Electricity 2.0

Offshore Electricity Transmission

This morning's story in the New York Times about the partnership of Google and Good Energies (among others) to construct a underwater transmission line 15 to 20 miles off the Atlantic coast between New York and Norfolk in order to serve off shore wind projects along the coast speaks to the centrality of transmission capacity to tapping wind resources.  However, it also speaks to the importance of independent transmission as a mechanism to accelerate clean energy and Electricity 2.0.

Last week, we released our acceleration agenda for Electricity 2.0.  Among other things, we noted the importance of access to long distance transmission capacity as a way to get renewable power onto the grid and also as a way t get it off.  While there is an open mechanism in place to access so-called bulk power lines currently under FERc rules, capacity is constrained. Limited capacity makes access a difficult proposition for renewable energy developers.  Taking down bulk power directly, meanwhile, is prohibted by law for all but utilities.

The Google-Good Energies backed project, led by Trans-Elect, a transmission developer faces a number of hurdles before construction can begin . But as the article points out it has received praise from most quarters. ( A key variable is distance from shore.  A two hundred foot windmill is visible up to 28 miles away so a windmill 15 miles from shore could be visible on clear days.)  However, a number of other large independent or merchant transmission projects are underway or have been completed.  ITC, originally a spinoff of Detroit Edison, has begun building transmission capacity throught the Midwest.  One prominent merchant transmission line is the high voltage DC or HVDC line connecting New Haven and Long Island.  A similar HVDC line connects San Francisco with Pittsburg, CA to the East where San Francisco draws much of its power.

Over time, a larger more robust independent network, complementing utility owned lines would provide additional flexibility to our nation's electricity architecture, allowing large electricity users to source their power where it is cheapest.  Combine that with the smart grid and it is possible to envision enterprise sourcing and management of power--analagous to enterprise management of information technology.  And, of course, new transmission capacity such as the Trans-Elect project would provide is critical to developing wind resources.

Creating the Next Economy

In my last post, I wrote about where the capital is that is necessary to create the next economy.  It is in private hands--those of banks, institutional investors and, as the New York Times echos today, corporations who are now sitting trillions in cash.  There is no guarantee this money will go to work anytime soon or that it will all stay in the Untied States.  Government's role post-crisis must be to coax it out of hiding by reducing uncertainty while investing in education and infrastructure--two local factors in growth where there is no substitute for government leadership--to make the US attractive to investors.

But when capital comes out of hiding, what will the next economy look like?  Today I will describe four economic trends that will shape the next economy.  The Great Recession did not reverse these trends; rather it was failure to adjust to them that precipated the crisis. 

First, small continues to beautiful as economies worldwide continue to decentralize.  Continuing a trend that began in the 1970s, over the last decade, Fortune 500 employment has been flat though their sales and profits have jumped evan allowing for the Great Recession.  Not only only do small businesses create about two thirds of US jobs as we often hear, small and medium size businesses are providing a higher percentge of jobs as the Fortune 500 continue to outsource functions and some old companies disappear.  We may regret the passing of high paid lifetime jobs at blue chip companies but that day is gone.  Overseas the dynamism in China, Vietnam and elsewhere is occurring not in large monolithic companies but in networks of smaller firms with a strong regional focus.  Chinese economic dynamism on in Guangdong province and coast, for example, appears to be yet another example of the regional development fueled by local spillovers described by Michael Porter (and decades earlier by Alfred Marshall) following liberalization.  We should not confuse liberalization with what remains of command and control.

There is a solid economic reason for this trend.  Firms grew large in the 20th century, as Nobel Laureate Ronald Coase first observed, not because of economies of scale which can exist over a keiretsu of companies or region (such as the Garment district in New York) but rather to avoid the transaction costs of contracting with outsiders.  In recent years, those transaction costs have collapsed due to email, database integration and other technologies.  During the recent crisis it was firms that remained highly vertically integrated such as GM that suffered whereas those that embraced collaborating such as Ford survived. Similarly, large bank like Citi suffered.  And, of course, it was bailing out the large companies that created the largest chore for government.

Second, and related to the first, technologies have dramatically empowered the individual--or perhaps more accurately the crowd--at the expense of elites.  From the Barack Obama campaign to political movements in other countries to the tea party insurgency within the Republican parth this summer, groups of people have allied quickly and unexpectedly at the expense of incumbents, helped by new technologies.  Accustomed to this democracy in most parts of their lives, people expect to see it in the economy.  For this reason, the bailouts of large companies, however, necessary following the financial crisis, created a cognitive dissonance that the Administration needs to escape.  There is no way we are going to redo the 1930s in the age of Twitter.  The next economy will be bottom up and leverage new technology.

Third, the next economy must leverage innovation.  The US can (and should) not compete on cheap labor.  To do so would be at best a race to the bottom that we would lose.  Nor can we compete on cheap land or raw materials--because our exchange rate prices those things equal to or greater than equivalents elsewhere.  We can compete, however, on knowledge and productivity where we excel.  No country conducts better research or has better unversities.  And no country can convert an idea into a business better than the United States.  The next economy must leverage that knowhow.  The US economy received a huge boost from our leadership in Internet technology and we need similar boost in new sectors if we are going to retain global economic leadership.

Fourth, the next economy will follow changes in laws.  The sectors where we reform regulation will be those that upgrade plant and equipment as capital flows toward new opportunities. 

Ironically, post financial crisis, one sector that has been granted a new set of rules is the financial one.  Early indications are that financial regulation while curtailing some businesses will create vast new ones.  For example, the derivative clearing houses created in the regulation are likely to spawn a whole new growth industry on Wall Street.  There is nothing wrong with a new industry per se and it is too soon to know whether Congress got it right or perhaps created a new moral hazard.  But clearly, it will form part of the next economy.  Similarly, the healthcare sector will adjust to new rules, however, it remains to be seen how a reduction in medicare and increase in medicaid will impact healthcare practice.

Perhaps the key sector in need of reform that has yet to get it is the energy sector.  Silicon Valley and savvy investors have identified clean technology and, in particular, the smart grid, electric transportation and electricity sector as one rife with opportunities.  However, the technologies fermenting in laboratories will go nowhere without meaningful reform of the electricity sector that provides virtually no way, currently, to monetize new technologies.  Reform is complicated by the large state role in electricity regulation.  (The telecom and financial sectors which boomed in recent decades solved this problem by carrying out reform at the federal level.)  Climate change legislation would have sparked a surge in energy investments, but didn't happen.

For the energy sector to become a driver of wealth and job creation, the Adminsitration needs to get behind a major bipartisan effort to upgrade our nation's outdated energy regulatory architecture.  NDN launched this drive with our Electrcity 2.0 initiative and we are glad to see more and more groups beginning to embrace what must become a central economic policy project of the next year. 

So what will the next economy look like?  It will be underweighted in housing and consumer spending reflecting the overhang of the housing crisis.  It will include a financial services component.  Ant it  will rise or fall on its embrace of innovation.   But to achieve its full potential and engage the trillions in private capital now sitting on the sidelines--money that could easily go to China or Vietnam, it will require upgrading our energy regulation.

 

A National Renewable Electricity Standard

On Tuesday, Senators Bingaman and Brownbacked dropped a bill (S.3813) to establish a national Renewable Electricity Standard or RES.  In the wake of the collapse of climate change legislation earlier this year and considerable soul searching in the environmental and energy communities about what comes next, the RES legislation is a positive sign that there is life after cap and trade.

As I argued this summer when Majority Leader Reid announced the tabling for the time being of climate legislation, there are many ways to advance cleaner forms of energy beyond making carbon-based energy more expensive.  On its face, cap and trade was (and is) a way to price the future social costs of climate change into fuel prices today--and create a market to lower those costs efficiently.  On another level, however, it was (and is) a market intervention to level a playing field already tilted by earlier interventions, notably the highly complex set of rules and regulations that shape energy usage.  Many developing countries subsidize gasoline, setting a gasoline price far below the market one at a huge cost to their treasuries.  In developed countries such as the US, we don't subsidize consumption of carbon fuels but we subsidize production.  In electricity highly complex regulations and the monopoly structure of the business favor incumbent technologies.  Before a price on carbon can ever begin to internalize future damage to the climate, it first must offset these governmental carbon subsidies.

To be fair, besides favorable government policies, the oil and gas industry have benefited from robust R&D investments.   Oil engineers have taken drilling technology so far that no one noticed how difficult it is to drill a mile below the sea until a BP oil rig exploded.  Most recently, the gas industry has had a transformative breakthrough that many believe will alter the energy landscape for decades: namely a new way to produce low cost gas from shale rock.  High R&D spending in oil and gas is a direct result of the high rewards to risk in the sector. 

In contrast, the electricity sector spends almost no money on R&D.  Why?  The regulated rate of return system for setting rates does not reward risk.  Utilities are merly reacting rationally to the system.  Inventors of clean energy technologies and producers of renewable energy face huge barriers to getting their products to market because there frequently is no open market and no reward to risk.

An RES standard of the type proposed by Senators Bingaman, Brownback and their co-sponsors is a simple and proven (at the state level) tool to open up the market for renewable power.  In effect, it creates a market for renewable power equal to the level of the standard - 15% in the Senate Bill.  There is more we can do to open up electricity markets to technology and renewable power.   But a national RES is a start.  Congress can and should move S.3813 this year.  

Congressman Edward Markey, Nick Sinai, Clem Palevich, Jigar Shah and Michael Moynihan to speak on Electricity 2.0: Envisioning the Future of Electricity

On May 11, NDN invites you to attend an important and groundbreaking event focused on charting a course to the electricity future. Entitled Electricity 2.0: Envisioning the Future of Electricity, the event will feature remarks by:

  • Congressman Edward Markey, Chairman of the House Select Committee on Energy Independence and Global Warming and Chairman of the Subcommittee on Energy and the Environment

and a panel discussion with:

  • Clem Palevich, former President and CEO of Constellation New Energy
  • Nick Sinai, Director of Energy and Environment for the Federal Communications Commission
  • Jigar Shah, founder of Sun Edison and now CEO of the Carbon War Room
  • Michael Moynihan, moderator and author of NDN's recent policy paper, Electricity 2.0 

In addition to protecting our climate and enhancing energy security, clean electricity has the potential to power a new wave of prosperity. It can serve as a platform for entrepreneurs and innovators to create new jobs and build new industries.  

In order to meet this challenge and achieve clean electricity's promise, the United States must update our antiquated grid and add dramatically more renewable resources. The US currently supplies 3.5% of power from renewables, compared with 28% in Denmark. 

Electricity 1.0 helped secure reliable, universal power. But with R&D in the electricity industry having dwindled to less than 1% of sales, utilities constrained from offering new products and services, renewable generators unable to get their product to market, and consumers unable to control their energy destinies, it is time for an upgrade toElectricity 2.0. With a new open architecture in place and the right incentives to restore innovation and revive investments, Electricity 2.0 promises to do for energy what the Internet did for communications.  

We are on the cusp of a revolution in how the world creates, trades, and consumes energy.  However, for that revolution to occur we need to create a new modern, open, and secure electricity architecture that allows innovation to flourish.

Please join us for this important discussion.  To attend, please RSVP.  If you can not attend, you may watch this event via our live webcast.

 

Location

U.S. Capitol
Room HC-6 (access through South Entrance)
Washington, DC
United States

On May 21st in NYC, Join Us for An Event Looking at Electricity 2.0 - Unlocking the Power of the Open Energy Network

On May 21st, NDN and New Policy Institute Green Project Director, Michael Moynihan, will host a presentation with NDN's new Senior Advisor, Alicia Menendez, in New York.  This presentation will examine the electricity industry and why the uptake of renewables has been so slow. Moynihan argues that the answer lies in the outdated and complex structure of Electricity 1.0, a closed, highly regulated network created a century ago, is fundamentally incompatible with clean technology and renewable power. America must upgrade to Electricity 2.0, an open, distributed network capable of fostering innovation and a clean technology revolution.

Clean energy has captured the imagination of people from Silicon Valley, who invested $5.4 billion in the sector last year, to President Obama, who highlighted it in his State of the Union Address. However, it has yet to fulfill its economic promise and displace legacy fuels in America’s electricity sector, especially when compared with the significant progress made in other countries. Today, non-hydro renewables account for just 3.5% of electricity in the US. 

Joining Michael on the 21st will be our new Senior Advisor, Alicia Menendez.  If you haven't had a chance to meet Alicia this will be a good time.  And check out this recent appearance by her on Fox News. 

We hope that you will be able to join NDN in New York.  Please RSVP if you can attend. 

Electricity 2.0 paper available here.

Electricity 2.0: Unlocking the Power of the Open Energy Network
Friday, May 21st
8:00 AM, breakfast will be served
The Harvard Club of New York, The Mahogany Room
35 West 44th Street
New York, NY

Electricity 2.0

Last week, NDN released my paper on Electricity 2.0: Unlocking the Power of the Open Electricity Network and since then, talking about E2.0 with many in the electricity and energy world, producers, consumers and other leaders, I am move convinced more than ever of the need to upgrade our electricity architecture.

In a nutshell, the argument I make in the paper is that the US will not recognize the promise of clean energy without fundamental redesign of the network at the core of the energy system: the electricity network.  The electricity network is the only portion of the wider energy network where energy moves at close to the speed of light as opposed to the speed of a tanker or truck.  It translates energy from carbonized plants, falling water and the atom to usable form.  It is the only part of the network able to let falling water in one time zone simultaneously light a city in another.   But our antiquated architecture restricts its amazing qualities.

Many have commented on the antiquated physical state of America's grid.  But the deeper question is why is the grid so underfunded, undersized and unintelligent?  The answer is that America has the grid that the current system was designed to create.  For many years, R&D in the highly regulated electricity sector outside of the industry consortium, EPRI, has been virtually nil.  Our balkanized system operates under a patchwork of multi-tiered regulation.  Since utilities realize no reward for risk and receive a guaranteed rate of return on capital, they have no incentive to innovate.  The incentives all work against clean energy and new technology.  Resistance to innovation, in turn, works its way back up the value chain, constraining purchase of new technology and clean energy developed by others, be they Fortune 500 companies or high tech start-ups.  The clean energy promise has captivated everyone from President Obama to Silicon Valley--largely due to gap between what we have and what is possible.  However, we won't achieve what is possible without an upgrade to Electricity 2.0.

Electricity 2.0 involves an upgrade at multiple levels.

  • It involves the upgrade of our physical wires--network modernization.
  • It requires the upgrade of the software and switches guiding the network--a smarter network.
  • However, far beyond that it requires, a new open, plug and play architecture to facilitate many-to-many connections, richer information exchange between consumer and producer, the blending of the consumer and producer distinction as more people trade with one another and the rollout of innovative new products and services across an electricity commerce platform that leverages the power of an open network.
  • To make all this happen, it requires the rearchitecting and modernization of the regulatory framework underlying the system to reward risk, create competition and create opportunity for incumbents and new players alike. Absent a new architecture, the system will remain frozen in time and investments in meters or new transmission will fail to achieve their goals.

To do these four things, while making the network more reliable and secure, we need nothing less than a Big Bang at the federal and state and local level to consist of federal and state legislation and federal and state rulemaking to create a 21st Century platform for electricity delivery and exchange.  As a starting point, we should look to the model that unleashed innovation and unlocked wealth in the highly regulated telecom world at the start of the Internet era, the 1996 Telecommunications Act.

Ultimately, we cannot expect regulated utilities to lead a revolution.  In the case of the telecom revolution, people designing websites, configuring cellphones and writing code late at night made the revolution.  The American people have the energy, drive and desire to lead a clean energy revolution as well, but we must give them the tools they need to do so.

The stakes are huge.  If we succeed, we will realize the opportunity of clean energy and launch a renewable revolution.  We can lower electricity costs, freeing up purchasing power in household budgets and make American industry competitive in the coming century.

If we fail, and continue with the current system, we will not see clean energy come online at scale, we will see few innovative energy products and the competitiveness of our industry will erode.

Electricity 1.0 served the country well in its day.  But that day is past.  It is time to upgrade our century-old architecture to Electricity 2.0 if America is to stay competitive in the 21st Century.

In coming months, NDN will be working with stakeholders to develop a framework for America to upgrade to Electricity 2.0.

After Copenhagen

Well, it's over.  The 2009 United Nations Climate Change Conference ended not with a bang, a whimper or a treaty but rather with something akin to a scream from developing countries--some like Tuvalu that may one day end up under water--whose objections to a plan cobbled together at the last minute prevented the conference from reaching a formal agreement.  Instead, the organizers "took note" of an accord forged by the US, China, India, South Africa and Brazil  that now lacks even the mild imprimateur of formal endorsement by the UN conference. 

And what of the Accord reached by those five countries that other countries may now sign onto?  Given the fear and loathing that broke out earlier in the week between the developed and developing nations that with disastrous logistics threatened to make Copenhagen the Seattle of climate change negotiations, it was as good an outcome as could have been hoped for by the end.  However, the deal struck--to commit to reduce emissions with transparent reporting--was far weaker than what appeared achievable earlier in the week let alone expectations for the conference.  It keeps the idea of a global climate change accord alive but just barely. 

In retrospect, the idea of forging an international agreement requiring the acceptance of every country on earth during the greatest global financial crisis since the Depression to deal with a crisis whose greatest effects may not be felt for decades, may have been overly ambitious.  The promise of a global agreement on climate change that began in Rio made sense for many reasons.  The atmosphere moves across the face of the globe so that gases emitted anywhere impact global weather.  However, the bar for concerted action--a global treaty with billions of zero sum dollars at stake--is clearly high.  It can take the US years to negotiate a tax treaty with a single county.  With the Accord a guide to a more formal agreement,  countries will work over the coming year toward a binding agreement in Mexico.  But in the wake of Copenhagen, action appears no closer than before and perhaps further.  The Accord does give President Obama something to show Congress to encourage action on climate change.  But what form should the action take?  The centerpiece of the House bill is, of course, a US cap and trade system.  Cap and trade has proved effective in lowering NOX emissions .  However, it is a mistake to view action on climate change and cap and trade as synonymous.  Europe has had cap and trade in place for several years and has not succeeded, for the most part in actually reducing emissions.  A cap and trade system like a carbon tax provides an incentive to adopt new technologies or change behavior to produce less carbon.  But it is only a means, not the end.

What is the end?  The end is new low or no carbon technologies that are the necessary and sufficient condition to lower greenhouse gas emissions.  Emissions will go down when electric cars powered by renewable electricity replace gasoline cars and industry, homes and business run not on carbon-intensive fuels but on clean, renewable energy.  While a cap and trade system or carbon tax would make high carbon technologies more expensive, the real long term goal is to lower the price of clean alternatives.  That means breakthrough technologies and disruptive innovation.

Fortunately, breakthrough innovation and transformative technologies are their own reward and do not depend--in the long term--on making carbon more expensive.  There are other ways to accelerate innovation.  In the context of electricity, a key task is to break down barriers blocking the uptake of clean technology.  One such barrier that will remain whatever happens to the price of carbon is the cumbersome process by which utilities, heavily regulated and incented to do the wrong thing, not the right, currently source--or don't source--clean technology and renewable power.

The good news is we still control our destiny since if the US can pioneer new technologies, not only will we reduce our own emissions, we will harvest the economic benefits of selling this technology to others.  Whatever happens in Congress with cap and trade and with international climate negotiations, it is vital that we move forward on accelerating clean innovation now and tear down barriers blocking the free flow of clean technologies and energy to market.

 

Nissan Leaf Gets Electric Vehicle Cost Structure Right

The New York Times "Wheels" blog delivers some interesting news on the Nissan “Leaf” (not sure about that name), the company’s new electric vehicle that is being introduced in Los Angeles today. 

The Leaf, an all-electric five-door hatchback, will have a 100-mile range, Nissan said.

Mr. Ghosn said last month, in introducing the Leaf at the Tokyo Motor Show, that the vehicle would be priced “competitively” compared with other cars its size. This has been estimated at $25,000 to $33,000. But the price won’t include the lithium-ion battery packs; those will be available for lease separately. The spent battery packs will be recycled by Nissan and reused.

The Times writes those last two sentences (emphasis added) as if leasing the battery packs is some kind of "catch" in the pricing. It's not. Rather, the battery pack and the electricity to charge it are analogs to gasoline in conventional vehicles, which is never sold with the car.

For this reason, Nissan is on to something with the battery leasing. Like Better Place, which is building infrastructure for electric vehicles (and is teamed up with Renault-Nissan), Nissan knows that the key is not to build a car with a battery for the same price as a conventional gasoline car. Rather, the key is building a battery-less car for the same price as a conventional car. And once that happens, because electricity is far cheaper than gasoline, all one has to do to beat conventional cars is make the lease cost of a battery plus the electricity costs competitive with the cost of gasoline over the same period (which is already a reality in many countries). Incorporating the battery and its cost into the vehicle is likely not the right way to go for so many reasons, but on the financing side the cost of actually making a car go is always an addition to the purchase cost. 

Fully electric cars have some way to go – charging infrastructure needs to be built out and standardized, battery costs still have to come down, and capacity should go up – but getting the cost structure right is crucial in creating this piece of the low-carbon economy. Electric vehicles will ultimately offer tremendous benefits to consumers, from price stability to never having to go to the gas station, and to the electricity system, as the aggregate storage capacity in batteries will provide a demand response capability. And while I might prefer a name that connotes a bit more strength, the Leaf is a nice step forward.

A Busy Week for Climate

New York City - With President Obama's speech today before the UN meeting on climate change, convened by UN Secretary General Ban Ki-Moon, the release of excerpts from an IEA report on the climate Sunday and climate on the agenda at the G-20 meeting in Pittsburgh, this week has shaped up as a remarkable one in climate discussions.  On Sunday, the IEA released sections from its forth coming Energy Outlook  that are remarkably optimistic about the climate.  Today, President Obama gave a forceful--if thematic--speech to the UN--notable more than anything else for the reversal of US policy on the climate that his presidency brings relative to his predecessor.  And later in the week, the G-20 will take up the issue anew after failing to make major progress in London.  All of this is happening with Copenhagen now just around the corner.  At this point, it is worth taking stock of where the world is on what Sir David King has dubbed the hot topic.

First, the IEA report in its suprisingly positive findings shows above all, that action on climate change is within our reach.  The IEA found that the EU effort on climate has succeded more than previously thought.  It also praises China for its efforts and the US for improving fuel economy  Most notable, however, is the huge decline in emissions that has evidently accompanied the current recession.  The sharp dropoff in emissions shows that the word can cut emissions dramatically over a period of months and still survive.  In effect, it sets a boundary.  Obviousy, we don't want to see unemployment at 10% in the US in order to lower emissions.  But it shows that a lower emissions world is attainable. In fact, we are living it right now. 

The President's speech, though criticized by some environmentalists for lacking specifics, in my mind hit the right notes and reverses one of the troubling elements of much of the discussion before.  While noting that the developed world needs to do more, the President also called the developing world to account.  This strikes a slightly different note than many dicussions up to now that have reprised the poverty debate with the developing world asking for aid and the developed world expressing guilt over previous sins.  Climate change discussions--though they touch on issues of development--are not about equity between North and South but rather the survival of the planet.  Progress on saving the climate cannot be about apologizing for the last century of industrialization.  That was a necessary phase of economic development that although it raised living standards first in the developed world, in effect, paved the way for industrialization everywhere.  Nor was industrialization in the west a free ride for the workers who toiled in factories or even those who enjoyed its fruit as the high mortality of the indsutrial wage and bloody 20th Century attest.  The developing world although slower to industrialize in many ways inherits the technology, transportation network and markets created by the developed world's industrialization.  And developing countries have an even greater stake in addressing climate change because they stand to suffer disproportionately from rising sea levels, disruption of food supplies, extreme weather and other potential consequences of a hotter planet.  The President was right to call on the developing countries to be as serious as the developed ones about facing this issue.

The discussions underway at the UN and those that will be part of the G20 process, however, are not moving at the pace that anyone would like.  Although President Obama took pains to mention the passage of climate change legislation in the House, he could not point to a unifed American position as our basis for international negotiation.  The simple fact is that there is a very real possibility that a comprehensive global agreement on global greenhouse gas emissions will not be ready by Copenhagen.

If that is the case, however, as the IEA repot makes clear, that does not mean all is lost.  Rather, the US like China and, indeed, all countries needs to move forward on the many other fronts available to address the problem of greenhouse gas emissions.  Since the recent interruption of growth was, we all hope, temporary, as I have written before the answer ultimately must be technology.  In order to incent the private sector to accelerate the rollout of low carbon technologies, government needs to put the right policies in place.  That means improving fuel economy, building more efficient buildings and creating a new, smarter, more open electricity network to spur a renewable revolution. 

Regardless of what happens this week in New York and Pittsburgh, or what happens in Copenhagen the problem of climate change will not be solved in a day a month or a year, but only through the consistent application of private industry and government in all their actions to introducing that technology.  That is the real imperative underlying this week's focus on climate change.  And it must be the real goal of a wide range of policy efforts going forward whether the world secures a comprehensive agreement or not.

Getting to Clean

As the New York Times reports today in an editorial, the decision of Senators Kerry and Boxer to put off introduction of their climate bill until the end of the month is likely to push Congressional action on climate change that much further into the future.  With the fate of health care legislation in doubt, there is little appetite for moving climate change legislation to the floor.  However, as the Times also points out, that does not mean all is lost.  The EPA is moving forward on rules to regulate carbon dioxide as a greenhouse gas.  Perhaps even more importantly, however, the Senate has already passed legislation to create a renewable electricity standard.  Indeed both the Senate and House have passed numerous provisions--that while not as dramatic as putting a price on carbon--attack the climate problem in important ways.

The current situation highlights the fact that while putting a price on carbon through a cap and trade system or carbon tax--as France just announced it will do next year--has achieved symbolic status as a litmus test for seriously addressing climate problem, it is only one policy tool.  Indeed, as the EU's experience with cap and trade (and carbon taxes in Finland, Sweden and Denmark) shows, there is no silver bullet for reducing emissions.  There are policies.  And all of these policies ultimately must accomplish the same thing: accelerate the development and use of new, cleaner technologies.

Assuming continuing growth of human civilization, only new low emissions technologies that replace carbon intensive ones can sustain growth without warming the planet.  Conservation--getting by with less--is helpful in the short term.  So is reforestation.  Over the long term, however, as population grows and living standards rise, forests will be cut and emmissions rise, leaving new technologies as the only long term answer. 

The appeal of putting a price on carbon is that by internalizing the social costs of emissions, it lets the market select the best way to reduce them.  The difficulty, as the EU has discovered, is that allocating the right to pollute or even crafting a fair and harmonized carbon tax is an inherently political process that provides a golden opportunity to free ride on the reductions of others.  Since climate change is something taking place over decades, governments have an even greater opportunity than usual to postpone pain.  To date, Europe's success in reducing emissions through cap and trade has been real but modest and its efforts offset by exploding emissions from India and China. 

This does not mean that cap and trade is not a good idea: only that is just one tool in the shed.  Which brings us to alternative approaches. 

Europe has had success with a feed in tarriff to encourage deployment of renewable energy.  The US equivalent of tax credits has been useful though less transformative.  A renewable electricity standard such as that in the EU and those already passed in separate bills in the House and Senate will also help replace carbon intensive energy with renewable energy. 
 
However, there is an additional problem.  While building is going green--most new large commercial buildings are seeking Leeds certification, power generation is changing far more slowly.  The reason is its regulated status.  While the telecom industry is now turning over its entire network infrastructure every five years at a cost of billions and consumer businesses must continually invest in new products and technologies to stay in place, heavily regulated power utilities face no real competition and, instead, major barriers to innovation.

True, regulated utilities normally earn a guaranteed rate of return on investment which, all things being equal, should incent them to make new investments.  However, they also require the approval of regulators whose mission, above all, is to contain costs to consumers.  A consumer preference for renewable energy rarely expresses itself in the market since consumers don't get to choose their source of power. In  short, the structure of the utility industry is currently blocking the renewable revolution.

I support prompt action on cap and trade as one tool to address the climate problem. However, as valuable as it is, it is one tool of many.  Regardless of how quickly this tool becomes available, it is important to take all of the other steps available to accelerate investments in clean technologies.

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