The following OECD assessment and recommendations summarise Chapter 6 of the Economic Survey of the Unites States 2005 published on 27 October 2005.
What are the remaining challenges for energy and environmental policies?
The continuing sharp rise in oil prices has focused attention again on energy markets. Although energy use relative to GDP has been on a downward trend, energy expenditures in the United States – both per unit of output and per capita – are much higher than in the other major OECD regions. Energy supply is dominated by fossil fuels, while renewable sources of energy remain relatively insignificant, with their share lower than in the mid 1990s. Despite California’s earlier electricity crisis and the major blackout in the northeast of the country, progress in the area of energy policy reform has been slow, with the Energy Policy Act passed only this summer. The Act aims at improving the country’s electricity grid, expanding the diversity of energy supply and enhancing energy efficiency, thereby reducing the reliance on foreign sources (the contribution of net imports to total energy supply having grown to more than one quarter). Relatively limited attention has been given to curtailing energy demand. In implementing energy reforms:
Priority should be accorded to providing incentives for renewable energy production – which avoids the atmospheric externalities of fossil fuels – rather than traditional forms of energy, and to enhancing energy efficiency, in particular in the transport sector, using economic instruments where possible.
To realise the benefits of improvements in energy infrastructure, in particular in electricity transmission and generation, the changes embodied in the Act should be monitored to ensure markets are contestable.
While environmental quality in the United States has improved, both air pollution and greenhouse gas emission intensities are quite high compared to those of other OECD Members. The average US vehicle produces almost twice as much carbon dioxide emissions as in most other countries, and fuel efficiency has stopped improving as the weight and power of the fleet has tended to increase. While most OECD countries rely to a greater extent on environmental taxes, the US approach to air pollution control focuses on tradable permit schemes for large-scale emitters. By contrast, the Administration’s climate change policy relies primarily on voluntary and non regulatory actions. Meanwhile, however, many states and localities look likely to move beyond the federal approach, limiting carbon dioxide emissions from new cars and light trucks or introducing a cap and trade system for fixed source emissions. To further improve environmental quality:
Since voluntary approaches to environmental control have been shown to be less effective in general, measures should be taken to stabilise and then reduce greenhouse gas emissions in an economically efficient manner. This could be done by introducing some mixture of a domestic cap and trade system, as exists for air pollutants, and a carbon tax on all carbon based energy products. Such a move would not only reduce air pollution and combat global warming, it would also promote energy independence and – in the case of a tax – provide valuable public revenues.
Greater use should be made of economic instruments to integrate environmental concerns in transportation. While an increase in fuel taxes would be justified, so as to take on board the external costs of the carbon produced, a further tightening in CAFE (corporate average fuel economy) standards, as proposed by the Administration, would be a second best solution.
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