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Palin's Alaskan Energy Plan Will Cost You Money

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The soon to be former Governor Sarah Palin's "plan" to keep America addicted to fossil fuels and to abandon the President's cap and trade program for carbon pollution is not only a disastrous climate policy, it is even worse as an economic policy.

We need to find ways to cut our dependence on oil, reverse the loss in manufacturing jobs, and ensure America's place as a global economic leader. Cap and trade policy will meet these challenges while "drill here, drill now" would have us keep our heads in the sand and hope it all goes away someday.

Governor Palin's energy policy prescription to increase offshore drilling clearly shows she isn't one of "those who knows and understands the issue". Access to credit and high commodity prices are far bigger drivers of investment than access to new oil and gas fields. The truth is that domestic production is driven by the prices the oil and gas firms can charge us. When the price is painfully high, they "drill, baby, drill" but when the price drops as it has in the past year those drill rigs disappear faster than cockroaches when you turn the light on. In Sept 2008 there were over 2,000 production drill rigs in operation; last month there were only around 900, a nearly 60% drop. This didn't happen because the government put lands off limits. It happened because companies who want us to believe their only interest is in bringing us as much cheap oil and gas as we can possibly burn, lose interest when the price drops.

Indeed, Governor Palin knows this better than anyone as she has spent the past several months trying to woo bankers into financing her states $26bln natural gas pipeline project - a task she had yet to accomplish before abruptly leaving office.

If the Governor truly cared about increasing America's oil production, she would actually be supporting the ACES climate bill that passed through the House of Representatives last week. Under the bill, billions of dollars of support will be given to utilities to capture the carbon dioxide from their smoke stacks; a portion of the billions of tons of carbon would then be piped to oil producers for use in enhanced oil recovery (EOR). According to the Department of Energy, enhanced oil recovery with CO2 has the economic potential to recover between 45 and 89 billion barrels of stranded domestic from existing wells.

The state of Louisiana alone has 6 billion barrels of stranded oil that could be recovered using enhanced oil recovery with CO2. This is about as much oil as is thought to exist in the Artic National Wildlife Refuge and would triple the states current oil output over the life of the climate bill, creating billions of dollars in tax revenue and tens of thousands of jobs in the process.

Accelerating the deployment of carbon capture at power plants, and using the CO2 to recover trillions of dollars worth of stranded oil in existing wells is something that would never happen if our economic and climate futures were left up to Sarah Palin and her buddy Newt Gingrich.

Furthermore, "drill, drill, drill" is really just another way of saying "tax, tax, tax". Just like a cigarette smoker, we have become numb to the higher prices that have come with our addiction to oil. In fact, the average American household has paid an additional $2,500 over the past five years just keeping up with our oil habit (see graph below):

The Palin plan would continue to stick an oil needle stuck in our arm forever or at least until demand from China (which is expected to rise from 9% today to 15% of total demand in 2030) pushes prices beyond our means. What choice will we have then other than to simply swear, shrug and open our wallets even wider?

President Obama, on the other hand, is actually trying to treat our addiction to foreign oil by requiring cars to be cleaner. By passing standards that improve CAFÉ to 35.5 mpg by the year 2016, and providing up to $45bln to help re-tool the US auto industry under the cap and trade bill, President Obama's plan is expected to lower our oil consumption by 1.4mln barrels a day by the year 2020. Providing a cumulative savings to American households around $1,900 through the year 2020 using the EPA's gas price forecasts (see graph below):

While Governor Palin's points about jobs were really only talking about jobs in Alaska, the amount of capital required in creating those energy jobs she was referring to is simply outrageous. The $26bln pipeline she wanted to build was only expected to employ 9.300 people at its peak and a fraction of that number thereafter, which is roughly $3mln of investment per temporary job. This compares with the nearly 300,000 clean jobs that could be created with the same amount of capital under the climate bill, which are jobs that are accessible to middle and lower middle class workers in the lower 48 states (and Hawaii) and can help America re-power its economy by getting more people back to work.

Indeed, the Waxman-Markey climate bill would actually help accelerate investments and create jobs in the new industries needed to help the economy recover faster. Larry Summers highlighted this connection between climate and economic policy in a recent speech by pointing out that cap and trade would "spur a whole range of green investments in the present, when our economy can benefit from all the investment it can get".

In fact, Larry Summers believes that we have an opportunity to create "millions of jobs" transforming our energy economy but only if we act now. According to Summers, "the evidence is clear: we can choose to lead these (low carbon) industries, with all the commensurate economic and political and environmental benefits, or we can choose to lose out on these jobs and these opportunities."

As an example of the industries Larry Summers is referring to, a recent ACEEE study sees potential to create 935,000 new jobs in the US semiconductor industry through the advancement of "smart" grid technologies. These technologies have a better than 2-1 payback in energy savings and would create an additional $1.2trln in energy costs savings over the next two decades if enabled to scale under the Waxman-Markey climate bill. Semiconductor sensors are just one example of the technologies needed by utilities and manufacturers to transition their businesses to a low carbon model, investments based not on goodwill, but on their high return on capital under climate legislation.

In sum, the Palin plan is simply bad business. Maybe not for Alaska but it certainly is for the rest of us. Sarah Palin's shock and awe concerns about the cap and trade bill demonstrate less about where the bill goes wrong than about how little she understands of its content. There are provisions in the climate bill that dramatically increase our domestic oil production, they just don't require us to tear through pristine wilderness first in order to get to them. Lastly, no one is saying that the transition President Obama is proposing will be an easy one, but as Nobel Prize-winning economist Paul Krugman recently said, "if you really believe in the magic of the marketplace, you should also believe that the economy can handle emission limits just fine."


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