Getting our energy policy right does not require new technology, added societal cost, or economic disruption. However, it does require the political courage to question the sacred cows that have shaped 100 years of electric-market regulation.

A few ideas that are missing from the energy debate:

  1. Fossil fuel use in the U.S. is split approximately in thirds between transportation fuels, electric power generation, and heat generation (buildings, industrials, etc.). GHG emissions track accordingly.
  2. The electric industry is — with very limited exceptions — a regulated monopoly, subject to cost-plus pricing. This has been the case for 100 years. In other words, they have had a 100-year incentive to overconsume fossil fuel.
  3. Adam Smith never said anything about profits causing the public good. What he did say is that the pursuit of profits in a competitive market engenders the public good. The second half of this clause is entirely missing from the electric sector.

Why this matters:

Much of the debate on energy policy — be it driven by national security, prices, global warming, reliability, or any other issue — is built on the implicit, but flawed, assumption that our economy is optimal. This assumption is never spoken, but you hear it when Dick Cheney says that conservation is nothing more than personal virtue, or when economists discuss the costs of GHG reduction. All are predicated on the belief that we have a functioning market economy, ergo we have perfect efficiency, ergo any deviation from the status quo must imply an increase in cost.

The first piece of this logic is flawed, and the house of cards cannot stand. Whether this is cause for optimism or pessimism is a matter of perspective.

Pessimistically, this means that for over 100 years, we have been paying too much for electricity so that we could release too much CO2 into the atmosphere. Had we crafted a more thoughtful regulatory paradigm in the early part of the 20th century (or changed courses sooner), we could have massively reduced today’s atmospheric GHG concentrations and lowered our energy costs — with all sorts of concomitant benefits in terms of industrial competitiveness, etc. Indeed, the entire electric industry was twice as efficient in 1910 as it is today. Meaning that if all we did was return to 1910 efficiency levels, we would not only cut fossil-fuel use in the electric sector in half, but would also exceed our obligations for carbon reduction under Kyoto.

But there is an optimistic take as well. We can dramatically lower greenhouse-gas emissions without imposing societal costs and without depending on new, unproven technologies. And we can do so as part of an economic growth plan. But only if we have the political courage to change 100-year-old rules that have been extremely remunerative to the electric sector — the biggest industry in the country.

Let’s start.