CLEAN

ENERGY SOLUTIONS

ECONOMIC PERSPECTIVES

July 2006

U.S. DEPARTMENT OF STATE / BUREAU OF INTERNATIONAL INFORMATION PROGRAMS
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ECONOMIC PERSPECTIVES

Economic Perspectives / July 2006 eJOURNAL USA

Cover image: Wind turbines on the border of Colorado 

and Wyoming. (AP/Wide World Photo) 
ECONOMIC PERSPECTIVES

U.S. DEPARTMENT OF STATE / JULY 2006 / VOLUME 11 / NUMBER 2

http://usinfo.state.gov/pub/ejournalusa.html

CONTENTS

CLEAN ENERGY SOLUTIONS

Introduction

 SAMUEL W. BODMAN, U.S. SECRETARY OF ENERGY

 Clean Energy for Tomorrow

PAULA DOBRIANSKY, UNDER SECRETARY, 

 U.S. DEPARTMENT OF STATE

 The United States believes that the best way to promote

 energy security and help nations develop in a sustainable

 way is to promote clean and affordable energy

 technologies. 

 Sidebar: Pennsylvania—Changing the Way 

 America Thinks About Energy

 Kathleen A. McGinty, Secretary, Pennsylvania

 Department of Environmental Protection

Reinventing the Wheels: The Automotive

Efficiency Revolution

AMORY B. LOVINS, CHIEF EXECUTIVE OFFICER, 

ROCKY MOUNTAIN INSTITUTE

New automotive technologies are good for business,

environmentally friendly, and provide safe and

affordable mobility.

Sidebar: Progress in Making Affordable Light Auto Materials

Amory B. Lovins, Rocky Mountain Institute

The Renaissance of Nuclear Energy

JAMES A. LAKE, ASSOCIATE DIRECTOR FOR THE NUCLEAR

PROGRAM, IDAHO NATIONAL LABORATORY

Nuclear power is poised to enter a new era with strong

safety and economic performance, capacity to produce

electricity cheaply, and potential to displace greenhouse 

gas emissions.

 Sidebar: Conditions Shift in Favor of

 Nuclear Power

 Andrew Paterson, Partner, 

 Environmental Business International

 Renewables: Looking Toward

 Inexhaustible Energy

 MICHAEL ECKHART, DIRECTOR, 

 AMERICAN COUNCIL ON RENEWABLE ENERGY

 Renewable energy is not a silver bullet, but it can 

 help reduce oil imports, cut pollution and greenhouse 

 gas emissions, and increase jobs.

 Sidebar: AMORE—Renewable Energy for 

 Development in Mindanao

 Sidebar: Conventional Biodiesel Crops

 Small Steps Save Big in Energy

 MARK D. LEVINE, DIRECTOR, 

 ENVIRONMENTAL ENERGY TECHNOLOGIES, 

 LAWRENCE BERKELEY NATIONAL LABORATORY

 Energy efficiency is the most potent tool in our policy 

 arsenal for achieving energy security and environmental 

 advantage.

 Sidebar: U.S. Homebuilders Go “Green”

 Sidebar: Saving Energy— An Individual 

 Choice

Economic Perspectives / July 2006

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Economic Perspectives / July 2006 2 eJOURNAL USA 

 Clean Solutions for Power Generation

 LEWIS MILFORD, PRESIDENT, CLEAN ENERGY

 GROUP; ALLISON SCHUMACHER, PROJECT 

 DIRECTOR, CLEAN ENERGY GROUP

 Low-carbon options such as decarbonized 

 coal, carbon sequestration, ultra-high-efficiency 

 fossil energy production, and fuel cells provide a 

 path toward a sustainable energy future.

 Sidebar: Cogeneration—More Energy, 

 Less Pollution From Fossil Fuels

 Developing Markets for Clean Energy 

 Technologies

 LARISA E. DOBRIANSKY, DEPUTY ASSISTANT 

 SECRETARY FOR NATIONAL ENERGY POLICY, 

 U.S. DEPARTMENT OF ENERGY

 In today’s more competitive, integrated, and 

 efficient global markets for innovative, clean 

 technologies, a government can play the role of an 

 enabler and catalyst. 

 A Road Map to Investing in 

 Sustainable Energy

 STEVEN PARRY, PARTNER, NGEN PARTNERS 

 LLC; MARK CIRILLI, PARTNER, MISSIONPOINT

 CAPITAL PARTNERS LLP; MARTIN WHITTAKER, 

 PARTNER, MISSIONPOINT CAPITAL PARTNERS LLP

 A surge of commercial innovation is coinciding 

 with market, regulatory, and environmental 

 trends to make investing in sustainable energy 

 increasingly attractive.

 Energy Security As a Global 

 Partnership

 PAUL E. SIMONS, DEPUTY ASSISTANT SECRETARY

 FOR ECONOMIC AND BUSINESS AFFAIRS, 

 U.S. DEPARTMENT OF STATE

 Ensuring U.S. energy security requires well- 

 coordinated international efforts considering the 

 increasingly integrated nature of the world energy 

 markets.

 Bibliography

 Internet Resources

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eJOURNAL USA 3 Economic Perspectives / July 2006

INTRODUCTION

I

n the fi rst decade of this new century, clean 

energy technologies are transforming the 

way we power our homes, our businesses, 

and our vehicles. Before the decade is out, 

I believe we will see even more dramatic 

breakthroughs.

This isn’t just my opinion as U.S. secretary of 

energy: Clean energy is gaining momentum in 

the global marketplace as well.

Venture capitalists are investing hundreds 

of millions of dollars in alternative energy 

technologies. The Ardour Global Index of 

renewable energy companies began operating in 

May 2006. The investment community clearly 

believes money can be made in renewable energy, 

which is just another sign that renewable energy 

is on the verge of a major market expansion.

In short, the case for “green” energy is as 

strong as it has ever been.

President Bush’s Advanced Energy Initiative 

seeks additional funding for clean energy 

technologies, beginning with a 22 percent 

increase in 2007. The United States is 

accelerating its research into technologies that 

we believe hold the greatest promise to be 

competitive in the marketplace. 

Clean energy systems are incredibly diverse, 

yet technology has brought them within our 

grasp. Cellulosic ethanol, hydrogen fuel cells, 

next-generation nuclear power, photovoltaic solar 

cells, and near-zero-emissions coal plants will 

transform the way the economies of the world 

are powered to more clean, alternative sources of 

energy.

As the various articles in this journal explain, 

these new technologies promise to raise standards 

of living around the world and are giving us 

the tools to build a brighter, cleaner, and more 

prosperous future. I hope you will fi nd these 

essays to be as interesting and informative as I 

have.

 Samuel W. Bodman

 U.S. Secretary of Energy
Economic Perspectives / July 2006 4 eJOURNAL USA 

The world needs affordable and 

clean energy to fuel economic 

growth, development, and 

democracy without harming the 

environment. The United States 

is confronting this challenge with 

transformational technologies, 

creativity of entrepreneurs, and 

support for local initiatives in the 

developing world. 

Paula Dobriansky is Under 

Secretary of State for Democracy 

and Global Affairs.

Ensuring access to ample, 

affordable, clean, and 

sustainable sources of energy is unquestionably 

one of the greatest challenges facing the modern world. 

The U.S. government and America’s private sector and 

nongovernmental organizations are confronting it by 

building on a long tradition of clean energy research to 

develop transformational technologies that will reduce our 

reliance on oil and have far-reaching benefits for the entire 

world.

By embracing the energy challenge, the United States 

is working to promote energy security, reduce poverty, 

reduce harmful air pollution, and address climate change. 

These efforts often strengthen self-governing societies by 

building a culture of democracy at the grassroots level. 

THE ENERGY CHALLENGE

Rarely does a day pass without an energy-related 

issue making the headlines. Whenever world leaders 

meet, energy is an important and urgent topic of 

discussion. From the 2002 World Summit on Sustainable 

Development to the 2005 Gleneagles Group of Eight 

(G8) Summit to the 2005-2007 energy cycle of the UN 

Commission on Sustainable Development, energy is front 

and center. 

And for good reason. Supply disruptions and rising 

prices loom large in day-to-day decisions about how 

we fuel our vehicles, heat our homes, and power our 

businesses. What’s more, approximately 2 billion 

people—nearly one-third of the world’s population—lack 

access to the modern energy services that are essential for 

bringing schools into the 21st century, driving industry, 

moving water, and boosting crop production, as well as for 

lighting, heating, and cooling health facilities. 

The integrated goals of energy security and poverty 

alleviation are also inextricably linked with the need to 

reduce harmful air pollution and address climate change. 

The World Health Organization estimates that 4,400 

people die every day from indoor air pollution, much of 

which is associated with unhealthy cooking and heating 

practices. 

DEVELOPING CLEAN AND AFFORDABLE

ENERGY TECHNOLOGIES

The United States believes that the best way to promote 

energy security and help nations develop, while protecting 

the environment and improving public health, is to 

promote clean and affordable energy technologies. We will 

need a diversified approach that includes conventional, 

advanced, and renewable energy and energy-efficiency 

technologies. 

Paula Dobriansky

CLEAN ENERGY FOR TOMORROW

 President Bush talks about energy at the California Fuel Cell Partnership laboratory.

AP/Wide World Photo
5 eJOURNAL USA

The U.S. government, frequently in partnership with 

the private sector, is pursuing both domestically and 

internationally a suite of technologies that should be 

incrementally deployed by the second half of this century. 

These include new biofuels from nonfood crops; clean 

coal technology; commercialization of plug-in hybrid 

autos; hydrogen fuel cell technology; more effi cient, 

proliferation-resistant nuclear systems; and fusion 

technology. And these are just the highlights.

In his January 2006 State of the Union address, 

President George W. Bush outlined a strategy to reduce 

America’s dependence on oil. The president’s Advanced 

Energy Initiative proposes a 22 percent increase in funding 

for clean energy research at the U.S. Department of 

Energy. This includes greater investment in solar and wind 

technologies, zero-emission coal-fi red power plants, clean 

nuclear technology, and ethanol.

It is important that we not only develop clean energy 

technologies but also work to make them more affordable 

and accessible. That is why the U.S. government has 

spent more than $11.7 billion since 2001 to develop 

alternative energy sources. This funding has contributed 

to a dramatic reduction in the cost of renewable energy. 

As the costs of conventional energy rise, the private 

investment community is responding. In 2005, we saw 

$44 billion of new capital investment in renewable energy 

technologies in the electricity sector. Renewables now 

comprise approximately 20 to 25 percent of global power 

sector investment.

As we strive to develop new sources of energy, we are 

also working hard to reduce our energy consumption. 

A leading example of this effort is Energy Star, a U.S. 

government-backed program that helps businesses and 

individuals protect the environment through superior 

energy effi ciency. With the help of Energy Star, Americans 

saved enough energy in 2005 alone to avoid greenhouse 

gas emissions equivalent to those from 23 million cars—all 

while saving $12 billion on their utility bills, or 4 percent 

of the United States’ total annual electricity demand. 

DISSEMINATING TECHNOLOGIES THROUGH

PUBLIC-PRIVATE PARTNERSHIPS

Multi-stakeholder partnerships with governments, civil 

society, and the private sector are critical to addressing 

the energy challenge. The United States participates in a 

broad spectrum of partnerships, with groups ranging from 

small American nongovernmental organizations building 

and demonstrating the use of simple solar cookers in 

African refugee camps to broader regional alliances such 

as the recently launched Asia-Pacifi c Partnership on Clean 

Development and Climate. This voluntary partnership 

with Australia, China, Japan, India, and South Korea—

countries that together with the United States represent 

over 50 percent of global energy use and greenhouse gas 

emissions—has as its goal the accelerated deployment of 

cleaner, more effi cient technologies and the meeting of 

partners’ respective national pollution reduction, energy 

security, and climate change objectives. The Asia-Pacifi c 

Partnership will engage stakeholders from key economic 

sectors as full partners in addressing clean development 

and climate issues in an integrated manner. 

In order to foster public-private alliances, the U.S. 

Agency for International Development (USAID) created 

the Global Development Alliance in 2001. Through 

this innovative program, USAID has funded programs 

with nearly 400 alliances, with more than $1.4 billion in 

government funding leveraging more than $4.6 billion in 

partner resources.

The ultimate measure of the partnerships’ success is 

whether they deliver concrete, on-the-ground results. 

When we talk about measurable results, a really positive 

story is emerging from some of the partnerships launched 

almost four years ago at the World Summit on Sustainable 

Development in Johannesburg. One example is the 

Women working below wind turbines in India.

Joerg Boethling/Peter Arnold Inc. 

Economic Perspectives / July 2006
Economic Perspectives / July 2006 6 eJOURNAL USA 

Partnership for Clean Fuels and Vehicles, one of the four 

performance-based, market-oriented partnerships under 

President Bush’s Clean Energy Initiative, a multifaceted 

approach to addressing access to energy and improving 

energy efficiency and environmental quality. In 2002, 

leaded gasoline was used in all but one country in subSaharan Africa. By the end of 2005, with the assistance 

of the Partnership for Clean Fuels and Vehicles, all 49 

sub-Saharan African countries had stopped refining 

and importing leaded gasoline. This change will have a 

significant health impact on many of the 733 million 

people living in these countries. 

The United States is committed to transparent 

reporting on the partnerships in which we participate. 

Toward that end, we have created a Web site—

www.SDP.gov—to provide continuously updated 

information on U.S. sustainable development partnership 

efforts. 

BUILDING EFFECTIVE POLICY AND

REGULATORY FRAMEWORKS

One of the keys to disseminating clean-energy 

technologies is ensuring the development of markets to 

receive them. Effective policy and regulatory frameworks 

at the local and national levels are absolutely necessary to 

encourage the level of private sector investment that will 

be needed in the coming decades. 

The U.S. government is making significant progress 

to build capacity throughout the developing world. From 

our work on providing reliable energy services in poor 

slum areas in India to setting rules for power trading in 

Southern Africa to improved public participation in energy 

sector decision making globally, we are working with 

developing country ministries, utilities, and end-users to 

build the kind of institutional and market structures that 

will encourage investment in the energy sector. 

The United States is also proud to work with its 

G8 colleagues and a number of other partners on the 

Extractive Industries Transparency Initiative (EITI). The 

EITI supports improved governance in resource-rich 

countries through the full publication and verification of 

company payments and government revenues from oil, 

gas, and mining. 

FOSTERING DEMOCRATIC HABITS

AT THE GRASSROOTS LEVEL

Increasing access to modern, clean, healthy, and 

efficient energy services can help lift people out of poverty 

and protect the environment. Perhaps equally important, 

the very act of providing energy services offers tremendous 

opportunities for communities to come together to learn 

and practice the fine art of democratic decision making. 

The roots of strong democracies reach much deeper 

than the act of voting, resting on a foundation of social 

cohesion and participatory institutions. For the individual 

rural villager or urban slum dweller, the quest for energy 

services hinges on whether or not the institutions that 

serve the community are accountable to their constituency. 

Far too often, citizens’ needs are not fully incorporated 

into political decisions about who gets what, when, where, 

and how.

A number of innovative electrification initiatives across 

the globe are addressing this problem by fostering local 

community structures that can bridge the gap between 

households and service providers. For example, USAID 

supported an alliance in Ahmedabad, India, in which local 

nongovernmental organizations served as intermediaries, 

assisting slum dwellers with financing and acquiring the 

appropriate documentation regarding land ownership to 

make them eligible for legal electricity service. The results 

are impressive. In the pilot project, 820 households were 

upgraded from illegal and unreliable service to regularized 

electricity. The utility is now rolling out the program to an 

additional 115,000 poor urban households. In Salvador, 

Brazil, the utility COELBA has hired local “community 

agents” to work with the local citizens and community 

leaders to identify and resolve problems, as well as to 

provide education on energy conservation practices. 

Thus far, COELBA has electrified more than 200,000 

households. Building on this success, USAID and the 

Eurelios, an experimental solar power plant of the European Union, 

in Sicily.

AP/Wide World Photo
eJOURNAL USA 7 Economic Perspectives / July 2006

U.S. Energy Association are supporting a South-South 

exchange between COELBA and Angolan electric utility 

EDEL. 

By involving community intermediaries in 

electrification efforts, these programs are strengthening 

democratic habits at the grassroots level. They build 

trust, form social capital, and allow people to voice 

their concerns. In so doing, they not only connect 

customers to electricity but also enable citizens to learn 

what it means to participate in democratic processes. 

This experience and these newly formed skills can easily 

be applied to other aspects of social and political life, 

ultimately contributing to a stronger, more robust, and 

more secure democratic culture. 

MEETING THE CHALLENGE

The United States is pursuing a clean energy future 

that rises to the significant challenge before us. Our 

approach draws upon the best scientific research, 

harnesses the power of markets, fosters the creativity of 

entrepreneurs, and works with the developing world to 

meet our dual aspirations for vibrant economies and a 

clean environment.  
Pennsylvania is home to one of America’s 

most progressive 

alternative energy 

portfolio standards, 

ensuring that 18 percent 

of all energy generated 

by 2020 comes from 

clean, efficient, and 

advanced resources. The 

clean energy law puts 

our state in the vanguard 

of a growing movement 

by state governments to 

ensure wide distribution 

and use of zero-pollution 

solar power, and it 

builds substantially on our 

leadership in wind production east of the Mississippi River. 

Pennsylvania Governor Edward G. Rendell personally led 

a campaign to attract the Spanish wind-energy company 

Gamesa Corporation, which is investing $84 million to 

locate its U.S. headquarters and four manufacturing facilities 

in Pennsylvania.

The state, traditionally known for its coal heritage, 

is using its purchasing power to stimulate the market 

for alternative energy projects by investing in advanced 

technologies that make these resources more competitive. 

Over the next decade, Pennsylvania will replace 3.4 billion 

liters of transportation fuel with locally produced alternative 

resources, such as ethanol and biodiesel, or with fuels derived 

from coal liquefaction. The 3.4 billion liters represents the 

forecasted amount of fuels to be imported from the Persian 

Gulf to Pennsylvania 10 years from now. The state will invest 

$30 million over the next five years to build refueling and 

production infrastructure to support wide distribution of the 

alternative fuels.

Pennsylvania very well could soon be the nation’s leading 

producer of biodiesel, going from practically nowhere 

in early 2005 to a projected 151 million liters of annual 

production in the next 12 months. The state already is home 

to the East Coast’s first state-of-the-art biofuels injection 

facility, which opened in late 2005 with $219,908 in 

state aid. The plant will help replace 12.1 million liters of 

imported oil with domestically produced biodiesel and keep 

at home $6 million by reducing the state’s need to purchase 

fuels from other countries.

America’s first coal 

gasification-liquefaction 

plant is being built 

in northeastern 

Pennsylvania. The facility 

will use waste coal to 

produce 151 million liters 

of clean-burning diesel 

fuel each year. What 

Pennsylvania is doing 

to support the project is 

unprecedented—creating 

a fuel consortium with 

private industry to 

purchase nearly all of the 

output. Pennsylvania will 

lock in its supply for some 

10 years at prices well below 

current market values to ensure a long-term, viable market 

for the plant.

Pennsylvanians now spend some $30 billion per year 

on imported energy fuels. Instead of spending overseas, we 

are investing at home and putting Pennsylvanians to work. 

Brought back to life after years of inactivity, the Pennsylvania 

Energy Development Authority has awarded $15 million 

in grants and loans for 41 clean energy projects that will 

leverage $200 million in private investment. The projects 

will create 1,558 jobs in start-up construction and ongoing 

operations. The Pennsylvania Energy Harvest Grant Program 

has awarded $15.9 million and leveraged another $43.7 

million in private funds since its inception in May 2003 for 

projects using sources such as wind, solar, biomass, waste 

coal, and recycled energy.

Advanced energy technology is about achieving both 

environmental protection and economic development. In 

Pennsylvania, we are changing the way America produces 

fuel and thinks about energy, attracting investments that 

stimulate the economy and create jobs, putting indigenous 

resources to work to enhance domestic security, and realizing 

significant improvements in environmental protection.  

Kathleen A. McGinty is secretary of the Pennsylvania Department 

of Environmental Protection.

The opinions expressed in this article do not necessarily reflect the views 

or policies of the U.S. government.

PENNSYLVANIA

Changing the Way America Thinks About Energy

Kathleen A. McGinty

Entrepreneur John Rich at a future plant in Gilberton, Pennsylvania, where 

waste coal will be converted into low-emission diesel fuel.

AP/Wide World Photo

Economic Perspectives / July 2006 8 eJOURNAL USA
9

A “car-effi ciency revolution” that could move the world 

beyond oil is in the making, as automakers start shifting to 

lighter-weight materials, sleeker aerodynamics, hybrid-electric 

propulsion, and non-petroleum fuels.

Amory B. Lovins is co-founder and chief executive offi cer 

of Rocky Mountain Institute, a nonprofi t organization that 

fosters the effi cient and restorative use of resources, and chairman of the composites-technology fi rm Fiberforge.

Transportation drives global oil trade and is a key 

environmental challenge, especially in cities.

Most cities are designed around cars, not 

people—changing cars “from a convenient accessory 

of life into its central organizing principle,” according 

to environmental author Alan Thein Durning. It need 

not be so. Moreover, new car technologies already exist, 

and others are under development, with potential to 

transform the paradigms of global development and 

energy security. These technologies, if pursued, will be 

good for business throughout the world, provide safe 

and affordable mobility, be environmentally friendly, and 

create competitive advantage. They are not the stuff of 

science fi ction, but realities we can expect to see emerge 

even within this decade. 

The world cannot go on turning nearly fi ve trillion 

liters of oil per year, half of it for transport, into the 

roughly 42 percent of global carbon dioxide emissions 

reported by the International Energy Agency in its 

2005 World Energy Outlook. Oil’s direct and hidden 

costs—climate change, insecurity, geopolitical rivalry, 

price volatility, and degradation of economic and social 

development—make it unsupportable.

The most fundamental solutions are the simplest. More 

Amory B. Lovins

REINVENTING THE WHEELS

The Automotive Efficiency Revolution Ned Ahrens/King County Metro Transit

 A new diesel hybrid-electric bus is tested in Seattle, Washington.

eJOURNAL USA Economic Perspectives / July 2006
Economic Perspectives / July 2006 10 eJOURNAL USA 

sensible land use strengthens neighborhoods and lets 

people be already where they want to be. Smart policies 

let all means of getting around—from walking and biking 

to ultralight trains and advanced buses—compete fairly at 

honest prices. From Singapore to Curitiba (Brazil), cities 

that treat cars without favoritism have no car problem, yet 

they achieve excellent mobility for all. In time, so could 

even the car-centric United States and other industrialized 

countries if they stopped incentivizing sprawl and cars 

through their tax systems and zoning laws. 

Less driving is good. But with seven-eighths of the 

world’s people without cars so far—China and Africa 

have only about the car ownership that America enjoyed 

around 1915—we will also need better cars. Fasten your 

seatbelt: Automaking’s greatest revolution in a century is 

now gathering speed.

If the best conventional technologies now in some cars 

were in all cars, we would save at least a fourth of their 

fuel, repaying the investment in less than a year at current 

U.S. gasoline prices. But we can do better still by exploiting cars’ physics.

NEW AUTOMOTIVE MATERIALS

A modern car’s engine, idling, driveline, and accessories 

dissipate seven-eighths of its fuel energy. Only one-eighth 

reaches the wheels. Of that, half heats the tires and road 

or heats the air that the car pushes aside. Only the last 6 

percent accelerates the car (then heats the brakes when 

you stop). And since about 95 percent of the mass being 

accelerated is the car, not the driver, less than 1 percent of 

the fuel energy ultimately moves the driver—unimpressive, considering it is the fruit of 120 years of engineering 

effort. 

Happily, three-fourths of a car’s propulsive energy need 

is caused by its weight, and every unit of energy saved 

at the wheels saves another seven units we don’t need to 

waste on the way to the wheels. Thus, making cars that 

are radically lighter weight has huge fuel-saving leverage. 

Lighter weight formerly meant costly metals such as 

aluminum and magnesium. Now, ultralight steels can 

double a car’s efficiency without extra cost or decreased 

safety. With clever design, even conventional steels can 

yield surprising results. A German startup firm’s 2+2-seat 

450- to 470-kilogram diesel roadster (www.loremo.com) 

combines 160- to 220-kilometer-per-hour (100- to 137-

mile-per-hour) top speeds with a fuel economy from 1.5 

to 2.7 liters per 100 kilometers (87 to 157 miles per U.S. 

gallon), and will sell in 2009 for 11,000 euros to 15,000 

euros.

Advanced polymer composites are even stronger and 

lighter. They can halve a car’s weight and fuel use, yet increase safety, because carbon-fiber composites can absorb 

up to 12 times as much crash energy per kilogram as steel. 

Such materials can make cars big (comfortable and protective) but not heavy (hostile and inefficient), saving both 

oil and lives. A new manufacturing process (see sidebar) 

can even make a carbon-fiber car cost the same to produce 

as its steel version. That’s because its costlier materials are 

offset by simpler automaking and a smaller propulsion 

system.

For example, an uncompromised mid-size sport utility 

vehicle (SUV) designed in 2000 (figure 1), equipped with 

the most popular efficiency-doubling hybrid-electric drive 

system, could carry five adults in comfort and up to two 

cubic meters of cargo, haul a half-ton up a 44 percent 

grade, accelerate from 0 to 100 kilometers per hour in 7.2 

seconds, be safer than a steel SUV even if it hits one, yet 

use less than a third the normal amount of gasoline, getting about 3.56 liters per hundred kilometers, or 67 miles 

per U.S. gallon. 

If produced at a rate of 50,000 cars per year, its retail 

price would be $2,510 (in year 2000 U.S. dollars) higher 

than today’s equivalent steel SUV, but only because it is 

hybrid-electric, not because it is ultralight. Saved gasoline 

would repay this investment in two years at U.S. fuel prices or one year at European Union or Japanese fuel prices. 

Manufacturing such cars would use far less space and 

two-fifths less capital than today’s leanest plant, thanks to 

up to 80-fold less tooling and to elimination of the body 

shop and paint shop—the two hardest and costliest steps 

in automobile manufacturing.

Figure 1: The Revolution concept car, an ultralight (857-kilogram) 

carbon-fiber mid-size sport utility vehicle, designed in 2000.

Courtesy Hypercar Inc.
eJOURNAL USA 11 Economic Perspectives / July 2006

ALTERNATIVE AUTOMOTIVE FUELS

Many cars already on the road can burn advanced 

biofuels—say, 15 percent gasoline and 85 percent ethanol, ideally cellulosic ethanol made with new processes 

from woody plants such as switchgrass or crop wastes. An 

ultralight hybrid car burning such “E85” fuel could cut its 

oil use by another three-fourths, to just 7 percent of the 

current level. Brazil has already eliminated its oil imports, 

two-fifths via sugar-cane ethanol that now competes without subsidy. Three-fourths of Brazil’s new cars can burn 

anything from pure ethanol to pure gasoline, although all 

of its gasoline is at least 20 percent ethanol. Sweden plans 

to be oil-independent by 2020, chiefly via ethanol made 

from forest wastes and the requirement that its top-selling 

60 percent of filling stations offer renewable fuel by 2009. 

In the longer run, one can make a robust business case 

for tripled-efficiency, ultralight-hybrid cars to use compressed hydrogen gas as fuel and turn it into electricity in a 

fuel cell. A heavy, inefficient car would need an excessively 

bulky tank and a big, costly fuel cell. But an ultralight, 

aerodynamic car would need two-thirds less propulsive 

energy and smaller tanks. And just 3 percent as much 

cumulative production volume would be needed to make 

the three-fold smaller fuel cell cost effective—thus it could 

become cost effective many, many years earlier. Such cars 

when parked (which is 96 percent of the time) could even 

become profitable power plants on wheels, selling electricity back to the grid when and where it’s most valuable. In 

a parking structure, there would be a pipe to get hydrogen 

into the car and wires to get electricity out. At times of 

peak power demand, you could turn the fuel cell on and 

the car could run as a power plant, crediting the owner’s 

account. 

Meanwhile, adding more batteries to conventional hybrid cars, if cost effective, could displace fuel now used for 

short and, perhaps, medium trips.

COST-EFFECTIVE TECHNOLOGIES

The modern car needs to be functional, aesthetic, safe, 

fuel-frugal, and affordable. Makers of cars and public 

policy often assume that efficient cars must be small, sluggish, unsafe, ugly, or costly. But integrative design and new 

technologies can achieve all desired car attributes, today 

and tomorrow, simultaneously and without compromise. 

We therefore will not need high fuel taxes or efficiency 

standards to induce people to buy unattractive cars; rather, 

they’ll want to buy the super-efficient cars because they’re 

better, just as most people prefer digital media to vinyl 

records.

For conventionally improved cars that do cost more 

up front, car buyers’ short view—looking at just the first 

two to three years’ worth of fuel savings—is a big obstacle. High fuel prices discourage driving but have little 

effect on car choices because they’re diluted by nonfuel 

costs, then heavily discounted. The most powerful way to 

influence car choice is “feebates.” Within each size class, 

new-car owners pay a fee or get a rebate—which and how 

big depend on a car’s efficiency—and the fees pay for the 

rebates. The increased price spread encourages a buyer to 

buy an efficient model of the size he or she prefers. The 

buyer saves money; automakers make more profit; national 

security improves. Such feebates, now starting to emerge 

around the world (in Canada, France, and some states in 

the United States), are more effective and politically attractive than fuel taxes or standards.

The car-efficiency revolution faces many challenges, but 

An electric car is recharged at an alternative fuel station in San Diego, 

California.

AP/Wide World Photo
Economic Perspectives / July 2006 12 eJOURNAL USA 

each can be overcome. Hybrids, invented by Dr. Ferdinand Porsche in 1900, were reengineered nearly a century 

later by Japanese automakers with strong leadership and 

balance sheets. These popular hybrids now offer up to 

doubled efficiency, many with boosted performance as a 

free bonus. 

U.S. automakers are playing catch-up and need help 

with retooling and retraining (which needn’t cost the Treasury). Their choice is stark: whether America will continue 

to import efficient cars to displace oil, or make efficient 

cars and import neither oil nor cars. A million jobs hang 

in the balance. But the process Austrian economist Joseph 

Schumpeter called “creative destruction” is sweeping the 

overbuilt auto business: The market will change either the 

managers’ minds or the managers, whichever comes first. 

China’s and India’s ambitious automakers will quicken 

the pace, leapfrogging over Western technology. And 

countries without an auto industry may choose to start 

one of a wholly new kind—not based on steel, but more 

like making computers with wheels than cars with chips.

Altogether, tripled-efficiency cars, trucks, and planes 

are feasible with today’s technology, repaying their extra 

cost in a year or two. More efficient use of oil in buildings and industry, and substituting saved natural gas and 

advanced biofuels, could together eliminate U.S. oil use 

by the 2040s, revitalize the economy, and stop 26 percent 

of carbon dioxide emissions. Getting off oil altogether 

would cost an average of $15 per barrel (in year 2000 

U.S. dollars)—a fifth of the recent world oil price—so the 

transition will be led by business for profit.

A U.S. version of such a transition was mapped by my 

team’s 2004 Pentagon-cosponsored study Winning the Oil 

Endgame, and implementation is under way—for example, Wal-Mart doubles its heavy trucks’ efficiency, Boeing 

markets the 20 percent-more-efficient (at no extra cost) 

787, and the Pentagon explores radically more efficient 

military platforms whose technology could transform civilian vehicles much as military research and development 

created the Internet. Other countries can do as well or 

better if they just aim high, think boldly, and take markets 

and technological progress seriously. Super-efficient cars, 

and their analogues in other kinds of vehicles, are among 

the best ways to make the world richer, fairer, and safer. 

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government.
eJOURNAL USA 13 Economic Perspectives / July 2006

Carbon fiber—stiffer and stronger than 

steel but a third its 

density—embedded 

in plastic resin forms 

very light and strong 

“advanced composite” 

material, analogous to 

wood (cellulose fibers 

embedded in lignin) 

or concrete (steel rebar 

embedded in cement and 

aggregate). Advanced 

composites, increasingly 

familiar in sporting 

goods, have long 

been used in military and aerospace structures, but 

to compete in automaking their production must 

become about a thousandfold cheaper and faster. The 

handicraft process for placing the carbon fibers in the 

proper positions, impregnating them with liquid resin, 

and slowly baking the combination to “cure” it by a 

chemical reaction is far too slow and costly for making 

auto bodies: Specialty cars made in this way, like the 

Formula One-inspired Mercedes SLR McLaren, cost 

hundreds of thousands of dollars.

Some automakers are making encouraging progress 

in bridging this cost gap. BMW has 60 specialists 

perfecting its proprietary process, which uses the 

world’s biggest resin-transfer-molding press and is 

already making more than a thousand carbon-fiber 

roofs and hoods per year for high-end models. Toyota 

and Honda are widely believed to want to migrate 

advanced manufacturing technique from their carbonfiber airplane divisions back to automaking. 

Meanwhile, higher-volume production, especially 

for aerospace (over half the weight of Boeing’s new 787 

is advanced composites), is making composite materials 

better and cheaper, and innovators outside the auto 

industry are developing new manufacturing processes.

For example, 

a small private 

Colorado firm, 

Fiberforge, a firm 

this writer chairs 

and owns stock in, 

is working with 

automakers, their 

suppliers, and 

other industries 

to commercialize 

a novel process 

that appears able 

at scale to achieve 

80 to 100 percent 

of the performance 

of hand-layup aerospace composites at 10 to 20 

percent of their cost. This process first makes a flat 

“tailored blank”—super-strong polymer “plywood” 

with variously oriented layers of carbon fiber and 

thermoplastic—automatically and precisely formed 

by a digitally controlled machine akin to an inkjet 

printer. The tailored blank is then heated until the 

thermoplastic softens, and stamped on a hot die in a 

conventional thermoforming press to mold it into the 

desired complex shape. One minute later, the cooled 

part is ready to trim and use. 

Further information is available at http:// www.fiberforge.com/ and in the trade press articles and 

technical papers linked to that site.  

Amory B. Lovins is co-founder and chief executive officer of Rocky 

Mountain Institute.

The opinions expressed in this article do not necessarily refl ect the views 

or policies of the U.S. government.

PROGRESS IN MAKING

AFFORDABLE LIGHT AUTO MATERIALS

Carbon-fiber composites are used to make doors, hood, and body for the 

Mercedes-Benz SLR McLaren at a plant in England.

Courtesy DaimlerChrysler

Amory B. Lovins
Economic Perspectives / July 2006 14 eJOURNAL USA 

Nuclear power renewal promises to energize electricity generation worldwide and help address concerns about greenhouse 

gas emissions, despite remaining challenges. In the long term, 

nuclear energy could become safer and more economical, 

proliferation resistant, and sustainable.

James A. Lake is associate laboratory director for the nuclear 

program at the Idaho National Laboratory and was president 

of the American Nuclear Society in 2000-2001.

The strong economic and safety performance of 

nuclear power in the United States, the growing 

demand for energy, and the increasing awareness 

of the environmental benefi ts of clean nuclear power form 

the foundation for a nuclear energy renaissance that can 

support U.S. energy security, economic prosperity, and 

environmental quality goals in the 21st century. However, 

before such a renaissance can become a reality, policy 

makers must respond to major challenges in such areas as 

the relatively high capital costs of new plants, sustainable 

management of used nuclear fuel, and the risks of proliferation of weapons-grade plutonium from the nuclear 

power fuel cycle.

NUCLEAR POWER DEVELOPMENT

IN THE UNITED STATES

Nuclear power in the United States was born in the 

1950s and 1960s to unreasonable and, as it turned out, 

unachievable expectations of being so inexpensive that it 

THE RENAISSANCE 

OF NUCLEAR ENERGY

James A. Lake

The Calvert Cliffs nuclear plant in Maryland seen from the Chesapeake Bay.

Constellation Energy
eJOURNAL USA 15 Economic Perspectives / July 2006

was “too cheap to meter.” As the first 

nuclear power plants were built and 

operated, they began to experience 

difficulties with rising construction 

costs and with safety performance, 

culminating in the accident at the 

Three Mile Island Unit II plant near 

Middletown, Pennsylvania, in 1979. 

The subsequent corrective actions put 

in place by the U.S. Nuclear Regulatory Commission (NRC) to assure 

safe operations delayed for many 

years completion of plants under 

construction during a time of doubledigit inflation and caused several of 

these plants to go bankrupt and be 

cancelled, thus ending the first era of 

U.S. nuclear power. 

Throughout the 1980s, the nuclear 

electric utilities completed many of 

the remaining plants, brought them 

on line, and devoted their attention 

to improving cost effectiveness and operations performance, which simultaneously improved safety. By the midto-late 1990s, the 103 nuclear power plants in the United 

States were producing 20 percent of America’s electricity at 

a cost that made them highly competitive with those fired 

by coal and other fuels—less than 2 cents per kilowatthour. Furthermore, their safety performance has improved 

by more than a factor of 10, to a point where nuclear 

power is a leader in industrial safety performance today. By 

the end of the 1990s, with rising energy prices and major 

blackouts in California, U.S. business interest in nuclear 

power turned up. Several large utilities, such as Exelon and 

Entergy, bought nuclear power assets from smaller, less 

profitable utilities as the business environment for nuclear 

power began to improve. 

Today, more than half of currently operating U.S. 

nuclear power plants have sought and received 20-year 

extensions to their original 40-year licenses. The industry 

fully expects all U.S. plants to apply for these extensions as 

their original license periods expire. Such extensions would 

ensure that these large capital assets continue to produce 

electricity while Americans continue to enjoy their financial and environmental benefits. 

As we close out the second era of nuclear power, the era 

of financial and safety recovery, nuclear power is poised 

to contribute even more to U.S. and world energy needs. 

This recovery will be fueled in part by growing national 

energy security concerns and the rising costs of imported 

fossil fuels; substantial demand growth 

for energy to fuel our economic prosperity; increased attention to eliminating environmental threats associated 

with burning fossil fuels and substituting emissions-free nuclear power; and 

an electricity market very favorable to 

inexpensive nuclear power.

Public trust in the operation of 

nuclear power plants has steadily 

improved with better understanding 

of the economic and environmental 

benefits and with improved safety 

performance. Some polls show that 70 

percent of Americans favor continued 

operation of the existing plants, and 

more than 50 percent support building 

new plants.

Today, 440 nuclear power plants 

generate 16 percent of the world’s electricity needs. Aggressive new nuclear 

plant construction programs have 

begun, particularly in East Asian countries, Russia, and 

India. The United States itself is on the verge of resuming 

construction of new nuclear power plants, a process that 

has been dormant for more than 25 years. This is the beginning of the third era, the renaissance of nuclear energy.

To fulfill robust expectations, nuclear power needs to 

meet four principal challenges: 

• First, nuclear power must remain economically competitive in the world energy market; in particular, energy 

companies must better control capital costs. 

• Second, in order to satisfy the public’s expectations of 

exceptional safety performance, current plants must continue to operate safely and future plants must continuously 

improve safety in expanding world markets.

• Third, nuclear power and its fuel cycle must be 

viewed by the public and by national leaders as sustainable; 

in particular, used nuclear fuel must be managed in a manner that is cost effective and safe for the extended period 

of time that used fuel remains highly radioactive, and the 

nuclear fuel supply must be extended for centuries in the 

face of depleting fossil fuels. 

• Fourth, the nuclear materials from the fuel cycle must 

be protected from proliferation and misuse for non-peaceful purposes. 

“We stand at the verge 

of a renaissance of 

nuclear energy, founded 

in the continued 

safe and economical 

operation of America’s 

103 nuclear power 

plants and signaled by 

the expected nearterm announcements of 

several orders for new 

nuclear power plants 

to be constructed and 

operated in the next 10 

years. “ 
Economic Perspectives / July 2006 16 eJOURNAL USA 

A NEW DIRECTION FOR U.S. NUCLEAR POWER

In 2001, the U.S. government issued a new National 

Energy Policy (NEP) that set the nation on a course to 

expand the use of nuclear energy in the near term by making more efficient the processes of obtaining extensions of 

licenses to operate existing nuclear plants and of obtaining 

licenses to build new nuclear facilities. The NEP further 

sought to encourage nuclear energy use through the development, demonstration, and deployment of next-generation nuclear power technologies. Importantly, it aimed at 

achieving this goal through research and development of 

advanced fuel cycles that might prove to be cleaner, more 

efficient, less waste intensive, and more proliferation resistant than a single-use nuclear fuel, which requires geologic 

disposal of the used fuel.

 Several programs were put in place to implement the 

NEP, including:

• the Nuclear Power 2010 program to encourage the 

near-term construction of new nuclear power plants; 

• the Generation IV program to develop nextgeneration reactors that are more economical, safer, more 

sustainable, and more resistant to proliferation of 

weapons-grade plutonium;

• the Advanced Fuel Cycle Initiative to investigate advanced reprocessing and recycle strategies for used nuclear 

fuel that extract substantially more energy from uranium 

resources by burning up long-lived constituents in used 

nuclear fuel in a manner that does not separate plutonium. Such technologies promise to reduce the amount 

of used fuel, potentially extending the life of the planned 

Yucca Mountain geologic repository for spent nuclear fuel 

and radioactive waste. 

On August 8, 2005, President George W. 

Bush signed into law the Energy Policy Act 

of 2005, which authorizes long-term budgets 

for these programs, including loan guarantees, 

production tax credits, and protection for 

private sector investment in the construction 

of the first few new nuclear power plants. 

(These plants face risks associated with the 

new licensing process and with reestablishment of the U.S. design and construction 

infrastructure.) The act further provides 

funding authorization for long-term nuclear 

energy research and development programs, 

including the Generation IV advanced reactor 

development program and the Advanced Fuel 

Cycle Initiative, which together have grown 

into the Global Nuclear Energy Partnership 

(GNEP).

Nuclear Power 2010: The focus of the Nuclear Power 

2010 program is on testing and validating a new NRC 

licensing process based on certification of the safety of the 

reactor system design, issuing a permint for the proposed 

reactor site, and issuing a combined license for construction and operation of a certified reactor design on a 

permitted power plant site. 

Four advanced reactor designs developed by Westinghouse and General Electric have already received NRC 

certification, and another six are still in review, with at 

least two of these expected to be certified by 2008 to 

2010. Early site permit applications were submitted by 

three groups for at least six potential new plant sites and 

are under review. Finally, 12 utilities have notified the 

NRC of their plans to seek construction and operating 

licenses for as many as 23 new reactors. It is expected that 

the first formal nuclear power plant orders will be placed 

by late 2007 or early 2008.

Generation IV and the next-generation nuclear 

plant: The Generation IV advanced reactor roadmap 

was developed by more than 100 international nuclear 

experts to evaluate and prioritize six next-generation 

reactor technologies that have strong potential to be more 

economical, safer, more sustainable, and more proliferation resistant than existing technologies. The very-hightemperature gas-cooled reactor and the sodium-cooled 

fast reactor have emerged as the priority technologies for 

international development and demonstration. 

The next-generation nuclear plant is based on a gascooled technology that can operate at temperatures of 

850 to 950 degrees Celsius with greatly improved thermal 

efficiency for electricity production, but notably in a temTests are run on the advanced test nuclear reactor at Idaho National Laboratory. AP/Wide World Photo
17 eJOURNAL USA

perature range that may enable high-effi ciency production 

of hydrogen. High-effi ciency, emissions-free production of 

hydrogen is a critical element of President Bush’s efforts to 

displace increasingly expensive imported oil with hydrogen as a domestic transportation fuel—initially to enrich 

heavy domestic crude oil, but subsequently to produce 

synthetic transportation fuels, and, ultimately, to power 

fuel cell vehicles. It is important, therefore, that the nextgeneration nuclear plant can not only generate electricity 

but also produce hydrogen for the transportation sector 

and heat for industrial processes, the areas in which the 

heavy U.S. dependence on imported oil is a threat to our 

economic prosperity.

 The Advanced Fuel Cycle Initiative and the GNEP:

The GNEP was announced by President Bush in early 

2006. It is intended to substantially accelerate the U.S. advanced-fuel-cycle and fast-reactor technology development 

efforts. The goals of the program are these:

 • to reduce the burden related to geologic disposal of 

used nuclear fuel in terms of waste volume, heat load (as 

the radioactive fuel decays, it gives off huge amounts of 

thermal energy), radiotoxicity (levels of radiation that 

become toxic to living cells or tissue), and number of 

repositories that will be needed in the 21st century; 

• to recover the substantial energy value contained in 

used nuclear fuel;

 • to increase the proliferation resistance of used nuclear 

fuel recycle processes. 

In order to meet these goals, 

three technologies will be developed 

and demonstrated. They are (1) the 

transmutation of the materials in used 

nuclear fuel in a new generation of 

sodium-cooled fast-spectrum advanced 

burner reactors to extract their energy 

value and to render the ultimate 

nuclear wastes more manageable with 

a single repository; (2) the separation 

of the elements of used nuclear fuel 

coming from the fl eet of water-cooled 

reactors into uranium, reusable fuel 

components, and fi ssion product 

wastes using a uranium extraction 

process called UREX+ that does not 

separate weapons-usable plutonium; 

and (3) the development and demonstration of fuel-recycle and fuelfabrication technologies for the advanced burner reactors. 

OUTLOOK

We stand at the verge of a renaissance of nuclear 

energy, founded in the continued safe and economical 

operation of America’s 103 nuclear power plants and signaled by the expected near-term announcements of several 

orders for new nuclear power plants to be constructed 

and operated in the next 10 years. In the longer term, our 

national laboratories are working with the nation’s universities, U.S. industry, and the international community 

to develop the next generation of advanced nuclear power 

systems, which will be even more economical, safer, and 

sustainable with a closed fuel cycle that burns up substantially more of the nuclear fuel to extract much more 

of its energy potential while minimizing the quantities of 

nuclear waste. Nuclear power has an important place in 

America’s energy future, safely providing electricity and 

transportation fuel products that are economical, clean, 

and sustainable. 

The opinions expressed in this article do not necessarily refl ect the views or 

policies of the U.S. government.

Diagram of a very-high-temperature reactor.

Courtesy of Idaho National Laboratory

Control

 Rods

Reactor

Helium

Coolant

 Heat

Exchanger

Heat Sink

 Hydrogen

Production Plant

Pump

Blower

Hydrogen

Oxygen

Water

Graphite

Reflector

Graphite

Reactor

Core

Very-High-Temperature Reactor

Economic Perspectives / July 2006
18 

The dramatic recovery of interest in nuclear energy is likely to lead, in 10 years or so, to construction 

of the first nuclear power units in the United States in 

25 years. Expectations for the economic viability of new 

nuclear power projects are rising due to several factors. 

Competitive production costs and reliability: In 

the United States, nuclear power production costs at 

existing plants are a bit below those of coal-fired plants 

and roughly one-third of gas-fired plants, according to 

the Utility Data Institute private directories and data 

bases. However, this is because the capital equipment 

costs for the 103 U.S. reactors are now fully recovered by 

their owners. Uranium fuel prices—below half a cent a 

kilowatt-hour (kWh)—though rising recently, have been 

more stable and much lower than gas prices. Moreover, 

uranium fuel comes from stable allies Canada and 

Australia, not volatile supply sources in the Middle East. 

And recycling Russian warhead material from the Cold 

War actually provides half our fuel. Lastly, nuclear plants 

run continuously, regardless of weather, making them the 

most reliable source of large-scale electricity.

Potential for lowering construction costs: Nuclear 

power plants have the highest construction costs in 

the large-scale power generation sector. In recent years, 

however, an international market for nuclear reactors has 

emerged. U.S. plant owners are developing alliances to 

provide a string of orders on standardized designs certified 

by the U.S. Nuclear Regulatory Commission (NRC) that 

should bring down single-unit prices. By teaming up, 

utilities provide reactor vendors and engineering firms 

with a 20-year sales curve, allowing them to efficiently 

staff up and order large components. With multiple 

orders, the capital costs of new units can be brought 

down to around $1,200 to $1,500 per kilowatt-electric 

(kWe) from roughly $2,000 to $2,300 per kWe for first 

units. By comparison, capital costs for coal-fired plants 

are around $1,300 to $1,500 per kWe (depending on 

whether they combust or gasify the coal), and those of 

gas-fired plants are around $600 per kWe.

Predictable licensing: The NRC has redefined the 

licensing process for nuclear power plants—perceived 

by the industry as a “showstopper”—making it more 

predictable without compromising on safety. The NRC 

reforms will be tested in the near future with government 

help, under the Energy Department’s Nuclear Power 2010 

program. Unlike the “greenfield” plants of the 1970s, 

however, the first new reactors will be added to current 

nuclear sites where infrastructure is already in place and 

communities support them, primarily in the Southeast.

Advanced plant design and experience: Instead of 

varying designs, the NRC is now certifying only a few 

reactor designs. And, more important, plant design and 

production are now much more advanced than they 

were 25 to 30 years ago, when the last U.S. reactors 

were ordered—before automated computer-aided 

design/computer-aided manufacturing (CAD/CAM) was 

available. Thousands more hours of experience worldwide 

since 1980 have strengthened the design and engineering 

process.

Government financing: Government support for the 

first few new reactors—in the form of loan guarantees, 

production tax credits, and federal risk insurance for 

commissioning delays—monetizes the emissions savings 

of nuclear power and will help the industry address 

regulatory uncertainties beyond their control. Interest 

rates are also significantly lower than in the late 1970s (a 

prime rate at 5 to 6 percent now versus 15 percent then). 

More reactors were cancelled because of high interest rates 

than as a result of the accident at Three Mile Island in 

March 1979.

Nuclear vs. natural gas: In the 1990s, after passage 

of the Clean Air Act, relatively cheap natural gas emerged 

as the most popular clean alternative. The capital costs 

of nuclear power—which can be three times higher 

than those of gas plants—and other factors, such as the 

four- to six-year construction cycle, made nuclear power 

unattractive to investors and utilities. But gas prices have 

risen dramatically since then and remain volatile. A 2001 

study by the Electric Power Research Institute projected 

that new nuclear capacity could be economically viable 

if natural gas prices stayed above $5 per million British 

thermal units (BTU). In fact, prices are trading between 

$8 and $12 per million BTU for December 2006 

delivery. 

Andrew Paterson is a partner with Environmental Business 

International, a firm specializing in market data and 

strategic intelligence for energy and environmental industries 

(www.ebiusa.com). He also serves as a consultant for Technology 

Management Services, a firm specializing in technical support to 

federal agencies, principally the Department of Energy.

The opinions expressed in this article do not necessarily reflect the views 

or policies of the U.S. government.

CONDITIONS SHIFT IN FAVOR OF NUCLEAR POWER

Andrew Paterson

Economic Perspectives / July 2006 eJOURNAL USA
19

RENEWABLES

Looking Toward Inexhaustible Energy 

Michael Eckhart

A major expansion of renewable energy worldwide will 

require innovative government policies, a stable and 

predictable investment environment, and technology transfers 

to the developing countries.

Michael Eckhart is president of the American Council on 

Renewable Energy (ACORE), a nonprofit organization based 

in Washington, D.C. ACORE staff members Peter Gage and 

Cameron McCarter contributed to this article.

The renewable energy sector is about to turn a 

corner. Commercially available and economically 

competitive in many locations, renewables 

will further U.S. national interests by helping end our 

addiction to oil and begin to address the issue of global 

warming. The industry is poised for Phase II, putting 

America’s 30-year, $15 billion investment in research, 

development, and demonstration of renewable energy 

technologies to use in the marketplace.

MARKET DRIVERS

There are three key drivers pulling markets toward 

renewables. The first is national energy security. Current 

projections show U.S. oil consumption increasing and 

outpacing flat domestic production curves, leaving the 

United States increasingly dependent on foreign oil 

An artist’s rendering of a planned Stirling Energy Systems solar power plant in the Mojave Desert, 

California.

Courtesy Wade Newhouse/ Stirling Energy Systems, Inc.

eJOURNAL USA Economic Perspectives / July 2006
20 

markets. This would make the U.S. economy vulnerable 

to disruption in oil imports.

Additionally, the rapid growth of developing countries 

such as China and India places an increasing strain on 

world oil markets, a problem that is likely to get worse 

over time. The effects of this can already be seen: The 

price of oil surpassed $70 per barrel in mid-June 2006, 

up from $30 only a few years ago. Renewable energy can 

help the United States rely on domestic sources of energy, 

which will reduce our need for oil or lessen the growth of 

our consumption. 

A second driver toward renewable energy is concern 

about climate change. Renewable energy can help 

provide for our energy requirements while decreasing 

our greenhouse gas emissions. According to several news 

sources, more than 2,000 scientists have concurred that 

greenhouse gases such as carbon dioxide and methane 

are building up in the Earth’s thin atmosphere and that 

this buildup of gases is increasing global temperatures. 

Many of these scientists believe that this increase 

of temperatures portends negative and potentially 

catastrophic consequences, that the time frame for 

addressing the issue is now, and that there are actions that 

can be taken. Use of carbon-free renewable energy is one 

of them. 

A third market driver is the cost of renewable energy, 

which has been decreasing for decades and is projected to 

continue to decrease for some renewables, as shown in the 

figure above. The decreasing costs of renewable energies 

can be attributed to improvements in the technologies 

of the renewables. As the industry matures, costs will 

continue to decrease. 

PUTTING RENEWABLE ENERGY TO USE

The uneven distribution of renewable energy resources 

across the United States makes it difficult to have a single, 

sweeping national policy. Solar energy is strongest in the 

Southwest; wind power is most used in the Great Plains, 

on mountain ridges, and offshore; and geothermal energy 

is available in the West. Biomass is available across the 

country, but regionally in different forms. Biofuels are 

being produced in the farming states but consumed in 

cities that have air quality restrictions.

There are multitude of local markets for renewable 

energy across America, each with unique resources, 

economics, culture, and politics. Individual states have 

taken the lead in the renewable sector. Nearly half of the 

states employ a renewable portfolio standard (RPS)—a 

system of goals for producing renewable energy. The 

employment of RPSs at the state level requires utilities 

to provide a particular amount of energy from renewable 

sources by a specific date, thus creating new demand for 

renewable energy immediately. 

Elsewhere, the European Union has taken steps toward 

promoting renewable energy use and is a source of policy 

Decline in Renewable Energy Costs

1980 1990 2000 2010 2020

40

30

20

10

 0

Wind

1980 1990 2000 2010 2020

100

80

60

40

20

 0

Photovoltaic

2010

10

 8

2010

15

 12

1980 1990 2000 2010 2020

 9 

 6

 3

 0

1980 1990 2000 2020

 6 

 4

 2

 0

1980 1990 2000 2020

70

 60

 50 

 40

 20

 0

 30

10

Biomass Geothermal Solar thermal

These graphs are reflections of historical cost trends, NOT precise annual historical data.

COE = Cost of Energy.

Source: National Renewable Energy Laboratory (www.nrel.gov/analysis/docs/cost_curves_2002.ppt). 

COE cents/kWh

COE cents/kWh

Economic Perspectives / July 2006 eJOURNAL USA
21 Economic Perspectives / July 2006

innovation. Germany, Spain, Italy, and others 

have implemented feed-in tariffs—the price per 

unit of electricity that a utility or supplier has 

to pay for renewable electricity from private 

generators. Meanwhile, Finland, Greece, and 

the United Kingdom have grants, tax incentives, 

and mandates for people to produce or use green 

power.

There have been widespread efforts to 

deploy renewable energy in the developing 

countries, with funding by the U.S. Agency for 

International Development and many donor 

agencies, and with financing support by the 

World Bank, European and other regional 

development banks, and the private sector. India 

was one of the first to commit to broad-based 

use of renewables and is active in wind, solar, 

hydro, and biomass energy. Brazil has been the 

early leader in sugar-based ethanol. Southern 

India, Sri Lanka, and Bangladesh have developed 

markets for the use of solar photovoltaics (PV), 

getting initial electricity to off-grid homes. China 

has developed a $3-billion-per-year solar water 

heating industry. 

WIND POWER

Wind power is the leader in wholesale renewable 

electricity production in the United States. Total 

installed U.S. wind power capacity was 9,149 

megawatts at the beginning of 2006, according to the 

American Wind Energy Association. A large part of 

this—2,420 megawatts—was installed in 2005, and an 

estimated 3,000 megawatts is planned for installation 

in 2006. With recent technological advances, the price 

competitiveness of wind generation versus natural gas has 

improved, supporting continued growth. In addition, the 

U.S. federal government offers companies a production 

tax credit for wind power equal to about 1.9 cents per 

watt-hour. This has been a powerful incentive to attract 

tax-oriented investors, such as utility companies, into 

wind farm ownership.

The original market for wind power was Denmark 

in the late 1990s, followed by Germany. Today, the hot 

markets are Spain, Italy, France, the United Kingdom, 

and India. But wind power is available almost everywhere.

SOLAR ENERGY

Solar PV, a $12-billion global industry, is the leading 

renewable power source for distributed power generation 

(consumers who generate heat or electricity for their own 

needs and send surplus electrical power back to utilities), 

with recent growth in Japan, Germany, and Spain. 

In 2005, the U.S. Energy Policy Act established a 30 

percent federal tax credit for solar systems purchased for 

both residential and business applications in the United 

States, on top of substantial subsidy programs in states 

such as California and New Jersey. 

In the developing countries, PV has great opportunity 

but has proven difficult to implement because it requires 

a local infrastructure of companies to sell, install, and 

service the equipment, and needs financing, which often 

is not available. Yet, markets are growing in India, Sri 

Lanka, Bangladesh, Morocco, Kenya, South Africa, and 

elsewhere.

Maize-Based Ethanol Into Gasoline

The United States produced about 3.4 billion gallons of fuel ethanol in 2004. 

Almost 86 percent of that came from the Midwest, which produces more than 

two-thirds of the nation’s maize.

Making of fuel ethanol

Ground maize, 

water, and

enzymes are 

cooked until the 

starch in the grain 

is converted to a 

sugar.

After cooling, 

yeast is

added, and the 

sugar is

converted to 

ethanol.

The ethanol is 

separated

from the mixture 

in a distiller.

After a drying 

process, the 

remaining water is 

removed. Gasoline 

is added, making 

it harmful if 

ingested.

Nontoxic carbon 

dioxide is collected

and often sold to 

beverage companies.

The remaining 

mixture can be sold as 

animal feed.

AP/Associated Press Graphics

eJOURNAL USA
22 

BIOFUELS

Biofuels, principally maize-based ethanol, present 

the biggest investment opportunity in renewable energy 

in the United States for the next several years. Recent 

evidence assembled by Lawrence Berkeley Laboratory 

rebuts outdated beliefs from the 1970s that, because of 

the energy-intensive production, environmental benefits 

from maize-based ethanol are nonexistent. It now appears 

that producing maize-based ethanol requires much less 

petroleum than producing gasoline and that greenhouse 

gas emissions from such an ethanol are about 15 percent 

to 20 percent lower than from gasoline. New cellulosic 

ethanol technology reduces both greenhouse gas emissions 

and petroleum inputs even more substantially. With 

ethanol replacing methyl tertiary-butyl ether (a chemical 

compound used as a fuel component in gasoline that has 

been banned in 22 states), demand has grown rapidly. In 

2006, more than 4.7 billion gallons (17.9 billion liters) of 

ethanol will be produced, and there are 2 billion gallons 

(7.6 billion liters) per year of new processing capacity 

under construction in the United States.

The U.S. auto manufacturers have taken notice of the 

recent interest in biofuels. General Motors, for example, 

currently produces nine models that can run on E85, a 

mixture of 85 percent ethanol and 15 percent gasoline.

 

INVESTMENT

Large investments are being made in renewable energy 

companies and projects. Venture capitalists invested 

close to $181 million in alternative energy companies 

in 2005, an increase of $78 million from the previous 

year, according to PricewaterhouseCoopers, Thomson 

Venture Economics, and the National Venture Capital 

Association.

Major industry leaders have begun to take notice of 

this growing market opportunity and are showing their 

support. For example, General Electric recently invested 

$51 million in a 50-megawatt wind project in California, 

and Cascade Investment LLC placed $84 million into 

Pacific Ethanol, which produces and markets renewable 

fuels. The accelerated market growth has created a 

favorable environment for investors, with opportunities 

for substantial profits, as well as risks, in this now $50-

billion-a-year industry. 

NATIONAL AND GLOBAL BENEFITS

Renewable energy is a broad category of sources that 

draws from the naturally available energy around us. 

While not a silver bullet, the more we use it, the better 

off we will be in terms of reducing oil imports, reducing 

pollution and greenhouse gas emissions, and increasing 

jobs.

Renewable energy can provide significant 

opportunities for developing countries and rural areas. 

For example, by providing new jobs and new sources of 

income for farmers and ranchers, the Colorado Green 

Wind Farm in Lamar, Colorado, boosted the local county 

tax base by 29 percent, increased the school general 

fund by $917,000 per year, and increased funding of the 

county medical center by $189,000. 

The potential of renewable energy is vast. It 

contributes to America’s needs for security of supply, 

a cleaner environment, good jobs, and investment 

opportunities. The rural sector of America stands 

to receive the most benefits from renewable energy 

development.

Such development also offers opportunity to the rural 

people of the world everywhere to gain access to modern 

forms of energy. Wind, solar, geothermal, biomass, and 

small hydro plants can generate electricity for rural

Geothermally heated greenhouse in Hveragerdi, Iceland.

Simon Fraser/Photo Researchers Inc.

Economic Perspectives / July 2006 eJOURNAL USA
eJOURNAL USA 23 Economic Perspectives / July 2006

utilities and villages. Solar PV and solar water heating can 

bring modern energy to homes.

OUTLOOK

The outlook for renewable energy in the United States 

and around the world is positive and accelerating. This is 

a challenge for government policy planners who have to 

rely on computer modeling projections that can be out of 

date because oil prices have increased rapidly and demand 

for renewable energy has accelerated. For example, while 

the official U.S. forecast from the Energy Information 

Agency shows renewable energy contributing only 

about 10 percent of U.S. energy supply in 2030, various 

industry groups are more optimistic. The Energy Future 

Coalition is calling for 25 percent by 2025, and ACORE 

sees the potential for 20 percent, 30 percent, and 40 

percent by 2020, 2030, and 2040, respectively. 

To make this happen, conventional energy prices 

must continue to stay high, renewable energy costs must 

continue to come down, and government policies must 

be stable and predictable to encourage commitment of 

lenders and investors to the financing of renewable energy 

systems. There also must be international collaboration to 

transfer the technologies to the developing countries.  

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government.
24 eJOURNAL USA 

AMORE

 Renewable Energy for Development in Mindanao

A solar panel is not just a solar panel—a device generating “clean” electricity. In the developing 

world, it can open the door to development and light the 

road to it, too. 

In the Philippine’s Autonomous Region in Muslim 

Mindanao, ravaged by three decades of civil unrest, solar 

photovoltaic panels and micro-hydropower systems have 

helped improve public health and education, nourish 

entrepreneurship, empower women, and enhance a 

sense of community and peaceful coexistence. The 

panels were installed 

by the U.S. Agency 

for International 

Development’s 

(USAID) Alliance for 

Mindanao Off-Grid 

Renewable Energy 

(AMORE). AMORE 

was established in 2002 

to provide electricity 

from renewable sources 

to villages on the 

southern Philippines 

islands, which are 

far from the national 

energy grid. 

As of March 

2006, AMORE had 

electrifi ed more than 

1,300 households, community centers, and streets in 227 

barangays (villages). In the future it plans to equip with 

sustainable, renewable small-scale energy systems at least 

170 more remote rural communities in the region.

Solar-powered lights cost 70 percent less per month to 

operate than kerosene lamps and save the carbon dioxide 

such lamps produce from entering the atmosphere. 

AMORE’s efforts are helping to increase outdoor 

safety and signifi cantly boost business and educational 

productivity by allowing work and study to extend into 

evening hours. Maintained by community development 

groups, the stand-alone energy systems also enable 

aspiring entrepreneurs to pursue new small-business 

projects such as mat-making and other local crafts.

But the development drive does not stop there. 

Electrifi cation has given an impulse to related programs— 

installing solar-driven pumps to provide clean drinking 

water and irrigate vegetable farms, as well as delivering 

audio materials through radio to villagers wanting 

to study English. AMORE also has promoted using 

renewable energy for fi sh drying, for producing fi sh 

and seaweed by aquaculture, and for powering public 

telecommunications offi ces, a community computer 

center, and cable TV facilities. Some of these projects 

attracted partners that were not part of the original 

alliance.

AMORE energized the village of Chua in 

Bagumbayan, Sultan Kudarat, when it installed an 8-

kilowatt micro-hydropower system and established a 

spring-fed potable water system, an integrated grain and 

bean mill, and a vegetable farm. Electrifying the local 

school enabled powering 

distant educational 

facilities.

In the village of 

Kahikukuk in Banguingi 

on the island province 

of Sulu, a potable water 

system is expected to 

reduce the incidence 

of diarrhea and other 

waterborne diseases. 

Before the system was 

installed, the village 

residents—mostly 

women and young 

girls—fetched water 

from unsafe makeshift 

wells 1.5 kilometers away 

from their residences. 

AMORE applies in practice the idea of self-propelled 

development. Putting the operation and maintenance 

of energy and other systems into the hands of local 

development groups has ignited a sense of community 

and responsibility. Such a group in Barangay Lagasan 

not only used its own resources and funds to protect the 

systems from pilferage, but also raised funds to purchase 

a streetlamp. The U.S. embassy in Manila concluded in 

an article published on its Web site that Barangay Lagasan 

and similar groups have evolved into organizations that 

promote community progress. An island community 

leader was heard saying: “Among the best things that the 

AMORE program has done in our community was that 

they provided the light that brought us closer.”

The AMORE Alliance includes the Autonomous 

Region in Muslim Mindanao, the government of the 

Netherlands, Mirant Philippines Corporation, the 

Philippines Department of Energy, Shell Solar, and 

SunPower Corporation.  

Villagers erect a solar photovoltaic panel in Mindanao, Philippines.

Alliance for Mindanao Off-Grid Renewable Energy.

Economic Perspectives / July 2006
eJOURNAL USA 25 Economic Perspectives / July 2006

Typical crops for conventional biodiesel production include soy, sunflower, rapeseed, palm, and other 

oilseed bearing crops such as jatropha.

Soybeans are grown as a commercial crop in more 

than 35 countries. The major producers are the United 

States, China, the Democratic People’s Republic of 

Korea, the Republic of Korea, Argentina, and Brazil. 

Soybean is grown primarily for the production of seed. 

It has a multitude of uses in the food and industrial 

sectors (including biodiesel production) and represents 

one of the major sources of edible vegetable oil and 

proteins for livestock feed use. Soybeans are often 

rotated with such crops as maize, winter wheat, spring 

cereals, and dry beans.

The many diverse species of sunflowers produce two 

types of seeds: oil-bearing and edible. Oil seeds have 

an oil content greater than 40 percent and are best 

suited for biodiesel production. The main producers 

of sunflower seeds are Russia, Ukraine, and Argentina, 

but sunflowers are also widely cultivated in China, 

India, the United States, and Europe. Yields vary 

widely according to the growing environment. Water 

availability is the main cause of the variations.

Rapeseed (colza) is a member of the mustard 

family. Two types of rape are commonly cultivated to 

produce either tuber-bearing or oil-bearing rapeseed. 

Rapeseed is used for the production of edible oil in 

Asia and elsewhere for the production of animal feed, 

vegetable oil, and biodiesel. China, India, Europe, 

and Canada are now the top producers, although 

rapeseed can be successfully grown in the United 

States, South America, and Australia. The spring-type 

oleiferous rapeseed performs well under a wide range 

of soil conditions but is not very drought tolerant. 

Oilseed rape cannot be grown on the same field more 

than once every three years to prevent the buildup of 

diseases, insects, and weeds.

Crops for biodiesel demand more than three times 

as much land as sugar cane used for ethanol to deliver 

the same amount of biofuel energy. Sunflower and 

rapeseed lead to much lower biofuel yields per hectare 

than those for ethanol. The typical yield of soybeans 

cultivated in Brazil is 600 to 700 liters of diesel 

equivalent per hectare, while European rapeseed yields 

are around 1,100 liters of diesel equivalent per hectare.

Palm oil offers an opportunity for expanding the 

energy supply in developing countries by using it as 

a biomass resource. Care should be paid to analyze 

which areas of land are used to supply the palm fruits, 

as palm oil plantations grown in tropical areas are a 

major cause of deforestation in countries like Malaysia 

and Indonesia. Malaysia is the world’s largest producer 

and exporter of palm oil. As with other oily crops, 

current estimates of fuel yield from palm oil are low: 

about 900 liters of diesel equivalent per hectare.

Oil-importing countries are considering the 

production of biodiesel from physic nut or jatropha 

grown on degraded land. The idea is not to compete 

with land where profitable food production would 

be possible. The jatropha tree is indigenous to South 

America, but it is widely planted in Central America, 

Africa, and Asia. It is adapted to high temperatures, 

and it can tolerate drought. The tree is well adapted to 

marginal soils with low nutrient content. Its cultivation 

is technologically simple and requires comparatively 

low capital investment. The oil of the physic nut can 

be used after detoxification to make edible oil, or it 

can be converted into biodiesel. Nicaragua is a leading 

producer of biological diesel substitute based on the oil 

of the physic nut. 

Source: Energy Technology Perspectives: Scenarios and Strategies to 

2050. Paris: International Energy Agency, June 2006. (Copyright 

OECD/IEA, 2006)

CONVENTIONAL BIODIESEL CROPS
Economic Perspectives / July 2006 26 eJOURNAL USA 

It is time for policy makers to recognize they can play a more 

active role in encouraging consumers to invest in and gain 

from energy efficiency. Steps taken by many individuals can 

save vast amounts of energy and boost both local markets and 

the national economy. 

Mark D. Levine is director of the Environmental Energy 

Technologies Division at the Lawrence Berkeley National 

Laboratory in California.

Energy efficiency is usually regarded as a personal 

activity that can be recommended to individuals 

but has limited impact on a nation. This is a 

regrettable misperception. Energy efficiency is not 

only a tool for achieving energy security; it is the most 

potent of all the tools in our arsenal. Well-designed and 

implemented energy efficiency policies can not only 

substantially reduce energy demand but also give a boost 

to an economy.

ENERGY CONSERVATION VERSUS

ENERGY EFFICIENCY

Energy conservation has come to mean 

actions taken by individuals to use less 

energy in carrying out their everyday tasks 

or even not doing certain activities so as to 

save energy. There has been only one time 

when energy conservation was implemented 

as a serious policy in the United States. This 

was during the electricity crisis in California 

in 2001. The state was in a desperate 

situation: There was no time to build more 

power plants, and importing electricity from 

outside the state was not viable. Energy 

efficiency—as defined below—could not 

come into play fast enough. 

California came up with creative ways 

of inducing energy conservation, especially 

the 20/20 program, which gave consumers 

a 20 percent rebate on their electricity bills 

if they cut electricity use by 20 percent. 

During the crucial summer months of 2002, conservation 

yielded 11 percent electricity and 16 percent peak power 

savings. The state paid for the savings. But the money 

stayed in California, going to electricity consumers, and 

the rebate cost was a fraction of the supply cost, especially 

at the very inflated prices prevailing at the time.

Energy conservation is not a favored policy except 

in crisis. The more effective approach involves 

investment in energy efficiency. Please note the word 

“investment.” Energy efficiency is an investment strategy, 

and government policy is as important to its success 

as the decisions of a country’s central bank are to its 

macroeconomic policy. Energy efficiency is not a shortterm policy; it is, in fact, effective only if carried out 

consistently over years and decades.

THE ECONOMICS OF ENERGY EFFICIENCY

To many people, energy efficiency is either ethereal or 

so small as to make little difference. People easily relate 

SMALL STEPS SAVE BIG IN ENERGY

Mark D. Levine

Figure 1

Energy Intensity in the 

United States, 1949 - 2005

Thousand BTU/$ (in year 2000 dollars)

25. 0

20. 0

15. 0

10. 0

 5. 0

 0. 0

19491951

1953

195519571959

1961

1963

1965196719691971

1973

1975

1977

1979

1981

19831985

1987

1989

1991

19931995

1997

1999

20012003

2005

Note: British Thermal Unit (BTU) is the amount of heat necessary to raise the temperature of one pound 

of water by one degree Farenheit.

Source: Derived from data at http://www.eia.doe.gov/emeu/aer/overview.html.

Actual (2.1%/ year)

If intensity dropped at pre-1973 rate of 0.4%/year

Energy savings from energy intensity 

declining at a faster rate
eJOURNAL USA 27 Economic Perspectives / July 2006

to solar energy installations (for example, photovoltaic 

on rooftops) or wind energy. But energy efficiency does 

not lend itself to visualization. And it is achieved through 

the implementation of many measures, each of which 

contributes a small amount to reducing energy use. 

Because policy makers typically do not recognize the 

importance of energy efficiency as a policy measure, it 

often gets ignored. Figures 1 and 2 clarify these points for 

the United States as a whole. Figure 1 compares energy 

intensity [energy consumption per unit of gross domestic 

product (E/GDP)] as it evolved during the three-plus 

decades after 1973 to what would have occurred if 

previous trends had prevailed. 

Figure 2 shows the dramatic results of this change 

in energy intensity. If energy demand had continued 

its earlier growth patterns, we would today be using 75 

percent more energy than we are. 

The reduction in energy intensity is the result of 

structural change in the U.S. economy. The shift away 

from manufacturing toward services such as banking and 

information technology has contributed about one-third 

of the intensity gains. Two-thirds is from investment in 

energy efficiency. This means, remarkably, that energy 

efficiency contributed almost four times as much as new 

energy supply in the United States to meeting demand for 

energy services during the three decades since the 1973 

oil embargo. For something virtually invisible and rarely 

addressed in high circles dealing with energy-security 

matters, energy efficiency has been a potent force.

THE FIVE MAJOR ENERGY EFFICIENCY POLICIES

The energy efficiency gains in the United States have 

resulted from four explicit policies and one implicit 

policy. The four explicit policies have involved these:

• appliance efficiency standards;

• utility demand-side management (DSM) programs 

(utility investments to increase customers’ energy 

efficiency);

• building-energy standards; 

• corporate automobile fuel economy (CAFE) 

standards.

The implicit policy has 

been one by which the federal 

government does not stand in 

the way of modest energy price 

increases. That is, unlike other 

industrialized countries in which 

energy prices are much higher, 

the United States does not tax 

oil to reflect a broad range of 

external costs. 

Of the four explicit policies, 

three are very actively pursued 

in the United States. The Energy 

Policy Act of 2005 set levels that 

led to 15 appliance standards. 

The U.S. Department of Energy, 

under judicial court order, is 

aggressively pursuing standards 

that will be issued over the 

next two to five years for 17 

additional products. 

DSM—utility programs 

working to increase energy efficiency on the customer 

side of the meter—appeared for a time to be stalled 

because of utility restructuring, but has come roaring 

back. One of the most successful of the utility DSM 

programs carried out by many utilities has involved 

rebates for replacing inefficient fluorescent lighting with 

efficient lamps. 

California utilities will invest $2 billion over three 

years in DSM, almost double the previous level and 

quadruple the average over the last decade. According 

to the utility forecasts, this will cut electricity demand 

growth from 2 percent per year to 0.5 percent per year 

over the next decade. California is among the most 

in energy intensity. If energy demand had continued 

been one by which the federal 

government does not stand in 

the way of modest energy price 

increases. That is, unlike other 

industrialized countries in which 

energy prices are much higher, 

the United States does not tax 

oil to reflect a broad range of 

external costs. 

three are very actively pursued 

in the United States. The Energy 

Policy Act of 2005 set levels that 

led to 15 appliance standards. 

The U.S. Department of Energy, 

under judicial court order, is 

aggressively pursuing standards 

that will be issued over the 

next two to five years for 17 

additional products. 

19491951

1953

195519571959

1961

1963

1965196719691971

1973

1975

1977

1979

1981

19831985

1987

1989

1991

19931995

1997

1999

20012003

2005

200

175

150

125

100

75

50

25

 0

Quads

200

175

150

125

100

75

50

25

0

Figure 2

Energy Consumption in the

United States

If E/GDP had dropped 0.4%/yr

New Physical Supply

Actual (E/GDP drops 2.1%/yr)

$ 1.7

Trillion

$ 1.0

Trillion

New Physical Supply = 25 Q

Avoided Supply - 70 Quads in 2005

Note: Quad is an energy unit equal to 1015 BTU.

Source: Derived from data at http://www.eia.doe.gov/emeu/aer/overview.html.
Economic Perspectives / July 2006 28 eJOURNAL USA 

aggressive states in promoting energy 

efficiency. Electricity demand growth 

is expected to be reduced by about 

85 percent over the next decade, 

compared to a projection without the 

appliance/building energy efficiency 

and utility DSM programs. As 

shown by this state’s pursuit of 

electricity end-use efficiency for 

at least two decades, good energy 

efficiency investment policies can 

bring significant results over the long 

term. This is not widely recognized by 

the public or by public policy makers.

The third policy involves 

energy efficiency standards for 

buildings. Like utility demand-side 

management, building standards 

are generally set at the state level 

and implemented at the local level. 

As such, performance varies greatly 

among states. In part because of 

important achievements in federal 

research and development (R&D) 

programs, energy use in new 

buildings is two-thirds to one-half 

that of existing buildings, resulting 

in an assurance of savings over the 

lifetime of the building. 

There are two critical factors necessary to continue 

this success story: (1) revitalization of the federal R&D 

effort on energy efficiency in buildings, an effort that 

produced technology that enabled the energy efficiency 

improvements; and (2) strengthening of the building 

energy standards. Several states—especially those on 

both U.S. coasts—have programs for updating and 

strengthening standards, but most states do not.

The fourth policy—and the one that is directly related 

to oil supply security—is auto fuel economy standards. 

In the long term, the solution to oil imports will require 

an economically and environmentally viable replacement 

for oil. But this will not happen soon. Oil imports will 

continue to rise for the coming decades. While there 

is universal agreement that the United States needs to 

cut imports, the problem is not being addressed. This 

increases our peril in the world. 

The problem is not intractable, except perhaps from 

a political viewpoint. Strengthening corporate auto 

fuel economy standards, much like appliance efficiency 

standards, has the beauty of simplicity: It applies to 

only a small number of manufacturers who can make 

the required investment to achieve higher efficiency and 

pass the cost on to consumers. This is also a weakness 

in the sense that a few strong manufacturing companies 

can oppose the policy in the U.S. Congress and win the 

battle. Manufacturers are concerned that stronger fuel 

economy standards will make consumers unhappy at 

losing important amenities—in the case of autos, size, 

safety, and power (acceleration). In fact, prior experience, 

including the original CAFE standards in the United 

States in 1975, shows that the industry has been able 

to innovate and meet what were thought to be tough 

standards without compromising these characteristics.

Such improvements in auto fuel economy can 

be achieved to the satisfaction of tens of millions of 

consumers in other countries. Figure 3 shows the fuel 

economy standards in the United States and several 

regions. One wonders, looking at this figure, if there 

may be some clouds on the horizon for U.S. auto 

manufacturers in world markets.

The United States can aim to achieve the 2005 

European Union level of fuel economy standards by 

2015 with all vehicles, including sport utility vehicles 

Figure 3

Comparison of Auto Fuel Economy Standards 

Among Countries, Normalized to U.S. Test 

Procedures

55

50

45

40

35

30

25

20

Miles per gallon - Converted to CAFE Test Cycle

Note: Dotted lines denote proposed standards.

Source: Feng An and Amanda Sauer, “Comparison of Passenger Vehicle Fuel Economy and 

GHG Emission Standards Around the World,” Pew Center on Global Climate Change, 

October 27, 2004.

EU

Japan

China

Australia

Canada

US

2002 2004 2006 2008 2010 2012 2014 2016

California

55

50

45

40

35

30

25

20
eJOURNAL USA 29 Economic Perspectives / July 2006

and other light and heavy-duty trucks, having the same 

percentage increase as automobiles. It could also agree 

to meet the European 2012 standard by 2020. Although 

either goal is unlikely to be set by policymakers, the result 

of such policies, which would still leave us well behind 

the Europeans, would be to decrease our dependence on 

imported oil from a projected 56 percent in 10 years to 

about 40 percent and from 62 percent in 20 years to 25 

percent. 

For many, the primary motivation for auto fuel 

economy is energy security. There are other economic, 

environmental, and safety benefits. The policy is almost 

certainly cost effective—the energy efficiency investment 

pays a healthy return. Much like the energy efficiency 

gains shown for the whole economy in figure 2, such 

investments in more efficient autos result in very 

significant benefits to the entire U.S. economy—annual 

returns of 20 percent or more compared to supply 

investments that provide no net benefits. 

ROLE FOR PUBLIC POLICY

Policies addressing energy efficiency are not adequately 

recognized as the major tools for increasing energy 

security. Even though the policies have had only limited 

attention and support, savings from energy efficiency 

over the past three decades have yielded four times the 

impact in meeting demand as new energy supply. Today, 

America’s annual energy bill is $1 trillion. Without earlier 

energy efficiency, it would be $1.5 trillion!

Energy efficiency is an investment with a wellunderstood payback. The return on investment is 

generally high, as long as the policy is well designed and 

implemented. The financial return from this policy is 

every bit as certain as the return from an investment in a 

new oil well or coal mine, only generally better. The big 

difference between the supply and demand investments 

is that the former goes to companies that have strong 

incentives to pursue them. The latter generally are spread 

among millions of consumers. These consumers are often 

not aware of the benefits.

Because the energy efficiency investments often are 

not made without strong policies to promote them and 

because energy demand growth has very large impacts on 

the nation, there is a strong case to be made for the role 

of public policy. Proper policy on energy demand can 

induce investments from consumers and thus not require 

government subsidies, unlike some policies that affect 

energy supply.

It is desirable for energy policy to become a priority for 

government decision makers, especially those concerned 

about the energy security of the nation. 

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government.

A retail store label provides energy-efficiency information on an air 

conditioner.

William Thomas/Getty Images
Economic Perspectives / July 2006 30 eJOURNAL USA 

By incorporating off-the-shelf, energy-efficient technologies, homeowners and building managers could cut up to 

80 percent of the cost of heating, cooling, and lighting their 

buildings, according to the U.S. Department of Energy. The 

potential benefits of using these technologies in the roughly 

2 million houses constructed in the United States each year is 

huge: Nearly 25 percent of U.S. energy consumption is used to 

power homes. 

In 2007, two-thirds of U.S. homebuilders will “build green” 

in 15 percent of their projects, according to a June study by 

McGraw-Hill Construction. The study defines building green 

as going beyond accepted building codes to increase energy 

efficiency, conserve water, 

develop building lots in a way 

that preserves trees and uses the 

sun, incorporate earth-friendly 

materials, and reduce job-site 

waste. 

Not long ago, green houses 

were the province of custom 

builders. But no more. Pardee 

Homes, a large-scale builder 

putting up hundreds of houses in 

the U.S. Southwest, conforms to 

high environmental standards in 

one-third of its projects.

Homebuilders say the biggest 

reason for building green is 

customer concern about energy 

costs. Gasoline prices have 

increased 86 percent in the last 

three years in the United States, 

according to the Bureau of Labor 

Statistics. Joyce Mason of Pardee says her customers live in 

suburbs, far from their jobs, and drive a lot. As gas prices rose 

and they could not easily change their commutes, they looked 

to save on home energy bills. Mason says her company offers 

photovoltaic solar systems that might cost as much as $18,000 

but will reduce bills by about 70 percent. 

The McGraw-Hill study emphasizes builders’ use of passive 

solar heating—situating a home to maximize use of the sun’s 

energy and planting trees to provide shade. Deciduous trees 

offer shade during summer and lose leaves in winter to allow 

sun to enter windows. 

Builders also are increasingly using low-emissivity windows. 

According to Donald Albrecht, the lead curator of a yearlong National Building Museum exhibit on green houses that 

opened in May 2006, there are several types of new windows 

on the market that lock heat or sunscreens between layers of 

glass. Yet houses featured in the exhibit apply ancient principles 

in addition to the new technologies. For example, some have 

bamboo flooring because, unlike wood from hardwood forests, 

bamboo is a renewable, fast-growing grass.

Thermal mass, another tried-and-true construct, is evident 

in the thick, rammed earth walls of architect Rick Joy’s Tucson 

Mountain House featured in the exhibit. The walls—like heat 

sponges—absorb heat during day and release it at night. 

A recently built green apartment building in Washington, 

D.C., requires no advertising, according to designer Russell 

Katz, because tenants are aware of its financial benefits. 

“Some people think of living in a green home as being a ‘dogooder,’ ” says Katz. “In fact, 

it is business savvy—you 

really save money.”

Katz’s tenants pay less 

than most do for hot or cool 

air. During construction, 

Katz cut out such luxury 

features as marble in 

bathrooms and stainless 

steel kitchen appliances 

in favor of a geothermal 

system that pipes water 

from below ground (where 

the temperature remains a 

constant 18 degrees Celsius) 

and blows air over the pipes 

to heat or cool apartments. 

“The temperature 

underground doesn’t cost 

anything,” Katz says. The 

building also has a roof garden 

that insulates it and manages storm water. 

Retailer Home Depot reports that individual U.S. consumers 

are also renovating homes to conserve. Some of the store’s 

popular items are tank-less water heaters, which save energy 

and space by heating water as it is used; compact fluorescent 

lightbulbs, which last 10 times longer and use 66 percent less 

energy than standard bulbs; programmable thermostats, which 

save $100 a year on energy costs when used correctly; and 

additional insulation, an inexpensive way to reduce energy bills. 

Some office-tower builders are using the same energy-saving 

features that homebuilders have recently gravitated toward. 

“In Germany and Austria, there has been legislation to go 

more sustainable; as a result they are more advanced and spur 

innovation,” says Albrecht. But citing green high-rises going up 

in New York City, he notes that “little by little ... Americans are 

coming on.” 

U.S. HOMEBUILDERS GO “GREEN”

The Tuscon Mountain House with rammed earth walls designed 

by Rick Joy.

Undine Pröhl/Courtesy National Building Museum
eJOURNAL USA 31 Economic Perspectives / July 2006

Over the last several decades, energy prices have been on a roller coaster, often affecting everyday decisions 

on work, play, and growth. U.S. federal, state, and local 

governments; businesses; and consumer groups have 

responded by working together to better educate the public 

about what individuals can do at a personal level to reduce 

energy costs.

Following are a few tips for individuals.

Housing

• In hot climates, 

plant shade trees to 

cool roofs, walls, 

and windows. Close 

blinds or shades in 

south- and west-facing 

windows. In cooler 

climates, allow sun 

to reach south-facing 

windows.

• Seal air leaks 

around doors and 

windows.

• Use ceiling fans in 

the summer and winter. 

By reversing the direction of the blades, warm air is pushed 

down, helping to keep rooms warm in winter.

• Lower house thermostats in winter; just a one-degreeFahrenheit reduction can reduce heating costs by about 4 

percent. Regularly clean or replace filters in air conditioners 

and furnaces.

• Consider switching to fluorescent lightbulbs, which 

last 6 to 10 times longer than incandescent bulbs; add more 

natural lighting with additional windows.

• Put reflective tiles on roofs and adequate insulation in 

attics.

• Use low-flow aerating showerheads. Lower the 

thermostat on the water heater to 49 degrees Celsius (120 

degrees F).

Consumer Products

• When looking for major appliances, buy those labeled 

with the highest efficiency rating. The electricity savings 

from today’s refrigerator model with a high rating compared 

to a 1990 model would save enough electricity to light a 

home for almost five months.

• Use renewable products: bamboo or linoleum in 

flooring, for example.

• Wash only full loads of clothes. Wash clothes in cooler 

water, using cold-water 

detergents. Clean the 

lint filter in dryers after 

loads to improve energy 

efficiency.

• Turn off your 

computer, monitor, and 

other electrical devices 

when not in use.

Transportation

• Avoid erratic 

driving—quick stops 

and starts can decrease 

gas mileage by 33 percent 

on the highway and by 5 

 percent in the city.

• Maintain your car. Clean air filters can improve gas 

mileage by as much as 10 percent. Properly inflated and 

aligned tires will increase mileage by as much as 3 percent. 

But using the wrong grade of oil can reduce mileage by 1 to 

2 percent.

• Observe the speed limit. In general, every 8.05 

kilometers per hour over 96.6 kilometers per hour increases 

the cost per gallon of gas by 5 to 18 cents per liter at mid2006 gas prices.

• Avoid carrying extra weight. Every 45 kilograms 

decreases fuel efficiency by 2 percent.

• Consider buying a hybrid car. The increased gas 

mileage relative to gasoline-only cars can reduce fuel use by 

50 percent or more. 

Sources: Smithsonian Institution, U.S. Department of Energy, 

American Society of Interior Designers, Alliance to Save Energy.

SAVING ENERGY

An Individual Choice

Distribution of electricity consumption in an average U.S. home.

 Courtesy the Senate Republican Committee

Other

 15%

Lighting 7%

TV, VCR,

 DVC

 2%

Computer &

 Monitor

 2%

 Clothes

Washer &

 Dryer

 10%

Dishwasher

 2% Refrigerator

 6%

Water Heater

 11%

Heating and

 Cooling

 45%
Economic Perspectives / July 2006 32 eJOURNAL USA 

Strategies for implementation of low-carbon technologies must 

be creative to achieve energy security and a stable climate by 

2050. This planetary energy transformation must include a 

mix of clean technologies such as decarbonized coal, carbon 

sequestration, fuel cells, bioenergy, and ultra-efficient gas 

powered plants.

Lewis Milford is president of and Allison Schumacher is 

project director at Clean Energy Group, a leading U.S.-based 

nonprofit advocacy organization working on innovative 

technology, finance, and policy programs for a variety of clean 

energy and climate change issues.

Unprecedented, massive innovation must take 

place to develop, commercialize, and bring to 

market and to large-scale deployment low-carbon 

technologies that will revolutionize the world. 

Clean energy markets have grown tremendously in 

recent years, but represent only a fraction of a solution to 

global warming, which depends on a radical transition to a 

low-carbon future. 

Clean energy has usually included the conventional 

renewable technologies: energy production from solar, 

wind, small hydro, biomass, ocean thermal, tidal and 

wave, geothermal, fuel cells, and related energy storage 

and conversion technologies. 

But comprehensive, low-carbon-technology innovation 

is needed. We must massively increase use of these renewable technologies and significantly advance low-carbon 

options such as decarbonized coal, carbon sequestration, 

ultra-high-efficiency fossil energy production, fuel cells, 

bioenergy, and derivatives of genomics, nanotechnology, 

and related fields.

Moreover, today’s energy and climate policies alone 

cannot drive clean energy markets at the scale or pace necessary to solidify energy security and stabilize the climate 

by 2050. We must be more creative in deploying new, innovative strategies for all these low-carbon options. Also, 

current structures for financing and commercializing 

innovative technologies are failing to deliver these muchneeded low-carbon technologies to market. 

Only by simultaneously tackling the twin challenges of 

accelerating the pace of low-carbon technology innovation 

and creating broad-scale financing and commercialization 

can we achieve a planetary energy transformation.

LOW-CARBON TECHNOLOGY SOLUTIONS

In addition to renewables—such as solar photovoltaics, wind, ocean energy—and efficiency technologies, 

promising low-carbon technology solutions include the 

following:

Decarbonized coal: Integrated Gasification Combined 

Cycle (IGCC) represents a new generation of coal plants 

that are technologically superior and environmentally preferable to conventional plants. This is due to their ability to 

gasify coal, thereby reducing the levels of oxides of sulfur, 

oxides of nitrogen, particulates, and mercury emissions 

before combustion. IGCC plants also significantly reduce 

carbon dioxide emissions and can be further configured to 

capture carbon, eliminating the final cleanup. 

Coal can be decarbonized three ways—through endof-pipe scrubbers, sequestration, and IGCC (or IGCC 

plus sequestration). The three methods of decarbonization are already available commercially, but they need to 

be produced and deployed in large quantities to compete 

with and put a stop to new construction of conventional 

coal plants. This is especially true in developing countries, 

where the projected growth in conventional coal plants is 

very high. In a future carbon-constrained world, IGCC 

could become the coal plant of choice.

Ultra-efficient gas power plants: Natural gas plants 

that utilize advanced combined-cycle turbines have higher 

efficiency and produce less greenhouse gas emissions than 

conventional coal plants. At various times in 2005, natural 

gas was a more expensive and volatile fuel than coal, making cost/economics a critical factor. How future supplies of 

natural gas develop may affect any cost differential. IncenCLEAN SOLUTIONS 

FOR POWER GENERATION

Lewis Milford and Allison Schumacher
eJOURNAL USA 33 Economic Perspectives / July 2006

tives to increase cost competitiveness may be needed to 

encourage widespread use of ultra-efficient gas technology.

Fuel cells: Fuel cells convert hydrogen and oxygen 

into electricity, with only water and heat (no greenhouse 

gases) as by-products. They are a promising technology 

for multiple applications, especially for producing clean, 

distributed power on site at locations with sensitive power 

loads, such as airports, banks, data centers, first responder 

stations, hospitals, and telephone switching stations. 

On-site fuel cells offer energy security with sustained, 

high-quality power. They can operate on natural gas as well 

as renewable fuels. Barriers to fuel cell technology include 

relatively high upfront capital cost, maintenance and operation requirements, the cost of producing hydrogen fuel, 

and fuel storage and delivery issues. In order to achieve 

widespread adoption, fuel cells should be considered for 

critical sites such as hospitals and other places where power 

disruption can have severe consequences. For those types 

of facilities, the cost differential may be less of a barrier. 

Other barriers to greater penetration of fuel cells at the 

utility level, such as exorbitant rates charged to tap into the 

power grid when a fuel cell is shut down for maintenance, 

must also be overcome. 

Cellulosic biomass and biofuels: As interest in the 

production and use of biofuels rises, there is more use of 

biomass technologies, such as anaerobic digesters and gasifiers, to make power from crops, crop waste, and manure. 

However, the bioenergy market is relatively nascent and has 

a way to go to reach the point that signals the rapid and 

widespread adoption of biomass and biofuels technologies. Further, from a low-carbon perspective, it is widely 

recognized that using cellulosic (plant-based) biomass is 

preferable to growing dedicated crops, 

such as maize, to produce biofuels because 

harvesting and transporting the dedicated 

crops increases carbon dioxide emissions. 

Genomics research may be critical to 

advance this technology, but it has yet to 

be harnessed to develop and commercialize 

high-energy-producing biofuels and energy 

systems.

Sequestration: Sequestration—

capturing and locking away excess carbon 

emissions rather than releasing them to the 

atmosphere—falls into two categories: (1) 

biological, in which the carbon is captured 

in plants known to absorb a lot of carbon and planted in specific areas; and (2) 

geological, in which carbon is injected into 

rock formations. A host of technologies is 

being explored for both types of sequestration, but none is yet available on a widespread basis. All 

actors, public and private, should take more aggressive action to address quickly the various scientific and technical 

questions regarding how best to store and capture carbon 

for long periods of time.

There are probably many other low-carbon technologies yet to be invented that could disrupt the status quo of 

more traditional energy technologies. The challenge lies not 

only in the invention, but also in establishing and rapidly 

expanding the markets for future low-carbon technologies.

ACCELERATING INNOVATION

There are multiple low-carbon technology challenges 

and opportunities on the horizon. Experts agree that successful development of clean energy will require attention, 

not just to advances in basic and applied sciences, but 

also to the commercial dynamics that surround emerging 

technologies.

The Group of Eight (G8) countries recognized this 

pressing need for technology innovation and its commercialization when it launched the G8 Dialogue on Climate 

Change, Clean Energy, and Sustainable Development 

at Gleneagles, Scotland, in July 2005. The World Bank 

developed an “investment framework” to serve as a cornerstone for this dialogue, acknowledging the critical need 

for technology innovation to support a massive scale-up in 

investment, research and development, and commercialization of low-carbon technologies. 

The World Bank’s investment-framework report concludes that the current policies and funding from public 

A 250-kilowatt fuel cell, part of the system that generates electricity and heats water for a 

Sheraton hotel in New York.

AP/Wide World Photo
Economic Perspectives / July 2006 34 eJOURNAL USA 

and private sources are not enough to promote technologies that will reduce carbon to stabilize emissions.

CHALLENGES OF ENERGY TRANSFORMATION

Transforming the world’s energy system will be tremendously difficult. It is the most capital-intensive industry 

in the world, a complex and interdependent financial, 

regulatory, and institutional network with over a century 

of incumbent protection and support. However, an energy 

revolution can be swift: The car replaced the horse as a 

mode of transportation in about 30 years, while central 

electrification diffused throughout the United States in 

fewer than 40 years. 

The transformation at hand will need to be equivalent 

in scale to the energy-fueled technological transformation 

in the industrialized nations over the last 100 years. This 

was a period that saw a transition from waterwheels for 

industry, wood and kerosene for domestic use, and horsedrawn transportation to near-universal electrification, the 

dominance of coal for electric production, millions of 

gas- and diesel-fueled vehicles, jet travel, and, eventually, 

the microchip and the digital economy it spawned.

 To achieve a transformation on a similar scale, several 

changes must take place:

• Of the utmost importance, the government, academia and the private 

sector should coordinate 

research and development 

(R&D) with deployment 

and technology commercialization, rather than 

treat R&D as a sole area 

of focus.

• Debate on lowcarbon technologies 

should take place at various levels (international, 

subnational) and within 

many frameworks for 

subnational stakeholders, as well as the United 

Nations Framework 

Convention on Climate 

Change and the G8 

Dialogue on Climate 

Change, Clean Energy, 

and Sustainable Development. 

• The task of reducing carbon emissions 

on a global scale should be distributed to all levels of the 

public and private sectors. This would open the door to 

the kind of creative problem solving that would address 

market shortcomings, promote low-carbon technology 

transfer and information sharing, foster linkages among 

disciplines, and produce real results. 

• Energy finance must shift aggressively toward new 

forms of capital accumulation to build the low-carbon 

energy infrastructure of the future.

• The G8 investment framework and other forms of 

international collaboration must answer broader questions 

on technology innovation and commercialization. Gaps 

in the innovation chain must be filled in order to shift to 

low-carbon technologies in both industrialized and developing countries. To produce results, this must be coupled 

with a significant expansion of resources and distinct 

budgets. Public-private partnerships need to make it a top 

priority to accelerate the pace of low-carbon technology 

innovation and adoption.

Comprehensively addressing these issues is the energy 

security challenge of the 21st century. 

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government.

Carbon dioxide (CO2) captured from emissions or removed from the air can be stored long term in 

vegetation, soil, and underground reservoirs; injected deep into oceans; or converted to rock-like solid 

materials. Compressed CO2 can be used to enhance recovery of oil from oilfields and methane from 

unmineable coal beds. Once used for this purpose, CO2 remains safely and permanently stored beneath the 

Earth’s surface.

Courtesy Energy Information Administration, Washington, D.C.

Power Station CO2 Capture and Separation

 Ocean 

Sequestration

 Enhanced

 Recovery Saline Formation

 Depleted Oil and Gas Reservoir

 Terrestrial

 Sequestration

Unmineable Coal

 Bed

Carbon Sequestration Options
eJOURNAL USA 35 Economic Perspectives / July 2006

COGENERATION

More Energy, Less Pollution From Fossil Fuels

Electric generator/microturbine provides different energy functions within a building.

Courtesy Midwest Combined Heat and Power Application Center

Cogeneration has been known since inventor Thomas Edison applied the idea in 1882 in the fi rst U.S. 

power plant. The process uses a by-product of electricity 

to also provide heating and cooling. It was only quite 

recently that the U.S. government and environmental 

groups embraced this and other integrated energy systems 

as one of the best ways of improving energy effi ciency and 

reducing air pollution. Cogeneration and trigeneration, 

which includes also cooling, reduce energy costs and 

improve power reliability and quality. 

Currently used to power some commercial buildings 

and industrial facilities, these systems convert 80 to 

85 percent of fuel’s energy content into usable energy, 

compared to 

50 percent at 

conventional 

thermoelectric 

stations and only 

33 percent for 

power generation in 

general, according 

to the Midwest 

Cogeneration 

Application 

Center. Increased 

effi ciency of energy 

utilization reduces 

the amount of fossil 

fuels consumed 

per unit of energy 

used, cutting by 45 

percent air emissions 

that would come 

from conventional 

power plants.

Yet the concepts 

of combined cooling, heating, and power (CCHP) 

generation, as trigeneration is known, and combined heat 

and power (CHP) generation, as cogeneration is known, 

have failed to create the same excitement and interest 

as, say, hybrid cars. The share of power generation from 

integrated systems and renewables in the global market 

has increased only slightly, going from 7 percent in 2002 

to 7.2 percent in 2005, according to a survey by the 

World Alliance for Decentralized Energy (WADE). 

WADE blames this slow growth on “persistent” 

regulatory barriers and the high prices of natural gas, 

the second most used fuel in the integrated systems 

after coal. Some experts, however, argue that the lack of 

one-stop shopping for the integrated systems and the 

incompatibility among parts from different manufacturers 

have hampered the expansion. 

A cogeneration system consists of an engine, turbine, 

or fuel cell that generates on-site electricity, and a heat 

recovery unit that captures waste heat from the generation 

process. In commercial buildings, cogeneration systems 

are usually connected to an absorption chiller that 

provides heating and cooling for the central heating, 

ventilation, and air conditioning systems.

Experts predict a more positive outlook for 

cogeneration in coming years, thanks to standardized 

parts and preassembled modular systems. According 

to David Engle, a writer specializing in construction 

topics, the new generation of cogeneration systems will 

transform the integrated energy industry and broaden the 

potential customer 

base to hospitals, 

nursing homes, 

data centers, foodprocessing plants, 

supermarkets, 

warehouses, hotels, 

and educational 

facilities. Facility 

operating costs will 

dive as equipment 

prices drop and 

energy effi ciency 

rises, he says in 

a 2005 article 

published by the 

journal Distributed 

Energy.

WADE 

believes that 

growth potential 

in emerging 

markets is greater 

than prospects in the developed world. In India alone, 

integrated systems have the potential to cogenerate 

enough electricity from by-products of sugar-cane 

processing to become a major player in satisfying that 

country’s growing demand for electricity, according to 

Winrock International, a nongovernmental organization 

that works on natural resource and environmental issues. 

And in Brazil, new gas discoveries off the southeast coast, 

coupled with relatively new regulatory incentives, provide 

opportunities for cogeneration investment in São Paulo 

and Rio de Janeiro, according to WADE.

WADE says that future market prospects for 

cogeneration everywhere depend on removing regulatory 

barriers in the electricity market and creating a level 

playing fi eld for all forms of electricity generation. 

Dehumidifi cation Unit

Chilled Water

Thermal Chiller

 Unit Electric

Generator

Hot Exhaust

Gas

Hot Exhaust Gas

 Dry Air

Microturbine

Fuel

Electric Power

Typical Commercial CHP System

Dry Cool Air

Absorption Chiller
Larisa E. Dobriansky is Deputy Assistant Secretary of 

Energy for National Energy Policy.

Governments can play a critical role in facilitating clean 

energy technologies in the marketplace by providing financial 

incentives and removing market barriers to release the potential of technological innovation.

The challenges to achieving a secure and sustainable energy future are both large and urgent. If recent trends are to continue, global energy demand 

is projected to increase four times today’s level, entailing 

high costs, greater oil import dependence, worse local and 

regional air pollution, and higher risks of climate change. 

Moreover, in the next two decades, more than half of 

global energy growth will be in developing and transitional economies, as these nations continue to improve 

their standard of living. The magnitude of these realities 

calls for changing the course of world energy development 

through technology innovation and commercialization. 

Without massive and global technology development and 

deployment, such rapid growth in total world energy use 

will compound the energy-linked problems and challenges 

already of great concern today.

We have a critical window of opportunity to move 

the world off its current path and to embark on a trajectory toward a new global energy economy that will at 

once enhance energy security and economic growth and 

signifi cantly improve the environment. Substantial investment in energy infrastructure will be required to meet the 

anticipated growth in demand. Moreover, to transition to 

cleaner, more effi cient energy technologies and to mobilize 

the necessary private capital to bring the technologies to 

commercial scale will entail well-designed policies and 

incentives, effective public-private partnerships, and international cooperation. 

Government, therefore, has a crucial role to play in 

infl uencing the conditions in the marketplace for adoption and diffusion of cleaner, more effi cient technologies. 

Within today’s more competitive, integrated, and effi cient 

global markets, this role becomes one of an enabler and 

DEVELOPING MARKETS FOR CLEAN 

ENERGY TECHNOLOGIES

Larisa E. Dobriansky

A researcher at Argonne National Laboratory watches a Lexus hybrid car being tested. 

AP/Wide World Photo

36 Economic Perspectives / July 2006 eJOURNAL USA
37 Economic Perspectives / July 2006

catalyst. Where there is the potential in the marketplace 

for net public benefits from using better energy technologies, government can increase the prospects for adoption 

by focusing on making the energy-related attributes of 

these products more attractive to suppliers, consumers, 

and investors, while minimizing interference with market 

processes.

The Bush administration is pursuing a comprehensive approach to facilitating market development for 

energy technologies that will be the building blocks for 

transforming energy systems globally—an approach that 

accounts for all aspects of the innovation process. The 

administration’s programs and policies are seeking to accelerate innovation, reduce market barriers, create demand 

for clean energy services by increasing consumer choices, 

and improving energy production and consumption 

systems through better rules and institutions. This multifaceted, economic development approach to technology 

innovation focuses on building viable 

markets, domestically and internationally, that will attract investment 

in less energy-intensive products, 

cleaner and more energy-efficient 

processes, and production modernization. It is a pathway that combines 

technology innovation, investment 

mobilization, and market-based 

policy development. 

TECHNOLOGY INNOVATION

PROCESS

On January 31, 2006, President 

Bush announced his Advanced Energy Initiative to reduce U.S. dependence on foreign sources of energy and move beyond a 

petroleum-based economy. To change how we power our 

homes and offices, the U.S. government plans to invest 

more in zero-emission coal-fired plants, revolutionary solar and wind technologies, and clean, safe nuclear energy. 

To change how we power our automobiles, the initiative 

will increase research in better batteries for hybrid and 

electric cars and in pollution-free vehicles that run on 

hydrogen. It also provides funding for additional research 

in cutting-edge methods of producing ethanol, not just 

from maize, but also from wood chips, leaves and stalks, 

or switch grass.

This initiative, as well as other research, development, 

and deployment programs and activities undertaken 

during this administration, have emphasized the interactive learning process essential to technology innovation 

that aims to achieve technical improvements and cost 

reductions, as well as business and market organizational 

changes needed to fit the characteristics of the technology. The federal government is playing a pivotal role in 

encouraging private investment and activating learning 

processes among all relevant market participants. Toward 

the goal of technology deployment, the government 

interacts with the private sector to stimulate technology 

learning that can progressively reduce costs and lead to 

product refinements and to develop the ability of market 

participants to produce and use technologies more cheaply 

and effectively.

Procurement and niche market development have been 

two key deployment strategies to motivate learning investments from private sources and to stimulate organizational learning among market actors. Procurement through, 

for example, the Federal Energy Management Program, 

which brings together technology 

developers, customers, and intermediaries in the chain of supply, is facilitating changes in the way market participants are doing their business, in 

how they are relating to one another, 

and in their capability to produce and 

consume products that are cleaner and 

more efficient. Similarly, in focusing on specific characteristics of new 

technologies that are of special interest 

to certain buyers, niche markets have 

helped to set into motion learning 

processes and attract investment in 

technology development. In particular, the Department of Energy (DOE) 

is coordinating with the Department 

of Defense on expanding use of domestic energy sources 

(coal, biomass, heavy oil sands, and oil shale) for production of new low-emission transportation fuels for military 

and civilian use. This coordination will foster research, 

development, demonstration, and commercial use of such 

technologies as coal gasification, biomass energy conversion, and syngas-to-liquids technologies (converting 

natural gas- and coal-derived synthetic gas to liquid fuels 

and chemicals). 

 

MARKET BARRIERS

Relying principally on market forces, the administration has sought to intervene only in situations where the 

market fails to allocate resources efficiently and the inter-

“Using the globalizing 

forces of technology, 

information, and 

capital, governments at 

all levels can help to 

foster creative business 

solutions for assuring 

reliable, affordable, 

efficient, and clean 

energy.” 

eJOURNAL USA
38 

vention will improve net social benefits.

Market barriers slow the rate of uptake of new and 

improved technologies and create inertia based on conventional technologies. Typical barriers include lack of information, uncompetitive market prices or price distortion, 

high transaction costs, lack of access to financing, capital 

stock turnover rates, inefficient market structures, and 

excessive or inefficient regulation. 

The federal government is implementing a wide array 

of policies that adjust for factors such as pollution that 

are not accounted for in the market and not reflected in 

prices, or that make legal/regulatory changes in market 

organization and structure. Market prices have been 

adjusted to incorporate these factors through taxes, standards, and regulations that force sellers and buyers to take 

into account costs that are external to the market. Minimum energy performance standards, for example, have 

been a very cost-effective means for displacing inefficient 

products with energy-saving ones in the marketplace. 

Under the Energy Policy Act of 2005 (EPACT), new 

energy efficiency standards will be established for many 

appliances and for office equipment, including compact 

fluorescent lamps, dehumidifiers, refrigerated beveragevending machines, unit heaters, ceiling fans, commercial 

air-conditioning and heating equipment, commercial ice 

makers, and commercial clothes washers. 

The U.S. government also is implementing a variety of 

performance-based and investment-based incentives and 

has established reliable information systems that disclose 

the benefits of energy efficient products. With Energy Star 

product labeling, the federal government has set energy 

efficiency guidelines for more than 40 commonly purchased home and 

business products. 

In 2005, the 

program led to 

energy savings 

of 150 billion 

kilowatt-hours 

(about 4 percent 

of U.S. electricity 

sales), resulting in 

utility bill savings 

of $12 billion and 

preventing 35 

million metric tons of 

greenhouse gas emissions. 

EPACT also provides a wide array of incentives for 

clean energy technologies, products, and services, including tax credits and deductions; energy savings performance contracting; credit to holders of renewable energy 

bonds; and funding for state-run rebate programs for Energy Star products. The act also authorizes DOE to issue 

loan guarantees for new and improved technologies. This 

financial instrument can be targeted at the risks-discouraging investment by first adopters of advanced technologies 

to address a significant gap in the development cycle with 

respect to “getting to market.” Use of loan guarantees can 

significantly leverage private resources. The EPACT incentives will help to overcome market barriers and allow for 

market growth that would not otherwise have occurred 

but for the policy steps.

MARKET TRANSFORMATION

Market transformation programs are helping to raise 

the profile of energy factors in market activities and affect 

the institutional framework within which the markets 

operate, with minimal interference with normal market 

processes. 

The Federal Energy Management Program, for example, is developing markets for energy-efficient technologies, products, and services through a mix of policy 

tools and incentives, including standards and labels; 

performance/savings targets; government purchases; 

energy audits by energy service companies; consumer education and information; energy pricing policies and metering practices; research, development, and demonstration 

of new technologies; public-private partnerships; and innovative financing, especially energy savings performance 

contracts and public benefit funds.

Through the Partnerships for Home Energy Efficiency 

presidential initiative, DOE, the Environmental Protection Agency, and the Department of Housing and Urban 

Development are collaborating with the private sector to 

improve the access of homeowners and others to energy 

The Energy Star logo.

Courtesy the Environmental Protection Agency

An energy-efficient compact fluorescent lightbulb.

Courtesy the Environmental Protection Agency

Economic Perspectives / July 2006 eJOURNAL USA
eJOURNAL USA 39 Economic Perspectives / July 2006

efficient products and services. This initiative also aims 

at overcoming market barriers by better aligning policies 

and incentives to market structures in order to address 

bottlenecks to the uptake of efficient energy and renewable 

technologies.

CREATIVE BUSINESS SOLUTIONS

Taken together, these efforts represent a holistic approach to market development that combines technology 

innovation, investment mobilization, and policy development. Through partnerships and networks, this approach 

seeks to develop market relationships in which different 

participants at different levels, whether local, state, federal, 

regional, or international, operate in a mutually reinforcing 

manner and leverage one another. The aim is to develop 

mechanisms for greater cooperation and coordination 

to advance the social process of innovation. Using the 

globalizing forces of technology, information, and capital, 

governments at all levels can help to foster creative business 

solutions for assuring reliable, affordable, efficient, and 

clean energy to power economic growth and development 

in the future. 
Economic Perspectives / July 2006 40 eJOURNAL USA 

A well-designed regulatory environment and a solid fi nancial 

infrastructure are required to support large-scale implementation of clean energy technologies. International organizations, 

governments, and private fi nancial and risk management 

providers are seeking ways to participate in this monumental 

task through creative fi nancing mechanisms and alternative 

investment vehicles. 

Steven Parry is a partner at NGEN Partners LLC, a 

venture capital fi rm based in Santa Barbara, California, 

that invests in clean energy and other innovative technologies. Mark Cirilli and Martin Whittaker are partners at 

MissionPoint Capital Partners LLP, a private equity company 

based in South Norwalk, Connecticut.

Despite the fl ood of stories on climate change and 

the technology boom in the energy sector, little 

is reported on how we are going to fi nance the 

implementation of new technologies. The scale of this issue may dwarf the technological challenges—the International Energy Agency estimates a need for $17 trillion to 

fi nance global energy expansion, including clean energy 

projects, over the next 25 years. Some $5 trillion will be 

required in developing nations alone. 

SOURCES OF ENERGY FINANCE

Finance for sustainable energy is either company or 

project related. It can be provided at any phase of project 

development, from the earliest stages, where risks and 

return expectations are high, to the later stages of mature 

operation, where risks and returns are commensurately 

lower. A chart illustrates the roles these sources of fi nance 

play. 

A ROAD MAP TO INVESTING IN 

SUSTAINABLE ENERGY

Steven Parry, Mark Cirilli, and Martin Whittaker

 Schoolchildren walk under wind turbines in Pennsylvania.

AP/Wide World Photo
eJOURNAL USA 41 Economic Perspectives / July 2006

At the company level, sources of capital include these:

• individual, or “angel,” investors and venture capitalists at the highest risk, early stage of company development where research and development (R&D) and startup capital is required;

• private and public equity investors, who usually 

enter the fi eld once revenues are established to provide 

growth and expansion capital; 

• secured and corporate debt for late-growth-stage and 

mature companies with established 

history and balance sheets. 

At the project level, development is 

funded via these:

• project equity, which is provided 

early in the project cycle for siting, 

data collection, and project formation 

and which confers ownership interests 

to the investors, who then become 

shareholders in the enterprise; 

• mixed debt and equity, also 

known as “mezzanine fi nance,” which 

is typically provided for the construction or installation of the project; 

• senior debt, provided for the 

construction of larger projects and the 

ongoing expansion and operation of 

the project enterprise, and usually supplied in the form of traditional project 

loans offered by major institutional 

lenders requiring conventional interest and principal 

repayments over the term.

The scale of the project also impacts the source of capital. Large projects based on established technology, such as 

hydroelectric power or onshore wind power, are traditionally funded by large fi nancial institutions and require 

pools of debt, mezzanine, 

and equity fi nancing from 

multiple sources. In such 

projects, risk is both measurable and can be insured. 

Frequently, these projects are 

fi nanced “off balance sheet,” 

meaning that those loaning 

money to the project cannot 

recoup their loss through 

claims on the project owner if 

the project fails. 

Smaller-scale projects or 

projects utilizing new technologies, such as solar power 

and small-scale biomass, are different. These forms of 

energy technology involve a technical risk in addition to 

the risks associated with all energy projects, so they tend 

not to attract the traditional sources of capital from private markets. Financing in such cases is usually provided 

in the form of equity because lenders generally view the 

cash fl ows to repay debt as being high risk, the perception 

that makes them reluctant to extend loans. Thus, solving 

the risk challenge is critical to bringing sustainable energy 

production up to meaningful volumes.

ASSESSING RISK

Financing sustainable energy 

technologies necessarily entails taking 

risks. Some of these are typical for the 

energy sector, while others are particular 

to sustainable energy technology and 

the myriad technical, performance, 

regulatory, and contractual issues that 

surround it. These risks include the 

following:

• pricing—uncertainties of project 

economics in the face of deregulation 

and the trend from long-term contracts 

to short-term, or “spot,” power pricing, 

where pricing and payment occur at or 

near the same time; 

• currency risk—exposure to adverse 

exchange rate movements against assets held in foreign 

currencies;

• country/political risk—potential for governments 

to renege on the power purchase agreements (PPA) that 

provide the long-term revenues for power projects against 

which debt and mezzanine fi nancing are supplied;

“Technology 

improvements are 

rapidly driving down 

the costs for sustainable 

energy technologies ... 

The question remains 

whether the financial 

infrastructure will be 

in place to support 

significant rollout of 

new technologies as this 

happens.” 

At the company level, sources of capital include these:

pools of debt, mezzanine, 

and equity financing from 

multiple sources. In such 

projects, risk is both measurable and can be insured. 

Frequently, these projects are 

financed “off balance sheet,” 

meaning that those loaning 

money to the project cannot 

recoup their loss through 

claims on the project owner if 

the project fails. 

projects utilizing new technologies, such as solar power 

and small-scale biomass, are different. These forms of 

High Risk & Returns Low

Company

Project

Development

Stage

Investment

Vehicle

Investment Vehicle

Development

Stage

Traditional Project Finance—Senior and Sub-Debt

Installation Operation 

Developer Equity

Siting Data

Collection PPA

Early-Stage Growth Late-Stage Growth Mature R&D/

Seed

Angel

Investors Venture

Capital

Private

Equity

Bridge/

Mezzanine

Structured/

Project

Finance

Corporate

Bonds

Mutual

Funds

Public

Equity

Start-up
Economic Perspectives / July 2006 42 eJOURNAL USA 

• poor insurability—lack of underwriting 

experience and historical data on loan loss, 

which renders insurance expensive and limits 

coverage;

• technical performance—lack of historical performance data and scarcity of proven 

operators;

• intellectual property (IP) protection—

potential for patent infringement and IP theft 

in developing markets;

• servicing and maintenance—lack of 

specialized engineering services, skilled labor, 

and replacement equipment;

• primary resource availability—uncertain

ties over, for example, wind performance, 

biomass feedstock sourcing, and hydro availability; 

• infrastructure risks—grid connectivity 

problems and lack of access to transmission and distribution systems; 

• credit risk—poor credit quality of many smaller project developers and power contract counterparties;

• contractual risk—immaturity of legal environment 

surrounding clean technology;

• regulation and public policy—changes in political attitudes toward tax incentives for clean energy technologies 

(for example, uncertainties over investment tax credit and 

production tax credit extensions in the United States).

MITIGATING FINANCING RISK

Today, many of these risks are poorly understood or inadequately addressed in the marketplace. As a result, many 

mainstream finance providers feel unable to back sustainable energy technologies over more traditional investments. These financiers believe—often erroneously—that 

sustainable energy financing is a socially motivated pursuit 

that is inconsistent with their fiduciary duty to pursue the 

best risk-reward combinations.

Recently, a number of alternative investment vehicles 

have emerged that target sustainable energy financing 

and that are comfortable with the attendant risk equation. This has given rise to significantly enhanced levels 

of investment by the venture capital community in the 

broader clean technology category, which includes sustainable energy. Venture capital firms now direct 10 percent 

of their annual investment total to clean technologies. 

Companies such as SunEdison LLC are pursuing a feefor-service model—providing the initial capital for solar 

projects in exchange for monthly billing to the customer. 

This surge of commercial innovation is coinciding with 

other trends—record high volatility in fossil fuel markets, technology advancement, power market regulatory 

reform, and deepening environmental concerns—to make 

investing in sustainable energy increasingly attractive.

Currently, however, the vast majority of initiatives 

still require a combination of regulatory and third-party 

participation. In developing countries and economies in 

transition, key players in this quasi-public-private partnership approach include multilateral organizations such as 

the World Bank and its financing arm, the International 

Finance Corporation; bilateral organizations such as the 

Export-Import Bank of the United States; and unilateral 

national programs. In the United States, Canada, Asia, 

and Europe, governments pursue risk mitigation through 

tax subsidies, direct and indirect financial support, and 

the use of market mechanisms. Some important examples 

include these:

• the Indian Renewable Energy Development Agency, 

which is providing financial assistance to solar projects;

• the World Bank’s Asia Alternative Energy Program, 

which has contributed more than $1.3 billion to sustainable energy programs;

• investment tax credits and production tax credits 

in the United States, which provide capital and operating-cost tax offsets to lower the unit costs of sustainable 

energy production;

• the Carbon Trust, an independent company set up 

and funded by the government of the United Kingdom to 

help the country move to a low-carbon economy;

• Sustainable Development Technology Canada, a 

multimillion dollar foundation established by the governSolar powered pump in India installed as part of an Indian Renewable Energy 

Development Agency project.

Courtesy Polyene Film Industries Limited, Chennai-Hyberabad (c) ASTAE 1998/ World Bank 
eJOURNAL USA 43 Economic Perspectives / July 2006

ment of Canada in 2001 to foster the development and 

demonstration of clean technologies.

Future program opportunities, particularly for smallscale projects, include development of new forms of 

insurance, such as price protection programs and bundled 

energy purchase derivatives that provide buyers and sellers of power with greater price certainty, innovations in 

financing, and, finally, securitization of clean energy risk. 

Programs at the national level designed to help finance 

end-user sustainable energy projects are beginning to appear as well.

Ultimately, none of these programs will succeed without 

a favorable and well-designed regulatory environment. 

Countries will succeed only where the rules are consistent 

and long term, where protection of intellectual property 

is assured, where contracts are honored and regulations 

are enforced, and where financial support for sustainable 

energy projects includes long-term pricing clarity.

THE CARBON FINANCE ALTERNATIVE

Environmental market mechanisms that attach a 

financial value to the environmental benefits created by 

clean energy projects are proving to be an effective means 

of catalyzing additional financing. In particular, cap-andtrade-type emissions markets—where total emissions across 

a number of regulated entities are capped but individual 

entities are free to trade among themselves to meet their 

own targets at lowest economic cost—have diverted 

hundreds of millions of dollars into clean energy projects 

and given rise to entire industries dedicated to the monetization of emissions credits. Project-based programs—in 

which emissions credits are awarded to projects in amounts 

equal to the quantity of emissions avoided relative to a 

baseline business-as-usual scenario—have also proved to be 

effective at diverting capital to clean energy projects.

Some successful programs are the U.S. cap-and-trade 

sulfur dioxide allowance program, the European Union’s 

Emissions Trading Scheme, and the Kyoto Protocol’s 

Clean Development Mechanism and joint implementation schemes. Over time, these markets have the potential 

to materially alter the economics of power generation in 

favor of clean energy and emissions-reducing technologies. The trading of renewable energy certificates (RECs) 

or their equivalent (“green tags”) is a similar market that 

creates additional cash for qualifying clean energy projects 

based on the sale of units of renewable power (typically 

one REC equals one megawatt hour of renewable energybased electricity) to wholesale power producers regulated 

under renewable portfolio standards (RPS). In the United 

States, several states, including Texas, New Jersey, and the 

New England states, have adopted, or are in the process 

of adopting, REC trading programs. Regulated utilities in 

Connecticut, Maine, Massachusetts, and Rhode Island are 

allowed to satisfy their RPS requirements by purchasing 

RECs from renewable power generators anywhere within 

the New England Power Pool. 

TRANSITION TO A NEW ERA

Technology improvements are rapidly driving down 

the costs for sustainable energy technologies toward price 

parity with traditional sources of energy. The question 

remains whether the financial infrastructure will be in 

place to support significant rollout of new technologies as 

this happens. The financial and risk management providers 

are actively seeking ways to participate in the monumental 

task of supporting these new technologies, but they will do 

so only when the rules are clear, when government policy 

makers provide long-term commitments, and when the 

risks are appropriately balanced with rewards. The successful countries will be those that provide this clarity with 

long-term, thoughtful regulatory environments and stable, 

risk-mitigated financial markets. 

The opinions expressed in this article do not necessarily reflect the views or 

policies of the U.S. government.
Economic Perspectives / July 2006 44 eJOURNAL USA 

In a world of increasingly integrated energy markets, countries can ensure their access to reliable, affordable, and 

environmentally sound energy only by working in a variety of 

international partnerships. 

Paul E. Simons is Deputy Assistant Secretary of State for 

Economic and Business Affairs.

The fundamental objective of U.S. energy policy is 

to ensure that our economy has access to sufficient, affordable, and reliable energy supplies 

on terms and conditions that support economic growth 

and prosperity. However, due to the globalized nature 

of the oil market and the increasingly integrated natural 

gas market, events that negatively (or positively) impact 

the energy security of any country can affect the energy 

security of the United States, and vice versa. A pipeline 

attack in Nigeria, tension over Iran’s nuclear program, 

burgeoning economic growth in China and India, and 

natural disasters like Hurricane Katrina are issues that 

have direct impacts on global energy security. Therefore, 

the best way to strengthen U.S. energy security is to take 

steps to strengthen global energy security. How can this be 

achieved? One important element is an active process of 

outreach and energy diplomacy that the United States has 

pursued for more than 30 years.

As the world’s largest producer and consumer of energy 

resources, the United States must play a leading role in 

addressing the world’s energy challenges and ensuring a 

secure energy future. Ensuring our national energy security requires well-coordinated international efforts given 

the increasingly integrated nature of the world’s energy 

markets. It also implies that the global community has a 

responsibility to ensure adequate, affordable, and reliable 

energy supplies and services. To advance this goal, the 

U.S. international energy security policy draws on four 

key elements:

• promoting the diversification of energy sources and 

supplies, worldwide;

• working with other oil consuming countries to respond to supply disruptions, particularly through the use 

of strategic petroleum stocks;

• pursuing dialogue with major oil-producing countries to maintain responsible production policies to support a growing world economy and to reduce oil market 

price volatility; 

• working with other countries to reduce global 

dependence on oil, by promoting greater energy through 

efficiency and the development of alternative sources of 

supply.

DIVERSIFICATION OF ENERGY SUPPLIES

The U.S. government has taken a number of steps over 

the years to promote the diversification of energy supplies 

and transit routes. Although the Middle East dominates—

and will continue to dominate—world oil markets, the 

development of new supplies in a number of other regions 

in the world is an important objective. The United States 

imports energy from a diverse array of suppliers, including Canada, Mexico, Saudi Arabia, Venezuela, Nigeria, 

Angola, Russia, and the United Kingdom. We are actively 

engaged with these and a broad array of other countries 

in order to foster diversity of sources of energy supply and 

modes/routes of transit so as to lessen the impact of supply disruptions, whether they are natural or man-made. 

Europe

We are working with the European Union (EU) on 

broad and deep cooperation on energy security, announced at the 2006 U.S.-EU Summit, of which a key 

element is work on diversification of energy sources and 

supplies. Among other steps, we will jointly engage with 

key energy producers and consumers to encourage their 

diversification efforts, coordinate to provide technical 

assistance to improve legal and regulatory frameworks 

for energy in third countries, support maintenance and 

improvement of pipeline infrastructure to ensure delivery 

capability, encourage investments in energy diversification, 

ENERGY SECURITY AS A 

GLOBAL PARTNERSHIP

Paul E. Simons
eJOURNAL USA 45 Economic Perspectives / July 2006

and analyze geopolitical developments in key energy producing and consuming countries to coordinate responses. 

In addition, since 2002, U.S.-funded technical assistance 

programs have supported the Energy Community Treaty 

for Southeast Europe, which is aimed at creating electricity and gas markets in the energy transit countries of Bulgaria, Romania, Serbia, Macedonia, Bosnia, and Albania, 

with the added participation of Greece, Italy, Austria, 

Moldova, and Hungary. 

Caspian Region

A major U.S. foreign policy priority since the mid1990s has been the development of multiple pipelines 

to provide for the export of oil and gas from the 

Caspian region to the rest of the world. The Caspian Basin represents one of the most significant 

new sources of non-OPEC oil in recent years, and 

production should continue to grow in coming 

years. In addition to enhanced energy security, our 

policy in the region has been aimed at strengthening the sovereignty and economic viability of new 

nation-states, enhancing regional cooperation, and 

avoiding the potential bottlenecks and conflicts that 

might arise from rising petroleum exports through 

the Turkish Straits. 

Latin America

The United States 

benefits from strong energy 

relationships with Western 

Hemisphere countries. In 

2004, three of four of our 

largest oil import suppliers 

were from the Hemisphere: 

Mexico (15.9 percent), 

Canada (15.8 percent), and 

Venezuela (12.9 percent). 

Canada is our number one 

supplier of natural gas while 

Trinidad and Tobago is our 

largest supplier of liquefied 

natural gas. The United 

States participates in regular 

dialogue with Mexico and 

Canada to integrate the 

North American energy market. We also support Mexico’s 

Mesoamerican Energy Initiative, which aims to integrate 

Central American and Dominican Republic energy markets. We are working throughout the region to promote 

use of alternative and renewable sources of energy, building on Brazil’s position as a world leader in the production 

of biofuels. 

STRATEGIC PETROLEUM STOCKS

A second pillar of our international energy security 

policy is the multilateral cooperation we have forged 

through our membership in the International Energy 

Agency (IEA). Formed in the wake of the 1973 Arab oil 

U.S. Energy Secretary Samuel Bodman, second right, shakes hands with Turkish President Ahmet Necdet 

Sezer as Georgian President Mikhail Saakashvili, second left, looks on and Azerbaijani President Ilham Aliyev, 

right, applauds during an inauguration ceremony of the Baku-Tbilisi-Ceyhan pipeline in Azerbaijan in May 

2005. 

A man works at an ethanol distillery in the southern Brazilian state of Parana.

Paulo Whitaker/REUTERS

AP/Wide World Photo
46 

embargo, the IEA coordinates releases 

from emergency stockpiles for those 

events that shake global energy markets. Collectively, IEA members hold 

1.4 billion barrels of strategic stocks, 

equal to some 115 days of imports. 

The U.S. Strategic Petroleum Reserve 

holds nearly 700 million barrels, or 

roughly half of total global strategic 

stocks. In 2005, the IEA’s rapid release 

of stockpiles worldwide from its 26 

members in the wake of the devastation 

of Hurricanes Katrina and Rita helped to stabilize the 

markets and kept those events from causing even more 

disruption. Collectively, IEA members made 60 million 

barrels of oil available to the market. This was only the 

second time in the IEA’s history that stocks were released, 

but the action had an immediate calming effect on world 

markets. We are encouraging other major consuming 

countries, such as India, China, and member states of the 

Association of Southeast Asian Nations to hold strategic 

petroleum stocks, and support enhanced efforts to bring 

India and China into closer cooperation with the IEA on 

both short-term emergency response policies and broader 

energy security and technology policies.

DIALOGUE WITH PRODUCERS

A third pillar of our international energy security policy 

is to maintain an active dialogue with major oil- and 

gas-producing countries. Our objectives are not only to 

exchange information on oil markets, but to encourage 

producers to maintain responsible production policies, 

to support a growing world economy, and to reduce oil 

market price volatility. We have pursued dialogues with 

a number of the major oil-producing states, particularly 

Middle Eastern producers, for a number of years, in some 

cases since the 1980s. These have included formal bilateral 

exchanges with some countries, and regular discussions 

among high-level officials and through our embassies in 

the region. 

As evidence of the maturing relationship between 

producing and consuming countries, the IEA member 

states and Asia Pacific Economic Cooperation (APEC) 

countries are working with key Organization of Petroleum 

Exporting Countries producers to improve the efficiency 

and transparency of oil markets—to try to avoid the sort 

of market surprises that led to some of the shortages we 

see today. Since the 1990s, the United States has actively 

participated in the global producer-consumer energy 

dialogue, which has developed into the 

International Energy Forum (IEF). The 

IEF is an informal group consisting of 

about 50 countries and international 

organizations dedicated to promoting 

better understanding of international oil 

and energy market developments and 

policy issues among its members. The 

IEF secretariat, located in Riyadh, Saudi 

Arabia, is leading efforts on developing 

the Joint Oil Data Initiative (JODI), 

which is designed to improve transparency and information sharing in the global oil market. 

ENERGY EFFICIENCY AND

ALTERNATIVE ENERGY SOURCES

 The oil crunch of the 1970s also encouraged more 

progress in the area of energy conservation and efficiency. 

Since 1970, the energy intensity of the U.S. economy—

the amount of energy we consume per dollar of gross domestic product (GDP)—has fallen by almost 50 percent 

thanks to efforts at conservation. We support programs 

that provide for incentives for enhanced energy efficiency, 

conservation, and reductions in greenhouse gas emissions. 

In the United States, for example, Energy Star labels, 

which signal high efficiency in office buildings and appliances, were initially developed for domestic use, but they 

have proven so successful that they have been adopted in 

many countries.

ALTERNATIVE ENERGY SOURCES

 The United States is also engaged in multilateral efforts 

to obtain alternative energy sources. Several nations have 

already joined us in a multilateral partnership known as 

the Generation IV International Forum, which conducts 

research and development for the next generation of safer, 

more affordable, and more proliferation-resistant nuclear 

energy systems. We are working with several countries 

on FutureGen—an initiative to build the world’s first 

integrated carbon-sequestration and hydrogen-production research power plant. The $1-billion-dollar project 

is intended to create the world’s first zero-emissions fossil 

fuel plant. 

Most recently, the United States put forth a bold new 

vision of the future of nuclear power known as the Global 

Nuclear Energy Partnership (GNEP). Through

GNEP, the United States will work with other nations 

possessing advanced nuclear technologies to develop new 

“While we can be 

sure that the world 

will still have a great 

need for oil and gas, 

developing alternatives 

and renewable sources 

now is in everyone’s 

long-term interest.”

Economic Perspectives / July 2006 eJOURNAL USA
47 Economic Perspectives / July 2006

proliferation-resistant nuclear fuel recycling technologies 

in order to increase U.S. and global energy security; provide for expanded use of economical, carbon-free nuclear 

energy; minimize nuclear waste; and curtail proliferation 

concerns. Additionally, these partner nations will develop 

a fuel services program to provide nuclear fuel to developing nations, allowing them to enjoy the benefits of abundant sources of clean, safe nuclear energy in a cost- effective manner in exchange for their commitment to forgo 

enrichment and reprocessing activities, thus alleviating 

proliferation concerns.

The United States has initiated, or served as a founding 

member of, several international technology partnerships 

designed to share data and best practices among nations 

while reducing the time and expense needed to achieve 

technological breakthroughs. For example, the International Partnership for a Hydrogen Economy was formed 

to advance the global transition to the hydrogen economy, 

with the goal of making fuel cell vehicles commercially 

available by 2020. The Methane-to-Markets Partnership 

works closely with the private sector to develop methods to recapture waste methane escaping from landfills, 

leaking from poorly maintained oil and gas systems, and 

vented from underground coal mines. In order to obtain 

improved energy security, reduce pollution, and address 

the long-term challenge of climate change, the United 

States, along with China, India, Japan, Australia, and 

the Republic of Korea, recently launched the Asia-Pacific 

Partnership for Clean Development and Climate. The 

partnership will focus on voluntary practical measures 

taken by the six countries to create new investment opportunities, build local capacity, and remove barriers to the 

introduction of clean, more efficient technologies.

Earlier in 2006, President Bush announced a major 

new initiative, the Advanced Energy Initiative, to invest in 

new technologies that we believe can change the way we 

power our homes, our businesses, and our automobiles. 

By developing new energy technologies, such as biofuels, 

hydrogen, and solar, we should be able to take pressure off 

markets, enhance the sustainability of precious natural resources, and keep energy prices affordable. The president’s 

strong support for research into the potential of cellulosic 

ethanol as a fuel source and battery technology for plug-in 

hybrid vehicles is particularly important to reduce our 

dependence on petroleum-based transport fuels. And 

while we can be sure that the world will still have a great 

need for oil and gas, developing alternatives and renewable sources now is in everyone’s long-term interest. Many 

of these fuels are cleaner forms of energy that complement 

our environmental goals as well by emitting fewer pollutants into the air.

WORKING IN GLOBAL PARTNERSHIP

 As President Bush and Secretary of State Condoleezza 

Rice have noted, we remain concerned with the potential 

economic risks posed to the United States by reliance on 

imported oil and by instability in the Middle East, where 

much of the world’s oil is produced. At the same time, oil 

is a global commodity, and a disruption in supply anywhere in the world will have an immediate impact on all 

oil-importing countries, no matter where their oil comes 

from. 

Energy security is a leading priority of the U.S. government. However, energy security can only be achieved by 

working in global partnership with other countries. Our 

bilateral and multilateral relationships are the means 

through which the United States will achieve energy security. The United States has a national interest in working 

with other countries to ensure that reliable, affordable, 

and environmentally sound energy is available to power 

U.S. and world prosperity. 

An artist’s rendering of a FutureGen coal plant.

Courtesy Coal Leader

eJOURNAL USA
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Vehicles: Energy, Environment, and Development Issues. CRS 

Order Code RL30758. Washington, DC: Congressional 

Research Service, 6 January 2006.

http://fpc.state.gov/documents/organization/61498.pdf

Yergin, Daniel. “Ensuring Energy Security.” Foreign 

Affairs, vol. 85, no. 2 (March 2006): pp. 69-82.

The U.S. Department of State assumes no responsibility for the content and 

availability of the resources from other agencies and organizations listed 

above. All Internet links were active as of June 2006.
Economic Perspectives / July 2006 50 eJOURNAL USA 

U.S. GOVERNMENT

Energy Star

http://www.energystar.gov/

Interagency program helping businesses and individuals 

to protect the environment and save energy through 

energy efficiency.

U.S. Department of Energy (DOE)

 Idaho National Laboratory

 http://www.inl.gov/ 

 Science-based, applied engineering national 

 laboratory dedicated to meeting America’s 

 environmental, energy, nuclear technology, and 

 national security needs.

 Lawrence Berkeley National Laboratory

 http://www.lbl.gov/

 DOE-supported laboratory that conducts research 

 across many disciplines, with key eforts in 

 fundamental studies of the universe, quantitative

 biology, nanoscience, new energy systems and

 environmental solutions, and integrated computing.

 National Energy Technology Laboratory

 http://www.netl.doe.gov/about/index.html

 Part of the DOE national laboratory system that 

 implements research and development programs to

 resolve the environmental, supply, and reliability 

 constraints of producing and using fossil resources.

 National Renewable Energy Laboratory

 http://www.nrel.gov/

 DOE-supported laboratory that develops renewable 

 energy and energy-efficiency technologies and 

 practices and advances related science and 

 engineering.

 Office of Energy Efficiency and Renewable Energy

 http://www.eere.energy.gov/ 

 DOE office that advances the commercialization and

 deployment of renewable energy and energy-

 efficiency technologies.

U.S. Department of State

 Bureau of Economic and Business Affairs

 Office of International Energy and Commodity Policy

 http://www.state.gov/e/eb/c9982.htm

 State Department bureau that coordinates the 

 department’s liaison with major energy-producing 

 countries and organizations.

 Bureau of Oceans and International Environmental 

 and Scientific Affairs

 http://www.state.gov/g/oes/

 State Department bureau that coordinates policies 

 related to science, the environment, and the world’s 

 oceans.

ACADEMIC, PRIVATE, AND NONPROFIT 

ORGANIZATIONS

Alliance to Save Energy

http://www.ase.org/ 

Coalition of business, government, environmental, and 

consumer leaders that supports energy efficiency.

American Council on Renewable Energy 

http://www.acore.org/ 

Nongovernmental group that promotes renewable energy 

options for the production of electricity, hydrogen, and 

fuels, as well as for end uses.

Alliance for Mindanao Off-Grid Renewable Energy

http://www.amore.org.ph/

U.S. Agency for International Development partnership 

with private groups and nongovernmental organizations 

designed to provide electricity from renewable sources to 

villages on the southern Philippines islands.

Asia-Pacific Partnership on Clean Development 

and Climate

http://www.asiapacificpartnership.org/default.htm

Multilateral effort to accelerate the development and 

deployment of clean-energy technologies.

INTERNET RESOURCES

Selected sources of information on clean energy
eJOURNAL USA 51 Economic Perspectives / July 2006

Clean Edge 

http://www.cleanedge.com/ 

Research and publishing firm specializing in clean-energy 

markets. 

Clean Energy Group

http://www.cleanegroup.org/

Nonprofit group that promotes greater use of clean energy 

technologies through innovation in finance, technology, 

and policy.

Energy Voyager

http://www.energyvoyager.com 

Consulting firm that supports energy innovators and 

entrepreneurs.

Environmental and Energy Study Institute

http://www.eesi.org/index.html

Nonprofit provider of information services and public 

policy initiatives on environmentally sustainable societies. 

Global Village Energy Partnership

http://www.gvep.org/

Partnership of public and private groups that aims at ensuring access to modern energy services for the poor.

Massachusetts Institute of Technology (MIT) 

Energy Research Council

http://web.mit.edu/erc/index.html 

Program that explores how to best match MIT expertise 

with global needs and produce a plan for tackling the 

world energy crisis through science, engineering, and 

education.

Partnership for Clean Fuels and Vehicles

http://www.unep.org/PCFV/Main/Main.htm

International initiative to reduce vehicular air pollution in 

developing countries through the promotion of clean fuels 

and vehicles. 

Pennsylvania Department of Environmental Protection

http://www.depweb.state.pa.us/dep/site/default.asp

Agency of one of the 50 U.S. states that is responsible for 

administering the state’s environmental laws and regulations.

Renewable Energy Access

http://www.renewableenergyaccess.com/rea/home

An Internet source for information on renewable energy.

Rice University

Baker Institute Energy Forum

http://www.rice.edu/energy/index.html 

Program dedicated to educating policy makers and the 

public about important energy trends.

Rocky Mountain Institute

http://www.rmi.org/

Nongovernmental organization that promotes marketbased, integrative solutions aimed at fostering efficient and 

restorative use of resources.

Stanford University

Global Climate and Energy Project

http://gcep.stanford.edu/ 

Long-term research effort on technologies that will permit 

the development of global energy systems with significantly 

lower greenhouse gas emissions.

UN Commission on Sustainable Development

http://www.un.org/esa/sustdev/csd/policy.htm

Organization responsible for monitoring implementation 

of United Nations’ policies on environment and sustainable development.

World Alliance for Decentralized Energy

http://www.localpower.org/

Nongovernmental organization that promotes worldwide 

deployment of on-site renewable energy, cogeneration, and 

energy recycling systems.

The U.S. Department of State assumes no responsibility for the content and 

availability of the resources from other agencies and organizations listed 

above. All Internet links were active as of June 2006.