The economics of clean energy: how to spur growth by fixing oil prices

In case you haven’t heard, the United States is the world’s second largest producer of carbon emissions, one of the main drivers of the greenhouse effect. Forty percent of our carbon emissions come from the generation of electricity through fossil-fuel powered generators, such as coal, natural gas, and petroleum-fired plants. The second largest source of carbon emissions is transportation, which contributes roughly 33% of our greenhouse gases. I’ve heard a lot recently about how the U.S. is developing and utilizing more clean and renewable energy sources, reducing the amount of greenhouse gases we’re emitting into the atmosphere. That might be true, but I don’t think the figures people are touting are very significant. I’ve heard some cite a reduction in petroleum consumption over the last four years as evidence that we’re “going green”, but that reduction is more likely due to an economic slump that stifled production than an increase in clean energy. Moreover, we’re expected to reverse that trend in 2010 as economic growth spurs production. So I asked, is the current allocation of clean energy sources enough to offset our growth and demand for energy? To find out, I went straight to the source: the U.S. Energy Information Administration (EIA).

According to the EIA, about 11% of our electricity generation comes from clean energy sources, those that generate little to no greenhouse gases. 6.6% of clean energy is hydroelectric, and 4.4% comes from so-called renewable sources (biomass, geothermal, solar, and wind). Let’s ignore nuclear for now because, while it doesn’t emit a whole lot of greenhouse gases, it does create nuclear waste. Forecasts estimate that our thirst for electricity and growth will result in an increase in fossil fuel generated CO2 emissions of 3.4% in 2010, which means that our current level of production of clean energy is not enough to even offset our own growth.

Percent change in CO2 emissions from previous year

So why aren’t more companies generating clean energy? There’s tons of viable alternatives, from solar power to generate electricity, to biofuels to run our vehicles. One of the main reasons more of these technologies aren’t being employed or developed is because of price instability – not of clean energy prices, but of oil. Let’s consider biofuels as an alternative to oil, from which petroleum, diesel, and gasoline are created. Every company producing biofuel has to bring their product to market at a price that generates profit. Assuming all other factors are equal, buyers will buy whatever product is cheapest. Throw in oil as an option, and the clean energy companies have problems. Now, oil is not necessarily the cheapest product. In fact, its prices fluctuate wildly; but therein lies the problem: the drastic fluctuations of oil prices stifle entrepreneurship and growth in the biofuel industry. A biofuel company might be able to bring a product to market at a stable price, but competing with a product (oil) whose price can fluctuate as much as 25% in two months, that company never knows if it will remain cost-competitive for more than sixty days.

Take a look at this graph of crude oil and gasoline prices over the last six years. The price of crude oil is in red and the average price of gasoline in the U.S. is in blue.

Crude oil prices over last 6 years

A biofuel company could be competitive in 2007 as oil prices increased, but it would go out of business when oil prices dropped, as they did in mid 2008. From a new company’s standpoint, it could be profitable one month, and two months later have no buyers. So how can we expect new clean energy companies to be created when their ability to remain competitive is extremely volatile? We can’t.

However, there’s an interesting idea floating around that could foster growth in the clean energy field. Not that it will happen, but it’s an interesting one: to fix crude oil prices in the U.S. There’s two ways to do this. Let’s pick an arbitrary number, say $65/barrel. In the first method, if the global price per barrel goes above that amount, the U.S. government will subsidize the cost. The second way is to instate a non-revenue tax on oil. If the global price for oil falls below $65/barrel, we tax the oil so it remains at $65. If the price goes above $65, the tax is removed. Either way, stabilizing the price of oil would vitalize the clean-energy industry and foster new growth because companies wouldn’t have to worry about being cost-competitive in an unstable market. If they can bring biofuel or other clean energy to market below an equivalent cost of $65/barrel for oil, they will be profitable. Period.

It’s an interesting theory. One that makes you think a lot about how an unstable global market can have an impact on something so seemingly obvious as “we need to use more clean energy”. Juan Enriquez mentions this idea at a TED conference in 2007. If you want to watch him talk about it, click here for the TED talk and fast forward to about 16:40.

Sources:

http://seattletimes.nwsource.com/html/nationworld/2003732690_carbon03.html

http://www.eia.doe.gov/steo/contents.html#Carbon%20Dioxide%20Emissions

http://www.eia.doe.gov/cneaf/electricity/epm/epm_sum.html

http://www.gasbuddy.com/gb_retail_price_chart.aspx

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