CARTER'S PROGRAM: WILL IT WORK?

At 8:30 on the evening before his address to Congress, President Carter huddled with his energy team in the White House Cabinet Room. Dressed in blue jeans and sipping ice water, Carter worried over each point in his message with Energy Aide James Schlesinger (TIME cover, April 4) and a handful of key staffers. Rosalynn stopped by to eye the text. "If I can understand it, everybody can," she explained later. "We changed a word here and there to be more easily understood." At 12:45 a.m., a weary President went off to work on the speech for another hour before going to bed. Schlesinger and his small staff retreated to their offices, where the staff worked all night putting the finishing touches on the address and the Administration's proposed legislation.

Despite the last-minute wording revisions and a few substantive changes (gasoline taxes will be rebated to consumers by reducing their income tax, not their Social Security tax as had been contemplated earlier), Carter's program remained true to the details that had already been reported (TIME cover, April 25) and previewed in his Monday night speech. In essence, the President hopes to arrest growing U.S. fuel demand through conservation, and to rely on plentiful coal and conventional nuclear energy to stretch out supplies of oil and natural gas until new forms of energy (solar, geothermal and thermonuclear fusion) become the nation's major power resources in the next century.

That is a commendable--indeed, indispensable--goal. But some of Carter's chosen methods are debatable. The program largely bypasses the supply and demand workings of a free economy. Instead, the presidential plan relies heavily on rewards and penalties, to be dealt out mainly through a complex scheme of taxes and rebates. "Voluntary compliance is not enough," said Carter. "The problem is too large and the time is too short." Major items:

GASOLINE. The Government would set consumption targets providing for a gradual rise in usage until 1980, then a decline after 1982. If U.S. motorists in any year from 1978 on burn as much as 1% more gasoline than the target, then the next year they will have to pay a federal tax of 5-c- per gal.; the tax could rise to a maximum of 50-c- by 1989. Any money raised by the tax--and it could eventually be as much as $60 billion a year --would be returned, said the White House, not just to drivers but in equal amounts "to every man, woman and child in America" through income tax credits and direct payments to people who do not owe taxes. The credits and payments would function as a kind of income redistribution device. Lower-income people, who usually do not drive as much as those in higher brackets, would pay less in gasoline taxes but receive the same rebates.

GAS GUZZLERS AND SIPPERS. Washington will penalize buyers of gas-thirsty cars and reward purchasers of fuel-efficient autos, through a complex formula of excise taxes and rebates keyed to gas mileage. For example, in 1978 a $449 tax would be slapped on autos achieving 12 m.p.g.; by 1985 the tax would rocket to $2,488. By contrast, in 1978 a buyer of a car getting 39 m.p.g. would receive a rebate of $473; by 1985 the rebate would rise slightly, to $493.

CRUDE OIL. In order to discourage consumption, the cost of U.S.-produced oil to buyers will be raised from its present average of $8.25 per bbl. to the world level--presently $13.50--by 1980. This would be done primarily by taxation rather than by any significant relaxation of federal price controls. The oil companies would be allowed to charge world prices only on newly discovered oil, which in the future could substantially boost their earnings. The cost of oil from existing wells would be driven up by a new federal tax at the wellhead. Thus buyers would pay more for gasoline (even if the 5-c--per-gal. gasoline tax never went into effect), for heating oil and for all other products made from crude. But, as Carter noted, "the oil companies would be prohibited from deriving any revenue" from most of the increases.

People who heat their homes with oil would get back every dollar that the tax adds to their heating bills. Other revenues raised by the tax would be refunded to consumers in the same manner as the gasoline tax, through income tax credits and direct payments, but again the credits would not be geared to usage; people who used a great deal of oil would lose money, people who used little would gain.

NATURAL GAS. The nation's cheapest fuel--whose artificially low price has led to its catastrophic depletion--would become more expensive. Federally controlled wellhead prices of newly discovered natural gas would rise by 300, to $1.75 per 1,000 cu. ft. Gas produced and consumed within the same state, which now is free of federal controls and sells for as much as $2, would be placed under the $1.75 federal "cap." Carter's reasoning: nationwide equalization of natural-gas prices should stop hoarding of supplies within one state, as occurred last winter, while other sections of the nation shivered without heating fuel.

CONVERTING TO COAL. A 10% tax credit on the cost of new equipment would be granted to factories that switch from oil and natural gas to coal-fired systems. Industrial users of oil who fail to switch will be hit with a 900-per-bbl. penalty tax that will rise to $3 by 1985. Money collected from such levies would be channeled into a development fund for accelerating the conversion of plants to coal. Factories and utilities would be flatly forbidden to burn oil or gas under new boilers unless they could demonstrate that for some special reason they could not use coal.

HOME INSULATION. Since an estimated 40% of house heat escapes through faulty flues, ill-fitting windows and porous walls, tax rebates would be offered to homeowners who insulate their residences. The amount: a 25% personal income tax credit on the first $800 outlay, or a tax saving of $200, and a lesser percentage on the next $1,400. For householders unable to raise the cash, utility companies will be required to offer installment-plan insulation programs for their customers.

SOLAR ENERGY. Homeowners would receive a 40% tax credit on the first $1,000 spent for solar-heating devices and 25% on the next $6,400. There is much, much more. The plan includes provisions requiring utilities to change their pricing methods--eliminating discounts for big users and offering discounts to customers who burn "juice" in off-hours. In a bow to environmentalists, Carter declared that there would be no relaxation of clean-air standards, even though the Administration hopes to increase coal production nearly two-thirds by 1985 to more than 1 billion tons a year. Instead, utilities and factories converting to coal would be required to make large investments in "scrubbers," which remove harmful chemicals, and other antipollution devices.

The program delves into some minute details: a requirement for separate meters in all new apartments, rather than a single large meter for an entire building, for example. There were a few omissions, notably any mention of developing mass transit as a means of saving fuel. Carter's explanation: "This is a separate item that will be handled under the Transportation Department." But on the whole, Carter fulfilled his promise to make his plan comprehensive.

Its goals are also quite specific. The three main ones: 1) to cut growth in U.S. energy demand to less than 2% a year by 1985, from the nearly 3% it otherwise would have been expected to reach and 6% now; 2) to reduce gasoline consumption by 1985 10% under this year's expected level of 7.2 million bbl. a day; and 3) to reduce imports of foreign oil to 6 million bbl. a day eight years from now (they averaged 7.2 million bbl. a day last year, and Carter estimated that they could grow to 16 million bbl. daily by 1985 if nothing is done).

White House attempts to explain and justify the program had their moments of confusion. As the week went on, the tone of Administration statements vacillated. The first White House "fact sheet" on the plan asserted that the energy program would create 100,000 new jobs by 1985 and make economic growth a bit faster than it would be otherwise. Later, Budget Director Bert Lance said the program would have no effect one way or the other on growth (some outside economists fear it would slow growth a bit).

The President himself calculated the amount that one family might receive in gasoline-tax rebates. In fact, the Administration at first implied that all of the money raised by gasoline and crude-oil taxes would be returned to the public through tax credits. But then on Friday the President said, "I can't certify today that every nickel of the taxes collected will be refunded to consumers."

Most striking, Carter on Monday night spoke in somber Churchillian tones of sacrifices for everybody--but by week's end the White House indicated the sacrifices would not be financial, and indeed the program would save consumers money. A statement issued Friday night contended that without the program the average family's energy bill in 1985 would be $1,367; Carter's proposals would cut that figure 16%, to $1,145. That contention is highly debatable: it assumes that conversion to coal would free "old" and inexpensive natural gas now burned by industry to flow to homeowners, and that families will save heavily by insulating their houses. The White House estimate also appears not to count price increases on myriad products that might be forced by higher industrial fuel bills.

Much of the first burst of criticism came from special-interest groups, but many of their gripes were legitimate. Foreign automakers, for example, were frightened that their cars might not qualify for the rebates on fuel-efficient vehicles. Actually, they probably wilL; but rebates on foreign cars are certain to provoke the wrath of the United Auto Workers.

There was some grumbling that the President had overstated the dangers of the energy crisis. Carter played up a CIA report indicating that the world would begin to run short of oil as soon as the mid-1980s. In fact, the CIA study is questionable: its estimates of world demand are in some cases frankly guesswork, and they conflict with the calculations of other experts, notably those employed by the 24-nation Organization for Economic Cooperation and Development.

Ralph Nader rather irresponsibly voiced doubt that there is any energy crisis: he asserted that "we have far more oil and gas in this country than the oil industry is officially willing to recognize." His argument is difficult to refute conclusively; the Government itself is dissatisfied with figures on the size of U.S. energy resources (TIME, April 18). Yet neither point makes much difference for policy. World oil reserves assuredly are finite, even if they might last a bit longer than the CIA thinks. Moreover, part of Nader's argument is that vast quantities of natural gas under the ocean (now unreachable) and oil shale in Western states (now far too costly to tap) might some day become accessible with improved technology. No responsible Government could bank on that.

More sage criticism focuses on three main points:

> The program, which is very modest compared with what it promises, is aimed too strictly at conservation, too little at increasing supplies of gas and oil as well as coal.

> It relies too heavily on Government taxation, too little on the workings of the market price mechanism.

> It is potentially more economically restrictive than it need be.

Conservation unquestionably is necessary, and Carter is right in contending in effect that consumers and industry will not save energy unless waste is heavily penalized financially. Through the familiar use of taxation to bring about socially desirable change, the Administration is seeking to give industry and consumers a number of choices in which "doing the right thing" will be profitable. But the President has perhaps unwittingly discouraged the chances for the possibility of increasing U.S. oil and gas supplies by rigging his taxes so that the oil industry gets no additional money to find and develop new oil and gas fields. Complains John Winger, the Chase Manhattan Bank's chief oil economist: "There was a reference by the President to the need for higher prices to deal with replacement costs [of oil], and in the next breath he said he would raise the price through the tax mechanism. That doesn't provide the funds to pay the bills for development."

By relying almost exclusively on federal tax incentives and penalties, Carter also raises a danger of making the Government the director and problem solver on energy as well as the goal setter. Despite its best intentions, the Government has blighted every industry it has touched, notably the decrepit U.S. railroads and the nation's dwindling maritime fleet. Carter's aides vehemently deny that a huge bureaucracy would be needed to oversee his program, and Schlesinger is known as a lean administrator. Nonetheless, the program is so complex and involves the Government so heavily at every turn that the proposed new Department of Energy would carry heavy bureaucratic burdens.

As to the inflationary aspects, they are to a degree unavoidable. The U.S., as Carter notes, has been fooling itself by paying artificially low prices for energy--but, unhappily, any rise in energy prices raises the U.S. cost of living. The impact could be offset partly by an increase in supply--but none of the money raised by his energy taxes will be devoted to developing new energy sources. Indeed, the taxes would create a second inflationary impulse, because they would be returned to consumers through the income tax system, thereby giving people more money to spend.

Why was the program shaped this way? Energy Aide Schlesinger and other Carter assistants insist they were simply being pragmatic, looking for the quickest, most effective way to solve energy problems. At a White House background briefing, a top Carter energy aide declared, "One of the areas in which the sacrifice will be required to be the greatest will be our cherished beliefs." Yet an ideological tone of suspicion of the oil companies seemed to wind through many of Carter's remarks. In his April 18 speech, he told the public that "you might be right" in believing that the oil industry has been withholding supplies from the market--even though an Interior Department investigation of the possible extent of such withholding has not even begun.

Why did Carter propose letting higher taxes rather than higher prices discourage energy consumption? The obvious answer: to prevent oil companies from making windfall profits. In his press conference, he noted that the oil companies, under his plan, will have to report their profits in each geographical area and for each type of fuel they produce. That, he said, might well disclose anticompetitive practices that the Government could then use to prosecute the oil companies under the antitrust laws, and perhaps avoid any necessity of breaking up the companies or making them get out of non-oil energy fields, such as coal or nuclear power. This stand marked a softening of his position from the campaign: Candidate Carter said he would probably favor making the oil companies split off marketing activities and get out of non-oil businesses.

Is there a compelling alternative to the Carter program? Many parts of the plan--the stand-by gasoline taxes, the moves to push industry toward using coal--make sense. Moreover, a Democratic President cannot be expected to ask a Democratic, heavily liberal Congress for immediate decontrol of oil and gas prices that would indeed allow oil companies to make enormous profits. Aside from the political realities, such decontrol, as Carter noted, would give the economy an inflationary shock that it could not readily absorb.

But there could be another way: a phased decontrol that would allow prices to seek their own level--and discourage consumption--without dealing too great an inflationary blow in any one year. The Government could ensure that the profits oil companies make from higher prices would be devoted to exploration and development of new fields by placing a tax on any earnings that were not --with the proceeds to be devoted, perhaps, to joint federal-private exploitation of resources that are particularly difficult and expensive to tap, such as those lying under water on the outer continental shelf. The impact of rising prices on the poor could be offset by a system of federal gasoline and heating stamps, similar to food stamps. This proposal was rejected as too cumbersome.

Whatever the plan's shortcomings, even its critics give Carter the highest marks for focusing national attention on the problem, for ending the period of inertia and corridor infighting within the Administration, and for opening an intense, even vehement, national debate.

It is just possible that out of this debate will come a new partnership between Government and business, closer than Carter himself has proposed. An articulate advocate of such an approach is Thornton Bradshaw, the thoughtful president of Atlantic Richfield. Despite his belief in capitalism, Bradshaw contends that the U.S. does not enjoy a totally free market in which competing and countervailing forces work, as Adam Smith would have it, for the ultimate benefit of the consumer. Instead, the U.S. already has developed an only partially free market characterized by a unique blend of private and Government forces.

In that mixed environment, Bradshaw sees the need for each element to perform the function that it does best. As Bradshaw wrote in the February Fortune: "We should not strive to bring about more government intervention in economic matters, but we surely need to make that intervention more rational. " Bradshaw's prescription: Government must set the overall goals and signal to industry what it wants done. Then, with a minimum of federal interference, industry should get on with the job of accomplishing those goals.

That may or may not happen. But the energy crisis demonstrates once again that the U.S. no longer can afford the luxury of having the Federal Government and the business community regard one another as adversaries to be wounded at every turn.

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