongside an estimate for the energy security “externality”. I had trouble trying to piece together in my mind how this is an externality one could quantify. So I read Gib Metcalf’s excellent piece on the economics of energy security (free earlier version here). Gib is one of the finest minds in our field (and a fellow UMASS alumni). With laser sharp precision he injects some clear economic thinking into what the issue and the solutions are – from an economic perspective.
So let’s define what we mean by energy security first. Gib uses the Congressional Budget Office’s definition which is “the ability of households, businesses, and government to accommodate disruptions in supply in energy markets.” Bam. Simple and clear. There are some other definitions floating around, many of which I do not like, because they are so often wishy washy. Science, people. You don’t want a hand wavy surgeon. So what did I learn from this piece:
- Many folks think that simply stopping reliance on energy imports will fix things. But it won’t, because oil markets are flippin’ global. If there is a supply shock elsewhere in the world, your local prices will rise as producers sell their wares in global markets. There are of course big differences between natural gas and oil here, but I may blog on this another time. Back to the junkie – buying drugs from the nicer (maybe more expensive) dealer on your own block versus the scary pusher on the next block won’t make you better off. The answer is consume less (or none, but I’ll get to that).
- Energy security is not an externality in the way we usually talk about it. WHUUUUT? Did Max eat the whole bag of gummies? Nope. When we talk about taxing our way out of externalities, we usually talk about the non-pecuniary kind! In that case someone is imposing a direct cost (or benefit) on someone else without internalising it. This is simply not the case here as energy security is “only” a pecuniary externality. Which means, drumroll, that for once a tax is the wrong prescription here! So if you see proposals for an explicit energy security tax, you will hear me groan. But Max, does this mean a carbon tax has no energy security benefits? Hold my beer, I will get to that below.
- Low prices to consumers do not protect against supply disruptions and hence should not be a goal of energy security policies. Yes, we all like cheap stuff. I just returned from Costco with two pounds of organic garlic that cost me 3 cents or something. I love it. But in the case of energy, low prices decrease the value of energy efficiency investments and make you very much exposed to big welfare losses when prices are suddenly high! That 48 gallon gas tank on your inefficient Ford Super Duty you use to drop Timmy off at daycare is really expensive, while Meredith smiles all the way to Giannini in her efficient 2007 Prius and Gernot is sending snark your way from his high saddle on the lower West Side Bike path.
Increasing Energy Security
The paper goes through a number of non-economic considerations, which are of course important and I would encourage you to read the paper! But I want to get to the solutions part. If a tax is not the right prescription, what is? Easy.
- Pushing on instruments to decrease the energy intensity of sectors is key. The perfect cocktail here starts with a healthy dose of pricing the actual externalities of fossil fuels, and pushing on cost effective policies that improve the energy efficiency of the economy, which brings us back to the famous energy efficiency gap literature aptly summarised here. R&D certainly plays a key role here. If we can get the same service, while consuming less energy, we feel less pain when energy supplies are disrupted.
- Diversifying the portfolio of fuels is another suggestion. If you rely on a single fuel its source gets disrupted, you are more screwed than if your economy relies on a variety of fuels. This is of course easier said than done. I see you Hawaii and Japan.
- Investing in infrastructure to make sure fuels can get there in times of need is another key aspect. This includes pipelines, but is mostly going to involve the complex task of grid planning and running big wires to plan for times of local shortages in a future grid that powers a largely electrified economy.
- Stockpiling. Most economists are not huge fans of the Strategic Petroleum Reserve, but the government can of course buy fossils when prices are low. My understanding is that in the case of oil, this is largely political ribbon cutting since in order to affect global prices, you would have to stockpile unfeasibly large amounts of oil.
I will make Gib’s last point my conclusion. The solution to this is to get off the junk as quickly and efficiently as we can. Not cold turkey, but quickly. In the long run, countries with significant resources of renewable energy will likely reap massive energy security benefits by exploiting those and not having to rely on the despots of the world to keep the lights on. This is an agenda item that the climate parts of Build Back Better were key to. Not doing anything along these lines puts America’s energy security at risk, no matter your political preferences.
On a personal note, hug your kids if you have them. Call your family and check in on them. We are all rattled by what is going on in Europe, Syria and simply too many places on top of the pandemic. If you need to chat, reach out to someone (including me). And help however much you can.
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the Energy Institute at Haas, part of the University of California, Berkeley.
This article is published with permission
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas