Creating a Low-Carbon Economy

The extraordinary success of the Cash for Clunkers program--$1 billion worth of credits dispensed in about a week--is an outstanding validation of the power of green stimulus that we at NDN began championing at the beginning of last year.  Not only is the cash for clunkers program a win for the environment--about 250,000 clunkers will come off the road, replaced by the same number of fuel efficient cars, the program has provided a shot in the arm to the beleaguered auto industry and also put $1 billion of stimulus out onto the street when we need it.  You might call it a win, win, win: a victory for the environment, auto manufacturing and the broader economy.

The program is so successful that Congress should dramatically extend it.  As a thought exercise imagine what would have happened had Congress enacted a $10 billion program at the beginning of the year that might have sold 2.5 million cars--about the number that the auto industry would have needed over the last six months to be profitable.  It might have put the auto companies into the black and possibly avoided the GM and Chrysler bankrtupcies and billions in taxpayer support. 

While it's too late to turn back the clock, it's not too late to extend the program--perhaps quadrupling it to $4 billion as Congressman Ed Markey has suggested, with the goal of replacing a million jalopies.  An extra $3 billion is worth it, in my view, to improve fuel efficiency, to protect the taxpayer's investments in GM and Chrysler and as quick stimulus now.

Clean technology clearly holds great promise for future economic growth.  However, as development of new clean technologies accelerate in the United States, it remains an open question whether US firms and workers will capture the economic activity or whether the bulk of the benefits will flow elsewhere.  The issue cropped up in the recent passage of the cash for clunkers law which will reward consumers for trading in clunkers for newer fuel efficient cars.  The law will benefit American consumers and carmakers but also benefit carmakers and overseas suppliers selling into the US market.  And, indeed, it shadows the entire issue of clean technology driven growth. While the transformation to a clean economy will pay important environmental and security dividends no matter what, how the economic promise of clean technology ultimately gets divided will vary by country. 

Call it Competitiveness 2.0.  It is the subject of a penetrating article in the current Harvard Business Review by two Harvard professors, Gary Pisano and Willy Shih entitled "Restoring American Competitiveness: Why America Can't Make a Kindle". The professors examine a wide range of technologies from computer equipment to software to clean technology and find America at a growing competitive disadvantage. Both the data they cite and the case studies they include should serve as a wakeup call to anyone thinking about clean technology and the future of the US economy.

While innovative ideas continue to flourish in the United States -- think Twitter, Ning and Facebook--the US has become a technology laggard among the OECD countries in critical measures. The US trade deficit is old news but the authors point out since 2002, the US has been running a deficit even in high tech goods and services. The main export of the US is capital.  And there are precious few bright spots in the technology firmament. 

In the case of the Amazon's Kindle reader, which the authors examine in detail, though engineers in California designed the product, there is simply no US capacity to make the components.  (If the US lacks the capacity to make a Kindle could it make a military computer in a pinch?)  In aircraft, Boeing continues to lead the world but it now relies on a network of global suppliers and has cut its American workforce.  Managing this complex supply chain led the company to delay delivery of its Dreamliner.  All but the highest end computers are now made abroad. And even complex software tasks, from writing software to using it for engineering, are moving overseas.

In clean technology, leadership in battery technology lies abroad. GM's Volt, scheduled for introduction next year, for example, will source batteries from South Korea. While a few companies such as Tesla are developing advanced auto technologies, the US lags Asian and European companies in hybrid and other technology.  With most growth in the world's auto sales likely to take place in China, India and the developing world, companies like Tata and Chery (originally a Chinese knockoff of Chevy) will have a homefield advantage. Chinese, Japanese and Korean companies dominate all PV production of solar cells except in thin films -- the most advanced and promising technology where US firms still lead the way. In smart grid technologies, US companies face roadblocks in the form of an excessively complex and highly regulated utility industry.  Installing new smart grid meters and retrofitting old buildings only gets you so far in terms of new jobs and new businesses.  All told, while the US has the potential, thanks to our still- unmatched system for financing innnovation, to develop the technologies of tomorrow we are, all too often, behind in the technologies of today.

What are the sources of our competitiveness problem? America continues to lag in primary and secondary education. Our universities may be the best in the world, but most of the spots in top PhD programs now go to more motivated students from overseas.  (Community colleges are a US strength that can be scaled as Rob Shapiro has argued and the President recognized today in calling for their expansion.)  The relentless search for low wages continues to send capital out of the US. American firms still can receive tax breaks for moving jobs overseas. Short term thinking, driven by the next quarterly results dominates corporate strategy.

On the macroeconomic level, the US continues to stress consumption over production. This bias, which derives from a strong dollar that keeps imports cheap as long as others lend us the money to buy them, encourages overseas instead of domestic production. A weaker dollar and shift toward a producer and investment-led economy would temporarily lower standards of living, but may be what is required to create the foundation for long term growth. Recently, former NEC head, Laura Tyson, proposed just such a shift in national priorities. While these are complex questions, a real debate over our priorities -- toward consumption--or production is in order. 

In the 1990s, the US made major strides in reversing its competititiveness deficit so that by decade's end it was leading the global economy. However, as Pisano and Shih make clear, those strides were temporary and the problem has returned.  The competitiveness issue, the authors show, is far more problematic today than  at any time in American history.  And if this issue is not satisfactorily addressed, the US will not see wages, standards of living or other metrics of welfare rise. As NDN has long argued and as the HBR authors note as well, stagnant wages combined with rising expectations led to the absurd borrowing that precipitated the latest financial crisis.

In short, if the US is to reap the economic rewards of a clean technology revolution, we need to seriously examine our competitiveness posture and take the steps needed to put us back on track to leading, not lagging the global economy.

Last week the Department of Energy released part of the $25 billion in loans provided for through the Advanced Technology Vehicles Manufacturing Loan Program, included in Section 136 of the Energy Independence and Security Act of 2007. The delay in releasing these funds had been one of the longest running scandals in clean tech policy. Upon taking office, the Obama Administration vowed to expedite their release and Secretary Steven Chu had made finalizing rules needed to administer the program a key priority. In the first installment of the loans, Tesla, the VC-backed California maker of an all-electric sports car, founded by Ebay veterans, will receive $465 million to make its compact, all-electric Model S sedan. Ford will receive $5.9 billion to retool 11 factories across five states to improve the overall fuel efficiency of its fleet.  Finally, Nissan will receive $1.6 billion to retool a factory in Smyrna, Tennessee, to make an electric vehicle that is being developed and initially manufactured in Japan. The remainder of the money will be released next year.

DOE's announcement comes on the heels of the release of its formal $3.9 billion smart grid funding solicitation last week. The Funding Opportunity Announcement spells out the conditions and terms for those seeking funding for smart grid investments under the American Recovery and Reinvestment Act, the offical title of the stimulus bill signed into law earlier this year. These two developments, coming one after the other, are evidence that the DOE is moving rapidly on the President's goal not only of getting money out into the economy to create jobs and drive demand, but also of making investments critical to a clean energy future.

In the case of the auto loans, they could not be more timely. Autos are a capital intensive business and with credit markets still impaired, it would have been very expensive or impossible for Tesla, for example, to borrow this money on its own. However, that does not mean that the loan is not good business for the government and Tesla. CEO Elon Musk indicated he thinks that Tesla may be able to repay the loan ahead of schedule. Tesla, despite some speed bumps in its early phase, is now profitable on a unit basis, meaning the approximately $120,000 price of its sleek sports car -- which has a long waiting list -- exceeds the cost of components.  Having also recently sold a stake to Daimler Benz, the company is now reasonably well capitalized. Recently, investor Steve Wesley indicated that Tesla's sales are on track to pass $100 million, a common bar for conducting an IPO. If Tesla continues on its current track, it may be the first home run of the clean transportation industry. In any case, the DOE funding puts it on track to move from the sports car niche to the mainstream where it hopes to leverage the glamour associated with the roadster. While Ford and Nissan have greater access to the capital markets, these loans -- provided for in the 2007 energy legislation in exchange for a commitment to higher fuel efficiency -- will help achieve that goal.

In the case of the smart grid, the major barrier to moving forward has been undeveloped standards.  Normally, standards evolve slowly as industry players forge alliances and choose standards that already enjoy market adoption. In this case, the desire to stimulate the economy has accelerated this process. Secretary Chu and Commerce Secretary Gary Locke are overseeing an effort led by NIST to fast track standards for the grid to facilitate adoption. The disbursements made by DOE will indeed help establish standards insofar as the money spent will validate standards and increase adoption.

It is important that standards be as open and uniform as possible to create the broadest and fairest playing field for innovators to enter the smart grid technology market.  Because a smart grid is necessary to get clean energy online and also to drive the creation of new energy products and services, this is an area I believe is absolutely critical to determining whether clean technology can live up to its promise. 

While it remains to be seen how the smart grid will develop, these two announcements from DOE show that the Administration is on the case. These developments should be encouraging to anyone concerned about America's clean energy future.

The passage yesterday by the House of legislation to regulate greenhouse gases, impose a renewable electricity standard and carry out a host of other energy reforms represents the first time that either legislative body in the United States has passed climate legislation.  If the Senate now goes on to pass this historic legislation as well, it will demonstrate that the US is serious about saving our climate.  It is hard to underestimate the importance of this bill--that for all the changes made to gain passage--would be one of the most important environmental bills ever passed comparable to the clean water act and other landmark legislation.

Conventional wisdom holds that the bill faces an uphill battle in the Senate.  However, when dealing with historic matters,  the Senate has at key points in history, proven itself unusually far sighted and stepped beyond the calculus of ordinary vote counts as the House did yesterday.   As the summer progresses we shall see.  But certainly, yesterday's action by the House was a major win for the environmental movement and fulfilled the leadership's goal of passsing a bill before July 4th.  This, in and of itself, is a significant accomplishment.  We are that much closer to putting a price on carbon and changing the rules to transform the economy and move America toward a clean, low carbon future.

Ever since the Waxman Markey American Clean Energy and Security Act or ACESA began congressional hearings this spring, many people have predicted its demise.  Yet the bill which will create a cap and market system in the United States--in preparation for climate discussions early next year in Copenhagen--create a renewable electricity standard and address other climate-related issues has moved steadily forward, first through committee and now to the floor of the House.  Today, President Obama made calls to critical House members whose support is needed to pass the bill. The bill may come to a vote as soon as tomorrow but probably only if Speaker Pelosi and the House leadership believe it has the necessary votes to pass.

This is an important piece of legislation.  As I have argued, this year represents the best chance for passage of a bill to put a price on carbon in many and probably for the forseeable future with a new President in office, Copenhagen coming up next year and with sizable Democratic majorities in both the House and Senate.  As the critical moment of truth approaches, proponents are actively working phones, faxes and email to bring support to bear. 

Polls show that Americans support the bill.  Most major environmental organizations support it as well, though some environmentalists wish it were stronger.  As I have argued, however, one cannot expect perfection in landmark regulation of this nature.  Just getting the principle of limiting greenhouse gas emissiosn on the books would be a historic legislative accomplishment.  On the other side, the American Petroleum Institute and some business groups oppose the legislation.  However, the bill includes substantial incentives to explore carbon capture and additional measures to allow coal producing regions to diversify their economies over the long term.

It remains to be seen if the bill will pass, but it has come a long way and--if past is prologue--will go the distance.

Those interested in trying to push the bill across the goal line can find out what groups are doing here.

A new wave of pessimism seems to be washing over the economy.  Its source is hard to pinpoint but there is no shortage of candidates: rising unemployment (if a declining rate of rise), second thoughts about the recovery of the stock market and even the Administration's rhetoric which in recent days has shifted away from a relentless focus on jobs.  I would like to suggest another potential cause, however.  So far there is little evidence of an igniting factor in the economy, in other words, a new engine of economic growth.  Replacing the tens of thousands of jobs lost in auto manufacturing, finance and construction to this recession will require more than a modest uptick in consumer spending.  It will require new innovation and new industries.  One such igniting factor might be clean technology and infrastructure.  However, green jobs have yet to materialize in substantial numbers so much so that Democratic pollster Stan Greenberg recently called on Democrats to stop talking about green jobs to lower expectations.

I do not share Greenberg's pessism about green jobs.  However, I do believe that to realize their full potential as a job creating machine, enough to power a new wave of prosperity, clean energy and clean technology will require important policy changes, changes that have yet to occur.

Why?  The energy industry, in particular, electricity, at the center of the clean technology promise, remains perhaps the most regulated industry in America. Its very potential as a catalyst for economic growth is a function of its slow rate of adoption of new technology for decades.  Over the last thirty years, a series of industries underwent regulation, including transportation, telecommunications and financial services and all became engines of economic growth.  Energy, in particular electricity, however, remains frozen in a largely transitional state of deregulation that came to an abrupt halt in the 1990s.  Before clean energy can realize its full potential, it is likely to require a new regulatory framework to unlock its economic potential.

One policy reform that many believe can help accelerate adoption of clean, renewable energy and clean technology is putting a price on carbon.  Legislation to do just that in the form of the American Clean Energy and Security Act (ACESA) is now working its way through Congress, however, its impact will not be felt for a number of years.

Another type of policy reform likely to be equally critical is revisiting the state of our electricity network.  Currently, the grid whose very name reflects its creaky status is too often outdated, undersized for today's energy needs and dumb, making inadequte use of information technology.  Legislation to improve security, expand transmission capacity and upgrade the grid's information capability is also making its way through Congress and many provisions are part of the ACESA bill.  However, measures as seemingly straightforward yet critical to creating clean technology jobs as creating a common interface for solar hookups remain controversial.  Congress has yet to pass a national Renewable Electricity standard.

The problem with our highly regulated electricity network is that it leaves the decision to deploy new clean technologies to a small group of buyers, utilities who may in their area be the only customer in town.  Trade in electricity, meanwhile, is hindered by lack of transportation capacity.  While electricity can cross the country in about 1/60th of a second--the same speed as computer bits at the speed of light--it is impossible, currently to buy electricity outside one's immediate area, due to capacity constraints.  Compare that with the global growth unleashed by being able to purchase everything from softballs to software globally.

To be sure policy changes must be well considered.  The examples of Enron and the banking crisis on Wall Street show that not every regulatory change is good.  On the other hand, to hold to the past is no answer if it impedes innovation and job creation.

In short, to ignite not only the immediate economy but also the economy of the next ten years, the Administration and Congress need to move forcefully to remove barriers to the clean economy.  Truly green shoots may be the key to truly robust recovery.

Later today, the Senate is likely to consider legislation, already passed by the House to provide about $1 billion to encourage people to trade in old cars for new ones.  If Senator Judd Gregg (R NH) does not prevent its passage, the so-called cash for clunkers bill--at this level of funding, down from the initial request--would take about 250,000 jalopies off the road and replace them with new cars.  Though a 250,000 increase in new car sales will have only a small impact on overall US car sales which have virtually halved from about 18 million cars to under 10 million cars this year, the bill will bring people into showrooms.  In addition, if passed, the bill will improve overall gas mileage and reduce overall emissions.  The cash for clunkers idea is a good one that NDN has long supported.

However, coming on the heels of the bankruptcies of GM and Chrysler and unprecedented government intervention in the auto sector it also serves to underscore the challenges and uncertainty that surround the auto business. Have Americans stopped buying cars because of the financial crisis?  Or does the decline reflect uncertainty following last year's gas spike?  Why are Toyota and AUdi gaining market share from US companies despite higher wages in Japan and Germany? Are all electric, hybrid or batural gas cars the answer to the challenges of climate change and energy security? What will the American and global auto industries look like in the future?  In the last six months, the US government and Wall Street have focused unprecedented attention on the auto industry.  Yet for the most part, no one has answered or even asked these questions. 

With the US auto industry likely to employ about half the people at the end of this year as at the end of last, there are plenty of reasons to be a pessimist.  But, no crisis occurs without opportunity.  When we consider that companies like Apple, Microsoft and Google went from nothing to billion dollar companies employing tens of thousands of people in a decade or less, it is not unreasonable to think that smart people could potentially reinvent the transportation industry in more sustainable form.  Indeed, some innovative companies are working to do just that.

One such company with a potentially transformative vision of the future is Better Place, a Palo Alto startup founded by Shai Agassi, formerly the chief operating officer of the software giant, SAP.  Better Place is not only working with car makers to develop all electric cars, it is also developing the infrastructure to easily charge them and create new leasing models that leverage the ability of car batteries to store power for the grid.  Better Place is one of a number of innovative companies working at the intersection of transportation, smart grid technology and the reinvention of the world's electricity infrastructure.  And it is doing this not only in the United States but around the world in Israel, Denmark, Australia and Japan. 

Just how America and the world address the challenge of the auto industry will be critical not only in determining our economic future but also in how we meet the challenges of climate change and energy security.

To advance discussion of this vital topic, tommorrow, I will have the pleasure of hosting Better Place CEO Shai Agassi at NDN in Washington for a conversation on the future of the global auto industry.  I invite you to attend this special event.

Envisioning the Future of the Global Auto Industry with Shai Agassi
Thursday, June 18, 9:45 a.m.
NDN: 729 15th St. NW, First Floor
A live webcast will begin at 10 a.m. ET

To register for this event, click here.

If you are not in Washington, the event will also be webcast.

Please join me for this important and exciting discussion.