Confronting Energy Security and Climate Change

By Robbin Johnson, December 18, 2008

President-elect Barack Obama and a Democrat-controlled Congress have flagged energy security and climate change as two premier issues to be addressed in 2009. Events, however, are reframing this debate in a manner that makes biofuel mandates, carbon taxes and carbon caps less and less appealing. Perhaps it is time to re-examine the idea of "feebates.��?

When oil prices were soaring above $100 per barrel and gasoline cost more than $4 per gallon, rallying Americans to subsidize biofuels as a way to address their "addiction to oil��? looked easy. It looks less so with oil below $50 and gasoline below $2. When the Western economies were humming along at 3-4 percent real growth, taxing carbon or capping carbon emissions seemed doable. With recession widening and fears of a depression lurking, enthusiasm for them is waning.

This dampening enthusiasm for biofuel subsidies and carbon taxes or caps may in fact be a good thing. Biofuel subsidies and mandates have ushered in food security concerns, and new evidence of adverse greenhouse gas effects from nitrous oxide releases have browned biofuels' environmental image. Carbon taxes or caps have always been problematic in the United States because of fears that they would handicap American industry if developing countries refused them (as they do). Now the European Community is encountering reluctance among some of its members because of global economic weakening.

The need to make progress on energy and climate issues even in a weak global economy justifies looking at other ideas. One that deserves more study is "feebates��?--the notion of using fees imposed on energy usage above some pivot point to fund rebates to consumers who lower their energy use below that point. If the real goal of both energy and climate-change policies is to alter human behavior, feebates are a highly focused, efficient and equitable way to do so.

Feebates are focused because they can be applied to specific energy use decisions by consumers, especially those affecting conservation. For example, fees could be charged to buyers of cars with a mileage rating below some standard. Rebates could be paid to car buyers who purchase vehicles that get better mileage than the standard.

Feebates need not weaken economic activity as taxes or caps may because the fees and rebates could be calculated to offset each other, avoiding a drag on the economy from a net tax. They also can be scaled to reward greater savings or burden greater usage. And they use market incentives rather than blunt regulatory caps to induce industry to be more innovative.

Finally, feebates are more equitable in two fundamental ways. One is that their burden need not fall disproportionately on the poor, as carbon taxes or caps do by raising energy costs across the board. In fact, their burden is likely to be progressive, as energy consumption per vehicle, home or recreational activity likely rises with income. They also are more equitable by engaging industry and consumers in a market-mediated collaboration to find ways to use less fossil-based fuel.

And feebates may be more politically palatable in today's environment by avoiding or lessening the problem of carbon taxes or caps burdening American industry in its global competition. Instead, they offer businesses incentives to get on board. And they avoid the potentially intractable problem of negotiating a globally equitable sharing of the burdens of emissions caps.

Energy conservation is the most readily-accessible tool for reducing dependence on imported fossil fuels and emissions of climate-changing greenhouse gases. Finding a way to use biofuels subsidies, carbon taxes or emissions caps to make meaningful progress toward both goals looks less appealing than a year ago. Maybe it's time to give consumer-targeted incentives to conserve a try; feebates do that in a focused, efficient, fair way.