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Op-ed

Will the New Climate Bill Damage US Energy Security?

by Trevor Houser, Peterson Institute for International Economics
and Michael A. Levi, Council on Foreign Relations

Op-ed on Slate.com
June 15, 2010

© Washington Post


Few groups have been more strident in their opposition to cap-and-trade legislation than the US Chamber of Commerce. Last year, four prominent members of the powerful business lobby, including Exelon Corporation and Pacific Gas & Electric, quit on account of its obstructionist approach to climate policy. When some activists announced, in a prank press conference, that the chamber would throw its weight behind an ambitious climate bill, the group responded with a lawsuit.

In arguing against cap and trade, the chamber has repeatedly advanced the notion that such legislation would harm US energy security in some fashion or another. So last month, when the chamber's Institute for 21st Century Energy announced that it had created a comprehensive new index of "Energy Security Risk"—a tool designed "to track shifts in US energy security over time and assess potential impacts of new policies"—we wondered whether its calculations might be applied to the most recent energy and climate change policy proposals. In other words, what would the chamber's own definition of energy security say about the cap-and-trade bills the group so consistently opposes?

To find out, we ran the numbers on the clean energy and climate change bill unveiled by Senators Kerry and Lieberman last month. We found that, according to the chamber's own definition of energy security risk, the bill would help America—nearly across the board.

Passage of the [Kerry-Lieberman] legislation would slow the initial increase in the risk index predicted by the US Chamber of Commerce, and by 2030, the risk index would be at least 8 percent lower than it would be otherwise.

Energy security is notoriously difficult to define and thus serves as the perfect weapon for attacking legislation: Just pick a bill, find a random but scary-looking detail (higher electricity prices!), and then claim that it will put the homeland in danger. This is an established tool in the chamber's arsenal. The group's website declares that it "will work to discourage ill-conceived climate change policies and measures that could severely damage the security and economy of the United States."

Now the chamber's new "Index of US Energy Security Risk" assigns some firm numbers to a slippery concept. It combines 37 factors that measure how our energy use affects the economy and national security. For example, one determines the security of global oil supplies by looking (in part) at whether oil is being produced in countries with free or repressive governments; another measures how much energy the United States uses to produce a dollar of GDP; a third evaluates the diversity of the US power plant fleet, since greater variety tends to make us more resilient to unexpected events.

With these definitions in hand, we now have a way to calculate what the chamber should really think about the Kerry-Lieberman bill. How would cap-and-trade affect these 37 factors and the country's energy security risk? In 2009, the group's index was at 83.7. (Higher scores indicate greater risk.) The chamber predicts how the index will evolve in the future by using projections from the Department of Energy's 2009 Annual Energy Outlook, along with some related data from another US government publication. In the absence of any new US policies, they say, the index will rise by 18 percent between today and 2020—from 83.7 to 98.8—before declining slightly through 2030.

We started our own work by making sure we could reproduce the chamber's predictions using data from the Annual Energy Outlook that they reference in their report. It took some careful calibration to match the chamber's numbers, but we ultimately achieved better than a 99 percent match. Having validated our approach, we then simulated the effect of the Kerry-Lieberman bill on US and global energy systems over the next two decades using the same modeling system that the government uses to produce the Annual Energy Outlook. (A complete analysis of the bill can be found here. Extensive detail on our methods and assumptions in applying this analysis to the chamber's index, and complete results, can be found here.)

Our simulations show a marked decrease in US energy security risk under the Kerry-Lieberman bill. Passage of the proposed legislation would slow the initial increase in the risk index predicted by the chamber, and by 2030, the risk index would be at least 8 percent lower than it would be otherwise.

There is no single reason why the bill delivers this result, but there are a few critical factors. Kerry-Lieberman would encourage people to conserve energy, which would reduce US exposure to volatile global oil and gas markets; it would boost production of alternative energy (including nuclear power); and it would cut US emissions, making the United States less vulnerable to international environmental pressure. The chamber measures energy security risk in four dimensions: geopolitics, economics, the environment, and the reliability of energy supplies. (The overall index is a combination of these.) Kerry-Lieberman wins on every count, with geopolitical risk falling 7 percent, economic and reliability risk each dropping 5 percent, and environmental risk declining by a whopping 19 percent.

To be sure, not everything comes out rosy. Four of 37 security factors get worse with the bill: energy expenditures per unit GDP, energy expenditures per household, retail electricity prices, and security of world natural gas production. That's because most energy would become a bit more expensive under cap and trade, and because US natural gas production would decline slightly under the bill. On the other hand, energy security would improve for 19 factors, including measures as varied as crude oil prices (down 5 percent), the diversity of US power plants (way up because of more nuclear and renewable energy), and the security of US natural gas imports (which would drop to zero by 2030).

Indeed, our analysis likely underestimates the bill's virtues. Take just one example: Among the chamber's 37 energy security factors is a measure of federal spending on energy and science research and development—the greater the spending, the lower the energy security risk. The chamber assumes that such spending will never increase. The Kerry-Lieberman bill, though, devotes $4 billion per year between 2013 and 2030 to precisely that purpose. Had we included that change, we would have predicted an even lower energy security risk with the bill. Moreover, on a few occasions, we could not precisely reproduce the chamber's methods, since some parts of the US government models they rely on are confidential; in each of those cases, we made sure to underestimate the value of the bill. Finally, our modeling of the Kerry-Lieberman bill assumes no improvement in efficiency standards for cars and trucks beyond the increase currently scheduled through 2016, despite language in the bill directing the administration to continue ratcheting up those standards in the years ahead.

When Senators Kerry and Lieberman introduced their bill last month, the chamber surprised many observers by announcing that it would carefully study the legislation before pronouncing judgment. It also laid down an important marker: "It will be critical," the group noted in a press release, "to determine how this bill will impact a broad range of industries as well as America's energy security." The new index is not the only way to measure energy security risk. But if the chamber believes in its own system, it should stop warning of the dangers of cap and trade and start touting the security benefits that Kerry-Lieberman would bring to America.


RELATED LINKS

Policy Brief 11-10: America’s Energy Security Options June 2011

Policy Brief 10-12: Assessing the American Power Act: The Economic, Employment, Energy Security, and Environmental Impact of Senator Kerry and Senator Lieberman’s Discussion Draft May 2010

Working Paper 10-6: Toward a Sunny Future? Global Integration in the Solar PV Industry May 2010

Policy Brief 09-19: The 2008 Oil Price "Bubble" August 2009

Paper: China Energy: A Guide for the Perplexed May 2007

Policy Brief 09-17: The Economics of Energy Efficiency in Buildings August 2009

Testimony: Structuring a Green Recovery: Evaluating Policy Options for an Economic Stimulus Package January 15, 2009

Policy Brief 09-18: Setting the NAFTA Agenda on Climate Change August 2009

Article: German Leadership and the Pursuit of Energy Security in a Global Economy December 2006

Paper: The Russian Economy: More than Just Energy? April 2009

Speech: Energy Security through Diversity March 23, 2010

Speech: Oil Markets: Principles, Perceptions, and Prices July 29, 2008

Speech: Managing Energy Insecurity February 23, 2005