FOREWORD

The strength and stability of the U.S. economy depend very heavily on an effective solution to the nation's energy problem. Thinking Through the Energy Problem offers a fresh approach to the multifaceted issues surrounding energy and a solid framework within which energy policies, present and future, can be judged.

The close association between energy and the economy has long been recognized by the Committee for Economic Development. In 1973, months before the Arab oil embargo, a CED Subcommittee was at work formulating proposals both for stimulating energy production and curbing energy demand. CED's findings and recommendations appeared in the policy statement Achieving Energy Independence, published in 1974.

Since that initial report, CED's Research and Policy Committee has published three policy statements that respond to various aspects of the nation's energy problem: International Economic Consequences of High-Priced Energy (1975), Nuclear Energy and National Security (1976), and Key Elements of a National Energy Strategy (1977). The 1977 statement warned that the intensifying public debate over energy was in danger of becoming "so enmeshed in details that fundamental domestic and international considerations may become obscured."

With this warning in mind, CED commissioned Professor Thomas C. Schelling of Harvard University to prepare a study designed to help public officials and private citizens think through the energy problem in a rational and objective manner and to identify certain fundamental principles. It was clear from the outset that the purpose of such a study would be to construct a conceptual framework for evaluating energy policy, not to devise a set of specific recommendations.

Working closely with Professor Schelling was the Design Committee on Long-Range Energy Policy, a small task force of CED trustees whose names and affiliations appear on page v. The Design Committee, assisted by experts from business and academe, met with Professor Schelling monthly over a period of more than a year, commenting on the successive stages of his analysis and exchanging ideas as to its applications. Thinking Through the Energy Problem is a distillation and refinement of concepts that emerged from this process.

Professor Schelling focuses on oil imports as the principal connection between United States domestic energy policy and a multitude of energy-related strategic and foreign policy issues. The question of oil imports, he maintains, deserves special attention in the design of energy policy. Indeed, how oil imports are treated becomes a key element in the formulation of American energy strategy.

Instead of proposing specific solutions, the study suggests new ways of looking at the connections among energy issues and then explores the implications of those connections in the choice of policy mechanisms.

Among the myriad issues surrounding energy, Professor Schelling identifies one that is paramount: price. The prices that people are willing to pay for existing fuels, he states, help determine how much new fuel can be developed and at what cost "Keeping fuel prices artificially below the replacement cost of the fuels being used," he argues, "subsidizes excessive consumption, inhibits exploration and development of supply, and misrepresent the worth of technological changes that economize energy." Price regulation, he maintains, may disguise the ways the costs of fuel are paid and who pays them, but it docs not reduce those costs.

Professor Schelling finds that the energy-related costs of environmental protection are an important factor in the rise of energy costs; yet the price system does not reflect these costs. Moreover, these costs will grow substantially, he believes, unless environmental protection is treated as an "economic choice," with costs related to benefits, rather than as a "technological absolute."

Recognizing that the market system cannot respond to all environmental and foreign policy concerns, Professor Schelling nevertheless concludes that the market's virtues of flexibility and adaptability are our best resources in dealing with most of the risks and uncertainties in the energy picture.

Thinking through the Energy problem is published as a CED Supplementary Paper, and as is traditional for such papers, the author takes responsibility for its contents. In this case, however, the study was discussed, debated, and its contents unanimously endorsed by the trustees who comprised the Design Committee on Long-Range Energy Policy. Its publication was strongly endorsed not only by this group, but also by CED's sixty-member Research and Policy Committee in this language:

This analysis of the nature of the energy problem is being made available by CED as a framework for addressing energy policy. It does not contain specific recommendations. It differs in that respect from CED policy statements, which do contain recommendations that have been voted on by CED's Research and Policy Committee and that also may contain dissents and reservations. Publication of this statement, prepared by Professor Thomas C. Schelling working with a small Committee of CED trustees, has been endorsed by the Research and Policy Committee as a fundamental and constructive perspective for its ongoing consideration of energy policy and is published so that it may serve that purpose for others as well.

Robert C. Holland - President Committee for Economic Development