Climate Change

Acting in Time on Climate Change

One of the things that has struck me more than anything else in directing the NDN Green Project over the last year and a half is how events have so often outstripped policy.  Last year when oil prices were spiking, contributing to the economic crisis that erupted in the fall and probably adding to uncertainty in the auto market that caused sales to collapse when the financial crisis struck, Congress debated a host of measures to check commodity index speculation, change drilling policy and accelerate the rollout of alternative fuels.  None came to fruition in anything close to a timely manner.  Indeed, with the exception of the American Recovery and Reinvestment Act that moved on a fast truck only because of the dire shape of the economy, Congress has rarely been able to act in time. 

Acting In Time happens to be the theme of a series of conferences, papers and thinking emerging from Harvard's Kennedy School of Government.  Dean David Elwood who served in the Clinton Administration coined the term to describe the difficulty of acting in time given the rapid pace of change in the 21st Century and the all too 20th Century pace of government.  Acting in Time on Energy Policy is also the title of a new book published by Brookings Press released today that distills the work of Harvard scholars on energy policy and tries to answer the question of how can the pace of policy action be accelerated to match that of the 21st Century.

The book contains a variety of presicent articles by experts on their respective topics, all with deep practical knowledge and experience in developing policy that works.  Thus, William Hogan, a key architect of those approaches to deregulation that have worked, discusses electricity policy reform, Daniel Shrag discusses the critical issue of carbon capture and sequestration, John Holdren, the President's new science adivsor, together with Laura Anadon discusses how to accelerate innovation in the energy field where the US has fall far behind other countries, Henry Lee writes about oil security, Max Braverman about the question of acting in time in general and Kelly Gallagher, the editor of the volume, discusses the critical issues of how to Act in Time on climate change.

The latter question is especially vital and time sensitive.  Scientists indicate that there is a large direct cost in terms of emissions and higher temperatures to delaying action even one or two years.  However, the political cost may be even higher.  As I have written, conditions have never been more auspicious for action on climate change than they are this year with a new Democratic president in office who has made energy policy a priority, strong Democratic majorities in the House and Senate and Copenhagen looming as a deadline.  If Congress fails to act this year, the prospect for action will dim.  As Holdren, Gallagher and others argue, trying to create the perfect legislative fix must not stand in the way of acting in a timely manner.

This week The House Energy and Commerce Committee also began markup of climate change legislation introduced by Chairman Henry Waxman, Chairman Ed Markey and others.  The back and forth at the hearings has been forceful, indicating the seriousness of what is at stake and also indicating that there is a better than even chance that the House will do its part to move this historic legislation. 

As Congress and stakeholders debate the issue, they will do well to remember what Ellwood has identified as the importance of Acting in Time on an issue that effects the health of the planet.

There are far too many examples of failing to act.   On the other hand, every now and then Congress gets together and does something historic.  Right now, the stars could not be more in alignment.

Fuel Economy in Context

The decision of the Obama Administration to embrace stronger fuel economy standards by 2016 is drawing praise from environmentalists but fire from auto analysts who say it will add to Detroit's woes.  The decision to accelerate fuel economy comes on top of a variety of policy proposals to address climate change, the auto industry and transportation including the cap and market bill that was the subject of House hearings yesterday, the deliberations of the Auto Task Force over GM's fate, replenishing the Highway Trust Fund and a proposal to offer clash for clunkers also in legislation working its way through Congress.  Here are my thoughts how higher fuel economy standards fit into the bigger picture.

First, fuel economy standards are among the least precise tools for addressing climate change.  The reason?  Fuel economy is the mathematical equivalent of lower gas prices insofar as its allow consumers to drive more for less.  While it is therefore good for motorists' pocket books, its impact on emissions is ambiguous.  If you believe that people drive a certain amount each day and never vary that amount--then higher fuel economy translates directly to lower emissions.  However, if you believe that people drive more when gas costs less in other words that gas usage is price elastic--then higher fuel economy leaves more money in your pocket but does little to reduce emissions.  Last year's falloff in driving when oil prices spiked (as well as numerous studies) suggests that gas use is price elastic. As a result, the primary impact of higher fuel economy is likely to be what economists call an improvement in consumer welfare but not a large reduction in gas emissions. 

Second, higher fuel economy--by lowering the cost of driving a mile--also runs counter to the idea of making carbon more expensive--the idea behind carbon tax proposals and the cap and market legislation debated yesterday.

Third, fuel economy standards like gas prices are likely to impact the quantity of gasoline consumed.  In fact that is the goal.  To the degree they lead to less gas consumption, they lead to fewer gas taxes collected.  Since the Highway Trust Fund which finances not only roads but a large share of mass transit in America relies on gas taxes, higher fuel economy standards may reduce money available for transportation.  Later this year, Congress will try to fix the finances of the Highway Trust Fund.  But we should be mindful that improving fuel economy cuts in the opposite direction of two other policy ideas: making carbon more expensive and replenishing infrastructure funds.

Finally, there is the cost to the auto industry of making cars more fuel efficient.  The Auto Task Force has adopted fuel economy as an unofficial goal and suggested Chrysler and GM need to improve fuel economy as a condition of survival.  However, there is no link between fuel efficiency and profitability and, if anything, the correlation is negative.  Large cars remain a requirement for families and Americans simply like them.  Indeed, a Chevy Suburban with five in it is far more fuel efficient than a Prius with one person in it.  Cash constrained Americans--the lower three fifths of our beleaguered consumers--also prefer to pay less up front even if they have to pay more for fuel later on.  This is a question of their internal discount rate and cost of capital--which in the case of the poor is very high.  Even the New York Times discussing the looming GM bankruptcy yesterday got its logic mixed up on this yesterday when it described the fact that 11 of 20 of GM's best selling cards are gas guzzlers as a problem.  The company's problem is not its money making cars but its money losers.

As I have written before the crisis of the auto industry is due to one thing and one only, the virtual halving of sales volume due to the financial crisis that makes it impossible for anyone, Toyota, Honda, GM or Chrysler, to make money in the United States.  Fuel economy is a largely separate issue.

All this is a long way of saying that the higher fuel economy standards are no magic bullet to the problem of emissions and the real requirement of all the policy suggestions currently floating around is that they work together in alignment.

Here are proposals that are aligned.

The cash for clunkers idea now before Congress that Jack Hidary and others have advocated makes sense because it replaces old, smoky cars with new clean ones and also will generate demand for cars at a time when sales are down.

Pricing carbon through cap and market makes sense because it will attach the costs of emissions directly to their source, carbon. 

Good old gas taxes which are a form of carbon tax make sense as well, since they connect the tax to the carbon.  In contrast, the Vehicle Mileage Tax that some have proposed, even apart from its Orwellian implications for our freedom, would remove any incentive to buy an electric car or plug-in hybrid or, indeed, own a fuel efficient vehicle.

Incentives for electric cars and plug-in hybrids make sense because they move us off gasoline entirely.  Indeed, higher gas mileage is only likely to lead to major reductions in emissions if it hastens a switch to electric vehicles.

All these goals require a healthy auto industry.  If the Auto Task Force can keep GM out of bankruptcy, this would be a good thing, as a drawn out GM bankruptcy could hobble America's clean energy future.

In short, when dealing with issues this complex, it is vital that we get them right and that different policy proposals work together.  While higher fuel economy standards are, on balance, good, they need to be viewed as part of an overall plan to create a clean, healthy and robust American transportation sector.

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.

The Political Challenges We Face to Preserve the Earth

It’s Earth Day as I write this, and the challenges to preserve the Earth as we know it are momentous ones. The biggest and most obvious one is climate change, since it involves the most serious threat. Getting Congress to pass a plan that can reduce greenhouse gas emissions sufficiently to be meaningful will be a very tall order. The biggest political hurdle is that meaningful action on the climate will raise an average American household’s energy costs by some $1,500 per-year (2005 $), including the higher prices they will pay for the oil, gas and electricity they use directly and the effects on the prices of everything else a family consumes. And that doesn’t include the costs of retrofitting the heating, cooling and lighting systems of offices, factories, and homes -- as the Obama administration is now doing with federal buildings, thanks to the stimulus – or converting to low-carbon fuels thousands of utility plants and the grids they use to distribute the electricity.

The political temptation is to reduce these costs by not imposing genuine limits on greenhouse gases. That’s the tacit strategy of the European cap-and-trade program, which has yet to reduce any emissions, and the unspoken appeal of the new Waxman-Markey bill, which has so many “carbon offsets” that excuse businesses from reducing their emissions, that environmental experts figure it won’t cut greenhouse gases at all between now and 2020. If the President wants to get this done and do it right, he needs to drive up those prices – that is, put a high price on carbon – while also giving people the means to absorb those increases. The best way to do that is not cap-and-trade at all, but a carbon-based tax that recycles its revenues in the form of tax relief, such as a payroll tax cut.

The higher price on the carbon content of our energy will move people and businesses towards less-carbon intensive fuels and technologies, but that also won’t be enough. We also will have to develop and deploy entirely new, climate-friendly technologies and fuels, because we probably have less time to contain climate change than we thought. In estimating how much time we have, most people focus on the threat from CO2 concentration: Those concentrations currently are about 370 parts- per-million, with the sustainable range for greenhouse gases falling somewhere between 450 and 550 parts-per-million. But there are other greenhouse gases besides CO2, including methane, nitrous oxide, ozone, and chlorofluorocarbons; and when we convert their atmospheric levels to what’s called, “CO2-equivalents,” we’re already at 415 parts per-million. So, the preserving the Earth is going to require technological breakthroughs on top of carbon-based taxes or cap and trade programs.

For that, we’ll need more support for basic R&D, which the Obama stimulus and budget got right. The challenge will be to sustain and probably increase this support when the goal of the budget turns with a vengeance from stimulus to deficit reduction. The new-technology requirements for climate change come with other strings as well, such as intellectual property rights. We will have to face down China, India, Brazil and a number of other developing nations, which argue that the only way they can afford to shift to less carbon-based and more energy-efficient ways of running their economies is to bring down the price of new technologies and fuels by providing them little or no patent protections. That might sound reasonable, but for the broad and certain economic finding that weakening those protections will mean producing fewer innovations – and without those innovations, we could well lose the better part of the fight to contain climate changes.

Since we also need to persuade those same developing countries to cut their emissions, and in some cases by even more than we will have to cut ours, the administration also will have to figure out how to help them pay for it. One way could be joint ventures to develop and sell these new technologies and fuels, by companies from the U.S. or EU on one side, and, on the other, enterprises in China, India, Brazil, Indonesian, Bangladesh, and other large developing nations. A more direct but also more costly approach would be a global fund set up by the advanced countries to defray some of the cost, for example, of China and India building and operating more nuclear, natural gas, and solar-based power plants, instead the cheaper, coal versions they’re now building. In principle, such a fund would be no different from the $125 billion in funds which we and other advanced economies committed to the IMF at the recent summit, to provide the means needed to stabilize developing economies whose currencies get caught in the riptide of the economic crisis. Selling Congress on that will take all of the President’s skills and a hefty piece of his political capital. Doing it again for climate change will be even harder.

These dynamics all point in the same political direction: Doing our part to contain climate changes will be very costly and consequently very difficult politically. That makes a strong, economic revival here and around the world perhaps the single most important thing the Obama administration can do right now to help preserve the Earth. On that front, as on climate change, the administration has a ways to go: Its programs to revive the financial sector and housing are part-way measures that are not likely to produce the results needed. Fortunately, President Obama appears to be that rare politician who learns from mistakes and is prepared to shift course. Doing just that – on carbon based taxes versus cap-and-trade, as well as these core economic strategies -- could become his most pressing challenge in protecting the Earth.

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.
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