Climate Change

House Passes Climate Change Legislation

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

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

 

The Little Bill That Could?

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

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

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

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

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

Sensory Overload Produces Sloppy Policymaking

Washington policymaking is caught in its own version of sensory overload. All at once, there are too many problems that seem - and actually are -- urgent, mind-bogglingly complex, and politically ultra-sensitive, to handle well. The result now emerging could be waves of ill-considered decisions.

Exhibit A is climate change.Taking serious measures to protect the planet's climate and ecosystems by driving down greenhouse gas emissions comes as close to an imperative as exists in science-based policy. But a small group has used this imperative to try to force a decision quickly, without preparing the public or most representatives for how their cap-and-trade scheme would affect everybody - for example, by increasing the volatility of energy prices, and setting off frenetic Wall Street speculation in the emission permits created by cap-and-trade.That's just the start of the sloppiness: The process of corralling the support to pass the measure in the House of Representatives - the vote is expected this week - has become a frenzy of giveaways that have cost the program most of its teeth and all of its bite. The result is the worst of both worlds: A measure that most environmentalists agree (at least privately) would do little about climate change, while unnecessarily harming the economy. Thankfully, the Senate is unlikely to go along.Once it fails there, perhaps we can get on to more serious and public deliberations about what will be required from all of us to shift to a less carbon-based economy.

Financial regulation is Exhibit B. The minimum for sound policymaking here has to be a genuine recognition of how our capital markets came to melt down and what irreducible steps can prevent it from happening again. We now know, to start, that the most prominent institutions in our financial system have operated for years in ways that create unsupportable levels of risk. We also know that their risky behavior wasn't an accident, but the result of thousands of calculated responses to real incentives. The toxic combination here is what insiders refer to as limited liability plus leverage: The executives, managers, traders and deal makers at Bear Stearns, Lehman Brothers, Merrill Lynch, Citigroup, Bank of America, AIG, Merrill Lynch, Goldman Sachs and others could borrow unlimited amounts of money (the leverage) to enter into almost unlimited numbers of risky deals. For the deals that worked out, they pocketed enormous profits and additional compensation; and for those that went south, only the shareholders suffered. If the bottom fell out on thousands of deals at once, they also all believed that they would be both too big to fail and not too big to save - and but for the incompetence of the Bush Treasury in the Bear Stearns and Lehman Brothers cases, they were right.

Today, after $3 trillion to $4 trillion in federal bailouts and federal guarantees, these incentives to undertake risky deals are even greater than they were before. And if the latest OECD forecast is right, and we should expect at best a weak and fragile recovery next year, the incentives to go for a killing will be even greater still.

Yet, most current proposals for new regulation would do little to head this off. Part of the problem with the financial system comes from simple size - firms that are too big to fail - yet none of the proposals even approach this issue. For example, we could debate scaling up a firm's capital requirements with its size:The bigger it is, the less pure risk it can take on - an approach the Administration likes. And with the collapse of so many large institutions, the survivors are now even bigger. So here's another thought we haven't heard much about: Shouldn't the rules of antitrust apply to finance?

We also know that part of the problem is the nature of the risks taken by these huge institutions:Complex derivatives being traded outside regulated markets, and thus not subject to the normal capital and governance rules applied to those issuing them or to the normal disclosure and transparency requirements applied to all transactions in regulated markets. So, requiring that all derivative-like instruments henceforth be traded on regulated public markets seems like a no-brainer. Perhaps sensory overload can help explain why the leading reform proposal preserves the right of those undertaking "large private transactions" in these derivatives to operate outside the regulated markets.If this sloppy decision stands, another element for the next market meltdown will be in place.

We also know that part of the problem lies in compensation arrangements that reward executives, managers, deal makers and traders for the highly-leveraged risks that pan out, but exact no costs for those that don't.The issue here is not how big the bonuses are - that's their business - but rather a structure that actually drives decisions to take unreasonable risks because they carry no personal price.Yet, for all of this issue's urgency, addressing it among the hundreds of others demanding attention has apparently been too complex and politically-sensitive. Why can't we have a serious discussion of creating a new SEC rule that would require a shareholders' vote approving any compensation over, say, $1 million? Better still, how about a genuine debate about compensation arrangements that would claw back previous bonuses to reflect large losses by the same people?

Maybe everybody needs a break to clear their heads - and remember their principles. Let's hope it happens before the new regulatory reforms for climate change and finance become law.

Putting the Green in Green Shoots

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

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

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

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

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

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

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

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

Envisioning the Future of the Auto Industry

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

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

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

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

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

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

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

To register for this event, click here.

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

Please join me for this important and exciting discussion.

 

More Inconvenient Truths

Yesterday, the Obama Administration released a long awaited, definitive government report on the impact of climate change on the United States by region, economic sector and social outcome.  In what might be called an American version of the Stern report, prepared by 13 government agencies, it confirms the large existing body of scientific work on the reality of climate change and then specifically charts the impact on the United States today and far into the future.

Significantly, it argues that climate change has already impacted the US through heavy downpours, rising temperatures and sea levels, thawing permafrost, earlier snowmelt and alterations in river flows.  And change will accelerate in years to come.  Indeed, the report underscores that much of the impact of climate change will be via water.  In some areas, increased precipitation will stress water management resources, leading to flooding.  In others, it will lead to drought.  Changing water paterns will impact agriculture, coastal regions and public health.

If this report cannot drive home the point that the cost of climate change is far greater than the cost of a cap and market regime to address it, nothing may.  The real threat of climate change is that its mechanism for wreaking havoc is so broad: rain, rising rivers, drought and other changes in our overall habitat can seem too diffuse to pin on one cause.  This report shows that there is a cause, however, and it is greenhouse gases.

As the House prepares to debate the American Clean Energy and Security Act (ACES) next week it would do well recognize that the problems of climate change do indeed transcend regional or parochial boundaries and only the political courage to see the big picture, will enable America and the world to take the steps needed to solve this complex problem.

 

Passing Climate Change This Year

As I have been writing, the time has never been better to pass a climate change bill and if action does not take place this year, the prospects for passage are likely to decline.  Recognizing the threat of a bill passing, opponents have pulled out all the stops, while supporters are making a full court press to gain passage.  With a critical vote in the House coming as early next week, the stakes could not be higher.

Against this backdrop, yesterday, Al Gore's Alliance for Climate Protection released a new ad as part of its Repower America campaign to help rally support for the bill.

The ad shows a farmer talking about the need to do something about dependence on foreign oil.  He has a point.  It was President Nixon who first began to rail about dependence on foreign oil.  In the 40 years since, the problem has only grown worse.  And, of course, we now have to contend as well with the even more serious threat of global climate change. 

Here's the ad:

Ford and the American Carbon Consumer

Last week I attended a conference at the University of Michigan for college and graduate students from a variety of backgrounds to address energy sustainability through field trips, lectures, and debates.  The take-home message was that accelerating world population and living standards is creating enormous pressure on the global energy system, which exacerbates climate change, international conflict, and economic strain.  The only clear long-run solution is a transformational shift in energy use and technology.

Despite some of the fascinating technologies of the future that I saw throughout the conference - including a car powered by fuel cells, a solar cell lab, and cutting-edge green architecture - I was most impressed by my visit to a facility dating back to 1928:  The Ford Motor Company's River Rouge plant outside Detroit.  One might wonder why I, as someone deeply concerned with energy sustainability, was captivated by this colossal factory which contributes towards the million gas-guzzling Ford F150 pickup trucks sold each year.

Seeing the River Rouge factory brought the industrial concept of "efficiency" to life almost a century after Henry Ford invented the modern assembly line.  Doors and truck beds floated by on mechanical tracks along the ceiling, while trains of moving platforms carried truck cabs along the floor so that workers could easily hop on and off to install sunroofs, floor boards, and the like.  My guide pointed to the number "243" on a large screen: "See that?  That is how many trucks have been manufactured since 6 AM."  Looking at my watch, that was approaching one truck every minute.

I see Ford's state-of-the-art industrial processes as an opportunity.  Create similar plants for wind turbines and solar cells, and the price of renewables will become competitive.  Do the same for electric cars and meters for the Smart Grid, and we're talking about an energy revolution.  The key is to drive consumer behavior.  People demand Ford trucks (many of them, in fact), and decades of engineering breakthroughs have allowed Ford to provide these trucks at high quality and low price.  Change consumer behavior by creating a price on carbon, and Ford will respond.

There is an important distinction.  While regulating producer behavior has more limited effects (e.g. CAFE standards narrowly promote fuel efficiency), stimulating shifts in consumer behavior spurs comprehensive and outside-the-box changes by producers.  How might Ford react to consumers demanding low-carbon products?  Providing more hybrids is an obvious option, but imagine if Ford identified more profitable uses for its high-efficiency factories given rising demand for renewable energy.  By converting its plants, Ford could mass-produce the Model T of wind turbines.  Additionally, a carbon cost would have a considerable impact on Ford's energy-intensive industrial processes, leading Ford engineers to come up with new breakthroughs, this time in energy efficiency.

Ford is already responding to changing consumer behavior.  In my tour, Ford marketing people showed off the major renovation of the River Rouge factory to improve its environmental impact, which includes one of the largest green roofs in the world and fuel cells that use toxic paint emissions to create electricity.  A PR move?  Definitely.  But, if consumers care, Ford will do it - and at River Rouge, it's to the tune of $2 billion.

With all the political debate surrounding the climate change bill, it's easy to forget the simplicity of the underlying problem:  While no one pays to emit carbon, everybody will suffer the consequences.  Whether through a tax or a cap, put a price on carbon because consumers will react, and no force compares to the speed and power of American-style consumerism.  Industry, technology, and a complete transformation of the energy system will follow the money - just ask Henry Ford.

Seizing The Smart Grid Opportunity

New York City -- The stock market's sigh of relief yesterday following GM's bankruptcy -- vastly improved at the last minute by a deal with bondholders to permit a pre-packaged filing -- provides yet another indication that the economy may finally be on the mend. Green shoots have been increasingly evident in the technology world with the successful IPO of OpenTable.com in the last week which experienced a pop reminiscent of the dot com boom, a $200 million round of financing for Facebook from a Russian mogul and the decision of Daimler Benz to take a 10% stake in Tesla, maker of the sleek, all-electric Tesla sports car.

Within the technology world, clean technology is now the third largest category of investment after life sciences and software, and according to some of the most savvy investors in Silicon Valley, the hottest category. It is the newest large sector and therefore, presumptively, the one with the greatest promise. The Obama Administration heeded this wisdom in including about $40 billion of money to modernize the grid in the ARRA bill as I and others have advocated. Improving the grid is not only vital to the deployment of renewables but also promises to reinvent the electricity industry itself. Given all the money flooding into smart grid investments and the grid generally, an interesting question at this juncture, therefore, is with the economy looking better, just how are utilities and technology companies in the clean energy sector faring?  The answer is mixed.
 
According to Marketwatch.com, which recently surveyed the sub-sector, utility shares are actually down 9.4% this year (in contrast to the broader market which is roughly even). Small and mid-cap firms have done better. But, it turns out that most of the government money slated for grid investments is still awaiting deployment. The reasons are varied but should not surprise anyone familiar with the pace of government and the regulated nature of the energy sector. Tesla, as one example, has been waiting for years to tap Department of Energy loan guarantees included in the 2007 Energy Act to build a cheaper, sedan version of its electric car. The DOE has yet to release any loans under the program due to back and forth between it and the Office of Management and Budget over rules. DOE Secretary Chu has made accelerating the availability of this money a key priority but even he has to wait for the wheels of government to turn.
 
The impact of the other key piece of the stimulus package, tax incentives, has yet to be felt on a large scale because rules and regs are still being developed and companies do not yet fully know how incentives relate to older rules on depreciation of assets. Smart grid projects, in particular a grant program at DOE for smart grid technology deployment, are at the center of the Administration's clean infrastructure policy. However, before most utilities are comfortable making large investments in the smart grid, they first need clarification on standards. The reason? Investing in the wrong standard can make an investment instantly obsolete.
 
Standards normally evolve gradually over a long time even in the computer world. To solve the standards issue, Secretaries Chu and Locke have begun a full court press to accelerate agreement among utilities, equipment makers and builders of software. At NDN, we have been making the case that smart grid standards should be as open as possible. Only by opening up the playing field to as many players as possible can we secure the maximum level of innovation. And innovation is what is needed to solve America and the world's energy and climate challenges.
 
Clean energy technologies clearly have the potential to be a huge engine of economic growth in coming years and decades. However, for clean technology to make good on that promise and justify the President's faith and commitments, we need to move at the speed of technology.
 
Two things can help America make good on the clean energy opportunity. First, standards that open up the grid to many players and allow people -- including producers of renewables and ancillary services -- to enter the market easily without having to wade through government red tape or regulation will go a long way to
accelerate innovation and the ensuing economic activity. In other words, set the standard and then let the parties innovate and compete. Open standards are particularly important in an industry as regulated and traditionally sleepy as that of electric power if we are to turn it into a field of innovation.
 
Second, it is time to re-examine the extraordinarily complex structure of electricity regulation itself.  Regulation should be as streamlined and efficient as is consistent with safety and security. Markets should be employed where practical to place everyone on an equal footing. The work of electricity reform begun in the 1990s remains unfinished.
 
These may seem like immense challenges. But ultimately, if we are to capture this economic opportunity, we need to create rules and systems to allow innovation to flourish. I am confident that America will.

Russian Affairs

As GM prepares to file for bankruptcy in the wake of rejection by bondholders of a tender offer for their $28 billion in outstanding debt, the strongest bidder to emerge for its large European assets is Magna, a Canadian firm, backed by the Russian bank Sberbank and GAZ, a Russian carmaker controlled by Prime Minister Vladimir Putin.

This news comes on the heels of a deal announced yesterday for a Russian firm to take a $200 million stake in Facebook.  Facebook founder Mark Zuckerberg indicated he accepted the Russian money because it came with a higher valuation than money offered by potential investors closer to home.  Facebook has previously taken money from investors in China (besides a high profile deal with Microsoft) making its funding base more international than most Internet companies.

The sudden appearance of two high profile Russian deals could just be a coincidence.  Or it could signal that Russia is looking to diversify away from natural resources which Prime Minister Putin had made a centerpiece of his economic strategy.  It does, however, raise provocative questions about the interrelationship between strategic and economic goals in a global economy.  Will Facebook's Russian investors have access to the data of Facebooks' millions of participants?  What role will Gaz play in determining Opel's future?  Less than a decade ago, US companies were not allowed to export strong encryption technology to Russia and many other countries.  Ideally, these sorts of deals will draw Russia more into the global economy; however, the scenario more troubling to contemplate is that security may trump economics and these deals will give Russia political leverage on economic matters.

The GM deal is notable, not only because of the Russian connection but also because it demonstrates that at best, the GM that emerges from bankruptcy will be far smaller than the one today.  Although not immune to the global downturn GM's European operations have long been among the company's most successful.  In addition, Opel has handled most of the engineering for GM's mid-size and compact cars, precisely the cars that the government says GM should now make more of.  Without Opel, GM will have to move its design and engineering operations for small and mid-sized cars to Detroit or Korea, potentially good news for laid off engineers in Michigan but problematic for the company's bottom line.  Indeed, the loss of its small car engineering capability if Opel is sold separately underscores the difficulty of trying to divide up a company as vertically and horizontally integrated as GM into good an bad pieces.  GM, like all the major automakers, derived its economies of scale precisely from sourcing and sharing its engineering and other components globally.  A smaller GM will potentially have to allocate these engineering costs against fewer revenues,

I was an advocate of trying to avert bankruptcy, however, the die appears to be cast.  Let us hope that the GM bankrupcy moves rapidly enough, while equitably addressing the rights of all stakeholders, to emerge in reasonably good condition on the other end.  

Syndicate content