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A bold -- and painless -- way to unleash energy innovation and create jobs

As we saw in the 1970s, new energy technologies blossom when oil gets expensive. We can raise the price of fossil fuels again without hurting consumers – if we implement a fee and rebate system.

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The energy crisis from 1973 to 1981 was not a happy period for Americans, but it was also a time when entrepreneurs and engineers formed a huge number of new businesses aimed at producing low-cost solar cells, high-efficiency engines for automobiles, better insulation for our houses, and so on.

I worked in the energy field then, consulting for many of these small – and large – companies. One was Sanders Associates of Nashua, N.H., with which I worked on a 100-megawatt solar turbine plant that came close to becoming reality. It was an exciting time for thousands of businesses that were close to major solutions to different aspects of the energy shortage and the extraordinarily high price of oil.

And then around 1981 the price of oil collapsed. Most of the companies working on solutions to the energy problems were either closed down or severely cut back.

Must move away from fossil fuels

Today, for environmental and national security reasons, America urgently needs innovative energy solutions that can power an economy still largely driven by fossil fuels. But so long as the price of oil remains superficially cheap, the incentive to develop the next generation of energy technologies will remain weak.

The lesson, then, is simple: If we could find a relatively painless way of increasing the price of fossil-fuel energy and the emission of pollutants, we could produce a similar surge of new businesses and reduce the unemployment rate – if there were a reasonable guarantee that the increased prices were permanent.

Oil prices deserve to be higher: Economists are continually telling us that fossil fuels and polluting emissions are severely underpriced because their price does not include all the “external costs” such as health, ecological, and environmental effects. Thousands of Americans who live in Ohio, Pennsylvania, West Virginia, and other states where companies have discovered new natural-gas deposits buried deep within shale formations are encountering these “externalities” in the form of polluted water and, in some cases, the ability to light the water in their kitchen sinks on fire!

Cap-and-trade is the wrong way to go

Many economists propose energy and emission taxes such as cap-and-trade as a way to price energy more accurately so that we would consume less and have fewer cases of pollution and related health problems.

Such taxes however, have three severe disadvantages. They are regressive, hurting the poor more than the rich. They cause inflation. And they give huge amounts of money to Washington to spend on boondoggles like bridges to nowhere.

All three problems can be reversed by the following simple and low-cost plan. Congress should enact a law that would put a fee (not a tax) on all fossil fuels and on easily measurable emissions starting six months in the future and increasing by increments every three months thereafter.

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The fees could start at the equivalent of 25 cents per gallon for gasoline. No one, not even the president or the CEOs of large Wall Street banks, would be exempted. The fossil-fuel producers could pass along as much of the fees in increased prices as they wished. All the collected fees would be put into a trust fund.

A rebate for all Americans

At the end of each month, the trust fund would be reduced to zero by transferring exactly equal amounts to the bank accounts of every legal citizen in the US of seventeen and over. The cost-of-living index would be required to account for the rebates in addition to the many price increases, thus reducing any inflationary effects. In other words, energy itself and consumer products that use energy would cost more, but citizens would have money in their pocket from the rebate to offset a portion of, or even all, these costs.

Poor people, being lower users of energy and lower pollutant emitters, would get more back in rebates than they would pay in fees even if they could not change their fuel and other purchases. Richer people would invest in every possible way of avoiding the increased fees, much as they did in the 1970s.

They would start using their monthly rebates to buy more efficient vehicles, better home-heating systems, refrigerators, and other appliances while creating businesses to develop and manufacture these and other products. We would ensure that these new jobs would be based in the US by providing that the fee also apply to foreign-made products. New employees mean more tax revenue, reducing the country’s deficit. At the same time, the use of fossil fuels – coal, oil, natural gas – and pollution would be drastically reduced. The result would be a relatively painless improvement in life for everyone, especially for those out of work and for the poor.

This fee and rebate system may be new, but as unemployment and pollution remain at unhealthy levels, it’s time for some innovative solutions. To create millions of jobs in a hurry, we need to create the conditions that foster new business formation. It happened in the 1970s, by necessity. It can happen again today, by design.

David Gordon Wilson is emeritus professor of mechanical engineering at MIT. He wrote about the first version of this policy in the The Christian Science Monitor of March 15, 1974.

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