In a rare presidential press conference last week, one subject was posed repeatedly to Joe Biden: inflation. “How long,” The Wall Street Journal’s Ken Thomas asked, “should Americans expect to face higher prices when they’re at the grocery store? At the gas pump?”
After talking through the ways his administration hopes to break through supply-chain bottlenecks for goods like semiconductors, Biden got to energy prices. “That gets a little more complicated,” he said. He noted the Department of Energy’s November announcement that it would release 50 million barrels from the Strategic Petroleum Reserve onto the market, but he went on to emphasize that controlling inflation ultimately isn’t the responsibility of the president or Congress. “The critical job of making sure that the elevated prices don’t become entrenched rests with the Federal Reserve,” he said, through raising the federal funds rate.
Although hegemonic, Biden’s position is something of a historical novelty in the United States. Not so long ago, hardly radical policy-makers recognized that a wide range of now mostly rusted tools — from price controls to outright limits on profiteering — were needed to deal with the varied causes of inflation, especially in periods of crisis that demanded massive investment and economic planning. Climate change promises not just one crisis but an era of rolling crises.
Congress is not poised to green-light a Green New Deal or wartime-scale mobilization to cut emissions, unfortunately. But global efforts to curb warming — combined with ever-worsening fires, floods, and droughts — are likely to entail economic transformations at least as dramatic as war and depression, stranding trillions of dollars worth of assets as vast swaths of the planet become uninhabitable. Supply-chain troubles aren’t going anywhere, and it’s hard to imagine the Federal Reserve is equipped to manage all the upheavals the next decades have in store.
Inflation tends to be thought of as a fog that rolls in and settles over the economy, making life’s necessities pricier and voters angrier. Yet consider what drove last year’s 7 percent rise in the Consumer Price Index: Gasoline (oil) led the pack per usual, followed by used cars and trucks, energy, and gas piped in by utilities, then meat, poultry, fish, and eggs, and then new cars. In short, the biggest drivers of inflation these past few months are also what’s fueling the climate crisis. All feature heavily in the top sources of U.S. greenhouse-gas emissions, with transportation (including oil and cars) accounting for the biggest share, 29 percent. Burning fossil fuels for electricity generation is next, at 25 percent of emissions. Commercial and residential heating — mostly piped-in utility gas — accounts for 13 percent. Agriculture clocks in at 10 percent.
It was Ur-neoliberal and University of Chicago economist Milton Friedman who summed up the current consensus on inflation — that it was “always and everywhere a monetary phenomenon” to be controlled with monetary policy. Economic historian David Stein recently countered in Democracy Journal that inflation “is — always and everywhere — a specific phenomenon with specific causes.” More often than not, those causes are wrecking the planet.
Although clean-energy investments need to be significant to avert catastrophe — on the order of 1 to 2 percent of GDP at the conservative end — the results would very likely be anti-inflationary given the outsize role fossil fuels tend to play in driving the CPI. Decarbonizing the power sector and retrofitting homes and buildings to run on that new grid, as Green New Deal proposals outline, would not just create millions of jobs but decouple life’s essentials from fossil-fuel price volatility. The same is true of large-scale investments in electrified transit that, besides slashing deadly air pollution and cutting down on traffic, would give many more people a less intimate connection to oil-market decisions made an ocean away.
That is not the path the U.S. is on. Should Congress pass intact — and let’s hope it does — the climate provisions in the Build Back Better Act, it would initiate just $55 billion of new spending per year on average. The biggest-ticket items, more than $300 billion over ten years, incentivize consumers and companies to make lower-carbon choices with rebates for e-bikes and electric vehicles, alongside tax incentives for renewable energy build-outs and transmission lines. That will be good for the planet, to be sure. But given just how reliant these policies are on incentives, raising interest rates now stands to make those policies pack less of a punch, just as the window for the U.S. to be a competitive player in a budding green economy closes rapidly — if it hasn’t already.
The private-sector-led campaign embedded in Biden’s climate plans is odd in no small part because of how ubiquitous all manner of state-led planning has been in the nation’s long quest for energy independence via fossil fuels — a goal deemed too important to leave up to market forces. OPEC’s ability to manipulate the price of oil was a power the U.S. once exercised through both the Texas Railroad Commission and the imperial control of oil reserves throughout the world by American and British companies, maintained in some cases by violent coups. At one point in 1931, Texas governor Ross Sterling sent 1,200 National Guard troops to pry roughnecks from wells to keep oil prices from dropping too low when they ignored production limits. “Our task,” FDR’s Interior secretary Harold Ickes said in 1933, “is to stabilize the oil industry upon a profitable basis.” When the Supreme Court struck down the first New Deal’s price-control regime in 1935, it was promptly reinstated in the energy sector as the Connally Hot Oil Act, which leveraged punitive fines on companies that exceeded production quotas and transported excess (“hot”) oil across state lines.
Energy, as historian Andrew Elrod tells me, “was a thoroughly controlled industry for most of the 1970s,” with prices initially frozen by the Defense Production Act of 1971 and extended even as Congress allowed price controls in other areas to expire. Such controls took on new life after the oil-price shock of 1973, with tiered limits meant to flatten the differential between the price of oil in domestic and foreign markets once the U.S. lost its cartel. During this time, the Strategic Petroleum Reserve was created, along with what would become the Department of Energy.
It was Jimmy Carter who finally eliminated energy price controls in the late 1970s, overriding his Democratic Congress in a deregulatory push. Lo and behold, prices went up as output slowed, and we got stagflation. To remedy that, Carter’s chosen Fed chairman, Paul Volcker, would trigger a painful recession that spiked unemployment and triggered a global debt crisis. In an expansive recent essay on the history of price controls in the U.S., Elrod writes that the Volcker shock’s successes in curbing inflation — at tremendous cost — solidified the central bank’s virtual monopoly on economic planning:
The previous White House bodies charged with monitoring cost-price relationships — the Council on Wage-Price Stability, the Cost of Living Council, the Council of Economic Advisers, the Office of Price Stabilization, the Office of Price Administration — either became objects of McCarthyist persecution or accommodated themselves to a world in which such microeconomic analysis was considered irresponsible for a public agency to conduct, on the grounds that the only potential use of such data was public control of prices.
Nevertheless, through subsidies, foreign policy, and more, energy planning persisted — still in the service of producing fossil fuels. You don’t even need to look that far back to find sectoral planning creating seismic shifts in the world’s energy landscape. Among the biggest prizes of loose monetary policy after the Great Recession was the shale revolution: a domestic oil-and-gas-production renaissance made possible by the cheap credit and extra cash sloshing around the global financial system as interest rates floated near zero. Fracking is an extraordinarily capital-intensive process, and firms hemorrhaged cash. But Wall Street was patient and generous because dollars were cheap.
Furthermore, days after the Paris Agreement was brokered in 2015, the White House backed a deal to repeal a 40-year-old ban on crude-oil exports, helping resurrect shale drillers’ prospects after the price of oil crashed in late 2014 as OPEC flooded the market. The next year, the Department of Energy opened the door for U.S. liquified natural gas (LNG) to flow around the world. The State Department was already acting as an enthusiastic salesman for U.S. drillers the world over, through its Global Shale Gas Initiative, which cultivated export markets for LNG. Over the next four years, crude-oil exports exploded by 750 percent. Having started only in 2016, the U.S. is now the largest LNG exporter on earth.
Despite all the state planning surrounding fossil fuels, the U.S. is still not entirely in control of its own energy future. And despite claims of energy independence — or “dominance,” as Donald Trump put it — the U.S. routinely has to ask OPEC to lower prices when they get too high. As shale drillers found out the hard way in 2014, fat times can come to an end if a few bureaucrats in Vienna decide to keep on pumping. That’s in large part because, unlike the vast majority of oil-producing countries, the U.S. does not have a state-owned company through which it can either oversee domestic levels of production or capture natural-resource wealth — nearly all of which flows to shareholders and CEOs paying record low tax rates. Among the biggest causes of rising prices now is the fact that drillers in the Permian Basin spent months voluntarily constraining production in order to raise prices and extract more profits. All that Energy secretary Jennifer Granholm can do is ask them to get their “rig count up.”
The U.S. has a lot of catching up to do, both to reach its own professed goal of limiting global warming to 1.5 degrees Celsius and to be a serious player in the green economy. Thanks to some 30 years of dedicated industrial policy, China — by far the world’s biggest investor in low-carbon technologies — produces 66 percent of the world’s solar panels, supplies one-third of its wind turbines, and is both the largest supplier of electric vehicles and the largest market for them. It accounted for 99 percent of worldwide e-bus sales between 2016 and 2020. China controls roughly 60 percent of the market for lithium and other technology metals used in electric-car batteries and renewable-energy storage. “No other economy,” political scientists Jonas Nahm and John Helveston wrote in Science in 2019, “has been willing and able to pour even a remotely equivalent level of resources into manufacturing expansion and R&D in recent history. It is therefore highly unlikely that another nation will be able to replicate China’s skills in the time frame needed to avoid the worst consequences of climate change.”
Plenty of our allies are running ahead of us too. Just two of the world’s top wind-power developers are based in the U.S. Although this country has 9 percent of the world’s lithium reserves, according to the International Energy Agency, it has just one operational mine. Ninety percent of the world’s current supply is produced in Australia, Chile, and China. The top-ten EV battery manufacturers are all headquartered in East Asia. With few options left in Congress and executive authorities vulnerable to court challenges, it’s unlikely the U.S. will catch up anytime soon.
The old mantra of “energy independence” is at least as bad a fit for the 21st century as it was for the 20th. Rapid decarbonization will require good-faith cooperation, not a dead-end quest to dominate export markets. But many of the state-planning tools from earlier eras are still lying around collecting dust, ready to be picked up in service of the U.S. doing its part for the planet. The Department of Energy still has broad powers to stem the flow of energy exports and maintain strategic stockpiles of oil and other key minerals. The Department of the Interior can significantly limit oil-and-gas drilling on public lands, which is responsible for one-quarter of U.S. emissions. Even the Texas Railroad Commission still exists, though its three elected Republican members don’t exercise the control over methane leaks and production that they’re legally entitled to.
Theoretically, these powers and institutions could be put to use now not just to cut emissions but to insulate Americans from energy price swings. On the more modest end, the White House has already proposed a cross-agency effort to “recapitalize and restore” stockpiles of critical minerals and materials — mostly liquidated by Richard Nixon — and support domestic extraction, processing, and recycling of important green-economy components. The Roosevelt Institute’s Todd Tucker has detailed the range of powers available to the president under the Korean War–era Defense Production Act, whose allocation authority could be an engine of clean-energy development, filling gaps the private sector and Congress won’t.
Just as important for the U.S. is stemming the enormous amount of fossil fuels its companies plan to send abroad. This can be done without legislation, albeit not without controversy. The Department of Energy could revoke export permits, and, by declaring a national emergency, Biden could reinstate the crude-oil export ban. Unfortunately, Secretary Granholm has already ruled that out. After floating it as an option for relieving pain at the pump, she took it off the table in November, telling fossil-fuel executives directly, “I don’t want to fight with any of you.”
Dealing with the climate crisis, as the White House says it wants to, will inevitably involve just such a fight as well as cutting into runaway extractive-industry profits. That a policy will enrage the fossil-fuel industry isn’t a reason not to do it, especially when you don’t need Congress’s approval. Climate-conscious, 21st-century economic policy can mean allowing the economy to run hot while surgically targeting the causes of inflation, whether through a new evaluation of pricing policies (as suggested recently by, among others, economists Isabella Weber and James K. Galbraith), intervening in bottlenecks through industrial policy, rebuilding and strategically deploying stockpiles, or placing limits on profiteering. Combined with export limits, for instance, price controls on oil could stem the 50 percent rise in drilling planned in the Permian Basin over the next eight years, which is due to burn through 10 percent of the entire world’s remaining carbon budget. The administration could stabilize prices for consumers while discouraging new, costly exploitation and exploration that are out of step with its goals for a cleaner future.
