Are the Wild West days over? That is the subject of a front page article in today’s Wall Street Journal describing the UN crackdown on carbon credits created through the clean development mechanism or CDM. In the last four years, the market in these credits has gone from zero to many billions, creating multi millionaires such as Marc Stuart, the LSE-educated founder of Eco Securities, one of the subjects of the article.

The CDM is an outgrowth of the Kyoto protocol and was the brainchild of another former policy wonk investor, James Cameron, founder of Climate Change Capital. One of the key compromises of the Kyoto cap and trade system is that participants must limit their emissions to a percentage of their 1990 emissions. The choice of a year as a baseline for every country was designed, in part, to avoid difficult discussions about differences in emissions by country. If each country is compared only to its own baseline, then every country only needs to compete against itself.

This formula proved workable for most developed countries. But for developing countries such as India and China, it did not. The developing countries argued, first, that despite all the pollution evident in their skies, they still create only a fraction of the emissions of developed countries per capita. Second, in order to raise their standards of living to those of the developed world, they argued they are certain to increase emissions so much as to make their 1990 levels irrelevant. Finally, they argued they lacked the technology and capital to reduce emissions.. Thus was born the idea of the clean development mechanism. 

Under the CDM, if anyone—for example a western company—undertakes a project to reduce emissions in a developing country below what they would otherwise be—that company can create credits that can be sold to participants on the Kyoto protocol in the developed world to offset their emissions. The idea is that just as it is cheaper to make sneakers in Shanghai than London, it should be cheaper to reduce emissions there. Moreover, conditions are so bad in many developing countries, that cleaning up factories, in theory, should be low hanging fruit. The problem lies in distinguishing valid projects from invalid ones. And the UN, as the Journal article, observes has been ratcheting up the standards so that they are today approving far few projects than before. The result has been volatility in the price of credits and in the financial fortunes of firms such as Eco Securities.

In the long run, the developing countries must be brought into an internationally complete system of constraining emissions through caps or a carbon tax. In the short term, however, the CDM is the only game in town. While some projects are as simple as reforestation, others expand the market for new technologies such as carbon capture and sequestration, wind power, solar power and cellulosic biofuels. 

To learn more about carbon credits which all three remaining presidential candidates support for the United States—as well as the impact on the economy of exciting new clean technologies--come join me at NDN’s New York event this coming Wednesday “Understanding the Clean Technology Opportunity” where I will dicuss these issues with leading experts, Peter Fusaro, founder of Global Change Associates and David Kurzman, Senior Vice President of the Clean Technology Research Group at Panel Intelligence, LLC.. It's still the Wild West, to a degree, in the world of carbon credits and clean technology. But they are rapidly becoming big businesses.

Event Details:
Wednesday, April 16th
12:00pm
Regency Hotel, Regency Room
540 Park Avenue
New York, NY
Click here to RSVP

Note: In this piece, I take a break from my usual topic of the green economy to discuss the current financial crisis. I'll be back with commentary on green issues soon.--MM

How bad is the economy? According to some well respected financiers, it is in its worst shape since the Great Depression. That was the judgment of George Soros in a recent article. And at Goldman Sachs' annual meeting yesterday, CEO Lloyd Blankfein echoed other Wall Street leaders in calling it the worst economy in 55 years. The consensus on Wall Street is that the travails of the financial markets denote a weak-even cataclysmic economy.

But at yesterday's Goldman meeting, Blankfein also successfully defended his $68.5 million compensation in 2007 to shareholders. And, asked his opinion of the future, he hazarded that the financial turmoil may be almost over and that the economy should resume expanding in the fourth quarter. Another Great Depresssion? Thankfully, no. What we have seen is the collapse of an asset bubble that enriched a limited swath of the population over the last eight years. Those able to benefit from global liquidity made fortunes and some have had to give them back. But current financial market turmoil is not synonymous with the real strength and weakness of the US economy. The strength is that of the American people and the weakness is the stressed state of the middle class.

The source of the recent financial crisis--the inability of sub-prime borrowers to make monthly payments- has its roots in middle class stress. The sub-prime lending boom helped push home ownership from about 65% of American households to about 70%. This last 5%, what might be termed, if flipped around, the 30 to 35% percentile of American households, proved unable to make monthly payments. The conventional wisdom is that they deserve their fate-for taking out no doc loans or choosing to walk away from houses once their equity disappeared. The fact that incomes for the lower four quintiles of Americans have been flat or declining in real terms for years, that sub-prime borrowers typically must pay double digit interest rates in contrast to their well heeled counterparts and that budgets are being devoured by rising health care and gas costs has gone ignored.

Indeed, when one looks at proposed solutions to the housing crisis, conspicuously absent are provisions to strengthen the middle class. The housing bill passed by the Senate yesterday contains billions in funds for home builders and money to demolish housing to reflate prices, but not one provision to raise the after tax incomes of American families..

NDN has highlighted a series of specific ways to rebuild the American middle class from putting a laptop in every backback to strengthening our ideas based economy to reforming health care. Investment in new clean technologies promises to restore American technology leadership while updating environmental standards has the potential to create millions of new green collar jobs. It can be done! During the 1990s, income inequality began to decline thanks to the positive influence of Clinton era policies only to expand as a result of the Bush tax cuts and related measures.

The recent unprecedented activities of the Fed-designed to stem the financial crisis-may indeed be ushering in a new era of Fed activism. While they have an emergency quality, reform of our financial architecture is needed to keep pace with changes in financial markets. However, the Fed's actions and reform at the Fed will not address the problem at the root of the recent crisis-the growing financial stress experienced by America's working families. As Paul Krugman has tirelessly observed but as others have refused to acknowledge, the Gini index of inequality and numerous academic studies unequivocally show the gulf between the wealthiest Americans and every one else increasing at an alarming rate. The next president and Congress must deal with this issue.

At the end of the day, even a stratum as light as that of hedge fund managers and private equity managers cannot comfortably exist astride a financially stressed nation. America must reacquaint itself with the real source of strength in our economy, not the financial markets per se but the economic health of the working families who undergird it.

UPDATE: The Production Tax Credit was successfully attached to the Senate Housing Bill that passed today. The action now shifts to the House which must pass its version to send the measure to conference. We will keep you posted.

The Senate is scheduled to vote soon on rewewing the Production Credit (PTC) and your action is needed. But first, what is PTC and why is it needed?

While the price of renewable energy such as wind and solar power is steadily dropping and that of carbon-based fuels steadily rising, renewable power still requires subsidies to compete with carbon-based power. Why? In part, the technology is still developing. However, the comparatively high cost of renewables also includes the price of building new facilities-in contrast to carbon sources where facilities already exist-and carbon-based power such as oil and coal also receive immense subsidies in the form of incentives for exploration, government support of road infrastructure and other programs.

Moreover, while renewables will eventually become cheaper than carbon sources, it would be a mistake to wait until they are already cheaper to begin investing in these technologies as driving the price down requires scale. Every new technology requires a development period when it is more expensive than its predecessor. Blu ray dvd players, for example are far more expensive than the older kind today, but as volume scales, they are likely to drop in price.

In the case of renewable energy, due to the limited number of customers, there currently is no way to drive down pricing by selling to consumers . The answer to this quandary is the production tax credit (PTC), a 2.0 cent-per-kilowatt-hour tax credit for electricity generated from wind turbines and other renewable energy sources. Unfortunately, the US Congress-unlike legislatures in other countries that now lead the US in wind and solar production-has renewed the PTC on an ad hoc basis. A graph of wind power in the US shows it moving in fits and starts, rising when the credit is in place and falling off when it has not been extended in a timely manner as happened, for example, in 2000 and 2004.

Once again, Congress has put off extending the credit but the Senate is now scheduled to vote-perhaps as early as today or tomorrow on legislation proposed by Senators Cantwell and Ensign to re-extend the credit (the Clean Energy Tax Stimulus Act of 2008). If you would like to express your support for the bill, the American Wind Energy Association has a web page that allows you to contact your Senator easily and urge him or her to extend the Production Tax Credit.

The climate change debate has changed. As a recent New York Times piece by Andrew Revkin makes clear, it is dawning on many observers that mechanisms to slow emissions using cap and trade or other conservation mechanisms won't be enough. Nor are conventional biofuels such as corn based ethanol the answer. What is needed are true technology breakthroughs that dramatically reduce the carbon per unit of energy ratio. The emerging question is how to drive this innovation and deploy it across the economy.

Despite all the attention the climate change issue has garnered since the release of An Inconvenient Truth, real reductions in emissions have been elusive. While it would be a mistake to fault the European cap and trade system for failing to reduce emissions in Europe-the system was in a training phase until a few months ago and some sectors such as aviation will not be included for another two years--it has showcased the difficulty leaders face in setting low emissions targets. More troubling, however, may be the fact that few technologies have arisen so far with the ability to replace carbon-based fuels. Absent such technologies, strong caps would be likely to drive up the cost of numerous goods and services, effectively creating inflation. Conventional biofuels such as corn ethanol consume more energy than they produce according to several studies. Not until real game changing technologies provide alternatives to carbon-based energy will real progress happen.

What can change the game?

In the area of portable fuels, biofuels made from switchgrass and other inedible plants grown on scrubland, holds promise. At a time when food prices are soaring and many countries are hoarding rice, wheat and corn, it makes no sense to devote America's heartland loam-some of the richest land in the world--to the production of corn-based ethanol. However, technologies to convert hard-to-break-down grasses grown on scrubland to fuel do make sense.

In the area of power, renewable sources such as wind and sun might change the game. Here the problem is barriers to scaling production. Solar, for example, is currently stuck in a catch 22 where limited production is keeping costs high, slowing deployment. At a minimum the Solar Tax Credit must be made permanent. But more broadly, utilities must be prompted to purchase a larger share of power from renewable sources through renewable portfolio standards.

Finally, as more and more cars hit the road in China and India, electric cars must be part of the solution. We have written about game changing companies such as Project Better Place on this blog. Even the mass adoption of traditional hybrids technology such as that used in the Prius would make at best a dent in C02 emissions. A pure electric vehicle running on clean electric power, however, could change the game.

Both Democratic presidential candidates, Barack Obama and Hillary Clinton have proposed spending up to $150 billion on energy research and development. The key will be putting whatever money is ultimately allocated to good use to drive the development of new technologies.

I sent the following letter to President Bush today:

Dear President Bush,

Today your Administration announced that tomorrow you intend to send to Congress implementing legislation for the U.S.-Colombia Free Trade Agreement. Your Administration has not done what is required to pass this important agreement. If you send it tomorrow it will surely fail, undermining a staunch American ally in a troubled region, and weakening nascent bi-partisan efforts to find a new economic strategy that responds to the recession, shores up our financial markets and once again makes globalization work for all Americans.

In the weeks ahead you will surely blame Congress for not passing the Colombia Free Trade Agreement. But make no mistake - if this agreement fails the fault will be yours, and the nation will be able to add gross mismanagement of our global trade portfolio and a more unstable Latin America to your already terribly disappointing economic and national security legacy.

I call on you to put our national interest over your political party's interest, work with Congress to find a path forward on this Colombia Free Trade Agreement and introduce it when more work has been done to ensure its passage.

Given the warnings from Congressional leaders that the time was not right to introduce this important agreement, and given the stakes involved for our economy and our hemisphere, there can only be one plausible explanation for why you have chosen this reckless path now - the tens of thousands of votes of Colombian-Americans in South Florida. Out of respect for our close ally Colombia, and in recognition of the significant strides President Uribe has made in recent years, it is simply irresponsible to let this important agreement collapse out of hope for a political advantage in a pivotal Presidential state this fall.

I wish I could discern a more noble motive behind your decision, but given that Congressional leaders have told you the Agreement will fail if introduced, then your present course ensures that you will damage our ability to find a better path forward for our struggling economy and the interests of working people here and abroad; damage future efforts to liberalize global trade; undermine one of our most important allies in Latin America; and weaken our already diminished standing in the region. There can only be one explanation for why you have chosen this course - once again you have chosen your party's interest over the interests of the nation itself.

The people of both the United States of America and the nation of Colombia deserve better.

Statement from Senate Majority Leader Harry Reid on the Colombia Free Trade Agreement:

April 7, 2008

Reid: President's Colombia Free Trade Proposal A Continuation Of Failed Policies

Washington, DC—Senate Majority Leader Harry Reid made the following statement today in response to President Bush’s proposed Colombia Free Trade Agreement:

“President Bush has made numerous bad decisions during his Administration that have already cost countless American workers their jobs and have done profound harm to U.S. foreign policy – harm that will take years for the next President to undo. By sending up the Colombia FTA legislation under circumstances that maximize the chances it will fail, he will be adding one more mistake to his legacy and one more mess for the next President to clean up.

“There is strong support for Colombia in the U.S. Congress, evidenced by the fact that Colombia is the largest recipient of U.S. aid money in the hemisphere. Many in Congress have tremendous respect for the progress that President Uribe has been able to make under difficult circumstances. It is a major mistake, however, to set up the Colombia FTA legislation as the proxy for support for Colombia, as the Bush Administration is trying to do.

“An FTA is not a foreign-aid package. It is neither a favor for friendly governments, nor a substitute for sensible and sustained foreign-policy engagement in the hemisphere. An FTA is an essentially permanent economic integration agreement. Many Democrats continue to have serious concerns about an agreement that creates the highest level of economic integration with a country where workers and their families are routinely murdered and subjected to violence and intimidation for seeking to exercise their most basic economic rights. And the perpetrators of the violence have near total impunity.

“The Government of Colombia has undoubtedly made progress on this front, but the level of violence against trade unionists is still the worst in the world. Further, as Rep. George Miller has said, serious questions need to be addressed about the Government of Colombia’s sustained commitment to this effort. By sending up the FTA before these concerns have been fully addressed, President Bush is significantly undercutting support for the FTA.

“Further, the President’s decision to act unilaterally in sending the FTA disregards three decades of established precedent under fast-track legislation, and demonstrates yet again his lack of respect for Congress. The Colombia FTA will have enough problems purely on its merits; President Bush will exacerbate those problems by sending up the FTA in this manner. And by thumbing his nose at the basic processes that underlie Congress’ willingness to extend fast-track authority to a President, President Bush is dealing a serious blow to U.S. trade policy for years to come.

“If President Bush really believes that successful passage of the Colombia FTA is critical for U.S. foreign policy in Latin America, it is difficult to understand why he would send the FTA up under circumstances of his own creation that maximize the controversy associated with it. While it is understandable that a lame-duck Administration wants to notch accomplishments in its final year in office, I am very concerned that this short-term focus will leave long-term problems for U.S. foreign policy and U.S. trade policy.”

We at NDN have been promoting a new book called Futurecast: How Superpowers, Populations, and Globalization Will Change the Way You Live and Work. The author of that insightful book, Robert J. Shapiro, who is Chair of NDN's Globalization Initiative, recently spoke on some of the themes discussed in Futurecast at our March 12th Forum. Check it out below, and be sure to order his book while you watch. Head's up: the video is about 43 minutes long.

Be sure to pick up your copy of Futurecast: How Superpowers, Populations, and Globalization Will Change the Way You Live and Work, the new book by Dr. Rob Shapiro, Chair of NDN's Globalization Initiative. Our copies just arrived! If you're going to be in San Francisco, CA on April 10, you're welcome to attend our Schwartz Forum where Simon and Rob will discuss Futurecast.