International “Marshall Plan” on Technology Investment Key to Energy Security and Environmental Protection

ACCF Chief Economist Says if Mandatory Regulations are Deemed Necessary, Policymakers Should Focus on Carbon Tax, Rather Than Cap and Trade System

International partnerships with developing nations that encourage investments in clean energy technologies and have profit potential are the key to energy security, environmental protection and reduction in global energy poverty. Lawmakers should focus on policies that encourage investment rather than regulatory mandates, according to congressional testimony today by American Council for Capital Formation (ACCF) Senior Vice President and Chief Economist Dr. Margo Thorning.

“Energy security and environmental protection go hand in hand with economic growth,” Thorning said. “To be successful on both fronts, international partnerships encouraging investment with profit potential in clean fossil energy, renewable energy and distributed generation and transmission will provide the necessary incentives without mandates to reduce greenhouse gas emissions.”

Testifying before the U.S. Senate Subcommittee on Private Sector and Consumer Solutions to Global Warming and Wildlife Protection, Thorning pointed to energy trends showing that, absent sharp changes in consumption and technological breakthroughs, fossil fuels will remain the global dominant source of energy through 2030. Rising oil and gas demand, if unchecked, will accentuate vulnerability to a severe supply disruption and resulting price shock. Meeting the world’s growing hunger for energy will require over $20 trillion in investment (in 2005 dollars) over the next 25 years.

These global energy demands also make environmental efforts to reduce greenhouse gas emissions through a cap and trade system very unrealistic. Thorning provided multiple examples of European emissions data as well as anecdotal reports that demonstrate the inefficiencies of Kyoto protocol. The European Environmental Agency’s latest projections show that without strong new measures, the EU 15’s greenhouse gas emissions will be 7.4 percent above 1990 levels in 2010, rather than 8 percent below as required by the Kyoto Protocol.

In the U.S., a fixed cap on emissions will inevitably collide with population growth; the EU-15 countries are having difficulty meeting their Kyoto targets under negligible population growth. In fact, if the U.S. adopts emission caps, higher energy prices will make U.S. industry less competitive vis-à-vis China and India. As a result, China and India, whose primary focus is economic growth, will see it in their interest to accelerate the development of industries that depend on a competitive advantage in energy prices.

Should policymakers determine that a mandatory approach to reduction of greenhouse gases is necessary, serious consideration should be given to implementing a carbon tax rather than an EU style cap and trade system. A key component of any mandatory U.S. program should be allowing emissions to increase as both economic growth and U.S. population increase.

Thorning stressed again that incentive-based international partnerships with major developing nations, rather than mandates, are critical to succeed. The agreement reached at the recent G-8 Summit shows promise. The Asia Pacific Partnership on Clean Development and Climate is a practical model focusing on sector-specific technologies to increase energy efficiency and reduce emissions. Extending the framework of the AP6 to other major emitters will allow developed countries to focus their efforts where they will get the largest return, in terms of emission reductions for the least cost. By focusing on the key emitters, developed countries may find they have more resources for promoting both energy security of supply and reducing global energy poverty. The voluntary nature of private sector actions in the AP6 underscores the need for institutional reform to turn potentially profitable investments into real projects that will help reduce emissions.

“The Marshall Plan is a good historical model for tackling global energy and environmental issues,” Thorning concluded. “After World War II, Europe pledged various actions with investments provided by the U.S. When it made good on those pledges, the program was extended and broadened. Members of the Asia Pacific Partnership could undertake the same approach. Future actions by Australia, Japan and the United States desired by China and India would be contingent on success in implementing near term reforms agreed in the process.”