The US doesn't have a very coherent energy policy. Oil companies enjoy a variety of subsidies and tax breaks, and our energy taxes are among the lowest in the world. On a per-capita basis, Americans are by far biggest energy users in the world. Some commentators have denounced our "addiction" to oil as the driving force behind costly military and foreign policy blunders, including miscalculated invasions of Iraq and Afghanistan.

Since the early 1990's there has been occasional discussion of a general tax on energy--a carbon or BTU tax. This would probably generate fewer market distortions than taxes on specific resources, and would stimulate substitution to alternative energy resources.

Substitute (or "transition") energy sources include coal, hydro power, solar power and nuclear power. Any comparison of the relative costs of these ought to include their relative environmental costs. High-sulfur coal generates sulfur dioxide emissions causing acid rain, for example. Hydro power often involves massive disruptions of river ecosystems. Solar power is environmentally benight but very costly. Nuclear power is potentially cheap, but involves substantial risk costs which stalled new construction of nuclear power plants in the US for about 25 years. Efficient disposal of nuclear wastes remains problematic.

Private markets would supply the appropriate amount of nuclear power if private suppliers bore the full liability costs. But the potential costs of nuclear accidents are too high for utilities to shoulder these liabilities themselves. The Price Anderson Act (1957) set a liability ceiling of $560 billion, and committed the US government to underwriting $500 billion of that. The current ceiling is higher, the government share of that liability is less, and utilities are paying into a compensation fund pool to cover potential liabilities. The problem with liability-sharing is that it reduces the incentives of individual utilities to minimize their own risks. In the insurance industry, this phenomenon is termed moral hazard, and justifies imposition of deductibles on liabilities of negligent parties.

The problem of locating nuclear waste storage facilities and other locally undesirable land uses (LULU's) involves NIMBY ("Not In My Back Yard") behavior. Location decisions tend to reflect the relative political clout of different communities, with LULU's ultimately located in low-income communities with inadequate political representation.

Utility Regulation

Utilities are generally monopolies, and their pricing structures are typically regulated by public agencies (e.g., Delaware's Public Service Commission) so as to provide a "reasonable rate of return" to investors in the utility. Utilities need to maintain adequate capacity for peak loads, but this capacity is idle during other periods. Peak-load capacity involves relatively low capital (fixed) costs but very high operational (variable) costs. Utilities generally use average-cost pricing, where the high costs of peak-load generation are offset by the low costs of off-peak generation. During peak-load periods, power is priced at less than its marginal cost, so consumers have inadequate incentives to conserve energy during those periods. Conversely, during off-peak periods, power is priced higher than its marginal cost, and consumers consume too little. Marginal-cost pricing would be most efficient, but such pricing schedules are very complex to implement and do not provide for the recovery of the utility's fixed costs.

By promoting energy conservation, utilities can defer capacity expansions, and thus defer rate increases. Utilities can encourage efficient energy use via peak-load pricing, setting higher prices for energy consumed during peak demand periods. (This approximates marginal cost pricing.)