Are Markets the Answer to Energy Concerns?

Last Updated Aug 20, 2007 4:42 PM EDT

Only those with a close eye on Congress were likely to notice the introduction of H.R. 3300 last week. But Kevin Hassett, in an opinion piece on Bloomberg.com today, shows that "the Coal-to-Liquid Fuel Marketing Act of 2007," is of interest to more than just hard-core politicos and ever- vigilant environmentalists.

The bill, introduced by Rep. Nunes, a Republican from California's San Joaquin valley, would create a pilot futures market for alternative energy, specifically coal-to-liquid (CTL), a process which would turn America's large supply of coal into a liquid fuel for existing conventional engines.

Hassett explains the scheme this way:

Imagine you are deciding whether to sink a billion dollars into a plant that makes an oil substitute. If you eyeball the history of the oil market, you will immediately see a problem. The price goes up and down over time, frequently falling to levels so low that factories producing alternative fuels would be uneconomical. You could drop your money into a costly plant, then watch the price of oil drop and lose your entire investment.
The Nunes solution is to have the government create a market for long-run put options for alternative fuels... If you are planning to invest a couple of billion dollars in a coal-to-liquid plant, then you could purchase a U.S. government-backed option that would guarantee you a minimum price of, say, $70 a barrel. If the actual price is above that, you can sell your product for more than that. If the price drops below $70, the government pays you the difference between the market price and $70.
Environmentalists are highly critical of CTL technology (The Sierra Club, for instance, says that "liquid coal releases almost double the global warming emissions per gallon as regular gasoline, making a hybrid filled with liquid coal as dirty as a Hummer H3 running on regular gas.") and the bill may never make it out of committee, but Nunes' proposal is noteworthy nonetheless.

The idea is exciting to Hassett because it uses markets, rather than subsidies, to direct capital towards alternative energy sources - including, in the longer term, sources more acceptable to environmentalists. It is, as Hassett says, an economist's dream come true. By marrying the capitalist's goal of profit with the environmentalist's goal of scaling up the production of alternative energy, while creating investment opportunities, and (the potential for) green energy, the proposal offers a glimmer of hope in the face-off between the two camps. It is also of interest to all forward thinking managers who understand that green business is not just about avoiding the public jeers of environmentalists but also about creating the business opportunities of the future.

  • Jessica Stillman On Twitter»

    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.