Green Project

If you're wondering what the Senate is doing on climate change, since taking up the bill earlier this week, the answer is not much thanks to the bill's opposition. Senator Mitch McConnell (R, Ky) arranged for the reading of the entire bill which continued through about 10PM last night. Meanwhile, Republicans have been running through their talking points on how the bill is not about saving our climate but about restributing wealth. Senator McCain, a supporter of climate change, has been conveniently absent during this charade since his views are in opposition to that of his party.

While this may seem to be all bad news, in fact getting Republicans on the record about climate change and, even drawing out reservations from Democrats such as Jay Rockefeller and Robert Byrd from the coal-rich state of West Virginia is the point of bringing it to the floor. For this or similar legislation designed to put a price on carbon to pass, it is critical that opposing arguments be flushed out so that they can be addressed either through arguments or changes to the bill. That's what this process is about.

Thus, while it may not make for good viewing on C-Span, debating climate change on the floor of the Senate is a necessary part of developing legislation as cross cutting with regard to the economy as this. Legislation this transformative with the ability to help build the new, clean post carbon economy and dismantle the old dirty one, can't be passed overnight. Still let's hope the debate gets a bit more substantive soon.

As the Senate begins to debate climate change following a 74 to 14 vote to proceed, the strategy of opponents is already clear. They are painting the bill as a huge tax hike. A Wall Street Journal editorial salvo led off the barrage yesterday, describing it as a vast tax-fueled expansion of government. In turn, Republican leader Mitch McConnell of Kentucky dubbed the bill a "giant tax on virtually every aspect of the economy" and later in the day, President Bush duly termed it a "huge spending bill that... would impose roughly $6 trillion in new costs on the American economy."

Conservatives have used the expansion of government argument to great effect before, for example, in killing President Clinton's health care initiative. And the tax and spend charge is a Republican staple going all the way back to Reagan But will it fly, this time around?

It will only if proponents allow the bill to be framed in terms of the present. In present terms, a price on carbon costs money--although this legislation captures the cost and recycles it back into the economy. But the bill is not, really about the present, it's about the future. To ward off the tax charge, proponents need to show that the bill is not about taxes which people don't like but about protecting our environment--which they do--and moving our economy forward toward a better future.

The incentives created by putting a price on carbon will help create a whole new 21st Century post-carbon economy, wholly outside of government regulation, dynamic and fueled laregly by innovation that can restore America's technological leadership and economic strength. That's the argument proponents need to make.

In short, if opponents can keep the focus on the present, they can kill the bill. If proponents can make the debate about building our economic future, they can move it, if not this year, then next.

George Soros will throw his considerable weight behind the theory that hedge funds are driving up oil prices in testimony before the Committee on Commerce, Science and Transportation today. According to Soros, allowing large funds to invest in indices is new and their financial heft on the buy side is helping to push markets up beyond what fundamentals justify. If the hedge funds were to switch to the sell side, it could lead to a huge market crash.

Crashing oil and gas prices may seem like a good thing to you and me--but a potential crash is the sort of thing that makes regulators pay attention. The committee is gathering information for the FTC to use in devising rules to prevent market manipulation.

This is not the first time Soros has sounded the alarm on commodities market manipulation which he has said is creating the mother of all bubbles. But in supporting the testimony of Michael Masters in hearings by a different committee, a few weeks ago, he gives additional credibility to the hedge fund theory of skyrocketing prices. Of course the underlying fundamentals, rising demand in Asia and a falling dollars remain supportive of high prices.

Patrick Duffy of the Chicago Mercantile Exchange will argue just that in his testimony. So while Soros' testimony may set some regulatory wheels in motion, it's probably not yet time to short oil.

In other words, keep working on those electric cars, guys... we're going to need them one way or the other.

I would like to know (and if any readers know please email me) how it came to pass that the White House finally released a four year late report on the impact of climate change on the eve of Senate consideration next week of the Lieberman Warner Climate Change legislation.  The Bush Administration has fought release of the report for four years and from its contents it is clear just why.  Perhaps someone in the Office of Science and Technology Policy cared deeply enough about the climate change issue to release the report in time for next week's debate.  In any case, the picture of the future it paints is brutal.  Essentially, it predicts the end of the America we know today.

A few tidbits: By 2080, heat related deaths will soar particularly among the old and frail, streams will warm, sea levels will rise, wildfires will rage, droughts will afflict the Southwest, pests will threaten crops and billions will need to be spent both to combat flooding and air condition a hotter country.

The report only summarizes dozens of other studies but the overall effect, particularly, released on the eve of Senate debate of climate change legislation is stunning.   You can read it here. 

mmoynihan@ndn.org

In the Washington Post, Julia Eilperin today covered John McCain's announcement that he will miss next week's key vote on Lieberman-Warner climate change legislation. This is the same John McCain who has been giving speeches and running ads for the last month about climate change and has been attempting to draw distinctions between himself and President Bush on this issue (since he is out of other issues - from immigration to Iraq).

From "The Trail," check out John McCain's reasons for missing the next week's vote:

In a press conference late Wednesday afternoon, McCain said he did not support the bill sponsored by two of his closest allies, Sens. Joseph I. Lieberman (I-Conn.) and John Warner (R-Va.) because it doesn't offer enough aid to the nuclear industry, and he would not come to the floor to vote on it.

"I have not been there for a number of votes. The same thing happened in the campaign of 2000," he said. "The people of Arizona understand I'm running for president."

Some problems with his reasons for opposing and failing to vote on the bill:

1. The nuclear industry has received and continues to receive some of the most generous subsidies in the history of energy subsidies. Aside from that fact, additional legislation, similar in form to the energy bill passed last year, is a more than capable venue for further subsidizing nuclear energy. The point of this bill is to put a price on carbon emissions, which, by making fossil fuels relatively more expensive, would help nuclear. This objection to the legislation is manufactured and asinine.
2. Lieberman and Warner are two of McCain's biggest supporters. Lieberman goes on the road with McCain quite a bit. Do they disagree on this vastly important issue that McCain has chosen to make a centerpiece of his campaign?
3. McCain claims that the "people of Arizona understand" he is running for President. John McCain is running for President of the United States. His actions in the United States Senate, just over seven months before he would be President, should represent the best interests of every state, not just the 6 million people of Arizona. This attitude is un-Presidential, to say the least.

Time and time again, the wheels have fallen of the Straight Talk Express. This time, it is on the last issue McCain had to distinguish himself from an incredibly unpopular President. By failing to vote for this legislation, McCain should no longer have the latitude to claim confronting climate change as central piece of his platform, and the media's "maverick" tag for the Republican nominee should probably be put to rest.

In advance of Senate consideration next week of the Lieberman Warner legislation on climate change, Tony Blair has penned a thoughtful and compelling op-ed in today's Washington Post that puts forth the case for a cap and trade system in the United States. 

Why is a former British PM writing editorials in a Washington paper?

As members of the Brown government in the UK told me in London recently, Europe views US leadership as critical to global action on climate change.  The US withdrawal from Kyoto was harmful to the world's climate.  By passing strong climate legislation now, the US can set the stage for a real global accord next December in Copenhagen when the UN will lay out a successor accord to Kyoto to take effect in 2012.

If the US fails to take action on climate change by next year, it will go into the Copenhagen meeting in a considerably weakened position.  The US would then be following, equivocating and reacting, rather than leading.  Alternatively, if the US passes climate change legislation before then, we will have the opportunity to shape the Copenhagen accord and resume our rightful leadership position on the issue as the world's largest economy.  Without meaningful US leadership, it is doubtful developing countries such as China and India can be brought in, further raising the stakes for legislation and the future.

President Bush has threatened to veto the Lieberman Warner legislation and the bill the Senate will debate next week faces clear obstacles.  However, the debate next week--even if the final vote falls short--will help set the stage for action next year.  Since all three remaining Presidential candidates support climate change action, the prospect of getting a bill done will increase dramatically on January 20th.  But so will the stakes.

The urgency Blair expresses is well considered.  The Senate should do its best to move the ball forward because, on this issue, there is a deadline.

Last week I wrote about two causes of what I am calling the Third Oil Shock: 1) increased demand from China and India combined with flat supply as the world approaches its peak oil production and 2) the impact of the falling dollar which is responsible for almost half the rise in the dollar price of oil compared to the Euro price. This week I want to discuss a third possible cause: hedge fund speculation. While the first two causes suggest high oil prices are likely to be here for some time, if high oil prices reflect speculation, then there is a chance prices may come down. The role of speculation in skyrocketing prices lies behind the belief of some that we are in the midst of a commodities bubble. However, there is a lot of debate about this point. Here are a few obervations.

First, my own informal poll of hedge fund managers, none of whom invest in oil futures themselves but who track the strategies of others, suggests there is something to the speculation theory of skyrocketing prices. The word among traders and analysts is that hedge funds are driving up prices--both by bidding up oil index futures or, when they do go short, having to cover positions if bets turn sour. Hedge funds, of course, have huge leverage at their disposal...a $5 billion hedge fund can command $50 billion in capital through borrowing. And by buying futures which are already highly leveraged, the leverage becomes enormous. This was the thrust of a much talked about Barrons article that appeared about a month ago. That article and others in Seekingalpha and other investor-focused publications have detailed the strategies Hedge Funds are using to play in oil.

Second, a number of influential Senators seem to think speculation is part of the problem. Senator Lieberman has been holding hearings on the subject this past week.

While one would not expect traders to come out and talk about how they are destroying the American way of life, one hedge fund manager, Michael Masters of Masters Capital did put the blame for prices on what he called "index speculators", hedge funds buying futures of indices. His testimony included a primer for Senators on commodity speculation and graphs showing how speculators are moving the market.

The Lieberman hearings prompted a rebuke from John Dizard in yesterday's Financial Times in which he cited studies by the Commodities Futures Trading Corporation in Chicago that speculation can not lead to sustained higher prices because the participation in the markets of users--like industrial companies and the airlines--is sufficiently great to outweigh speculation. Speculators who bet against the real world, the CFTC, argues will eventually lose their shirt. The operative word, however, is eventually. It is quite possible that speculation may exacerbate spikes and how long speculation-induced bubbles continue can be anyone's guess. After all every market, even the housing market for example, eventually must reckon with supply and demand--but the reckoning may be put off for years if capital is sufficienlty abundant. And capital is certainly abundant in the oil business today--especially with money having flowed out of other asset classes such as property and structured debt.

My own guess is that there is something to the speculation theory. The history of financial markets for many years has been a pursuit of what investors consider their God-given right to double digit returns. When any one market slows, this has led them to seek out a a series of alterantive investments--from tech stocks to real estate to now, perhaps, commodities-- that by virtue of the inflow of capital alone eventually turn into bubbles.

However, the other two causes of rising oil prices, skyrocketing demand from China, India and the developing world as well as a falling dollar are still with us. If a correction does ensue as a result of the real economy intervening, it is not likely to happen until after the summer driving season. And it will not address the long term force of increasing demand for a finite resource.

The Third Oil Shock and the Dollar

Oil prices have jumped so high so fast, that we are arguably in the midst of the Third Oil Shock. But why is oil rising? Part of the answer is demand from India and China. But there's more to the story. It's not often that I find myself in agreement with the editorial page of the Wall Street Journal, but David King, a former Fed economist, makes an important point in an oped today, echoed in an editorial, that a large share of the current run-up in oil prices as well as prices of all commodities is due simply to the decline of the dollar.

According to King, in Euro terms, oil is up but far less than in dollar terms. Had the greenback not undergone its steep drop since 2002, oil would be selling for about $75 today instead of $135. The good news here is that managing the exchange rate--though not easy--is something the Treasury in concert with the Fed does every day. The bad news, of course, is that the dollar has not collapsed by accident. Arguably, it has long been overvalued and its high value allowed Americans to stock up on massive amounts of cheap goods from abroad--for which we incurred a trillion dollar debt, now held by the Bank of China in the form of US bonds--and also killed US exports.

The decline of the dollar in Euro terms but in Yuan terms as well (about 20% as opposed to 60%) will eventually lift US exports. But that will take time. In the meantime, we are importing inflation.

Finally, since so many countries peg their currencies to the dollar, the next shoe to drop in the surge of oil prices may be an inability of some developing countries to pay their oil bill as happend after the second oil shock, triggering the 1980s international banking crisis.

A Magic Bullet for Climate Change?

On a separate topic, climate change, Freeman Dyson asks an interesting question in the current New York Review of Books. Could there be a silver bullet to solve the climate change problem? In reviewing a new book by William Nordhaus, Dyson points out that CO2 levels vary seasonably by about 8%, with plants absorbing about 8% of the globe's CO2 every growing season and then disgorging it come winter. He hypothesizes that genetically engineered super trees could, in the future, be programmed to pull a lot more carbon out of the atmosphere. To do so, however, a great deal of science and technology development must happen first. That's why allocating money to R&D is likely to be such an important part of a climate change solution.

Senate to Debate Cap and Trade

In advance of consideration by the Senate of the Lieberman Warner bill to create a cap and trade system to combat climate change, currently scheduled for the first week in June, stakeholders are already beginning to float arguments. Legislation foes such as the Heritage Foundation are talking about the potential damage to the economy of higher energy prices that may result from putting a price on carbon--detailing the impact state by state. What they don't mention is that credits if auctioned off will provide revenues that offset higher prices. Nontheless, for climate change legislaton to move forward next year of not this year, these arguments are a necessary part of the process of calling out stakeholders. Before the legislation can pass, it's important to find out where the opposition lies and what the obstacles are in order to address them. Stay tuned.

"The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel prices are coupled with a weak US economy". So said American Airlines CEO Gerard Aprey yesterday in announcing dramatic cuts to service that will eliminate thousands of jobs, remove one of 8 American planes from the sky and charge passengers $15 to check a single suitcase.

Arpey warned the rest of the industry to follow suit or plunge into bankruptcy. And today, the Wall Street Journal reports that the International Energy Agency is anticipating reductions in supply that may drive prices higher.

The wholesale scaleback of air service as we know it is just one of the many ways skyrocketing fuel prices are beginning to alter America's way of life Yet shockingly, we still have no plan or policy to deal with it. President Bush begging Saudi King Abdullah to raise production last week or even Congress ending purchases for the Strategic Petroleum Reserve is not a policy.

While Senators Obama and Clinton have proposed broad energy policies, action is needed now. Conditions in the airline industry are approaching those after Sepember 11th when the Strategic Petroleum Reserve was tapped and energy officials should consider that now. Congress should move immediately to fund the Production Tax Credit and Investment Tax Credit to fund wind and solar investments. And the White House should convene a national energy council, as proposed by both Democratic Senators, modeled after the National Security Counsil, to meet weekly to address the current crisis and long term issues surrounding energy prices, dependence on foreign oil and climate change. Things will get worse before they get better, but at a minimum a crisis such as this needs attention.

In case you missed them, here are a few must read articles from the last few days:

From Center on Foreign Relations Economist Sebastian Mallaby’s strongly worded op-ed in yesterday’s Washington Post entitled “Rice and Baloney:”

We are now several months into the global food crisis, which is a much bigger deal than the subprime meltdown for most people in the world. Food prices have almost doubled in three years, threatening to push 100 million people into absolute poverty, undoing much of the development progress of the past few years. The new hunger has triggered riots from Haiti to Egypt to Ethiopia, threatening political stability; it has conjured up a raft of protectionist policies, threatening globalization. And yet the response to this crisis from governments the world over has been lackadaisical or worse.
...

The governments of the world are conspiring to undermine farming in developing countries. Do they mean to inflict hunger on tens of millions of people?

The New York Times’ Andrew Revkin, in response to an article from Sunday’s Times by Keith Bradsher and Andrew Martin, draws a parallel between incredibly low funding for both agricultural development assistance and basic research and dropping funding, from the federal government and private sources, for basic energy research.

In Sunday’s San Francisco Chronicle, UC Berkeley professor Dan Kammen lays out the challenges that that policy makers must confront on climate change:

Over the next five decades, progress to meaningfully address the risk of significant climate change will require an estimated 80 percent - or greater - reduction in global greenhouse gas emissions. The United States and China together account for almost half of all greenhouse gas emissions, so the work needs to begin here.

At the same time, no nation is better positioned to adopt a low-carbon energy diet than we are. The United States not only has tremendous clean energy resources, but it has major companies looking to take advantage of a change in federal policy to compete in the global clean energy economy. The United States must mobilize the world's largest R&D if we are to address climate change.

The central challenge of the 21st century will be to replace the vast fossil-fuel infrastructure with a new economy based on low-carbon technologies. The issue on the table is the need to finance clean energy research programs and to build markets where low-carbon technologies are rewarded. In other words, we must begin to price pollution.

Finally, Matt Bai’s column in Sunday’s New York Times Magazine examines John McCain’s foreign policy, support for the war, and his relationships with fellow Vietnam War veterans in the Senate, and, on Salon, pollster Paul Maslin takes an early look at the electoral math for Barack Obama.