Environmentalists support a major phase-down of fossil fuels (with the near-term excep-tion of natural gas) and substitution of favored“nonpolluting” energies to conserve depletableresources and protect the environment. Yet ener-gy megatrends contradict those concerns. Fossil-fuel resources are becoming more abundant, notscarcer, and promise to continue expanding astechnology improves, world markets liberalize,and investment capital expands. The conversionof fossil fuels to energy is becoming increasinglyefficient and environmentally sustainable inmarket settings around the world. Fossil fuelsare poised to increase their market share if envi-ronmentalists succeed in politically constraininghydropower and nuclear power.

Artificial reliance on unconventional energiesis problematic outside niche applications.Politically favored renewable energies for gener-ating electricity are expensive and supply con-strained and introduce their own environmentalissues. Alternative vehicular technologies are, at

best, decades away from mass commercializa-tion. Meanwhile, natural gas and reformulatedgasoline are setting a torrid competitive pace inthe electricity and transportation markets,respectively.

The greatest threat to sustainable energy forthe 21st century is the global warming scare.Climate-related pressure to artificially con-strain use of fossil fuels is likely to subside inthe short run as a result of political constraintsand lose its “scientific” urging over the longerterm. Yet an entrenched energy intelligentsia,career bureaucrats, revenue-seeking politicians,and some Kyoto-aligned corporations supportan interventionist national energy strategybased on incorrect assumptions. A “realitycheck” of the increasing sustainability of con-ventional energy, and a better appreciation ofthe circumscribed role of backstop technolo-gies, can reestablish the market momentum inenergy policy and propel energy entrepreneur-ship for the new millennium.

The Increasing Sustainabilityof Conventional Energy

by Robert L. Bradley Jr.

Robert L. Bradley Jr. is president of the Institute for Energy Research in Houston, Texas, and an adjunct scholar ofthe Cato Institute. An earlier version of this paper was presented at the 17th Congress of the World Energy Councilin Houston, Texas, in September 1998.

Executive Summary

April 22, 1999No. 341

Introduction

Joseph Stanislaw of Cambridge EnergyResearch Associates envisions the energycompany of the 21st century operating undertwo essential assumptions:

• Oil, gas, and coal are virtuallyunlimited resources to be used inany combination.

• “Supply security” becomes ”envi-ronmental security.” Technologyhas made it possible to burn allfuels in an environmentallyacceptable manner.1

Although overshadowed by the post-Kyoto interest in carbon-free energy sources,the technology of fossil-fuel extraction, com-bustion, and consumption continues torapidly improve. Fossil fuels continue to havea global market share of approximately 85percent,2 and all economic and environmen-tal indicators are positive. Numerous techno-logical advances have made coal, natural gas,and petroleum more abundant, more versa-tile, more reliable, and less polluting thanever before, and the technologies are beingtransferred from developed to emerging mar-kets. These positive trends can be expected tocontinue in the 21st century.

Unconventional energy technologies bydefinition are not currently competitive withconventional energy technologies on a sys-temic basis. Oil-based transportation holds asubstantial advantage over vehicles poweredby electricity, natural gas, propane, ethanol,methanol, and other energy exotics in almostall world markets. In the electricity market,natural gas combined-cycle generation has acommanding lead over the three technolo-gies most supported by environmentalists—wind, solar, and biopower—even after correct-ing for the estimated cost of negative exter-nalities.3 Where natural gas is not indige-nous, liquefied natural gas is becoming asubstitute fuel of choice. In less developednations such as China and India, oil and coaloften set the economic standard as a central-

station electricity source, not biopower andintermittent alternatives such as energy fromsunlight and naturally blowing wind.

Can the unconventional energies favoredby the environmental lobby to meet the emis-sion-reduction targets of the Kyoto Protocol(essentially requiring the United States toreduce fossil-fuel emissions by one-third by2012) mature into primary energy sources inthe next decades or later in the 21st century?Or will such alternatives continue to be sub-sidy dependent in mature markets and nicheor bridge fuels in remote or embryonic mar-kets? This study addresses those questions,

The first section examines trends in fossil-fuel supply and concludes that, contrary topopular belief, fossil fuels are growing moreabundant, not scarcer, a trend that is likely tocontinue in the foreseeable future.

The second section investigates the “nega-tive externalities” of fossil-fuel consumptionand finds that they are largely internalizedand becoming more so. Thanks to techno-logical advances and improved practices,environmental quality has continued toimprove to such an extent that increased fossil-fuel consumption is no longer incompatible withecological improvement. Moreover, America’sreliance upon imported oil should not be ofmajor foreign policy or economic concern.

The third section considers the econom-ic competitiveness of non-fossil-fuel alter-natives for electricity generation and findsthat a national transition from natural gas,coal, oil, and nuclear power to wind, solar,geothermal, and biomass is simply not con-ceivable today or in the near term ormidterm without substantial economic andsocial costs.

The fourth section examines the eco-nomic competitiveness of non-fossil-fuelalternatives for transportation markets andconcludes that rapidly improving gasoline-based transportation is far more economi-cally and socially viable than alternative-fueled vehicles for the foreseeable future.

The fifth section examines America’sfailed legacy of government intervention inenergy markets and concludes that environ-

2

Natural gascombined-cycle

generation has acommandinglead over the

three technologiesmost supported byenvironmentalists.

mentalists and some energy planners havefailed to learn the lessons of the past.

The sixth section investigates the scienceof global warming and the economics ofreducing greenhouse gas emissions. Theissue is important because many analystsbelieve that only by significantly reducing theuse of fossil fuels can we stop global warm-ing. The magnitude, distribution, and timingof anthropogenic warming, however, contra-dict the 1980s and early 1990s case for alarmabout climate. Furthermore, the cost of dis-placing fossil fuels with politically correctrenewable alternatives is so steep that thecosts of preventing anthropogenic warmingswamp the benefits.

The Growing Abundanceof Fossil Fuels

Only a few years ago academics, busi-nessmen, oilmen, and policymakers werealmost uniformly of the opinion that the

age of energy scarcity was upon us and thatthe depletion of fossil fuels was imminent.4

While some observers still cling to that viewtoday, the intellectual tide has turnedagainst doom and gloom on the energyfront. Indeed, resource economists arealmost uniformly of the opinion that fossilfuels will remain affordable in any reason-ably foreseeable future.

Resources As Far As the Eye Can SeeProven world reserves of oil, gas, and coal

are officially estimated to be 45, 63, and 230years of current consumption, respectively(Figure 1). Probable resources of oil, gas, andcoal are officially forecast to be 114, 200, and1,884 years of present usage, respectively.5

Moreover, an array of unconventionalfossil-fuel sources promises that, whencrude oil, natural gas, and coal becomescarcer (hence, more expensive) in thefuture, fossil-fuel substitutes may still bethe best source fuels to fill the gap beforesynthetic substitutes come into play.

3

230

63 45

1884

200114

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Proved Reserves

Probable Resources

Figure 1World Fossil-Fuel Reserves and Resources

Proved ReservesProbable Resoures

Sources: U.S. Department of Energy; Oil & Gas Journal; World Oil; Enron Corp.;World Energy Council.

Coal Natural Gas Crude Oil

The most promising unconventional fos-sil fuel today is orimulsion, a tarlike sub-stance that can be burned to make electricityor refined into petroleum. Orimulsionbecame the “fourth fossil fuel” in the mid-1980s when technological improvementsmade Venezuela’s reserves commerciallyexploitable. Venezuela’s reserve equivalent of1.2 trillion barrels of oil exceeds the world’sknown reserves of crude oil, and other coun-tries’ more modest supplies of the naturalbitumen add to the total.

With economic and environmental (post-scrubbing) characteristics superior to thoseof fuel oil and coal when used for electricitygeneration, orimulsion is an attractive con-version opportunity for facilities located nearwaterways with convenient access toVenezuelan shipping. While political opposi-tion (in Florida, in particular) has slowed theintroduction of orimulsion in the UnitedStates, orimulsion has already penetratedmarkets in Denmark and Lithuania and, to alesser extent, Germany and Italy. India couldsoon join that list. Marketing issues aside,this here-and-now fuel source represents anabundant backstop fuel at worst and a signif-

icant extension of the petroleum age at best.6

The significance of orimulsion for theelectricity-generation market may bematched by technological breakthroughscommercializing the conversion of naturalgas to synthetic oil products. For remotegas fields, gas-to-liquids processing canreplace the more expensive alternative ofliquefaction. In mature markets with airquality concerns, such as in California, nat-ural gas could become a key feedstock fromwhich to distill the cleanest reformulatedgasoline and reformulated diesel fuel yet.7 Ahalf dozen competing technologies havebeen developed, several by oil majors whoare committing substantial investments rel-ative to government support. The wide-spread adaptation of gas-to-oil technolo-gies could commercialize up to 40 percentof the world’s natural gas fields that hither-to have been uneconomic.8

In addition to orimulsion and synthesizednatural gas, tar sand, shale oil, and variousreplenishable crops also have great promise,however uneconomic they now are, giventoday’s technology and best practices (Figure2).9 Michael Lynch of the Massachusetts

4

CrudeOil

Orimulsion

Synthetic Oil

Agricultural Oils

Conventional

Nonconventional

“Depletable”

Infinite

Figure 2Resource Pyramid: Oil

Institute of Technology estimates that morethan 6 trillion barrels of potentially recover-able conventional oil and another 15 trillionbarrels of unconventional oil (excluding coalliquefaction) are identifiable today, an esti-mate that moves the day of reckoning forpetroleum centuries into the future.1 0

The gas resource base is similarly loadedwith potential interfuel substitutions, withadvances in coal-bed methane and tight-sandsgas showing immediate potential and synthet-ic substitutes from oil crops having long-runpromise (Figure 3). If crude oil and naturalgas are retired from the economic playingfield, fossil fuels boast a strong “bench” ofclean and abundant alternatives. Even thecautious Energy Information Administrationof the U.S. Department of Energy concededthat “as technology brings the cost of pro-ducing an unconventional barrel of oil closerto that of a conventional barrel, it becomesreasonable to view oil as a viable energysource well into the twenty-second century.”1 1

Technological Advances andIncreasing Resources

Despite a century of doom and gloom

about the imminent depletion of fossil-fuelreserves, fossil-fuel availability has beenincreasing even in the face of record con-sumption. World oil reserves today aremore than 15 times greater than they werewhen record keeping began in 1948; worldgas reserves are almost four times greaterthan they were 30 years ago; world coalreserves have risen 75 percent in the last 20years.1 2 Thus, today’s reserve and resourceestimates should be considered a mini-mum, not a maximum. By the end of theforecast period, reserves could be the sameor higher depending on technologicaldevelopments, capital availability, publicpolicies, and commodity price levels.

Technological advances continue to sub-stantially improve finding rates and individ-ual well productivity.1 3 Offshore drilling wasonce confined to fields several hundred feetbelow the ocean, for instance, but offshoredrilling now reaches depths of several thou-sand feet. Designs are being considered fordrilling beyond 12,000 feet.1 4

Predictably, advances in production tech-nology are driving down the cost of findingoil. In the early 1980s finding costs for new

5

NaturalGas

Gasified Coal

Gas Hydrates

Synthetic Gas

Conventional

Nonconventional

“Depletable”

Infinite

Figure 3Resource Pyramid: Gas

crude oil reserves averaged between $11.50and $12.50 per barrel in the United Statesand most areas of the world. In the mid-1990s finding costs had fallen to around $7per barrel despite 40 percent inflation in theinterim. In the United States alone, findingcosts dropped 40 percent between 1992 and1996.1 5That is perhaps the best indicator thatoil is growing more abundant, not scarcer.

Finally, the amount of energy needed toproduce a unit of economic goods or serviceshas been declining more or less steadily.1 6Newtechnologies and incremental gains in pro-duction and consumption efficiency makethe services performed by energy cheapereven if the original resource has grownmore (or less) expensive in its own right.1 7

Understanding Resource AbundanceHow is the increasing abundance of fossil

fuels squared with the obviously finite natureof those resources?1 8 “To explain the price ofoil, we must discard all assumptions of afixed stock and an inevitable long-run riseand rule out nothing a priori,” says M. A.Adelman of MIT. “Whether scarcity has beenor is increasing is a question of fact.Development cost and reserve values are bothmeasures of long-run scarcity. So is reservevalue, which is driven by future revenues.”1 9

Natural resource economists have beenunable to find a “depletion signal” in thedata. A comprehensive search in 1984 bytwo economists at Resources for the Futurefound “gaps among theory, methodology,and data” that prevented a clear delineationbetween depletion and the “noise” of tech-nological change, regulatory change, andentrepreneurial expectations.2 0 A morerecent search for the depletion signal byRichard O’Neill et al. concluded:

Care must be taken to avoid theseductiveness of conventional wis-dom and wishful thinking. While thetheory of exhaustible resources isseductive, the empirical evidencewould be more like the bible story ofthe loaves and fishes. What matters is

not exhaustible resource theories(true but practically dull) but gettingsupply to market (logistics) withoutdisruption (geopolitics). While it iseasy to see how political events maydisrupt supply, it is hard to contrivean overall resource depletion effect onprices.

2 1

The facts, however, are explainable. SaysAdelman:

What we observe is the net result oftwo contrary forces: diminishingreturns, as the industry moves fromlarger to smaller deposits and frombetter to poorer quality, versusincreasing knowledge of science andtechnology generally, and of localgovernment structures. So far,knowledge has won.2 2

Human ingenuity and financial where-withal, two key ingredients in the supplybrew, are not finite but expansive. The mostbinding resource constraint on fossil fuels isthe “petrotechnicals” needed to locate andextract the energy.2 3 Congruent withAdelman’s theory, wages in the energy indus-try can be expected to increase over time,while real prices for energy can be expectedto fall under market conditions. Under polit-ical conditions such as those that existedduring the 1970s, however, the record ofenergy prices can be quite different.

There is no reason to believe that energyper se (as opposed to particular energysources) will grow less abundant (moreexpensive) in our lifetimes or for futuregenerations. “Energy,” as Paul Ballonoff hasconcluded, “is simply another technologi-cal product whose economics are subject tothe ordinary market effects of supply anddemand.”2 4 Thus, a negative externality can-not be assigned to today’s fossil-fuel con-sumption to account for intergenerational“depletion.” A better case can be made thata positive intergenerational externality iscreated, since today’s base of knowledge

6

Fossil-fuel avail-ability has been

increasing even inthe face of record

consumption.

and application subsidizes tomorrow’sresource base and consumption.

The implication for business decision-making and public policy analysis is that“depletable” is not an operative concept forthe world oil market as it might be for anindividual well, field, or geographical section.Like the economists’ concept of “perfectcompetition,” the concept of a nonrenewableresource is a heuristic, pedagogical device—anideal type—not a principle that entrepreneurscan turn into profits and government offi-cials can parlay into enlightened interven-tion. The time horizon is too short, and tech-nological and economic change is too uncer-tain, discontinuous, and open-ended.

The Shrinking (Negative)Externalities of Fossil-fuel

Consumption

Fossil fuels are not being depleted andwill probably continue to grow even moreplentiful for decades to come. But now thatthe traditional rationale for a government-assisted transition to unconventional fuelsis removed, new rationales have arisen.Does our reliance on imported oil risk thenation’s economic security? Is not fossil-fuel consumption at the heart of most envi-ronmental problems, and can we “save” theenvironment only by repairing to uncon-ventional energies? This section examinesthose questions and finds that the econom-ic and environmental externalities of fossil-fuel consumption are vastly overstated anddwindling in importance.

The Chimera of Energy SecurityAlthough the underlying physical stock

of crude oil has always been plentiful, crit-ics can point to interruptions in oil importsto the United States and other net import-ing regions as the operative constraint.Energy security became a concern in theUnited States and other industrializednations with the “oil shocks” and oil prod-

uct shortages of 1973–74 and 1979.Enhancing “energy security” has been amajor mission of the U.S. Department ofEnergy and the International EnergyAgency of the Organization for EconomicCooperation and Development ever sincethe troubled 1970s.

Energy security, like resource exhaustion,has proven to be an exaggerated rationale forgovernment intervention in petroleum mar-kets (such as emergency price and allocationregulation, publicly owned strategic oilreserves, international contingency supply-sharing agreements, and crash programs tofund new electricity sources or transporta-tion alternatives). The lesson from the 1970senergy crises is that government price andallocation regulation can turn the process ofmicroeconomic adjustment to higher energyprices into a “macroeconomic” crisis of phys-ical shortages, industrial dislocations, lostconfidence, and social instability.2 5 The “oilcrises that were not,” during the Iran-IraqWar of 1980–81 and the UN ban on Iraqi oilexports of a decade later, demonstrated thatfreer markets can anticipate and amelioratesudden supply dislocations without physicalshortages, the need for price and allocationregulation, or strategic petroleum reservedrawdowns.2 6

The international petroleum market issubject to geopolitics, which will occasional-ly lead to supply disruptions and temporari-ly higher world prices. But the risk of higherprices must be balanced with the normalcyof price wars and a “buyers’ market,” givenan abundant resource base and natural pecu-niary incentives to find and market hydro-carbons. Markets learn, adjust, and improveover time as technology and wealth expand.“Market learning” from the 1970s has result-ed in increased energy efficiency; greaterdiversity of supply; enlarged spot-markettrading, futures trading, and risk manage-ment; and greater integration and alignmentof producer interests with consumer inter-ests.2 7 Future oil crises like those of the 1970sare highly improbable because of the amelio-rating effects of the new market institutions.

7

“Depletable” isnot an operativeconcept for theworld oil market.

Transient price flare-ups as a result of politi-cally driven supply reductions are, of course,possible. In the developed world, such“worst-case” events for motorists are notqualitatively, or even quantitatively, differentfrom abnormally cold winters for naturalgas consumers and abnormally hot sum-mers for electricity users. They are transienteconomic burdens, not macroeconomic ornational security events worthy of proactive“energy policy.”

World oil markets are more fluid andefficient than ever before, and this improve-ment can be expected to continue as moreeconomies are liberalized in future decades.Any alleged “energy security premium,”making the social cost of oil greater than itsprivate cost, is small and largely internal-ized by the market.2 8 Thus investments suchas the U.S. Strategic Petroleum Reserve,which holds oil with an embedded cost sev-eral times the recent market price of crudeoil in present dollars, and international oil-sharing agreements in the event of a short-fall, such as those under the auspices of the

International Energy Agency, are unneces-sary, create bad incentives, and are poten-tially costly as well.

Air Pollution: A Vanishing Problem?Technology has a remarkable record not

only in unlocking, upgrading, and market-ing fossil-fuel resources but also in control-ling air emissions upon combustion. Theprogress of the United States in reducingoutdoor air pollutants is a political, techno-logical, and economic achievement that wasaccomplished despite growing industrializa-tion and robust energy usage. In the UnitedStates between 1970 and 1997 significantreductions were recorded for carbon monox-ide, volatile organic compounds, sulfur diox-ide (SO2), particulate matter, and lead. Onlynitrogen oxides (NOx) increased in that peri-od, but under the Regional Transport Ruleand Acid Rain program NOx emissions areexpected to decline2 9 (Figure 4). Summarizedthe Environmental Protection Agency,“Since 1970, national total emissions of thesix criteria pollutants declined 31 percent,

8

0

50

100

150

200

250

Carbon

Monoxide

Nitrogen Oxides Sulfur Dioxide VOCs Particulate

Matter

Lead

1970 1997

-32%

+11% -35%-38%

-25%

-98%

Figure 4U.S. Air Emissions Summary: 1970–97 (million short tons)

Source: Environmental Protection Agency.

while U.S. population increased 31 percent,gross domestic product increased 114 per-cent, and vehicle miles traveled increased 127percent.”3 0

Emission reductions by power plants andon-road vehicles have been an important partof the above improvement. Emissions of car-bon monoxide and volatile organic com-pounds from on-road vehicles dropped 43percent and 60 percent, respectively, between1970 and 1997. Emissions of particulate mat-ter from on-road vehicles fell 40 percent inthe same period. Lead emissions from vehi-cles were virtually eliminated, dropping from172 thousand short tons in 1970 to only 19short tons in 1997. Nitrogen oxide emissionsfrom vehicles fell slightly in the same 27-yearperiod. On the power plant side, while NOxemissions increased 26 percent, emissions ofSO2, particulate matter, and lead fell by 25percent, 84 percent, and 80 percent, respec-tively, between 1970 and 1997.3 1

Entrepreneurial responses to future airquality regulations can be expected toresult in improved air quality and not bestymied by technological barriers so long asthe regulations are based on sound scienceand realistic marketplace economics, notpunitive disrespect for the energy and end-use sectors.

Indoor air quality has not shown theimprovement of outdoor air quality and, infact, has worsened. State and federal energypolicies subsidizing home and building insu-lation in the name of energy conservation areat issue. Ben Lieberman explained:

Insufficiently ventilated offices andresidences use less energy for heatingand cooling . . . [but] also hold inmore airborne pollutants, such asbiological contaminants, volatileorganic compounds, and formalde-hyde. Consequently, those and othercompounds sometimes reach indoorconcentrations that can cause physi-cal discomfort, or more serious ill-nesses. Indoor air pollution and itshealth effects are in large part an

unintended consequence of theenergy efficiency crusade.

3 2

The EPA has recognized that “indoor lev-els of many pollutants may be two to fivetimes, and on occasion more than one hun-dred times, higher than outdoor levels,” animportant problem, since people spend farmore time indoors than outdoors.

3 3While

this could lead to a heavy-handed expansionof regulation in an attempt to correct theunintended consequences of previous regula-tion, it may also be addressed by relaxingbuilding codes and removing subsidies to letindividuals decide between heavy insulationand letting more (increasingly cleaner) out-side air indoors.

Cleaner ElectricityMore electricity is being produced with

less pollution in the United States despite theoldest and most polluting coal plants beingexempted from the emissions reductionsrequired under the Clean Air Act of 1990.Electricity generation increased 14 percentbetween 1989 and 1996, while NOx emis-sions increased 3 percent and SO2 emissionsfell 18 percent.3 4 Those changes resulted pri-marily from

• a one-fourth increase in nuclear out-put,

3 5

• a nearly 50 percent increase in theamount of coal being “scrubbed” byhigh-tech pollution control technolo-gies,

36 and

• a drop in sulfur content of coal (a near-ly one-half drop in sulfur content ofcoal was registered between 1972 and1994 alone).

3 7

Lower emissions from retrofitted oil andgas units, and the entry of gas plants in placeof more polluting coal units, are also impor-tant factors in pollution reduction.3 8 Theenvironmental advantages of natural gasover coal in modern facilities have led manyenvironmentalists to welcome gas as a“bridge fuel” to a “sustainable” energy mar-

9

Future oil criseslike those of the1970s are highlyimprobable.

ket, displacing coal and oil before being dis-placed itself by renewables later in the nextcentury.3 9

Natural gas combined-cycle and cogenera-tion technologies also have some environ-mental advantages over their renewablerivals. A state-of-the-art natural gas plant canfavorably compare with wind farms in termsof land disturbance, wildlife impacts, visualblight, noise, and front-end (infrastructure-related) air emissions. Back-end air emissionreductions are where wind turbines muststake their entire environmental claim.4 0

Solar farms (in contrast to distributed solarapplications) are so land intensive, resourceintensive, and economically impractical thatChristopher Flavin of the WorldwatchInstitute has stated a preference for on-sitepower generation options, including naturalgas microturbines.4 1

Coal-fired electricity generation is far lesspolluting today than it was in the 1970s.However, it originally was the most pollutingtechnology of all fossil-fuel alternatives andremains so today, relative to modern oil andnatural gas technologies. In one sense that isa problem; in another sense it is an opportu-nity for further reductions of emissions tohelp produce what is rapidly becoming anenvironmentally benign mix of electricity-generating resources as defined by environ-mental regulators themselves.

Cleaner VehiclesThe internal combustion engine and

“antiseptic automobile traffic” solved theenvironmental problem of “horse emissions”earlier this century. James Flink explained:

In New York City alone at the turn ofthe century, horses deposited on thestreets every day an estimated 2.5 mil-lion pounds of manure and 60,000gallons of urine, accounting for abouttwo-thirds of the filth that littered thecity’s streets. Excreta from horses inthe form of dried dust irritated nasalpassages and lungs, then became asyrupy mass to wade through and

track into the home whenever itrained. New York insurance actuarieshad established by the turn of the cen-tury that infectious diseases, includ-ing typhoid fever, were much morefrequently contracted by livery stablekeepers and employees than by otheroccupational groups. . . . The flies thatbred on the ever present manureheaps carried more than thirty com-municable diseases. . . . Traffic wasoften clogged by the carcasses of over-worked dray horses that dropped intheir tracks during summer heatwaves or had to be destroyed afterstumbling on slippery payments andbreaking their legs. About 15,000dead horses were removed from thestreets of New York each year. Urbansanitation departments, responsiblefor daily cleaning up of this mess,were not only expensive but typicallygraft- and corruption-ridden. . . .These conditions were characteristicin varying degree of all of our largeand medium-sized cities.

4 2

The internal combustion engine wouldcreate its own emission problems, but nearlya century after its introduction it has becomefar more environmentally benign and is con-tinually proving itself compatible withimproving environmental conditions.

Vehicle pollution has declined in recentdecades thanks to a combination of greaterfuel efficiency per vehicle, cleaner motorfuels, and onboard technological improve-ments, such as catalytic converters. Thosedevelopments mean that more cars andincreased travel mileage no longer increasepollution in the aggregate. As older cars leavethe fleet, progressively cleaner cars are takingtheir place. New passenger cars in the UnitedStates have reduced major emissions by morethan 90 percent. A newer car making the 230-mile trip from Washington, D.C., to NewYork City, for example, emits less pollutionthan a gasoline-powered lawnmower emitscutting an average-sized yard. Appreciated

10

Indoor air quali-ty has not shownthe improvement

of outdoor airquality.

another way, sports utility vehicles todayemit less pollution than small cars did sever-al decades ago.4 3

The big three domestic automakers(Chrysler, Ford, and General Motors) haveannounced a National Low EmissionVehicle program for year-2001 models (andas early as model-year 1999 in theNortheast). Those vehicles will emit, onaverage, 99 percent less smog-forminghydrocarbon emissions than cars made inthe 1960s. Car size and comfort will not beaffected. The new technology incorporatesupgraded catalytic converters, improvedcomputer engine control, and enhanced air-fuel mixtures—all for about $60 a car.4 4

The motivation for automakers to intro-duce cars that exceed federal standards is toprepare for the next generation of federalrequirements and discourage states fromimplementing zero-emission vehicle (ZEV)mandates. The only ZEV is the electric vehi-cle, which qualifies only because it is notpenalized by the air emissions associatedwith its upstream electricity-generationphase. California already has rescinded itsrequirement that 2 percent of all vehiclessold in 1998 be ZEVs and postponed itsrequirement that 5 percent of all vehiclessold in 2001 be ZEVs. The 2003 ZEVrequirement, 10 percent of all new vehiclesales, remains on the books in California asdo ZEV requirements in New York,Massachusetts, Maine, and Vermont. Theautomakers’ National Low EmissionVehicle program will apply to 45 states andany other states that abandon their ZEVrequirements.

Reformulated FuelsReformulated gasoline, coupled with

advances in internal combustion engine tech-nology, has been setting the competitivestandard for transportation energy in theUnited States since the early 1970s, and par-ticularly in the 1990s. That began on the firstday of 1992 when the California AirResources Board (CARB) of the CaliforniaEnvironmental Protection Agency required

the manufacture and sale of the nation’s firstreformulated gasoline (known as Phase 1reformulated gasoline). The new gasoline—atan incremental cost of 1 to 2 cents per gal-lon4 5—lowered Reid vapor pressure, phasedout lead, and added engine deposit controladditives. Federal gasoline regulation pur-suant to the Clean Air Amendments of 1990followed later the same year. In November1992, 39 cities in 20 states not in compliancewith the Clean Air Act began using gasolineblended with oxygenates, primarily MTBEbut also ethanol, during the four-month win-ter driving season to reduce carbon monox-ide emissions. Major East Coast cities wereprominently represented, as was the entirestate of California. An increased cost of sever-al cents per gallon and a 1 percent to 4 per-cent loss of fuel mileage initially resulted.4 6

The winter oxygenated-gasoline programof 1992 was supplemented on January 1,1995, with a federal year-round reformulatedgasoline requirement for nine areas aroundthe country with the worst ozone (summer-time urban smog) problems, as well as other“opt-in” areas. Six southern California coun-ties formed the largest geographical concen-tration in the program, and 15 other stateswere represented as well. Compared withconventional gasoline, EPA Phase 1 reformu-lated gasoline reduced benzene (a carcino-gen), lowered Reid vapor pressure specifica-tions by reducing butane, increased oxy-genates, and reduced heavy metal content.The reduction of emissions of volatile organ-ic compounds contributing to summer smogand the reduction of year-round toxic emis-sions were achieved at an initial premium of2 to 5 cents per gallon in addition to someloss in fuel efficiency. Refiners reported thechangeover as “blissfully uneventful,” whileconsumers reported no operational prob-lems with the cleaner reconstitution.4 7

The Natural Resources Defense Councilpraised the reformulated oil product:

Changing fuel formulations is anessential element to improving airquality, in part because it has immedi-

11

Reformulatedgasoline has beensetting the com-petitive standardfor transporta-tion energy in theUnited States.

ate results: it reduces dangerous airtoxics and ozone-forming substanceseven from old cars. New vehicle tech-nology, by contrast, affects the airquality slowly as new vehicles are pur-chased and older vehicles are gradual-ly retired.

4 8

Effective June 1, 1996, CARB requiredeven cleaner reformulated gasoline (knownas Phase 2 reformulated gasoline) to furtheraddress ozone precursors. Six counties insouthern California and the greaterSacramento area were subject to both EPAPhase 1 and CARB Phase 2 reformulatedgasoline requirements. The new blend wastwice as effective at reducing smog as wasEPA Phase 1 reformulated gasoline andreduced SO2 emissions as well. The addedcost was estimated at between 3 and 10 centsper gallon with a slight loss of fuel economy.That made the total estimated cost increasefor reformulated gasoline over the cost ofpre-1995 grade gasoline in Californiabetween 5 and 15 cents per gallon with a 3percent loss of fuel efficiency.

4 9Californians

were paying around 15 cents per gallon,inclusive of fuel efficiency loss, more thanthey had paid for 1980s pre-reformulatedgasoline,

5 0an “environmental premium” that

can be expected to fall over time as refinerycosts are amortized and technologyimproves. Meanwhile, southern Californiahas registered a 40 percent drop in peakozone levels since the late 1970s.

5 1

The next requirement, effective January 1,2000, will mandate the use of EPA Phase 2reformulated gasoline in all areas nowrequired to use EPA Phase 1 reformulatedgasoline. The new gasoline will reduce NOxand volatile organic compounds in particu-lar. The EPA is considering new rules (Tier 2standards) to become effective in model-year2004 or later to bring light-duty trucks(including sports utility vehicles) under thesame emission standards as passenger vehi-cles and reduce the sulfur content of gaso-line.

A federal low-sulfur reformulated diesel

program took effect for the entire countryon October 1, 1993. On the same day CARBadopted for California a tighter standardthat also required a reduction in aromatics.CARB’s clean diesel standard applied to off-road vehicles as well as to on-road vehicles.5 2

The CARB standard was calculated toreduce SO2, particulate matter, and NOxby 80 percent, 20 percent, and 7 percent,respectively, at an initial incremental cost ofaround 6 cents per gallon.5 3 Improvedengine technology, which has increased theenergy efficiency of diesel from 37 percentto 44 percent in the last 20 years, has alsoreduced emissions.54 Those improvementsmay be matched by innovations of newalliances between General Motors andAmoco and GM and Isuzu to develop clean-er diesel fuels and diesel engines, respective-ly, in the years ahead.5 5

Internationally, leaded gasoline has beenphased out of 20 countries, but high leadcontent is still common in many areas ofAsia, Africa, Latin America, and EasternEurope. As older cars with more sensitivevalve systems leave the fleet and more sophis-ticated refineries are constructed that cansubstitute other octane boosters for lead,more countries will phase out leaded gaso-line. Reformulated gasoline and diesel stan-dards are beginning to be introduced in morewealthy nations such as Finland, Sweden,Norway, Japan, and across Europe. In the2000–2005 period, Latin America andCaribbean countries will introduce standardsfor all motor fuels, and Europe is scheduledto introduce tighter standards. The cleantransportation movement is an internationalphenomenon, not just a U.S. initiative.5 6

The Controlled Problem of Oil SpillsMajor oil spills such as those at Torrey

Canyon (1967) and Santa Barbara (1969) andfrom the Valdez (1989) tainted the upstreamoperations of the oil industry as environmen-tally problematic, downstream combustionaside. Yet trends have been positive in thisarea as well. The quantity of oil spilled in U.S.waters has fallen by 67 percent in the most

12

The quantity of oilspilled in U.S.

waters has fallen by67 percent in the

last five years.

recent five years compared with the five pre-vious years when comprehensive record keep-ing began. Even subtracting the 10.8 milliongallons of oil leaked from the Valdez from thebase period, spillage fell by more than 50 per-cent. The spillage in 1996 of 3.2 million gal-lons was approximately one-thousandth of 1percent of the 281 billion gallons moved andconsumed in the United States. Moreover,what is spilled is controlled more quickly andhas less impact on the ecosystem owing toimproved cleanup technology such as biore-mediation.

5 7

Those advances have been accelerated bythe problems the industry has experienced.Just months after the Valdez accident, theAmerican Petroleum Institute, concludingthat government and industry had neither“the equipment nor the response personnelin place and ready to deal with catastrophictanker spills” in U.S. waters, recommendedforming an industrywide oil-spill responseorganization. The result was a $400 million,20-member organization—the PetroleumIndustry Response Organization—financedfrom a small fee levied on transported tankerbarrels.

5 8The group was reorganized in 1990

as the Marine Spill Response Corporation,and a $1 billion five-year commitmentensued.

5 9Federal legislation was passed (the

Oil Pollution Act of 1990) that required dou-ble hulls in new tankers operating in domes-tic waters to provide greater protection incase of accidents. Not only the local environ-ment but ecotourism is booming in PrinceWilliam Sound in Alaska thanks to themonies collected and the attention gained asa result of the Valdez oil spill.

6 0Thus, a worst-

case environmental event turned out to be atemporary problem that in the longer runhas proven positive for the local environmentand the environmental movement in theUnited States.

The Competitive Quandaryof “Green” Electricity

Unfortunately, few analysts outside the

energy field fully grasp the explosion of tech-nological advances in conventional electricitygeneration. Such progress easily compareswith the technological progress of unconven-tional energies, given that the starting pointof conventional energies was so far ahead. Soeven if the rate of improvement (or rate ofgrowth) of an unconventional technology isgreater over a certain time frame, the relativeend points are what are relevant.

To use an analogy, a weekend athletecould achieve greater improvement thancould a professional athlete as the result offull-time training for a given period of time,but it would be incorrect to infer that the rateof progress implies that the amateur’simprovement is sustainable or that the pro-fessional athlete will eventually be displaced.The same may be true today of alternativeenergy technologies, most of which havelonger histories and more competitive chal-lenges than is commonly realized in ourpoliticized context.

The Emergence of NaturalGas–Fired Technologies

Natural gas technologies are setting thecompetitive standard for all conventionalenergies in the electric market wheremethane reserves are abundant. In NorthAmerica, gas-fired combined-cycle plants cangenerate large quantities of electricity ataround 3 cents per kilowatt-hour (kWh)where demand conditions support continu-ous (“baseload”) operation.6 1 Smaller gasunits can also be constructed without a greatloss of scale economies, allowing the flexibil-ity to meet a range of market demands.6 2

Quicker construction and less capital outlayfigure into those economies.

Even as stand-alone, off-grid generators,natural gas microturbines sized from 500watts to several hundred kilowatts can pro-duce electricity for as little as 4.5 cents perkWh on a fully utilized basis where generatedsteam is utilized in addition to electricity.Moderate usage (a lower capacity factor)without cogeneration doubles the nominalcost.6 3 Rapidly improving microturbine tech-

13

Even as stand-alone, off-gridgenerators, natur-al gas microtur-bines can pro-duce electricityfor as little as 4.5cents per kWh.

nologies offer self-generating opportunitiesfor large commercial and industrial cus-tomers facing high electric rates (with orwithout a stranded cost recovery surcharge),an argument supportive of rate deregulationof the electricity grid.6 4

On the other extreme are combined-cycle plants run on liquefied natural gas.The hardware required to liquefy the gas fortanker shipment and vaporize the gas foruse in a combined-cycle plant increases thecost to around 5 cents per kWh,6 5 about 50percent more than the cost of using naturalgas. This price, however, is still competitivewith coal in some applications and is belowthe cost of nuclear power.

Electricity generation from natural gas isthe cleanest fossil-fuel option. Gas-fired com-bined-cycle plants produce substantially lessair pollution and less solid waste than doscrubbed coal plants and oil-fired powerplants.

6 6Nitrogen oxides, the major emission

of gas plants, have been substantially reducedin recent decades by technological upgrades.That is why the environmentally consciousCalifornia Energy Commission (CEC) con-cluded that gas plants were both privatelyand socially the least cost generating optionfor the state.6 7

The superior economics of gas-fired gen-eration explains why the large majority ofnew capacity being built in North America isgas fired, not coal fired.6 8 State-of-the-artscrubbed-coal plants and advanced light-water reactor nuclear plants can produceelectricity at around 4.5 cents per kWh and7.5 cents per kWh, respectively, costs 50 per-cent and 133 percent greater than those ofbaseload natural gas combined-cycle units.

6 9

A 1996 study by two researchers at theElectric Power Research Institute concludedthat the costs of an advanced nuclear powerplant built after the turn of the century hadto be “sufficiently less” than 4.3 cents perkWh “to offset the higher capital investmentrisk associated with nuclear plant deploy-ment.”7 0 At least in North America, and alsoin much of Europe and in South Americanwhere natural gas is becoming more avail-

able, the environmental debate between con-ventional energies is being settled on eco-nomic and not political grounds.

Arlon Tussing and Bob Tippee summa-rized the success of gas technologies relativeto coal and nuclear research:

The use of gas-fired combustion tech-nology in the production of electricpower is the leading natural gas suc-cess story of the 1980s. Despite thehuge research budgets committed inthe 1970s and 1980s by the U.S.Department of Energy and theElectric Power Research Institute toimprove coal and nuclear-generationtechnologies, the greatest technologi-cal breakthroughs in generatordesign stemmed from the efforts ofthe aircraft industry to improve jetengines. . . . The result was the devel-opment of smaller, more dependable,and more fuel-efficient jet turbines,which were manufactured in suffi-ciently large numbers so that partssupply and maintenance were greatlysimplified.

7 1

Jason Makansi summarized the currentcompetitive picture of natural gas versuscoal:

Advanced coal technologies—ultra-supercritical steam generators, state-of-the-art circulating fluidized-bedboilers, integrated gasification/com-bined cycle, and pressurized flu-idized-bed combustion combined-cycle—look good compared to theconventional pulverized coal–firedplant, which has been the workhorseof electric power generation fordecades. Gains in efficiency and over-all environmental performance aresignificant. . . . [Yet] none of thesecoal-based options provide anywherenear the efficiency, simplicity, flexibil-ity, and emissions profile of today’snatural gas–fired combined-cycles. . . .

14

The CaliforniaEnergy Commis-

sion concludedthat gas plants wereboth privately and

socially the leastcost generating

option for the state.

For new plants, coal continues todominate only in countries with (1)protectionist tendencies for impor-tant indigenous industries, such asGermany [and Great Britain], or (2)surging economic growth and mas-sive domestic supplies, such as Chinaand India. Coal is also an importantfactor in new construction for coun-tries such as Japan and Korea, whichimport most or all their energy. . . . Inmost other countries with healthycoal industries, large [coal] projectstend to get pushed farther out on theplanning horizon [because of compe-tition from gas technologies].7 2

If you cannot beat them, join them. Astrategy to reduce emissions at existing coalplants is cofiring: for less than $25 per kWhnatural gas is burned along with coal in theprimary combustion zone of a boiler toreduce SO2 emissions and increase electricityoutput. Optimized cofiring can reduce emis-sions more than proportionally to the emis-sion reduction associated with the percent-age of natural gas used. Another option is gasreburning by which NOx as well as SO2 emis-sions are reduced.7 3

Advances in Nuclear Plant DesignThe size of the world’s nuclear power

industry qualifies uranium as a conventionalenergy source that complements fossil fuels.Nuclear fuel is also the largest emission-freeenergy source for electricity generation in theworld, even after accounting for the “embed-ded energy” pollution associated with infra-structure (primarily cement). While fossil-fuel alternatives, as well as hydroelectricity,have eclipsed nuclear fuel on economicgrounds in many regions, nuclear plants arebecoming more standardized and economi-cal. For large-scale needs in future centuries,nuclear technologies may be the leadingbackstop to fossil fuels for primary electricitygeneration.7 4

The performance of nuclear power isimproving with existing units and new-gen-

eration technologies. Of the United States’103 operating reactors, more than 90 per-cent have improved capacity, safety, andcost factors.7 5 In the eight-year period end-ing in 1997, average plant capacity factorsand total output per facility increased by 7percent and 6 percent, respectively. Totaloutput increased 9 percent as well, owing toa net increase of three units.76 Between 1990and 1996 (the last year for which informa-tion is available), the average productioncost (marginal cost) of U.S. plants fell 21percent.77 The Department of Energyexpects continued increases in operatingefficiencies through its 2020 forecast peri-od. However, the average is for fewer unitsbecause of the retirement of uneconomiccapacity and an absence of new entrybecause of cheaper fossil-fuel alternativesand political opposition.7 8

New advanced light-water reactor designshave been certified for the market, led by the600-megawatt Westinghouse design and two1,350-megawatt designs by General Electricand Combustion Engineering. An overarch-ing goal of the new designs is standardiza-tion and simplification to reduce costs,speed construction, improve reliability, andensure safety. While domestic interest in newnuclear capacity is absent, overseas businessis bringing the new technology to market. In1996 a new generation of nuclear plantdesign came of age with the completion of a1,356-megawatt advanced boiling-waterreactor in Japan. The plant took four and ahalf years to build (compared with some U.S.nuclear plants that took 11 years or more toconstruct) and came in under budget. Itsstandardized design will minimize mainte-nance and reduce worker risks during itsfuture decades of operation.7 9 A new designfor U.S. operation based on “simplificationand a high degree of modularity” couldreduce construction time to three years,according to the Electric Power ResearchInstitute.8 0 This is a very aggressive estimatefor the near future, however.

Regulatory streamlining and a politicalresolution of the nuclear waste problem are

15

More than 90percent ofnuclear powerplants in theUnited Stateshave improvedcapacity, safety,and cost factors.

necessary but not sufficient conditions forthe United States to join Asian countries ininstalling a new generation of nuclear reac-tors. The other hurdles for nuclear power aremarket related. Gas-fired plants are not onlysubstantially cheaper but can be flexiblysized to meet the demand of a variety of mar-kets. Coal at present is also substantiallycheaper than nuclear fuel for large-sizedunits (small coal plants have severe scale dis-economies and are rarely constructed).Nuclear power will also need to outgrow itsfederal insurance subsidy (the Price-Anderson Act) as the U.S. court systemmoves toward more rational liability laws.

8 1

The Economic Resilience of Coal-Fired Electricity

The economics of coal-fired generationeclipses that of natural gas (and liquefiednatural gas) in some major internationalmarkets such as China and India because ofthose countries’ huge indigenous coalreserves relative to methane. Yet reliance oncoal in Asia has created severe air qualityproblems, which call for installing the latestemission-control technologies to reduceparticulates and NOx in particular.

8 2 China,for example, has shown rudimentary inter-est in a “clean coal technology system withcoal preparation as the starting point, high-efficiency combustion of coal as the core,coal gasification as the precursor and minearea pollution control as the main compo-nent.”8 3 That would narrow but not elimi-nate the cost advantage of coal over naturalgas and liquefied natural gas plants inthose areas.

The price of coal for electricity genera-tion has been declining over time as a resultof falling upstream minemouth prices,reduced midstream transportation costs,and improving downstream combustiontechnology. The U.S. Department of Energyidentified technological advances in under-ground mining, large-scale surface mining,higher labor productivity, and the consoli-dation of coal transportation as “revolu-tionizing economies of scale in mining,

marketing, and shipping coal in the largequantities required by electricity generationplants.”8 4 Numerous improvements such asmodularity of plant design have loweredcost and enhanced energy conversion effi-ciencies,8 5 but environmental retrofits havecanceled out some of this improvement.

Abandoning coal altogether to reducecarbon dioxide (CO2) emissions is not war-ranted if economics dictates otherwise. It iseconomically wasteful to substitute alterna-tive energies with an additional cost that isgreater than the externality associated withthe traditional pollutants. Sound economiccalculation will prevent developing coun-tries, which can least afford it, from substi-tuting for superior energy technologies oth-ers that are inferior in terms of quantity,reliability, and cost.8 6

Renewable Energies: Ancient to OldA salient historical insight for the cur-

rent debate over renewable energy is howold hydropower is and how both wind andsolar enjoyed free-market sustainabilityuntil cheaper and more flexible fossil fuelscame of age. A history of energy use inEngland revealed that in 1086 more than 6thousand watermills and windmills dottedthe landscape.8 7 The long history of windand solar in the United States was docu-mented by a Greenpeace study:

In the late 1800s in the UnitedStates, solar water-heaters wereintroduced commercially becausethey offered hot water convenientlyinside a building without the trou-ble of heating it on a stove or on afire out of doors. Despite cheap fos-sil fuel and the invention of thedomestic water-heater, solar water-heaters enjoyed commercial viabilitywell into the 1940s. . . . Five decadesago, wind systems were fairly com-mon in many countries for water-pumping and mechanical power,and some small-scale electric-powergeneration. Then, except in certain

16

Abandoning coalaltogether to

reduce carbondioxide emissionsis not warranted.

limited locations, cheap fossil fuelswiped them from the market.8 8

Hydropower predated fossil fuels on theworld stage as noted by the WorldwatchInstitute,8 9 and hydroelectric constructionpeaked during the New Deal in the UnitedStates. Continuous geothermal productiondates from 1913 and became a mature indus-try prior to the 1970s.9 0 Biopower is theyoungest member of the renewable family,having emerged in systemic fashion duringand immediately after the 1970s energy crisis.

Subsidized Renewables:A Legacy of Falling Short

Shell, the world’s second largest energycompany, has announced an expansioninto biopower, solar, and possibly wind onthe assumption that fossil fuels will becomescarcer in the “next few decades.”9 1 BritishPetroleum is increasing its long-standinginvestment in solar energy on the premisethat man-made global warming is a poten-tially major social problem.9 2 Enron Corp.entered into solar energy in 1995 and windenergy in 1997 to complement its focus onthe cleanest burning of the fossil fuels, nat-ural gas.9 3

To environmentalists critical of fossilfuels, this burst of interest on the part ofsome of the world’s prominent energy com-panies signals the beginning of the end of thefossil-fuel era. Yet these ventures are verymodest compared with overall corporateinvestment in energy9 4 and are inspired asmuch by transient government subsidies andpublic relations as by underlying economics.To put the issue in perspective, the highlypublicized $500 million that Shell has com-mitted to spend over five years on interna-tional renewable projects is half as much asthe company’s far less publicized budget todevelop three previously located deepwaterGulf of Mexico oil and gas fields.9 5

Unconventional energy sources havelong mesmerized both government and—toa lesser but still real extent—private investors.Investments in these technologies in the

last quarter century have, with few excep-tions, been disappointing, as a historicalreview shows.

As fossil-fuel prices began their ascent in1973, a solar-energy boom began in theUnited States and abroad. By the mid-1970smore than a hundred companies, manyresponding to government subsidies andpreferences, had entered the business of con-verting the sun’s energy into electricity orsubstituting it for electricity altogether.Some of the biggest names in the energybusiness—Exxon, Shell, Mobil, ARCO, andAmoco—were among the entrants. Morethan a dozen other large oil companies hadpatents or were conducting research in thefield. Other companies, such as GeneralElectric, General Motors, Owens-Illinois,Texas Instruments, and Grumman, enteredthe solar collector heating and cooling mar-ket or the photovoltaics market, or both. Thehead of Royal Dutch Shell’s solar subsidiarydeclared in late 1980, “The solar electric mar-ket could explode.”9 6

Declining energy prices in the 1980s setback an industry that, like synthetic fuels(discussed below), never approached eco-nomic viability even when fossil-fuel priceswere at their peak. While the use of solarpower in niche markets and some remoteapplications remained viable, central-sta-tion electricity generation was anotherstory. Few, if any, major solar companiesshowed a profit in the 1980s, althoughsome survived. Fortune in 1979 stated, “Ithas proved harder than the pioneer imag-ined to overcome the inherent difficultiesof harnessing an energy form that is stu-pendous in the aggregate, but dilutes in anygiven setting.”9 7 The verdict was the samemore than a decade later. The liquidation inDecember 1991 of Luz International, previ-ously the world’s leading solar power devel-opment firm, marked the end of an era.

The wind power boom started a few yearslater than the solar boom, but the resultswere the same. First-generation technologywas very expensive, and unintended environ-mental consequences affecting land and

17

Investments insubsidized renew-able technologieshave, with fewexceptions, beendisappointing.

birds emerged. The first-generation problemsrequired a government-funded $100 millioncleanup and repowering effort in California,the heart of the U.S. wind industry.9 8

Oil companies did not diversify into thewind industry as they had into solar power.Profitable sites and applications for windpower were narrower even than those forsolar power, although wind power had oneclear advantage over its renewable rival—itwas substantially less uneconomic as asource of electricity for the power grid.Nonetheless, the economics of wind powerremained relatively poor, particularly com-pared with the economics of natural gascombined-cycle generation, which wasrapidly improving. The bankruptcy in 1996of the world’s largest wind developer,Kennetech, like the bankruptcy of solarindustry leader Luz five years before,marked the end of an era.

The heavy political promotion of windand solar power in the 1970s and 1980scannot be characterized as successful.Billions of taxpayer, ratepayer, and investordollars were lost, bearing little fruit exceptfor experience. But for proponents of alter-native energy, hope springs eternal. Twodecades of “broken wind turbines, boon-doggle wind farm tax shelters, and leakysolar hot-water heaters” are ancient history.“The world today,” the faithful believe, “isalready on the verge of a monumental ener-gy transformation . . . [to] a renewable ener-gy economy.”9 9

A survey of today’s leading renewablealternatives, however, demonstrates that thispredicted transformation is just as question-able now as it was two or more decades ago.

Solar and Wind as Kyoto EnergiesWind and solar power are the two energy

sources most favored by the environmentalcommunity to displace fossil fuels to helpmeet the goals of the Kyoto Protocol. Othersources have met with greater environmen-tal ambivalence if not concern. Biopower isan air emission renewable energy sourcethat can contribute to deforestation.1 0 0

Geothermal sites are often located in pro-tected, pristine areas and so create land-useconflicts, and toxic emissions and deple-tion can occur.1 0 1 Hydroelectric power is theleast environmentally favored member ofthe renewable energy family owing to itsdisruption of natural river ecosystems.1 0 2

Nuclear power, although it is air emissionfree like renewable energy after plant con-struction, is less popular than hydroelec-tricity with mainstream environmentalistsand is rejected because of its risk profileand waste disposal requirements.1 0 3

The respective costs of wind and solarhave dropped by an estimated 70 percentand 75 percent since the early 1980s.1 0 4

Extensive government subsidies forresearch on and development and commer-cialization of these technologies—muchgreater than for other renewables and fossilfuels on an energy production basis—havebeen a primary reason for this substantialimprovement.1 0 5 Mass production has result-ed in fewer material requirements, moreproduct standardization, automated man-ufacturing, and improved electronics.Larger wind farms have also introducedeconomies of scale. Improvements in infor-mation management, just-in-time invento-ry techniques, and lower energy costs—fac-tors at work across the economy—have alsobeen responsible for the reduced infrastruc-ture cost of these two alternative energysources. One recent study of wind tech-nologies concluded:

[Wind] costs have declined fromaround US$ 0.15–0.25 per kWh to theUS$ 0.04 to 0.08 per kWh today infavorable locations. Technical devel-opments have been rapid and impres-sive, most notably in the areas ofincreased unit size, more efficientblade designs, use of light-weight butstronger materials, variable speeddrives, and the elimination of reduc-tion-gear mechanisms through theintroduction of electronic controls forfrequency and voltage regulation.1 0 6

18

Geothermal sitesare often located

in protected,pristine areas.

But that is only half the story. The long-awaited commercial viability of wind andsun as primary energy sources has been setback by natural gas combined-cycle andcogeneration technologies. Natural gastechnology today can produce electricity athalf the cost (or less) and with more flexi-bility and reliability than power generatedfrom well-sited wind farms on a tax-equal-ization basis.1 0 7 The competitive gap withsolar power is much more pronounced,since solar power is triple (or more) the costof well-sited wind. Simply put, the techno-logical improvements in wind and solarpower have also occurred for traditionalfuels. In Europe, for example, an executiveof Siemens AG recently reported that pricesof electricity from fossil-fuel plants havefallen by an estimated 50 percent in the lastfive years alone.1 0 8

This competitive gap, which environmen-talists once thought to be surmountable,may persist for a long time. A joint study in1997 by the Alliance to Save Energy, theAmerican Council for an Energy-EfficientEconomy, the Natural Resources DefenseCouncil, Tellus Institute, and the Union ofConcerned Scientists concluded:

Although the cost of renewable elec-tric generating technologies hasdeclined substantially and their per-formance has improved, the cost ofcompeting fossil technologies hasalso fallen. In particular, the averageprice of natural gas paid by electricutilities has been low (about$2.30/MMBtu) since the mid-1980sand is widely expected to remain sofor the next 10 years or longer.1 0 9

A factor as important as cost and relia-bility for national energy policy is the enor-mous quantity disparity between gas-firedelectricity (and other fossil alternatives) andsolar- and wind-generated energies. A singlelarge combined-cycle gas plant can producemore electricity than all the wind and solarfacilities in the United States combined.

One of the world’s largest gas-fired com-bined-cycle plants, the 1,875-megawattTeesside plant in England, produces moreelectricity each year than the world’s mil-lions of solar panels and 30,000 wind tur-bines combined—and on fewer than 25acres of land.

The quantity differential partiallyreflects relative capacity factors, which arearound 95 percent for baseload gas com-bined-cycle plants and 20 percent to 40 per-cent for solar and wind that operate onlywhen the natural energy source is avail-able.

1 1 0It also reflects siting prerequisites in

light of natural conditions and consumerdemand. A wind site, for example, musthave steady high winds, be away from largebird populations, avoid slopes that mayerode, and be in remote (and sometimespristine) areas because of high noise levelsand poor aesthetics. Yet for economics’sake, wind farms need to be near popula-tion centers that have a power deficitbecause of high transmission investmentcosts and physical losses of electricity.1 1 1

This combination works against manysites, making well-sited wind, ironically, a“depletable” energy option. So while idealwind sites may generate grid power at a costonly double that of new technologies usingnatural gas, other sites, for example, onesfrom which the electricity must be trans-ported long distances, worsen this alreadysizable cost disadvantage. Consequently,wind is not a generic resource like a conven-tional energy. Wind sets up a growing eco-nomic and environmental conflict as moreand more sites must be tapped to meetexternal political demands.

Other Renewables Also ProblematicThe other basket of “renewable” alterna-

tives to fossil fuels—geothermal, hydropower,biopower, and fuel cells—may be even lesslikely to gain market share in the foreseeablefuture than are wind and solar power.

Geothermal and hydroelectricity aremore akin to conventional energies than tounconventional ones. Each has a long his-

19

The commercialviability of windand sun as prima-ry energy sourceshas been set backby natural gascombined-cycleand cogenerationtechnologies.

tory of economic competitiveness that pre-dates the air quality movement, although intoday’s political discussion they are oftenlumped together with wind and solar poweras renewables for “sustainable energy devel-opment.” Ironically, wind and solar advo-cates who do not favor hydroelectricity(which comprises almost 90 percent of totalworld renewable generation) can be said tobe more critical of renewable fuels per sethan are fuel-neutral, free-market energyproponents.

The most prominent of existing “exotic”renewable fuels is biopower. Biopower isbiomass converted to electricity (often,municipal garbage converted to electricityin incinerator plants) as opposed to thesimple burning of wood, dung, and otherwaste feedstocks for cooking and heating.Today, biopower is the second largestrenewable energy next to hydropower in theUnited States and the world.

Although scattered biopower projectsexisted before 1978, it was the Public UtilityRegulatory Policies Act of 1978 that putthis energy source on the map.1 1 2 That fed-eral law, which applied to other renewablesand certain nonutility nonrenewables,required utilities to purchase power from“qualifying facilities” at the utility’s “avoid-ed cost,” which in an era of higher fuelprices locked in favorable economics for thewaste-to-energy plants. These first-genera-tion plants have been characterized by their“high costs and efficiency disadvantages” incomparison with conventional energies.1 1 3

Like nuclear power, the biopower industryis an artificial creation of government poli-cy and would never have emerged as a sig-nificant energy source in a free market.

Biopower plants are more expensivethan well-sited wind projects but far lessexpensive than solar plants. The currentgeneration of biopower projects has an esti-mated cost of around 8 cents per kWh ver-sus wind plants at around 6 cents per kWh(prime sites without tax preferences) andsolar at 30 cents per kWh or more.1 1 4 Asnoted earlier, the environmental lobby has

serious misgivings about biopower as amajor electricity alternative because of apotential problem of deforestation, occa-sional competition with recycling facilitiesfor waste disposal, and air emissions.

Fuel cells, while perhaps further frommarket penetration than other renewables,hold potentially greater promise. Severalfuel-cell technologies are commerciallyavailable for distributed generation so longas a liquid fuel is available. The electro-chemical devices that convert energy toelectricity and usable heat without requir-ing combustion are actually a competitor towind and solar projects on the one handand gas microturbines and diesel genera-tors on the other.

Fuel cells have a number of technicaland environmental advantages. They donot have moving parts and are easy tomaintain. They can be sized for a home orfor a large industrial facility. Fuel cells canbe run on a variety of fuels, includingmethane, natural gas, and petroleum.(Natural gas is the most probable inputwhere it is available.) They are noiseless.They convert energy into electricity relative-ly more efficiently than do other generationprocesses. And since fuel cells are moreenergy efficient and do not require com-bustion, they are environmentally superiorto fossil-fuel plants and microturbines.1 1 5

Those advantages are lost on the econom-ic side. The average cost of a fuel cell today isaround $3,000 per kWh when $1,000 perinstalled kWh is necessary for market pene-tration. Subsidies from the Department ofEnergy for as much as one-third of the totalinstallation cost ($1,000 per kWh) have beennecessary to attract interest.116 The fuel cellfor stationary electricity generation is a back-stop energy source that competes againstunconventional technologies more than con-ventional ones at present. To break into themarketplace, fuel cells must become compet-itive against another natural gas user—micro-turbines. But “where very strict air emissionsrequirements apply, fuel cells may be the onlyoption for distributed generation.”1 1 7

20

Biopower plantsare more

expensive thanwell-sited windprojects but far

less expensivethan solar plants.

Distributed Energy: How Big a Market Niche?

In dispersed developing markets whereelectricity is being introduced, distributedgeneration (power that is distributed locallyand does not come through a regional grid) istypically more economical and practical thancentral-station, long-distance transmissionof electricity. Since some renewable energytechnologies have proven adaptable to mar-kets where transmission and distribution ofelectricity are relatively nonexistent, environ-mentalists hold out the hope that distributedenergy (which is becoming more economicalrelative to centrally dispatched power) willrevolutionize electricity markets and usher ina new era of decentralized industrializedrenewable energy.

Renewable energy is not dominant inoff-grid areas and may not be in the future.Traditionally, propane- and diesel-firedgenerators have been the most economicpower option. Improvements in solar tech-nology have made this technology increas-ingly viable in remote markets, but theintermittency problem requires very expen-sive battery technologies to ensure reliableelectricity service.1 1 8

Niche markets for solar power have grownover time and today range from the hand-held calculator to data-gathering oceanbuoys to space satellites. Wind power is oftenthought of as distributed generation, but alimited number of homes or businesses arelocated in perpetually windy areas necessaryto give the turbines a capacity factor highenough to make them viable and competitivewith other distributed options.

Distributed generation is more expensiveand problematic than central-station genera-tion where demand conditions can supportboth.1 1 9Thus, as a developing region maturesand gains greater economic infrastructure,first-generation electricity sources may giveway either to a distributed generationupgrade or to central generation. Just as bicy-cles and motorbikes are a bridge to automo-biles and trucks in many developing regions,solar panels or a wind turbine may become a

bridge technology to gas-fired (or oil-fired)microturbines or much larger combined-cycle or cogeneration plants. Thus somerenewable technologies could be bridgesources to conventional energies rather thanthe other way around.

Will Subsidies Rescue Nonhydro Renewables?

The competitive predicament of renew-able energy—reflecting both the economic, ifnot the environmental, problems of windpower, solar power, and biopower and envi-ronmentalist opposition to hydropower—could lead to a decline in renewable capacityin the United States. While “green pricing”and a new round of government subsidies areproviding some support, older projects arecoming off-line because subsidies are expir-ing, and new projects are encounteringfinancing difficulties in an increasingly com-petitive electricity market. Only a nationalquota for qualifying renewables, a federal“Renewables Portfolio Standard,” can saveunconventional energies from the “harshrealities” of competition, concluded a studyby two advocates of renewable energy.1 2 0 TheDepartment of Energy in a business-as-usualscenario predicts an overall decline of renew-ables from 12.5 percent to 9.2 percent ofdomestic consumption by 2020 due to flathydropower and geothermal power andaggressive entry by fossil fuels, natural gas inparticular.1 2 1 On the other hand, quotarequirements and cash subsidies for qualify-ing renewables as part of state-level restruc-turing proposals are coming to the rescue.1 2 2

The Uncompetitiveness ofAlternative-Fueled Vehicles

Although conventional fuels have a sig-nificant advantage over unconventionalfuels in the electricity market, their advan-tage is even more pronounced in the trans-portation market. Of the world’s approxi-mately 650 million motor vehicles, fewerthan 1.5 million (0.2 percent) are not gaso-

21

The Departmentof Energy pre-dicts a decline ofrenewables from12.5 percent to9.2 percent ofdomestic con-sumption by2020.

line or diesel powered. Liquefied petroleumgas or compressed natural gas powersalmost all alternatively fueled vehicles. Thisgives fossil fuels more than a 99.9 percentshare of the world motor vehicle trans-portation market, a market share notunlike their share in California or theUnited States as a whole.1 2 3

The cost of buying, driving, and maintain-ing gasoline-powered vehicles has steadilydeclined over time. Adjusted for inflationand taxes, the price of a gallon of motor fuelin 1995 was the lowest in the recorded histo-ry of U.S. gasoline prices. The weighted aver-age price of gasoline of $1.27 per gallon1 2 4

included 45 cents of local, state, and federaltaxes, leaving the “free-market price” of crudeacquisition, refining, and marketing atbetween 80 cents and 85 cents per gallon.Some of the “free-market price” includes theaforementioned “environmental premium,”given that environmental compliance costsare built into the price.

The price of regular unleaded gasolineaveraged $1.12 per gallon in 1998—a newrecord low and less than half the price of

1981’s high (in present dollars) of $2.39 pergallon, despite a higher burden of state andfederal taxes (Figure 5).1 2 5 Of the many retailliquid products, only low-grade mineralwater is cheaper than motor fuel today.1 2 6

This points to the triumph of technology inconverting crude oil into motor fuel andother products, a story not unlike the one ofimproving economies of turning natural gas,oil, and coal into electricity.1 2 7

The affordability of motor fuel has alsoimproved in terms of work-time pricing (theamount of work time an average laborermust put in to buy an asset). In the 1920s agallon of gasoline cost more than 30 minutesof labor time. In the mid-1990s the cost was6 minutes and falling.1 2 8

The declining work-time cost of an auto-mobile, even with numerous advances invehicle comfort and environmental perfor-mance, has been documented by W. MichaelCox and Richard Alm:

In the currency of work time, today’sFord Taurus costs about 17 percentless than the celebrated 1955 Fairlane

22

$0.25

$0.43

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

1920 1981 1998

Tax

Base Price$2.19

$2.31

$1.12

Figure 5U.S. Gasoline Price Comparison (1998 $/gallon)

Sources: American Petroleum Institute; Energy Information Administration.

and more than 70 percent less thanthe first Model T, introduced in 1908.And that’s without any adjustmentfor quality. Early cars rarely had anenclosed body, tires couldn’t beremoved from rims and buyers had topurchase a separate anti-kickbackdevice to prevent broken arms.Today’s models embody literally hun-dreds of standard features—from air-conditioning and antilock brakes tocomputer-controlled carburetors [andinjection systems] and CD players—making driving safer, more economi-cal and more fun.1 2 9

“Price war” conditions for automobilesales beginning in 1997 and continuing into1999, coming on top of intense gasolinecompetition, are continuing this trend.1 3 0

The price of renting an automobile, notonly buying one, has significantly declined.The Cox and Alm study found that carrentals in 1997 were 60 percent cheaper thanin 1970 in terms of work-time pricing.1 3 1

The economic and efficiency progress ofthe internal combustion engine can beexpected to continue. Direct fuel injection aswell as turbochargers to improve combustionand intercoolers are promising technologiesfor diesel engines.1 3 2 Continuous transmis-sion has great promise for reformulatedgasoline engines as well. Improving today’senergy conversion efficiency factors ofaround 24 percent for gasoline and 44 per-cent for diesel will be an important compo-nent of future emissions reduction.1 3 3

A survey of the various alternatives tofossil-fueled transportation, on the otherhand, suggests that the market dominanceof conventional vehicles will continue longinto the foreseeable future.

EthanolEthanol is a high-octane motor fuel

derived from grain and waste products, pri-marily corn, and mixed with 15 percent gaso-line (“E85”). Special governmental treatmentof ethanol began with a federal tax exemp-

tion in 1906, and farm states such asNebraska subsidized the fringe substitutefor conventional motor fuel during theGreat Depression. Despite encouragementfrom the U.S. Department of Agriculture,ethanol produced from surplus grain provedto be no match for the surplus of crude oilthat came from the new discoveries in Texas,Oklahoma, and other states in the 1920s and1930s.1 3 4

The subsidy floodgates for ethanolopened during the 1970s energy crises whentax breaks and government grants forethanol conversion projects become com-monplace. The Biomass Energy and AlcoholFuels Act of 1980 earmarked $900 millionfor ethanol projects and set a goal for thefarm fuel to capture 10 percent of the entireU.S. motor fuel market by 1990.1 3 5 Despitesuch government support, ethanol blendswould be as much as twice the cost of gaso-line on an energy-equivalent basis. Ethanol’smarket share in 1990 was four-tenths of 1percent (0.4 percent),1 3 6 making the legisla-tive goal 25 times greater than the actualresult. The market share of transportationbiomass has not appreciably changeddespite state and federal tax subsidies of 54cents per gallon.1 3 7

Current interest on the part of Ford andChrysler in “alternative-fuel flexible” vehi-cles that can run on either ethanol or gaso-line is due more to the desire to use a loop-hole to achieve compliance with the corpo-rate average fuel economy (CAFE) mini-mum mileage standards than to true con-sumer demand. In fact, ethanol flexiblevehicles register 25 percent less fuel econo-my than do vehicles running on CARBPhase 2 reformulated gasoline—with noreduction in air emissions per mile.1 3 8

Adding to the problem, only 40 service sta-tions in the Midwest sell ethanol, ensuringthat the several hundred thousand alterna-tive vehicles produced by the two automak-ers will run exclusively on gasoline.1 3 9

Ethanol output, even after receiving pref-erential tax subsidies, can be disrupted byhigh corn prices, as occurred in 1996.1 4 0

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The economicand efficiencyprogress of theinternal combus-tion engine canbe expected tocontinue.

Ethanol also has an “embedded fuel” prob-lem, since the created energy is largely can-celed by the energy used to plant, harvest, fer-ment, and distribute the agricultural fuel.

1 4 1

Environmentalists have not given ethanola free ride despite qualifying it as a renewableresource. One analysis complained that“heavy use of fossil fuels by current agricul-tural practices renders ethanol . . . from cornfermentation . . . non-sustainable as now pro-duced.”1 4 2 As it does on the electricity-genera-tion side, “sustainability” would requirerenewable energy inputs and a “closed loopsystem” in which the agricultural inputs weregrown in proportion to usage.

The major environmental problem ofethanol combustion is the higher evapora-tive emissions of smog-producing volatileorganic compounds, which must be bal-anced against ethanol’s reduction of theother smog precursor, NOx. The recentextension of ethanol’s federal tax breakfrom 2000 to 20071 4 3 was more a victory foragricultural interests for than the environ-mental community, which has traditionallybeen ambivalent if not hostile toward thismotor-fuel alternative.1 4 4

MethanolMethanol is a sister fuel to ethanol and

can be distilled from natural gas, coal, orwood products mixed with 15 percent gaso-line to produce a fuel known as M85. In the1970s and 1980s, methanol attracted largegovernment favor as a more viable and near-term choice than other alternative-fuel vehi-cle technologies. In a congressional hearingin 1986, General Motors called methanol“America’s energy ‘ace in the hole,’” while theAmerican Automobile Association describedit as “the number one alternative fuel of thefuture.” The EPA also tagged methanol as“the most promising alternative to motorvehicle fuel for this country.”1 4 5

The political home for methanol in thesehigh-water years was the CEC, the nation’slargest state energy agency in the world’sthird largest transportation market (afterRussia and the rest of the United States).

Under the leadership of Charles Imbrecht,the CEC was attracted to a liquid fuel thatcould promote “energy security” by erodingthe 99 percent market share of petroleum,while offering the near-term potential ofreducing ozone-forming emissions by 50 per-cent, compared with gasoline vehicles, andreducing particulate emissions by 100 per-cent, compared to diesel vehicles.1 4 6

Government-subsidized vehicle purchasesand conversions and public-private partner-ships with ARCO, Chevron, and Exxon tooffer methanol in service stations wereundertaken. Distributions from thePetroleum Violation Escrow Account (moneycollected from oil companies to settle dis-putes under the federal oil price regulation ofthe 1970s) also helped fund this alternative-fuel program.

Despite a 100-million-mile demonstra-tion program with “no negative results,”1 4 7

the methanol initiative proved to be more ofa pilot exercise than a jump-start to a massmarket. The political hope and favor formethanol would fade in the 1990s as succes-sive reformulations of gasoline and improve-ments in onboard vehicle technology signifi-cantly reduced emissions at an affordablecost with no inconvenience to motorists.

More important, however, was the factthat consumers were discouraged by a varietyof additional costs of methanol, includingcar conversion, higher fuel costs, more fre-quent oil changes, and lower vehicle resalevalue. A General Services Administrationstudy in 1991 estimated that those extrasamounted to a $8,000 premium comparedwith a conventional vehicle.

1 4 8Because

methanol fuel tanks were necessarily muchlarger than gasoline tanks (because of thelower energy density of methanol), motoristswere also faced with less storage space inmethanol-fueled cars. The absence of flameluminosity during methanol combustionalso posed a safety problem.

The beginning of the end for methanol asa viable transportation alternative came inlate 1993 when the Los Angeles CountyMetropolitan Transit Agency terminated its

24

The major environmental

problem ofethanol combus-tion is the higher

evaporative emissions of

smog-producingvolatile organic

compounds.

$102 million methanol bus program in favorof the latest diesel options. Breakdowns wereoccurring in the city’s 133 methanol busestwice as often as in conventional diesel busesbecause of the corrosive effect of methanolon engine parts. Seattle and Marin County(California) also dropped their methanol busprograms for the same reason.1 4 9

The CEC’s 20-year push for methanolhas been quietly abandoned. Whereas in1993 the CEC had predicted a million vehi-cles would be fueled by methanol by theyear 2000, the number across the UnitedStates is around 20,000 and falling.Methanol was not even mentioned as atransportation-fuel alternative in the mostrecent California Energy Plan,1 5 0 testament tothe perils of picking winners and losersbefore the marketplace does.

Electric VehiclesElectric vehicles once dominated the

mechanized transportation market in theUnited States. A study from the RenewableEnergy Policy Project summarized:

In 1900, electric vehicles outnum-bered gasoline vehicles by a factor oftwo to one; an electric race car heldthe world land speed record. Theirquiet, smooth ride and the absence ofdifficult and dangerous hand crankstarters made electric vehicles the carof choice, especially among the urbansocial elite. Early in this century, therewere more than one hundred electricvehicle manufacturers.

Improvements in the internal combustionengine and plentiful oil and oil productsreversed the competitive equation. The samestudy explained:

The weight, space requirements,long recharging time, and poordurability of electric batteries under-cut the ability of electric cars to com-pete with much more energy-densegasoline, an energy carrier manufac-

tured from crude oil. One pound ofgasoline contained as much chemi-cal energy as the electricity held inone hundred pounds of the lead acidbatteries then in use. Refueling a carwith gasoline was measured in min-utes, on-board storage was a snap,supplies appeared to be limitless,and long-distance fuel delivery wasrelatively cheap and easy. With theseattributes, gasoline dominated thefuel marketplace. By 1920, electriccars had virtually disappeared.1 5 1

The Worldwatch Institute has also docu-mented the rise and fall of electric vehicles.“Although electric cars and a variety ofother [alternative-fuel] vehicles were popu-lar at the turn of the century,” summarizedChristopher Flavin and Nicholas Lenssen,“they were pushed aside by improvementsin the internal combustion engine and thefalling price of the gasoline used to runit.”1 5 2 Disputing the claim that the electricvehicle is the car for the 21st century, theAmerican Petroleum Institute noted that itwas “more suitable for the late 19th centu-ry, when society was geographically com-pact and people tended to travel muchshorter