As in James Hamilton and Robert Kaufmann writing in the latest contribution of the Wall Street Journal Online's Econblog feature. The problem, as they both agree:
Robert Kaufmann writes: ...
Declining oil supplies will be a watershed in the economic history of the 21st century. Because oil readily comes from the ground and is easily refined, it generates a large energy surplus that powers the non-energy sectors of the economy, such as the transportation networks that support international trade, living patterns, and modern agriculture. After the peak, each barrel of oil will require more energy to extract. This leaves less energy to power the non-energy sectors of the economy.
This reduction differentiates the peak in global oil production from previous energy transitions. As society changed from wood to coal and coal to oil, the new energy resource was "better" than its predecessor. It could be used more efficiently and generated a greater surplus. With 20 years until the peak, no fuel now being researched generates a greater surplus or can be used more efficiently than oil.
James Hamilton writes: I agree strongly with most of what Robert said. I think this may very well prove to be one of the most important economic transitions that many of us alive today are going to witness.
Although James is more adamant about relying on market mechanisms to address the problem...
It is precisely because I agree with Robert about the importance of this transition that I think it's critical that we put all our resources to their best use. And I honestly believe that the best way to ensure that happens is to count primarily on the same system that has generated the fantastic improvements in global living standards over the last few centuries, namely, individuals choosing to direct the resources they personally control to those activities that yield the highest personal reward.
... they find common ground in an approach that relies on a well-constructed energy tax, as articulated by Robert Kaufmann:
Specifically, policy should impose a large energy tax that is phased in over a long period, perhaps 20 years. Furthermore, increases in the energy tax should be "offset" by reducing other taxes, such as payroll or corporate taxes. Economic studies show that such an approach can generate a "win-win" solution -- reduce energy use (and the environmental damages not paid by users), stimulate research and development on alternative energies, and speed economic growth. Phasing in an energy tax would send a signal to entrepreneurs that there will be a market for alternative energies. The tax does not pick technologies -- that will be left to the market, which is smarter than any Democrat, Republican, or even myself!
Neither, incidentally, is much impressed by the energy bill that made its way out of Congress last week.