Candidates' energy policies fuel economist's commentary

A Q&A with MIT Professor Robert Pindyck

Stephanie Schorow, News Office Correspondent
August 19, 2008

This is the first in an occasional series in which MIT experts weigh in on the presidential candidates, their policy ideas and aspects of the campaign.

As jittery consumers contemplate the price at the pump, energy issues have become a major factor in the U.S. presidential race. Have the two major-party candidates forthrightly addressed the hard issues about the country's energy needs?

Not really, says Robert S. Pindyck, the Bank of Tokyo-Mitsubishi Professor of Economics and Finance in the MIT Sloan School of Management.

Pindyck -- an expert in microeconomics and industrial organization, the behavior of resource and commodity markets, capital investment decisions, and econometric modeling -- recently examined the energy plans put forth by senators Barack Obama and John McCain as posted on their web sites. He was not impressed.

But, as Pindyck acknowledges, being honest about what it would take to wean Americans off oil could be political suicide.

Q: Would either candidate's energy proposals make much impact on energy costs in the short term?

A: Neither of the candidate's plans would have any impact. The one exception would be McCain's proposal to eliminate tariffs on the importation of Brazilian ethanol. It would immediately reduce the cost of ethanol.

Q: How so?

A: We have a tariff on imported ethanol from Brazil, which is made from sugar cane. Ethanol here is usually made from corn. Sugar cane ethanol is about eight times more efficient than that made from corn. By removing the tariff, Brazilian ethanol becomes cheaper and will make ethanol-gasoline blends cheaper. It will reduce the use of corn ethanol, which would reduce the demand for corn, which would make corn prices drop slightly. There are many places where gasoline is blended with 10 percent ethanol. It would have a small impact, maybe a few cents, on the cost of blended gasoline.

Q: Is there anything in either candidate's proposal that would be particularly bad for holding down energy costs?

A: Most of the proposals are political and they involve subsidies to alternative energy sources. A lot of those subsidies are just ways of providing pork for different groups.

Q: It sounds like you are not impressed, to put it bluntly.

A: Look, what are going to be needed ultimately is a tax on carbon and a tax on gasoline -- a large one. Another way to have a tax on carbon is to have a cap-and-trade system so you only allow a certain amount of carbon dioxide to be emitted. That will raise the cost of carbon. A gasoline tax would greatly reduce gasoline use. It would create the incentives we need for other energy sources, including conservation.

No candidate is willing to get up and say, "We need a to have a high tax on gasoline." In fact, McCain wants to suspend the federal tax on gasoline for the summer and Obama didn't. Nobody is going to say, "We want to make sure we have a tax in place so gasoline prices are always going to be high." That encourages people to drive smaller cars and to conserve and that brings about investments in new technology. When people know that gas prices and fuel prices will stay high because of taxes, it means they have incentive to develop alternative energy supplies.

The question is will the candidates, nonetheless, do something when elected. Who knows?

Q: What do you think about Bush's recent decision to lift the longstanding executive ban on offshore drilling, which McCain and Obama support in some manner?

A: Offshore drilling is a tradeoff between pollution and producing oil. We've had the federal ban in place because we worry about oil spills. You could say: Why don't states make their own decisions? The reason is that if one state allows offshore drilling and there's a spill, the oil moves to the neighboring state. So whether we do that is how we trade off the environment with greater ability to produce oil domestically. And there's no right and wrong about that. What is clear is that even if we opened up offshore land for leasing and drilling, it's not going to result in any more oil production for five, six years.