Energy Independence

Cap and Market This Year

New York City -- Later today, the House Energy and Commerce Committee is expected to release the Chairman's Mark of the American Clean Energy and Security Act of 2009, also known as the energy and cap and trade bill, for markup next week. The new text will reflect a deal made Tuesday on the key issue of giving out versus auctioning of allowances for greenhouse gas emissions. With those agreements -- which give out 35% of the credits to local utilities and 15% to trade-intensive industries -- the bill clears a major hurdle and is now more likely to pass the House than not. The question is what does the compromise on auctioning credits mean? In my view, it is secondary to the greater goal of moving a bill forward. Accordingly, the deal reached by Chairman Henry Waxman and Congressman Ed Markey with other Members should be hailed as a victory by everyone who cares about the climate.

The auctioning issue is not unimportant. When permits are given out, polluting is free and there are no immediate financial incentives to reduce emissions. On the other hand, forcing polluters to buy permits at auction places an immediate price on carbon, similar to a carbon tax, that creates an incentive to reduce emissions from the get go.

Like a carbon tax, auctioning permits also raises immediate revenue that can be used to invest in new technologies or offset the otherwise negative impact on the economy of higher carbon prices by reducing taxes elsewhere.

The downside of auctioning permits, however, is the immediate economic impact on industry and consumers of higher prices. For this reason, most cap and trade proposals have included, at a minimum, a transition period when permits are given out. The EU scheme allowed only 5% of credits to be auctioned in its rollout phase.

When permits are handed out free, no immediate incentive is created to reduce emissions. However, as emissions approach the cap, depending on the penalties for exceeding it, the cost of the permits will begin to impact the marginal cost of energy and energy or emissions-intensive products, creating an incentive to reduce emissions. Thus as the cap is approached, the system will begin to affect behavior. In the EU, while countries have begun to auction off more credits, the system still largely works on grandfathered credits and hinges on the cost of buying credits once the cap is reached.

The key point here is that auctioning is not an absolute requirement.

Far more important in the scheme of things is that failure to pass climate legislation this year would postpone action on climate change, perhaps indefinitely. There could be no more propitious time than now in this unique year in modern political history with a new Democratic president in his first year in the White House -- who has made clean energy a key priority -- and large Democratic majorities in both the Senate and House. Add to that the timetable created by Copenhagen. Next year things could be quite different, meaning the time to act is now.

Throughout American history, Congress has generally only passed major legislation either when conditions were especially propitious as they are now or in the midst of a major crisis. Since climate change is so gradual, we may not see a crisis that can be directly attributed to greenhouse gas emissions until it is too late to act.

Finally, some make the argument that no plan is better than a weak or flawed plan on the theory that Congress will only take this up once.

I disagree. In general, Congress is more likely to adjust something that exists than create something new and experience shows that regulations, once established tend to tighten, not the reverse.

Accordingly, today's bill is an important step forward in addressing the challenge of climate change.

Climate Change Alarmism

Anyone following the debate over cap and market legislation has probably noticed the growing alarmism voiced by opponents. Leaving aside the substance of attacks, their tenor has grown increasingly biting. During recent hearings held by Chairman Markey, opponents unleashed a fusillade of arrows ranging from dire warnings to shrill personal attacks on Vice President Gore who testified in support of cap and market legislation. What is most remarkable about the alarmism, as Paul Krugman point out in his column today, however, is that it is coming from the same people who ordinarily have an unbounded faith in markets to cope with any obstacle. Newt Gingrich, for example, who has at times been an evangelist for markets and the future, testified at the same hearing that putting a price on carbon would be devastating for the US economy. In fact, as Krugman writes today, the impact of a carbon regime is likely to be mild and gradual. Yet junk economics, he argues, is becoming as widespread in the climate change debate as junk science. While a cap and market regime is likely to increase prices of emissions-intensive commodities such as electricity, cement and steel over time, the increases will phase in slowly. According to data from MIT's Emmissions Prediction and Policy Group, cited by Krugman, even stringent limits would lead to a reduction of only 2% in consumer demand by 2050. The short term impact on GDP--from higher prices--would be almost negligible. Yet there is more to the story. While any negative effects would not show up for years, Krugman points out that a carbon regime might well stimulate growth in the near term. Were congress to mandate caps to begin phasing in three years from now, the impact on prices would be negligible in the short term, but the prospect of caps would stimulate capital investment today, driving up the investment component of GDP and exerting a multiplier effect on consumption--exactly what the economy needs during a slowdown. In short cap and market legislation won't hurt the economy much, will at most trim demand in the future and might actually help the economy now. If you throw in the fact that developing new technologies is something the US has to do if it does not want to compete with countries such as china and India solely on cost, the economic case for putting a price on carbon is there. Oh, and there is also the benefit preventing the very real costs of higher temperatures, rising sea levels and climate instability.

The Chrysler Bankruptcy: Don't Let it Happen to GM

Of the two members of the Big Three automakers receiving government life support, Chrysler was the weakest and therefore most widely prophesied to enter bankruptcy. Nonetheless the fulfillment of that prophesy with the "surgical" Chapter 11 Bankruptcy announced today is unfortunate. Occasioned by the refusal of some hedge funds holding Chrysler's debt to make a deal, hedge funds that the President did not hesitate to call out in his midday remarks, the bankruptcy opens a new chapter in the auto bailout. If all goes as expected, the company will emerge with a deal similar to that turned down by the bondholders which creates a new Chrysler allied with Fiat free of a large amount of debt and wage and pension obligations. The big question mark is whether the judge will ratify the prepackaged plan or whether the hedge funds can somehow use the bankrupty process to undo the deal.

While GM seems stronger than Chrysler, in some ways it is the more difficult case. There is no Fiat waiting in the wings to invest in GM. And becaue GM's bonds are far more widely held than Chrysler's, the bondholder committee that currently exists represents only about a third of debt outstanding and thus may have even greater difficulty striking a deal that all the bondholders support. A GM bankruptcy would be far more complex than one for Chrysler because of the size and scope of GM's operations.

As I mentioned in a previous post, two processes should commence immediately to make the most of a difficult situation.

First, the Administration should begin aggressively negotiating with bondholders in order to have the best chance of striking a deal. Secondly, rather than just scuttle business lines such as Pontiac and Saturn--what GM has proposed, GM should actively try to transfer these highly perishable, yet potentially valuable assets to others. Unwanted GM plants and dealer networks, invigorated with new capital, could easily become the nucleus of a new, high growth American electric car industry. But that will only happen if GM and the Auto Task force work quickly to convert challenge to opportunity.

Clean Tech--The First 100 Days

New York City-The first 100 days of the Obama Administration have not been as jam packed with legislative action as those of the Roosevelt Administration which saw a bank holiday, a major farm bill, the creation of the Civilian Conservation Corps and the Glass Steagal Act among major initiatives. But they've been remarkable. In its first 100 days the Administration has worked with smooth dispatch to repair the raft of problems it inherited from its disfunctional predecessor. In clean technology the major accomplishment has been the huge investments in grid modernization, energy efficiency, renewable energy and clean infrastructure contained in the American Recovery and Reinvestment Act. In normal circumstances those investments would be considered energy policy milestones. In the current environment at a moment when America finds itselves at a crossroads between an old and a new economy, they represent only a beginning. If America is serious about building a low carbon, high productivity economy, far more needs to be done to modernize our energy infrastructure, drive research and development in energy technology and ultimately lower the carbon intensity of the economy. This race is properly speaking a marathon. Three broad things are necessary to lay the groundwork for a clean economy-wide transformation. First, the social costs of carbon emissions need to be globally internalized in the price of carbon. The most promising regulatory approach is a globally harmonized cap and market system such as that in place in Europe and proposed by Chairman Waxman and Chairman Markey. The Administration supports this approach but has room to engage more forcefully, particularly once the legislation is taken up in the Senate. Second, technology must advance in order to bring the cost of low carbon energy sources below that of their high carbon alternatives. The President signaled his determination to double R&D spending last week over 10 years. But the hard legislative work must still take place to make this a reality. Third, a new regulatory structure must be established--particularly with respect to electricity but also with respect to transportation --that unlocks the power of clean technology--by opening up the grid and by altering transportation funding to end the preference for road over rail. This is a complex, but critical step--that more and more people are beginning to discuss. In short, in its first 100 days, the Administration has made a good start. But the marathon is only beginning.

Preserving America's Clean Auto Future

New York City - Yesterday, two things happened that in my mind should be connected but are not. The White House sponsored a car show---of energy efficient American vehicles right on the White House grounds. Later in the day GM announced it would not make almost any cars this summer. The rapid slide of GM--once the greatest company in America and still a prime driver of economic growth--into oblivion poses many problems for the American economy. But what would be doubly tragic for our country's future, however, is if the auto industry is allowed to slip away on the very eve of what may be a whole new growth chapter in auto history—as suggested by yesterday’s White House event--the development of clean cars. As I have written in a previous post, China which recently passed the US to become the world's largest car market is simultaneously embarking on a coordinated strategy to become the world's leader in the production of electric vehicles. China has every change of succeeding, first because of low costs, second because it now has about 100 companies making cars and, not least, because the government has targeted success in electric vehicles as a top priority at the precise moment that the US government seems willing to allow much of the US car industry to slide into bankrtupcy. The argument in favor of a pre-packaged bankrtupcy is, of course, that Chapter 11 allows companies to shed debt and labor contracts and re-emerge lean and mean. Oh Thank Heaven for Chapter 11 was the saying in Texas during the oil bust. Any number of airlines have been through bankruptcy and re-emerged. And, in a new twist, the government has proposed a good company bad company approach modeled after banking restructuring proposals--that would shift the obligations of GM to a bad side freeing the good side to emerge as profitable contender. The problem is that bankruptcy--even the Chapter 11 variety--carries immense risks, both legal and financial, adding up to huge uncertainty. On the legal side, bankrupty imparts significant discretion to a judge to do what he or she deems fairest for all parties, making bankruptcy far from a predictable event. Judges, in turn, must be sensitive to the risk of lawsuits from creditors, unions and affected parties. Veteran bankruptcy attorneys, commenting on the GM situation have observed that these factors are likely to make bankruptcy far more complex in reality than the simple process described in the press. Delco, the auto parts maker is undergoing a messy Chapter 11 proceeding. On the financial side, if conditions deteriorate, then a Chapter 11 bankruptcy can turn into a Chapter 7 bankruptcy, the kind where the companies close their doors and liquidate. This is what happened to Circuit City recently and has happened to many other firms. GM's banktuptcy would be vastly more complicated than almost any bankruptcy in history-occurring in multiple countries--with multiple regulators--and the likely delay in re-emerging out of Chapter 11 could easily cause the company to collapse in the meantime. Bankruptcy status would almost certainly impact sales, lower prices and start the clock ticking on the erosion of assets. So what can be done? Two things come to mind. First, the parties that ultimately decide whether a company must file bankruptcy are its creditors (which can include unions when there are pension and wage obligations). If the creditors are willing to make a deal with the company, bankruptcy can be averted. The key--particularly with a company as large as GM is to organize the tremendous numbers of bond holders into a group. A bondholders group exists for GM but so far the Auto Task Force has not actively explored this option. (Negotiations are underway with Chrysler but the parties are far apart.) Another approach is for the company to sell off or transfer as many assets as possible before bankruptcy. It so happens that GM has many great assets that would lose all of their value after bankrtupcy but can still be salvaged prior to bankrtupcy occurring preserving jobs, value and in particular, America's clean economic future. In the United States, a number of influential Congressmen have suggested that GM's assets can be repurposed to building a clean transportation infrastructure here in the United States--but only if the Auto Task Force works rapidly to make this happen. Why not turn a part of GM, for example, into EM or Electric Motors. Electric vehicle manufacturers or companies helping to develop America's next generation of clean cars could repurpose existing GM assets for the manufacture of electric cars right here in the United States. Repurposing facilities that GM intends to close anyway into electric vehicle manufacturing, injecting new capital and preserving American jobs would be a win win for all concerned. Indeed, the Financial Times reports that GM is in discussions to transfer its Opel/Vauxhaull and Saab units in Europe to investors who would put in new capital to revive them. The German and Swedish governments would provide financing and facilitate the deal. Ultimately, if the US is to make good on President Obama's call to develop a clean energy economy--one that creates good high paying jobs and can power a new wave of prosperity, we must preserve and indeed expand our industrial base--not allow it to disappear. The issue is critical in those parts of the country where auto-related manufacturing takes place--states like Michigan and Ohio but also Tennessee and Kentucky Make no mistake. If GM and Chrysler’s plants shut down, do not expect Ford, Toyota, Honda or even innovative startups such as Tesla to pick up the slack. The evisceration of the US supply chain would incent not only Toyota and Honda but even Ford to source more of their parts, components and even cars overseas than they already do. The auto task force and Congress should work now--to put off bankruptcy and restructure GM and Chrysler--in a way that brightens our clean energy future rather than dims it.

China, the World's Largest Car Market and the Future of the Electric Car

A little known artifact of the implosion of the US auto market is that China has now surpassed America as the world's largest market for cars.  Now, the New York Times reports, China is plotting a strategy to accomplish for electric car manufacturing what it has already done in computers, toys and just about everything else.

Yesterday, Chinese officials, including Minister of Science and Technology, Wan Gang, a former Audi engineer detailed a plan to make China the world leader in electric cars.  It is a very achievable goal for the world's largest manufacturer that now sports the world's largest car market as well.  The effort involves a concerted effort by "manufacturers, universities, research institutes and government agencies" to overcome any obstacles.

The centerpiece of the strategy is a $8,800 (60,000 yuan) subsidy for taxi fleets and government agencies purchasing cars to make them more affordable but leave the buyer free to choose the car of their choice.  The program is thus more ambitious than the complex US tax credit program included in the stimulus bill that provides a tax credit of from $2500 to $7500 depending on a variety of factors.

China's policy shows more of the market friendly industrial policy that China has used to convert its vast reserve of cheap labor into an industrial V-8 engine. 

With the nascent but eventually gigantic electric car business entirely up for grabs, China is laying down the gauntlet to a US industry that is on the ropes and, at the moment, largely in the hands of one man: financier and now auto czar Steve Rattner. 

What should the US do?

First, it is vital that Rattner together with the other US officials overseeing the auto bailout, at all costs, insure that the US industry survives standing on three feet, not one, with all of the Big Three still intact and not hobbled by excessive downsizing.  The report of the taskforce that rejected GM and Chrysler's recovery plans, prompting Rattner to fire GM's well regarded CEO, Rick Wagoner, seemed to blame the US firms for failing to make investments in cleaner cars.  In fact, such investments cost the companies money in the short term and run entirely counter the goal of preserving capital to survive.  The US auto downturn is due, almost entirely, to a disappearance of credit.  GM, most advocates of clean energy vehicles believe, deserves considerable credit for its muli-billion investment in the Chevy Volt.  The fact is, the halving of US auto sales from about 18 million to under 10 million vehicles is due to the financial crisis.  Extraordinary volatility in fuel prices may have played a small role--but this was impossible for the auto companies to plan for--and may have reflected lack of financial oversight of commodity index trading as well.

True, the US may yet create new car companies from scratch.  Tesla, the VC-backed maker of a sleek electric drive sports car that can go zero to 60 in under 4 seconds has seen its sales increase from 14 million last year to a projected 140 million this year.  However, for Tesla to make the jump to the consumer market, it will need government guaranteed credit.  It has been waiting for more than a year for a loan to build a factory in Calfironia which the Department of Energy has yet to release.  Similarly, the Big Three are still waiting for the $25 billion promised them to make the transition to cleaner vehicles.  Had they received this money, they would not be in their current predicament.

If the US doesn't want to be left out of the electric car future, the first task is to extend the necessary credit on non-onerous terms to the carmakers to survive a crisis not of their making.  Once they are healthy, we should consider subsidies and a concerted effort similar to China's to assist them in what promises to be a brutal battle to control the future of automobiles--or we should pressure China to eliminate such subsidies but we cannot expect US companies to beat highly subsidized competitors.

Ultimately, however, without a robust auto industry in which GM and Chrysler are still standing, it is unlikely that we will even be in the running.

NDN Backgrounder: A Long Great Recession, No Trust In Wall Street, Carbonomics

With President Obama meeting with his top economic advisers today, NDN is pleased to present some of our recent and most important economic analysis.

  • Thoughts on Wall Street 2.0 by Simon Rosenberg, 4/9/2009 - Roseberg explored the crisis of trust between the American people, the world, and Wall Street.
  • Friedman on a Carbon Tax by Michael Moynihan, 4/8/2009 - Moynihan discusses Thomas Friedman's column calling for a carbon tax and delves into the politics of pricing carbon.
  • Carbonomics by Michael Moynihan, 4/2/2009 - Moynihan looks at the connection between pricing carbon and the future of the American automobile industry.
  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

Friedman on a Carbon Tax

New York City -- In today's Times, Thomas Friedman, who has been writing about environmental technology for some time and is well credentialed in this space, not only due to his platform at the Times, but also due to his relentless exploration of energy issue, expresses his support for a carbon tax in lieu of a cap and trade plan to put a price on carbon. 

In so doing, he joins others with true green environmental credentials such as Al Gore who supported a carbon or BTU tax before cap and trade was even invented and many economists, including NDN's Rob Shapiro who has written extensively on the subject. 

It is important to recall that Al Gore, arguably the father of the carbon tax, also supports cap and trade and indeed the two approaches need not be mutually exclusive. Several European countries including Denmark, widely praised for its switch to renewable fuels, have a carbon tax and participate in the EU cap and trade system. 

However, as with the Yankees and the Mets, cap and trade and a carbon tax both have passionate advocates.  An advantage of a carbon tax, supported by many economists, is that taxes -- something the government has long experience collecting and companies paying -- are probably easier to administer than a system for trading carbon credits.  With financial markets less esteemed than only a year ago, opponents of a carbon tax worry about gaming of the carbon market. Supporters of a tax also argue that it may result in less price volatility in energy at the expense of less precision in reducing emissions since it fixes price rather than quantity.

Most environmentalist scientists consider a cap and trade system to be critical to addressing climate change because in theory it imposes an absolute cap on emissions.  If one takes seriously the science on the issue, the argument runs, we have less time and leisure to avert major damage to the climate than commonly believed and only a fixed cap provides certainty about lowering emissions.  Companies could -- under a tax regime -- continue polluting and simply pay more tax which, in some cases, they might be able to pass onto consumers, giving them broad license to continue emitting.

Of the two approaches, cap and trade has gained far more traction. It is already in use in the European Union. Ten northeastern and mid-Atlantic states recently launched a mandatory cap and trade system called the Regional Greenhouse Gas Initiative (RGGI) and a similar initiative is underway in California and other western states. However, carbon taxes --generally smaller ones than those that would be needed to achieve deep carbon reduction --are employed in Denmark and, indeed, most European countries, in several US states and, indeed at the national level, by commodity, as in the retail tax on gasoline.

Rather than take a position on these cross cutting arguments, Friedman focuses on the immediate politics of the issue: the fact that coal companies and others are now trying to paint cap and trade as a tax to block its passage. If opponents are calling it a tax, he argues, why not just go ahead and pass a tax?

In fact, many of the staunchest supporters of cap and trade such as U.S. Rep. Ed Markey who oversees a key subcommittee and, with House Energy and Commerce Chairman Henry Waxman, has introduced cap and trade legislation has indicated he understands the arguments for a carbon tax as well as cap and trade but believes that one must be mindful of political realities which, for the time being, favor cap and trade.

Friedman argues that a tax could be sold to the American people by marketing it as vital to America's defense and economic priorities. In supporting Congressman John Larson's proposal to tax carbon but cut the payroll tax by an equal amount (an idea proposed by Rob Shapiro) he advocates employing the President's National Security Advisor, General James Jones, to make the case. (Jones worked on climate policy for the US Chamber of Commerce prior to entering the Administration, to the consternation of some environmentalists).

Is Friedman right?

Here is my view on the issue of how to proceed on putting a price on carbon. Ultimately, cap and trade and a carbon tax have more similarities than differences. Both put a price on carbon and neither one invalidates the potential value of the other.

Cap and trade will probably pass the House this year and needs about four to five more votes in the Senate than it has yet to achieve cloture and become the law of the land.  It will enjoy the deserved support of the vast majority of environmentalists as debate unfolds in coming weeks and months. It is important that the carbon tax not be used to undermine cap and trade support.

However, a carbon tax also deserves a hearing and the idea of reducing payroll taxes with the revenues is particularly appealing.  It should receive, at the appropriate juncture, the full attention of the Congress to determine how much support it has at what level of tax.  We probably need at least a ten cent increase in the gas tax later in the year to restore the Highway Trust fund to solvency and one legislative approach might be to include this as part of a wider carbon tax proposal. 


In the current New Yorker, David Owen has a provocative, cautionary article on the difficulty of addressing climate change that points out that the only thing ever shown to truly lower CO2 emissions is a well timed industrial implosion.  Greenhouse gas emissions are the result, generally, of prosperity. 

While the article has many interesting observations, Owen draws a fine point on a subject that is often neglected and has relevance both to proposals to put a price on carbon and the future of Detroit, namely the mathematical equivalence between cheaper gas--anathema to many environmentalists--and, paradoxically, higher fuel economy 

The centerpiece of emissions policy for decades has been higher fuel economy standards.  However, as Owen notes, if higher gas prices such as those last summer lowered miles traveled and stimulated use of mass transit, then their mathematical equivalent, improved fuel economy or fiddling with the other side of the equation, can only reverse those trends. Higher fuel economy and, indeed, to a degree energy efficiency writ large suffer from the same problem.  Both encourage greater consumption of energy as cost declines.

Although Owen does not explore the next question, consider the impact of higher fuel economy and energy efficiency on energy independence--another major driver of efforts to get off fossil fuels.

Higher fuel economy which is to say cheaper driving if it leads to more driving as it appears to do may not reduce consumption of gas or oil and therefore either their price or money transferred to oil producing states.

This does suggest an interesting difference between hybrid and pure electric cars.  Whereas hybrids by improving gas mileage may promote more driving, limiting their effect on emissions, pure electric cars such as the planned Chevy Volt should unequivocally lower carbon emissions and oil consumption (since electricity generally produces less CO2 than gasoline thanks to its use of hydro, nuclear and natural gas-fired power not to mention renewables.)

But you say didn't cutting back on gas use last year after prices spiked, cause the price of oil to collapse, reducing payments to foreign oil producers?

First, the falloff in driving followed a price spike.  It only showed, therefore, that people consume driving like other normal goods, using more when costs drop and less when they rise.  The subsequent collapse of oil prices is much more tied to the collapse of the global economy than to any conservation efforts.

All of which brings us to the other main proposal for reducing emissions, the one now gaining traction in Congress: putting a price on carbon through a cap and trade system or tax.  In contrast, to better fuel economy or energy efficiency writ large, a cap that absoutely limits emissions or a cap and trade system that allows emissions at a price, by raising the price of fossil fuels should lower their consumption and thus greenhouse emissions.

This is not to say it will be easy to implement a cap and trade system or tax. However, it does suggest that we ought to try as the focus on fuel economy and energy efficiency alone will not get us to a lower carbon economy.

The Virtual March on Washington for Energy Independence, April 1-3.

Today is the first day of the three day Virtual March on Washington, organized by T. Boone Pickens, to promote the Pickens plan to get America off of foreign oil and onto new cleaner forms of energy.  The Pickens plan, in a nutshell involves increasing electric transmission capacity to bring wind power onto the grid and replace gasoline burning cars with those running on natural gas or, for lighter uses, electricity.

While opinions vary on whether there is enough natural gas in the US at an affordable price to ultimately replace foreign-imported oil, there is no doubting Pickens' energy and passion to promote his cause--or his ingenuity in using diverse media from television to Facebook to Twitter and partnerships with the NAACP, Rock the Vote, Ted Turner, AWEA and others--on its behalf.

If you haven't seen the commercials, you can learn more about the Pickens plan and the virtual march at

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