Energy Prices

New York City--The indication over the weekend from Carol Browner that the EPA plans to move forward on regulating greenhouse gases, though not unexpected, provides indication that we are likely to see real action on climate change this year.  The possibility of EPA regulation of CO2 emissions makes a cap and trade system look like the more appealing alternative.  Thus, despite the conventional wisdom that you cannot impose taxes or new costs on business during a recession, it is increasingly looking like we will see action on climate change in time for the US to have a meaningful position and thus play a leadership role in Copenhagen.

Obviously as far as the climate is concerned, this is good news.  However, as far as the declining economy is concerned it may not be bad news either for several reasons.  First, stability and clarity with respect to the pricing and potential regulation of carbon is an improvement over uncertainty since it lets companies plan ahead.  Companies that make carbon reduction technologies, alternative energy companies, and companies exploring clean coal, will have clear rules if action moves forward.  And even utilities and heavy industry will benefit from clarity as opposed to uncertainty.  Done right, the higher cost of some energy that will result from pricing carbon will be largely recaptured by the government through auctions in a cap and trade system or taxes in a carbon tax regime.  In the current atmosphere of huge deficits and economic uncertainty, the resolution of regulatory uncertainty combined with a potential revenue source may offset the economic effects of higher energy prices.

Moreover, at this critical point in economic history, there is another reason that meaningful action and leadership by the United States is welcome.  At this critical juncture, global cooperation is paramount to managing the economic crisis. The global economy has survived and even thrived cleaning up the environment.  It has not survived the breakdown of global cooperation on key issues.  When the history of the current crisis is written, the breakdown of global cooperation earlier in the decade--due to the go-it-alone philosophy of the Bush Administration--will be assigned a part.  On the other hand, successful cooperation leading up to Copenhagen and beyond, by restoring global trust, can be part of the solution.

And of course there is the inconvenient issue of the climate.  The indication that the Administration and Congress are moving forward on climate change is thus good news.

New York City -- The recovery bill that President Barack Obama will sign today, on schedule and less than one month into his presidency, is an important milestone in the effort to get America's economy back on track. Coming on the heels of tough economic news around the world last week, it is a welcome positive development. Its green initiatives, many of which began as NDN proposals suggested to the Obama team last year, include credits for solar and wind energy, money to green the federal government, smart meters, and other investments in our future. All of these are good things that pave the way for future prosperity.

But to make the most of this stimulus, President Obama has to keep our eyes focused on the bill's benefits and our future. A piece by Ahmar Bhidhe in today's Wall Street Journal, points out that a key element of the bill is how it is presented and, in turn, perceived by the public. The money will begin trickling out immediately but will not show up in a big way in the economy for some time. Much of the bill's initial impact will therefore rest on its "signaling" effect, as game theorists say. In other words, what it says to people about what our leaders believe about the future and are committed to do. 

The President has an opportunity to shape this signaling effect later today. If he emphasizes the dark clouds -- in effect amplifying the criticism of the bill from his opponents -- he may reduce the signaling effect. On the other hand, if he emphasizes hope and possibility --assuring Americans about our future, he will maximize the bill's positive economic impact.

History shows that many slumps have served to incubate new ideas that then bear fruit when the slump is over. This was certainly true in the 1970s, when entrepreneurs like Jobs, Wozniak, Gates and Allen, ignoring high gas prices, low stock prices and stagflation, were working away in their garages on revolutionary new technologies. It was true in the early 1980s when Ronald Reagan's optimism stirred enthusiasm about entrepreneurship, whatever one thinks of Reagan's social policies. And just last week, Twitter raised money for its software, while a host of clean technology companies will use money from the recovery bill to invent game-changing technologies to build the clean economy of the future.

However, the President's opponents have unleashed a withering barrage of attacks on the recovery bill. And economic news has plenty to suggest hunkering down. When President Obama signs the bill in Denver -- a location chosen to highlight the clean technology elements of the bill -- he will do well to talk about the potential of the future, rather than give credence to the naysayers.

New York City -- A little over six months ago, I proposed to the economic team within the Obama campaign and, subsequently, to the world at large, a green stimulus bill that would stimulate the economy in the short term, but also work for the long term to include tax credits and money for renewable energy, weatherization, mass transit, retrofitting buildings and building workforce housing. All of these proposals and more passed an important milestone yesterday on their way into becoming law with the House passage of what has become an $820 billion bill solidly weighted toward green investments. We are very happy to see the President and Congress working to create the foundation for a low-carbon future, independence from foreign oil and the next great wave of economic growth. The action now moves to the Senate where we expect these proposals will be incorporated into similar legislation.

At the same time, however, the nature of the stimulus bill process, in particular, the need to move the money out quickly through previously authorized law, means that this bill represents, as the President has said, only a downpayment on needed investments. It does not, nor could it, given the short time frame, create all the new investments that will be needed to bring the American economy fully into the 21st century.  More work is needed to reform our funding process, for example, and update regulation to make the long-term investments in clean infrastructure needed to update our infrastructure for a more productive 21st century.

Nonetheless, the action by the House represents an important milestone.  We are hopeful the Senate will move rapidly in due course to pass similar legislation that meets the President's goal of signing the American Recovery and Reinvestment Act into law in the next few weeks.

Within one week of taking office, President Obama has dispelled any doubts on whether he’s serious about tackling climate change. His stimulus plan will direct greater tax and spending subsidies to climate-friendly technologies and fuels over the next 18 months than the Bush administration did over the last eight years, and the federal government will offer itself as a model by bringing federal facilities up to the “Gold Leeds” energy-efficiency standard. Moreover, his EPA will let states that as yet are politically more climate-sensitive than Washington, including California and a dozen others, set more stringent CO2 emissions standards than the federal versions. And other climate-friendly laws and regulations are on their way, including higher federal fuel-efficiency standards for automobiles and trucks.

Sound as these steps generally are, they leave undone the hard work that climate scientists agree must be done – namely, to put in place a policy to embed the cost of carbon in the price of everything our businesses and households use, especially that electrical power which mostly still depends on the most carbon-intensive fuel we have, coal. And there’s a good reason why President Obama isn’t starting with this step, even though it’s the most important one: Making people pay more for carbon-intensive energy and the products and services produced with it means that, well, people have to pay more – and people don’t like that, especially in very hard economic times. And the inconvenient truth is, those are only the beginning of the costs to contain climate change, since retrofitting our factories, offices, homes and our power systems for less carbon-intensive and energy-intensive technologies and materials will cost everyone, well, a lot more than the stimulus package. To his credit, President Obama corrected one of his rivals for the nomination who tried to claim that we could beat climate change at little cost. And there is some other good news here: The costs to redo our lives around more climate-friendly fuels and technologies can be spread over two generations – and paying those costs will save much of planet for our grandchildren.

The current hard economic times hopefully will focus more of the climate change debate on how to contain those costs, both the direct costs to people and businesses and the indirect ones through the larger effects of these policies on the economy. And if we don’t figure that out, any systemic reform that doesn’t contain those costs may not survive long enough to make a difference. Here is where a real divide opens between the two main options for embedding the price of carbon, a cap-and-trade system and carbon-based taxes. On the direct costs, a tax-based system has the advantage: You can tax energy based on its carbon content, and then turn around and return the revenues to everybody through payroll tax cuts or simple disbursement to every household. Cap and trade could do something of the same thing by auctioning off its permits to generate greenhouse gases and then using those proceeds for tax cuts. But so far, every cap-and-trade plan either gives away its permits (businesses wouldn’t have it any other way) or uses the auction revenues to pay for other climate-friendly initiatives. In either case, cap-and-trade leaves everyone’s incomes lower, a pretty nasty outcome for most of us.

Another inconvenient truth here is that carbon-based taxes also have the advantage on indirect costs. The great asset of cap and trade is that it applies an actual cap to CO2 emissions. But whenever demand for the energy that produces those emissions is greater than had been expected when the cap was set – for example, because the summer is hotter than expected, the winter is colder, or the economy grows faster than anticipated – demand will hit the cap, and prices will spike for both the permits and the energy that underlies them. Adding a new layer of national price volatility in energy prices, on top of what we already have to bear from international forces, would be another nasty outcome.

Carbon-based taxes have their own problems. They don’t involve a set, annual cap on greenhouse gases, so keeping us on a safe emissions path would probably entail adjusting the level of the tax on a pretty regular basis. And the prospect of enacting a large, new tax and then choosing what offsetting taxes to cut could itself easily turn into a nasty piece of political business. It’s no wonder that President Obama isn’t eager to referee this fight. Of course, the public’s faith that of all of our national leaders, he alone is best equipped to drive and guide our responses to daunting challenges is also the main reason he’s the president today.

President-elect Barack Obama today announced his energy policy team (excluding the Secretary of Transportation, who will play a huge role in energy policy and Secretary of the Interior, who will oversee many environmental issues). Obama has signaled his strong desire to create a coherent energy policy and tackle climate change by creating a White House position (Assistant to the President for Energy and Climate Change) tasked with coordinating this portfolio.

From the transition's press release:

President-Elect Barack Obama Announces Key Members of Energy and Environment Team

CHICAGO – Today, President-elect Barack Obama announced key members of his energy and environment team, including Dr. Steven Chu, Secretary of Energy; Lisa Jackson, Environmental Protection Agency (EPA) Administrator; Nancy Sutley, Chair of the White House Council on Environmental Quality (CEQ); Carol Browner, Assistant to the President for Energy and Climate Change; and Heather Zichal, Deputy Assistant to the President for Energy and Climate Change.

President-elect Obama said, "In the 21st century, we know that the future of our economy and national security is inextricably linked to one challenge: energy.  The team that I have assembled here today is uniquely suited to meet the great challenges of this defining moment. They are leading experts and accomplished managers, and they are ready to reform government and help transform our economy so that our people are more prosperous, our nation is more secure, and our planet is protected. I look forward to working with them in the years ahead."

New York City - Watching the spectacle of auto CEOs seeking aid on Capital Hill, it is interesting to contrast their reception with that of their better heeled Wall Street counterparts.  Though--or perhaps because the auto guys--compared by the New York Post this morning to Moe, Larry and Curley--are the poor men among recent corporate CEOs seeking money, they have been treated far more contemptuously.  They have had to travel hat in hand to Washington.  In contrast, bankers for the most part have stayed in New York, while the G -men, like borrowers calling on the Morgan Bank in days of yore, have made the trip to see them.  Many Americans cannot resist gloating over the plight of the auto CEOs.  Indeed the headline of today's Post was Rust in Peace.

Are people really more angry about their cars breaking down and high paid auto workers than about 30% interest on credit cards, bait and switch mortgages and fee-based banking?  I don't think so.  Reflecting on the different treatment, I think the answer is that neither group has sympathy among the public but bankers have sympathy among those in power.  This has spared them the humiliating treatment of publicly asking for money at hearing after hearing.

Outside of Detroit, hardly anyone in government even knows a car guy.  In contrast, bankers and financiers are densely intertwined with the political class in Washington.  Washington routinely taps people from the financial industry to work in government and countless Schedule C employees not to mention cabinet officials go to Wall Street upon leaving government.  Most policy wonks know dozens of people in the financial sector.  There lies the difference in how the two sectors, both suffering in the current downturn, have been received.  (There also lies the risk of crony capitalism.)

It also helps the financial sector that a large group of government organizations, from Treasury to the SEC to the Fed to the CFTC are devoted to its well being.  The auto industry though regulated with respect to safety and emissions has no similar agencies with a stake in its ongoing health.

However, if policy makers were to put aside the cultural and career affinity they may have for finance as opposed to manufacturing, they would find that the auto industry is every bit as important to America's future.

Finance is a great way to make money.  However, you don't have to believe with Kevin Phillips that finance becomes an outsized part of countries in decline to acknowledge that financial business gravitates to sectors and regions that are putting money to productive use.  Strong industry in a country makes for strong financial opportunities.  Silicon valley was a driver of Wall Street wealth building in the 1990s.  American firms, not British or Japanese ones, took most of the business. 

However in the last decade, as the center of productive uses for capital has moved to China, US financial institutions have had to chase business there and eventually, they will find themselves outmaneuvered by Chinese banks.   And markets recognize this fact.  If the Big Three go under, the stock market and US financials may decline in value as well.   The irony is that if that happens, the financials stand a good chance of getting more billions from TARP or the FED.  The result in that scenario would be that we lost not only the money but the car companies, too.  It makes more sense to put together a real plan to get our auto industry back on track.  

New York City - Clean infrastructure stimulus is coming and it is coming fast, perhaps as soon as January 20th, given the new accelerated timetable of President Elect Obama and the Congressional leadership.  For us at NDN, this is an exciting moment, as we have been advocating on behalf of a large green stimulus package that works for the long term as well as the short term for quite some time.

Clean infrastructure stimulus has the ability not only to create jobs in the near term -- particularly in sectors and regions hard hit by the now official recession, the manufacturing belt and the construction industry -- but also to create the clean, modernized physical plant and infrastructure that America needs to ensure our future prosperity.

However, how the stimulus is structured and carried out is as critical as the dollar amount.  On Tuesday, the nation's governors presented President Elect Obama with a list of $176 billion in infrastructure projects ready to go.  However, to get the money out onto the street quickly, moving it through the usual government channels won't work.  Rather, we need to create a new process and structure to get the money out quickly and efficiently.

Dick Ravitch, the former New York City MTA Chairman and head of New York Governor Paterson's new infrastructure commission, knows more about how federal funds flow to the states under ordinary circumstances than most.  Funds normally move slowly.  He argues this is no time for business as usual and his recommendation, an emergency infrastructure board, well supervised, with proper auditing controls and carefully monitored by Congress, is critical to getting funds flowing and jobs starting quickly. 

Rather than allocate money to agencies, Congress should authorize a board to fund valid projects.  Infrastructure projects that get funded should be ones teed up and ready to go with all their zoning and permitting in place so that the only thing missing is funding.  This is a far better way to move the funds out quickly than the usual funding channels that generally go through the Department of Transportation.  At the same time, money should be allocated according to sound, consistent principles to ensure orderly dispensation of funds.  The interests of the people can be adequately addressed by states identifying those that are high priority.

Projects with a green advantage such as public transportation projects, projects that employ green building, water projects and others that move us toward a low carbon economy should go to the head of the line.

As excited as we at NDN are about the speed with which green stimulus is now moving forward, moving money out quickly but also responsibly is vital to making this historic stimulus work.  If the money is spent wastefully, or perceived as being spent wastefully according to political expediency, it will not only be a tragic missed opportunity but also reduce its impact and undermine market confidence. 

Indeed, just yesterday, China's sovereign wealth fund announced it would no longer invest in American banks because of the erratic changes in US policy.  I wrote recently about the problem with the Treasury managing the bailout fund like a hedge fund.  What we need is structure and consistency but a streamlined process to move money out onto the street where it is needed quickly and effectively.

At the same time, we cannot let red tape or ordinary bureaucratic lethargy slow funding when a key purpose of stimulus is to get the money out quickly to create jobs and get the economy moving again.

We don't have that much time to get this right, but we do have a great deal of will as we face up to the severe economic challenges facing the country. An emergency board with emergency powers but also the proper rules in force to guarantee the judicious but expeditious spending of the tax payer's money is a good idea that the incoming Administration and Congress should embrace.

Following are links to some of NDN's work on a clean infrastructure stimulus:

A Vision for a Modernized Electric Grid: Clean Infrastructure for a 21st Century Economy

Understanding the Cleantech Investment Opportunity

A Stimulus for the Long Run

Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure

Solar Energy: The Case for Action

Investing in Our Common Future: U.S. Infrastructure

President Elect Obama's comments at the press conference yesterday announcing Peter Orszag as head of OMB, following his announcement on Monday of other key economic appointments – Tim Geithner as Secretary of the Treasury, Larry Summers as director of the NEC and Christina Romer as head of the CEA – illustrates the tightrope that the new Administration will have to walk in addressing the economic crisis.

On the one hand, on Monday the President Elect highlighted the immense economic challenges facing the country that will require a stimulus package that Larry Summers has said "must be speedy, substantial and sustained."  On the other, however, it is important that the stimulus not be perceived as wasteful spending.  And thus it was appropriate for President Elect Obama to highlight his cost cutting challenge to Orszag, namely to eliminate waste from the federal budget.

By it very nature, a rapidly implemented stimulus cannot be as focused as ordinary elective spending.  To accomplish its goal, the stimulus must be broad, get the money out on the street quickly, and be large enough to do its job.  However, if the money is perceived as being dropped from a helicopter (in the metaphor popularized by Fed Chairman Bernanke), it may undermine faith in the government and hence confidence in markets.

As the stimulus package is developed and released, all eyes will be on whether it appears to be thoughtful or wasteful of the public's money.  President Elect Obama's comments yesterday were thus encouraging in suggesting he recognizes this requirement and that his team will work to ensure that the stimulus meets this crucial test.

As we at NDN have argued, investments in infrastructure not only have a short lead time in getting money where it is needed, they also are not wasteful because they will continue to pay dividends for years to come.  We need new, up to date roads, bridges, rail lines, water mains, fiber and power lines to undergird our future prosperity.  However, as we have also argued, a key part of infrastructure investments being up to date is that they acknowledge our energy and environmental challenges.  Retrofitting older buildings, requiring that every new government facility meet green standards and making transportation investments based on their energy and environmental implications is investing in the future. 

Placing a gigawatt of renewable solar power on government buildings over the next 5 years, for example, is not only desirable but is also cost effective.  Investing in our electricity grid can not only create jobs today but stimulate the economy down the road.  And funding a clean infrastructure bank to make energy smart infrastructure investments will not just stimulate the economy but raise productivity in the future.

In short, energy and environmentally smart represents a responsible use of the public's money.  And making these sorts of investments is one way to meet the challenge of stimulating the economy responsibly.  In coming weeks, we look forward to working with the Administration's new team, Congress, and stakeholders on a stimulus package that addresses both our short and long term economic challenges.

New York City - Should the federal government build or incent others to build a new electron superhighway? In other words, a backbone for a 21st century electrical grid?  At NDN's recent event on clean infrastructure, U.S. Rep. Jay Inslee asked precisely that question and it's one more and more energy leaders are asking.  

Our current grid, as former CIA Director Jim Woolsey has noted, resembles nothing so much as the road system before interstates were built. Had President Eisenhower not built the interstate system after observing the autobahns in Germany and fretting over the difficulty of moving an army from one end of America to the other, our roads would be a network of streets, shopping boulevards and country roads, slowed by trucks as well as tolls.  There would be no easy way to travel between one large city and another and trade and distribution of goods would be drastically hampered.  

This is precisely the situation we have today in the world of electricity, where mid-20th century wires are now tasked with carrying 21st century loads and tolls are collected by dozens of utilities along the way. As a result, instead of a national market in electricity, we have a balkanized patchwork of local fiefdoms each with vastly different prices. Electricity producers face obstacles in moving their electrons to market -- hardly an ideal solution.

How would an electron superhighway work? One proposal by the Energy Department would build major high voltage (765KV) trunk lines traveling East to West and North to South, particularly in the underserved center of the country. Like Interstates 10, 40, 80 and 90 which link the East and West and Interstates 5, 55 and 95 (as well as those in between) which link the North and South, these large roads would facilitate long distance movement of power.  Relieved of this burden, utilities could focus their resources on localized distribution. While the proposal might cost $60 billion to $100 billion (a weekend's worth of bailout money), the long-term benefits would be tremendous. In fact, the proposal could be financed through a miniscule tax of less than a penny on the average monthly utility bill.

A particularly interesting approach to building an electron superhighway would be to run the cables underground. No one wants a high voltage transmission line running anywhere near their home, leading to complex obstacles to siting new lines. Additionally, underground lines are far more expensive than overhead ones and it is harder to identify problems when they occur. However, new superconducting wire (eliminating almost all the resistance in a wire by cooling it down using liquid nitrogen) that can be laid in a three-foot trench and is already being implemented in Long Island could be run underneath bike paths, along roads and in other unobtrusive places. While this technology, proven in pilot projects and now being tested at scale is new, it could revolutionize long-distance power transmission.

The interstate highway system is not the only model for moving goods. The Internet backbone, though jumpstarted by federal investment, is run privately for profit. Similarly, private companies own the long distance natural gas pipes. And private companies own the railroads.  

Of these, the Internet system is probably least illustrative because it remains unregulated.  Natural gas is produced at a comparatively limited number of points, simplifying its long distance transportation requirements.  America's rail system, a relic of the 19th century, is probably not a model for a ubiquitous electricity network.

It may be that federal ownership is not necessary. However, a national tax on electricity would certainly be easier to implement than hundreds of individual rate cases -- the traditional method for funding investment. Important obstacles to greater federal involvement in electricity remain, however, in the form of state regulators and some utilities that have traditionally opposed a larger federal role.

As America confronts its 21st century challenges, in particular, developing a grid that can facilitate a national electricity market and also accommodate decentralized generation of renewable power, the idea of an electron superhighway merits serious attention. At a very minimum, work should accelerate on how to implement an electricity backbone. As FERC Commissioner Jon Wellinghoff, quoting Albert Einstein, remarked at NDN's clean infrastructure event, "physics is easy, politics is hard."

NDN is proud to host the Honorable Luis Alberto Moreno, President of the Inter-American Development Bank and former Ambassador of Colombia to the United States, to discuss "The Current Economic Crisis and Its Impact on Latin America." This briefing will take place on Thursday, December 11, at 3 p.m. at NDN, 729 15th St., NW, 1st Floor.

Please RSVP as soon as possible. The event is open, but space is limited. Refreshments will be served. Please visit our Web site to view past events with the Ambassadors of Mexico, Colombia, Ecuador, and the Vice President of Panama.