Clear Thinkers favorite James D. Hamilton and Robert K. Kaufmann, professor in the Center for Energy & Environmental Studies at Boston University, are the participants this week in the Wall Street Journal’s excellent Econoblog series (it’s free!). The topic is the notion of “peak oil” and exploring the economic ramifications of a drop in oil production, and the discussion between these two experts is insightful and informative.
By the way, both men share a disdain for the recently-passed Energy Bill, to which Mr. Kaufman comments:

Policy is needed to help the entrepreneurial spirit anticipate the peak, but we don’t need the type embodied in the current energy bill. No serious person can believe that it will help. The current bill demonstrates that Republicans and Democrats have the same view of policy, they just give tax dollars to different groups.
Sound policy should establish an economic environment that increases the economic returns and reduces the risk to long-term research and development on alternative energies. Specifically, policy should impose a large energy tax that is phased in over a long period, perhaps 20 years. Furthermore, increases in the energy tax should be “offset” by reducing other taxes, such as payroll or corporate taxes. Economic studies show that such an approach can generate a “win-win” solution — reduce energy use (and the environmental damages not paid by users), stimulate research and development on alternative energies, and speed economic growth. Phasing in an energy tax would send a signal to entrepreneurs that there will be a market for alternative energies. The tax does not pick technologies — that will be left to the market, which is smarter than any Democrat, Republican, or even myself!

And Mr. Hamilton makes the following sharp observation regarding efficient allocation of resources:

It is precisely because I agree with Robert about the importance of this transition [from peak oil] that I think it’s critical that we put all our resources to their best use. And I honestly believe that the best way to ensure that happens is to count primarily on the same system that has generated the fantastic improvements in global living standards over the last few centuries, namely, individuals choosing to direct the resources they personally control to those activities that yield the highest personal reward. Yes, the risks are great here, but so are the private rewards to those who best figure out how to navigate our way through them.
In so saying, let me be clear that I distance myself from those who might say that there is nothing to worry about and markets will solve everything. I think there is plenty to worry about, and markets may or may not solve the problems. But what I am saying is that I see private incentives as our best hope. Notwithstanding, I enthusiastically endorse the kinds of active government assistance for those incentives that we’ve been discussing.