McCain’s Energy Plan: The Good, The Bad and Some Ugly

Nicolas Loris /

Last week I ran though Senator Barack Obama’s “New Energy for America” plan. (You can find his plan here and my analysis here.) Now it’s the other presidential hopeful’s turn. Senator McCain’s energy plan, called The Lexington Project - “named for the town where Americans asserted their independence once before,” decidedly has a cooler name than Obama’s plan, but let’s see if there’s any steak behind that sizzle. As with Senator Obama’s package, there are both encouraging and discouraging policy recommendations. So, without further ado, let’s get started.

Expanding Domestic Oil and Natural Gas Exploration and Production: This one’s a no brainer. Eliminating bans on offshore drilling has tremendous potential with little risk involved. Improvements in technology have considerably reduced the probability of a spill and minimized the carbon footprint. Currently there are government restrictions in place for new energy production off the Atlantic and Pacific coasts, parts of offshore Alaska, and the eastern Gulf of Mexico.

In these areas alone, the Department of Interior estimates the amount of energy to be: 19.1 billion barrels of oil (30 years with of imports from Saudi Arabia) & 83.9 trillion cubic feet of natural gas (enough to power America’s homes for 17 years). Will eliminating bans on offshore drilling bring immediate relief at the pump? Probably not, but energy demands are projected to soar not only in the U.S. but all over the world; expanding production in America will be critical to meeting that demand.

The unfortunate part is that there’s no mention of ANWR. Why? Simply because McCain isn’t in favor of drilling in ANWR, which is the largest source of untapped oil at a single location. (an estimated 10 billion barrels in just a few thousand acres).

Investing in Clean, Alternative Sources of Energy: Senator McCain’s green initiative is a four-step plan: $2 billion for clean-coal technologies, 45 new nuclear plants by 2030, a permanent tax credit for clean energy R&D and tax credits for renewable energy. Renewable fuels remind me of lottery ticket addicts. They know the probably of hitting the jackpot is extremely small, but they’ll drop a couple bucks a day on tickets for years without winning. But at least the lottery addicts are spending their own money.

The government has been spending taxpayer money since the 70s on renewable fuels, chiefly ethanol, by means of subsidies and tax breaks because they can’t compete in the free market, yet they still only account for a small portion of our energy portfolio. Similar to buying lottery tickets for years, it’s a lot of money lost with little return on the investment. A $2 billion taxpayer investment in clean coal technologies is no better. If there is a market for clean coal technology, the private sector will develop it and export the technology to other countries. More importantly, clean coal is a global warming policy masquerading as an energy policy. It only becomes an energy policy once there are carbon dioxide restrictions or a tax on CO2.

To be clear, it’s not that wind, solar, renewable fuels (and buying lottery tickets, for that matter) are necessarily bad. The point is that government handouts generally stifle innovation and begets companies to further rely on federal assistance. A perfect example is the history of nuclear power in the United States, which brings me to my next point.

Perhaps the best part of McCain’s plan is his avid support for nuclear power. He should be commended for including nuclear power in his “clean, alternative sources of energy” mix since that’s exactly what it is. Nuclear power is a safe, proven and affordable source of energy that emits no carbon dioxide and already provides the nation with approximately 20% of its electricity. What is more, McCain supports placing used fuel in the geologic repository, Yucca Mountain. We’ve argued that Yucca is critical to the success of the nuclear industry a number of times (see here and here). But there’s more to it. The system of managing used nuclear fuel has been broken for as long as it’s been around – for a brief history, read this.

It’s also worth repeating that, Yucca Mountain, as critical as it is to the management of used nuclear fuel, is not alone a long-term solution. The amount of used nuclear fuel already accumulated in this country is near the 70,000-ton statutory limit. Furthermore, if nuclear power production increased by 1.8% annually after 2010, a 120,000-ton (what most scientists believe its actual capacity is) Yucca would be full by 2030. Heritage’s Jack Spencer outlined a free-market approach to managing used nuclear fuel that would better serve consumers as well as the nuclear industry. Moving on…

Reforming the Transportation Sector: Most of the sub-initiatives in this part of McCain’s plan are a dog-and-pony show, but there’s one point that’s buried that should be central to The Lexington Project. But hey, let’s start with the flashy stuff with little reasoning behind it.

Now I understand that when running for president, you can’t just say, “If we just let the market work, our country’s energy problems will be solved.” I’m no campaign strategist, but that probably won’t garner many votes. But a great deal of McCain’s plan to reform the transportation sector has central planning strategies such as having automakers make 50% of their cars Flex-Fuel Vehicles (FFVs) by 2012. (a description of FFVs here). Nevertheless, who is to say that FFVs will be the best option 4 years from now? Mandating something like this generally costs more money and suffocates entrepreneurial activity. Think about a mandate on technology: would it have made sense for the government to mandate a certain type of cell phone in 2003 when today everyone wants an iPhone? (For those living under a rock, the iPhone wasn’t invented until 2007.) The point is: we don’t know what the next invention is that will provide the cheapest and cleanest energy; it could be something that hasn’t even been invented or discovered yet.

And then there are forced incentives. Chief among them is a “$300 Million Prize to Improve Battery Technology for Full Commercial Development of Plug-In Hybrid and Fully Electric Automobiles.” Wow, that sounds like a lot of money. But did Steve Jobs need a $300 million prize to invent the iPod or the iPhone? Do you think he banked slightly more than that in profits the past few years? To quote chairman of the economics department at George Mason Don Boudreaux, “Gee whiz, if someone right now could come up with a genuinely sound alternative to the internal combustion engine that burns petroleum, that person would become far wealthier over night than $300 million dollars.” (The entire 7 minute podcast is good listening.) To sum it up, private sector market incentives work, flashy gimmicks to win an election do not.

He also touches on corporate average fuel economy (CAFE) standards that will increase the cost of making a car, which in turn will be passed down to the consumer. Furthermore, people may drive more knowing that they get more miles per gallon, and cars and trucks will need to be lighter, making them less safe in collisions. And another issue is that CAFE standards could restrict choice for the consumer; I’d hate to be the one to tell that cowboy from Texas that he has to swap his Ford F150 for a cute little Honda Fit (not that there’s anything wrong with that).

I swear I mentioned that there was good in this part of the plan. So here it is, taken directly from his plan: “We need to level the playing field and eliminate mandates, subsidies, tariffs and price supports that focus exclusively on corn-based ethanol and prevent the development of market-based solutions which would provide us with better options for our fuel needs.” It would have been perfect if he just stopped right there.

Bear with me, there’s just a few more points.

Capping-and-Taxing & Addressing Climate Change: McCain plans to implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 60% below 1990 levels by 2050, slightly less stringent than Obama’s plan. The Lieberman-Warner cap-and-trade legislation that quickly died on the Senate floor in June proposed 70% reduction of 2005 levels by 2050. The Heritage Foundation released a study on the economic costs of the Lieberman-Warner climate change legislation that detailed the burden cap-and-trade legislation would impose on the economy. If the Lieberman-Warner bill would have imposed a $4.8 trillion hit to GDP by 2030 and nearly 1 million jobs lost in certain years, just imagine what Obama’s plan would do. The Heritage analysis of the Lieberman-Warner bill also projects a huge jump in energy prices, including gasoline. So, is McCain for lowering gas prices or raising them? Hard to say.

Cracking Down on Speculators: Speculators have been receiving a lot of the blame for the rise in oil prices, but this is misleading. Heritage economist David Kreutzer gives a good primer on how speculators can help consumers at the pump, and J.D. Foster writes that the speculators’ role in increased oil prices is marginal, at best. Ultimately, speculators do little to affect supply and demand. Thankfully, he is against windfall profits taxes against big oil companies. And here I thought he was stuck in the 1970s.

Energy Efficiency: This part of the plan includes making federal buildings more energy efficient and improving our electricity grid. Overhauling every government-owned building in this country would require a significant overhaul but may be worth it in the long run. He also discusses reducing the red tape to enhance the efficiency of the nation’s national grid. Such a deregulation could prove useful.

Overall, there are important supply side solutions that would lead to more affordable energy in this country for years to come, but there are also policies that are either unnecessary or would take us in the wrong direction. As I said with Obama’s plan, these failed approaches to combat global warming will lead to substantially higher energy costs for Americans — all to change the earth’s temperature .1 of a degree.