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Hecht: Free market is “powerful tool” in search for cleaner fuel

An economist and an engineer strike up a conversation and come to loggerheads over the rising price of gasoline.

“When are you going to build a car that gets 100 miles to the gallon?” the economist demands.

“As soon as you explain why gas costs $3 a gallon,” the engineer retorts.

Bill Hecht '64, retired president and CEO of the Pennsylvania Power & Light Co., now PPL, told this anecdote during an address Oct. 31 at “Balancing Energy and the Environment: An Exploration of Future Research Needs,” a two-day conference sponsored by the College of Arts and Sciences and the P.C. Rossin College of Engineering and Applied Science.

The lesson, he said, is simple: The economics of the free marketplace, especially the law of supply and demand, can be a “powerful tool that has been underutilized” in the effort to develop sustainable, affordable, clean sources of fuel.

Hecht, who is vice chairman of Lehigh’s board of trustees, cited federal subsidies of ethanol production as an example of a policy with unintended and potentially harmful economic consequences.

“Subsidies don’t change the cost of producing ethanol,” said Hecht, who holds a B.S. and M.S. in electrical engineering from Lehigh. “They merely change the price to the consumer. But when we use tax revenues to offset the cost of production, we artificially increase the price of corn, directly, and the price of a host of other products, such as bourbon and beef, indirectly.”

“2030 is just around the corner”

Hecht was one of 10 speakers on the first day of the conference, which drew more than 180 attendees and featured a national roster of experts from government, industry and academia. The conference continues Thursday in Iacocca Hall.

Hecht agreed with other speakers that global energy needs will grow more critical in the next 25 years as world population increases, standards of living improve in developing countries, and geopolitical tensions undermine the reliability of oil supplies.

But while affirming the need to curb worldwide emissions of carbon-dioxide, he cautioned his audience not to expect a dramatic decrease in those emissions in the near future. The cost of new pollution-control technologies, growing economies in the Third World and the abundance of coal stand in the way.

“An absolute global reduction in CO2 emissions is not going to happen soon,” he said. “And we cannot say that the rest of the world is not entitled to seek the standard of living that we enjoy. So we will have to moderate the rate at which CO2 emissions increase.”

The Energy Information Administration of the U.S. Department of Energy estimates that worldwide energy consumption will grow from a current annual rate of 17.7 trillion kilowatt hours to 30 trillion kW hours by 2030, Hecht said.

Meanwhile, “clean” energy sources, including solar, wind and hydroelectric, are projected to increase their share of the total energy-consumption pie only modestly, Hecht said, from 19 percent now to 21 percent by 2030.

“And the year 2030 is just around the corner, given that it can take a decade just to build a large nuclear-power plant,” he said.

Much of the rest of the world, said Hecht, “increasingly recognizes nuclear power as a very useful energy option with a more modest environmental impact than that imposed by the generation of energy from fossil fuels.”

But a 30-year controversy over construction of nuclear power plants has stalled development of that power source in the U.S.

Fossil fuels thus offer the best practical, near-term solution to growing world energy consumption, Hecht said. And because coal, while abundant, represents the largest source worldwide of CO2 emissions, the world will need to increase spending on both the construction of new power plants and the development of new pollution controls, he added.

By 2030, he estimated, global investment in pollution research will need to more than double over its current rate.

“The competitive market does work”

Underlying the concerns over energy supplies and CO2 emissions, Hecht said, is the constructive role that the free market can play.

“The high wholesale prices of electricity are telling us something that has not been much discussed. They are signaling that we need to build new power-generation systems. The demand for electricity may soon outstrip the rate at which these new systems can be built.”

Supply and demand can be brought into closer alignment, Hecht said, by allowing prices to rise to reflect reality.

“The competitive market does work. It needs to be used on the demand side of the equation, especially given the geopolitical distribution of petroleum. The price of petroleum is understated in today’s market. And the prices of other forms of energy are also unrealistically low.”

Hecht agreed with one questioner, who asked if it would be wise for the U.S. to take a cue from some European countries by increasing taxes on gasoline and using revenues to fund development of new energy and pollution programs.

“I think that approach makes sense,” Hecht said. “I can’t think of a single country, outside the Middle East, that has lower gas prices than the U.S.”

In response to another question, Hecht said it would be possible for the free market to account for pollution remediation and other environmental concerns that are not directly responsive to market forces.

“If we tell the marketplace the rules concerning the regulation and limitations on carbon emissions,” he said, “the marketplace can evolve.”

--Kurt Pfitzer

Posted on Thursday, November 01, 2007

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