The Consequences of Short-Term Thinking: Part II

As gas falls below $2 per gallon, our collective response is sadly predictable. We all gorge on the transient good news at the pump while blithely ignoring the implications for our future. We are stumbling immediately back into the cyclical pattern of crisis and repose. Oil reaches $150 per barrel, and we angrily clamor for renewable energies, wondering how we could have been so shortsighted; then prices plummet and we develop an instant case of amnesia, forgetting with concealed embarrassment our recent panic and plea for help.

We seem incapable of thinking past one fiscal quarter, beyond our current paycheck or further than the next fill up. Whether driven by the realities of our daily needs or declining incomes or some inherent impatience, this obsessive focus on the near-term may prove fatal. Our political future, financial stability and environmental fitness are all vulnerable to the consequences of our short-term thinking. We must break this cycle, ignore the siren song of transiently inexpensive gas, and maintain our focus on the shift to renewable energies.

The industrialized world needed 140 years to consume the first trillion barrels of oil. We will double that in the next 30. More than 800 of the world's largest oil fields are past peak production. To maintain the current daily output of about 85 million barrels as those fields decline over the next two decades, the world will need to find new sources of crude to produce an additional 45 million barrels per day to make up the difference. That means that in the next 20 years, we need to find four more oil fields equivalent to the vast reserves under the boiling sands of Saudi Arabia, just to break even with today's production levels. And that assumes that demand will remain the same over those 20 years; any growth in demand will yield an even bigger gap. The era of cheap gas is over, even if we are too blind to see that truth in the face of temporary relief.

Yes, we are blind, and up to our old tricks yet again. We promptly lost interest in alternative energy at the first sign of declining gas prices. Like ungrateful mice on a sinking vessel, and with little provocation, we jumped overboard and abandoned the ship transporting us to a sustainable future. With only the slightest enticement from Arab sheiks, we gave up our quest to wean the economy from foreign oil and fell lovingly back into the arms of the oil barons. We sold ourselves for some trinkets.

Nowhere is the sad truth of our infidelity more evident than in the solar power industry. The future for that industry looked bright just a few short months ago. But now solar energy is under a darkening cloud, victim to a confluence of unfortunate circumstances and a notable lack of political commitment in Washington. Young capital-intensive industries like solar rely heavily on readily available credit at reasonable rates. The implosion on Wall Street dried up that source of money. Then oil priced tumbled. And finally, in a near-fatal blow, silicon supplies became scarce and expensive, bringing the industry down low. Under these circumstances solar energy has a difficult time competing with fossil fuels at the very moment in our history when we need this technology most.

This is where government, and a long-term perspective, come into play. Our national security, economy and environment will all benefit significantly if society can shift to renewable energies. Yet the market, responding efficiently to shorter-term signals, cannot bridge the gap to the future, where the payoff is great, but distant. The government can provide support where market mechanisms are weak, with tax incentives, subsidies and appropriate laws creating a regulatory environment conducive to alternative energy development.

We will never get to a fully-functioning hydrogen economy without transitioning through solar, wind and geothermal energy. And all three will have an important role even in a mature hydrogen economy. Solar will be the choice energy source to split water to create the hydrogen. Government support for these energy sources at this critical phase of development is absolutely essential. But we can only provide such support if we give up our fascination with the short term. We need to act now to create the infrastructure of the future while we still have oil available in sufficient supply and at reasonable prices to ease our way forward. If we wait, the process will be marred by crisis and dislocation. We must break the stranglehold of the immediate and start thinking more wisely and strategically about our future.

Congress took a tentative first step in October by extending the federal investment tax credit, which gives homeowners and factories a 30% credit against the cost of installing solar power. But the government can do much more. The most important items on the wish list include bigger tax credits commensurate with the need relative to oil prices, government grants to purchase solar manufacturing equipment and the creation of a national standard for renewable energy that would require the nation to derive a fixed percentage of total energy from renewables. The government can also set an example by converting federal buildings to solar power at a cost of about $10 billion. That spending would revive the solar industry like a defibrillator applied to a victim in the throes of a heart attack. Temporary but critical assistance giving a short-term jolt for a long-term gain.

The real solution to our problem is in fact embedded in long-term thinking. We need to tax what we burn, not what we earn. We solve many of our most pressing problems if we tax carbon, and offset that tax increase with an equal decrease in income tax. The restructuring would be revenue neutral, but would have a huge impact on the environment and on our national security. That tax would reveal the true cost to society of burning fossil fuels. Doing so would level the playing field and naturally create an environment in which alternative energies could more readily compete. The cap-and-trade system for reducing carbon emissions is worthy of support only in the sense of realistic political compromise until society comes around to a more fundamental solution. We should tax consumption, not production. And yes we can do that without making the tax regressive; a topic for another time. Taxing income punishes people for success, which makes little sense, and creates perverse incentives that endanger our environment, which makes even less sense.

The opportunity to restructure our tax system will only present itself if we can learn to look beyond the next three months or the next election. While the idea seems Quixotic now, a tax on carbon with an offset reduction in other taxes will have to be part of our future if we are to become energy independent. That is some long-term thinking.