Getting Energy Policy Wrong Around the World

This interview by James Stafford was first published by Oilprice.com March 18, 2014

Smart energy policies seem to be elusive. The US policy disappoints environmentalists and industry alike; Europe’s policy is economically disastrous but is getting people to change their habits; and developing-country subsidies aren’t helping the people they’re supposed to.

At a point in time when even the Chinese are having second thoughts about the balance they have struck between pollution and growth, the United States should be concerned about how much it’s willing to give up environmentally to remain competitive with energy. But there are ways to balance out this equation without further harming the environment or the economy, according to economist Ed Dolan.

James Stafford:When it comes to talk of fossil fuel prices and carbon taxes, are we stuck in a place that makes us choose between protecting the environment and protecting the poor?

Ed Dolan: No, definitely not. As you know, I have long advocated using the language of the market—prices—to communicate the message that we need to strike a better balance between environmental policy and energy policy. So yes, I would like to see higher energy prices than we have now, and yes, other things being equal, that would pinch everyone in the budget, including the poor. But, as I explained in a blog post a couple of years ago, there are persuasive reasons not to use energy policy to help the poor.

The biggest reason is that holding down energy prices is an inefficient way to help the poor. Most of the benefit of low energy prices goes to families with higher incomes. People in the lower half of the income distribution use only about 30% of total energy, and those truly in poverty only about 15%. If we try to use low energy prices as anti-poverty policy, 85 cents out of every dollar it costs us misses the target.

If we want to help the poor, we need to do something more targeted. My favorite policy would be a universal basic income of some kind. A UBI would provide a decent floor on a family’s standard of living without taking away their incentive to work, as many of our current poverty programs do. Once you have the safety net in place, then it makes sense to use higher energy prices to give the poor, as well as the rich, an incentive to turn down their thermostats, take the bus when they can instead of driving, and so on.

James Stafford: How do fuel subsidies fit into this equation?

Ed Dolan: Fortunately, in the United States, we don’t have much by way of absolute fuel subsidies. However, many emerging market countries, including Indonesia, Venezuela, Egypt and Iraq, spend huge amounts on fuel subsidies, nearly 10% of GDP in the case of Iraq. I wrote a piece last year explaining why these subsidies don’t help the poor much. The IMF calculates that for gasoline, some 60% of the benefit goes to families in the top 20% of the income distribution. Instead, they actually hurt the poor because the subsidies drain budgets of money that could otherwise be used for investments in education, public health, and infrastructure, which the poor need more of. >>>Read more