Tuesday, May 27, 2008

Coal-Cap Disaster

Tuesday’s Wall Street Journal strongly editorializes against the Warner-Lieberman cap-and-trade plan that allegedly will solve our alleged problem with global warming -- now called climate change. This plan is very similar to the one Sen. John McCain announced two weeks ago. The Journal argues that cap-and-trade “would impose the most extensive government reorganization of the American economy since the 1930s,” including a huge tax increase, higher prices across-the-board, and significant losses to economic growth in the decades ahead.

But why do we need a planned economy for energy or anything else? Why not a fully deregulated free market for energy where prices allocate production and consumption?

And why not allow the current $130-a-barrel oil price to open the door to a full portfolio of energy resources, including offshore drilling, Alaska, nuclear power, oil shale, conversion of coal and natural gas to liquid fuel, and the development of so-called alternative-energy sources such as solar, wind, and various cellulosic investments (although this latter group may never contribute more than 10 percent to our energy needs)? A true free-market approach wouldn’t pick winners and losers with heavy subsidies or penalties.

Incidentally, market forces also will curb energy consumption. The rising price of crude oil and gas at the pump has already cut demand sharply. Michigan professor Mark Perry, at his great Carpe Diem blog, reports that Americans in March 2008 drove 11 billion fewer miles than they did in March 2007 -- a drop of 4.3 percent. This marks the first traffic decline since 1979 while the month-to-month percentage drop is the biggest since record keeping began in 1942. It’s also the fifth straight monthly falloff in miles driven on a year-on-year basis.

Perry correctly bemoans the fact that the U.S. is the only country in the world where policies actually limit energy supply. And it’s my contention that Gosplan-type cap-and-trade regulatory planning will sharply limit our energy resources and our economy in the decades ahead.

The Wall Street Journal notes that under Warner-Lieberman existing coal-fired power plants that currently provide about one-half of U.S. electric power will be shut down, to be replaced by new nuclear-power facilities and other alternative technologies yet to be developed. Let that idea sink in. By pulling the plug on half of our current electricity production, cap-and-trade will risk a massive undermining of the American economy, as well as our future economic and national security.

The coal story is so important simply because the U.S. has massively undeveloped coal resources. With 27 percent of the world’s coal reserves estimated at 270 billion tons, the U.S. is the Saudi Arabia of coal. And yet cap-and-trade would destroy this critical sector.

New coal technologies being developed right now wouldn’t even be allowed to flourish under cap-and-trade. Synthetic-fuel-developed coal, through the Fisher-Tropsch technology, is a proven gas-to-liquid process that sequesters coal carbon. It could power the American economy for generations. Rentech Corp. is already using this process to create an ultra-low carbon and sulfur liquid that can be easily adapted to all our transportation needs. According to the ESS Environmental company, other chemical-based technologies that produce virtually no carbon emissions also could be used.

But the great risk is that cap-and-trade will stop these technologies dead in the water, right in their tracks. That would be a tragedy.

Sen. McCain, who favors cap-and-trade, has not yet spoken directly to the coal issue, or for that matter to the various ways that coal and natural gas can be liquefied and turned into clean fuel. But this could be an important political point for McCain.

Economist Jerry Bowyer has circulated a map of U.S. coal deposits that shows a proliferation of coal in key swing states such as Kentucky, West Virginia, Ohio, and Pennsylvania. Much has been written about Hillary Clinton’s ability to attract white, culturally conservative, working-class voters who have massively rejected Barack Obama. Various polls strongly suggest that McCain can capture as much as 20 or even 25 percent of these votes and thereby defeat Obama in November. But the Appalachian coal people may have a hard time swallowing cap-and-trade, which in effect would cap coal, their jobs, and their livelihoods.

To be sure, Obama also favors cap-and-trade, so McCain could win the vote anyway on the cultural grounds of traditional family values, religious faith, pro-war patriotism, and pro-gun individualism. But unless Sen. McCain can address clean-coal development and somehow carve out allowances for it, he may have a much tougher time moving the carbon working class into his column this November.

For McCain, bad carbon economics could lead to even worse carbon politics.