Clean Infrastructure

Climate Change: Next Steps in a Troubled Economy

New York City -- The conventional wisdom is that the financial crisis has claimed yet another casualty in the form of meaningful action in the next year on climate change. According to this argument, putting a price on carbon in a down economy is a non-starter. What's more, collapsing oil prices have taken at least one reason for major action off the table. And lower oil prices, combined with difficulty in getting financing, may take its toll on the entire renewables sector. The argument runs like this: while the presidential candidates are still talking about action on energy, the most likely scenario is for the status quo to continue as the new President and the Congress cope with a recession next year. Today, for example, the Financial Times and the New York Times have articles on the collapse of the biofuels industry.  And even Thomas Friedman writes in his column that he's seen this movie before in the 1900s when lower oil prices led to an abandonment of alternative fuels and the re-addiction to foreign oil.

However, this conventional wisdom is wrong. A downturn does not mean that action on energy efficiency must end or make it more difficult. In fact, the reverse is true. A downturn is more reason than ever to move forward on clean energy investments. Moreover, as long as the climate continues to warm (and last year was the warmest on record), climate change will remain an issue, and this urgency is reflected in the timetable of the Copenhagen process.  Accordingly, the United States not only should, but must, move forward on a whole range of climate and energy related issues.

First, with a recession likely, with interest rates already at low levels and banks impaired in their ability to lend, fiscal policy will have to play a much larger role than in the last few cycles in getting the economy back on track. Any stimulus package, as I have argued and as Friedman endorses today, must have a major green component. That includes support for grid modernization, mass transit, weatherization and green construction. But it also might include a tax credit for the purchase of energy efficient appliances, a tax credit for energy efficient vehicles and, to help the beleaguered American auto industry, as suggested by Jack Hidary and Alan Blinder, a trade-in tax credit to take old gas guzzlers off the road.

Whether or not a stimulus package is accomplished, government needs to create the machinery to retire our energy inefficient infrastructure and replace it with low-carbon infrastrucutre. In this regard, it is vital that Congress move forward on proposals to create a clean infrastructure bank such as those put forward by Senators Dodd and Hagel and the New Democrats with respect to energy.

Second, while oil prices have fallen precipitously, the volatility of gas prices itself is unacceptable for a healthy economy. The long-term trend not only for oil, but for gas, coal and electricity is up. And remember that the OPEC cartel always has the ability to restrain production if prices drop too low.

Third, low energy prices mean that in some ways, it will now be easier to put a price on carbon than it was this summer when the market alone seemed to be raising prices.  A carbon credit or tax regime will quantify the social cost of carbon emissions, improving on signals that vary with the gyrations of the market.

Fourth, Copenhagen is coming in early 2009 and the United States needs to develop a coherent position on how to address climate change before then. The Wall Street Journal recently castigated Jason Grumet for suggesting to Bloomberg Radio that the EPA may, by default, end up regulating carbon. But this very well may happen if Congress does not address the climate issue.

Ambassador Richard Holbrooke recently made an interesting suggestion that the United States should negotiate directly with China to reduce carbon emissions. Together, the two countries account for 60% of the total carbon emissions. Given the high level of complementary interdependency between the United States and China, a bilateral framework may prove more effective than a multilateral one in moving China off its dime. This is an avenue for action that would not require comprehensive cap and trade legislation.

Congress should also move forward on a renewable electricity standard, accelerated depreciation for clean energy investments by corporations and by families

Most importantly, all of these actions on energy are vital to a comprehensive strategy to create a true 21st century economy, raise incomes and get America moving again.  Call it a "Clean Deal."  We can't (and don't want to) compete with the emerging economies on wages. Rather, the United States needs to lead the world in innovation and the development of clean energy technologies. This issue has emerged as a vital challenge of the 21st century.

Far from slowing down, action on climate and energy is heating up.  Next year we need to roll our sleeves up and get to work to begin building the low carbon, but high economy of the future.

Energy Reform Can Be an Economic Boon

Critics of moving toward a low-carbon economy generally argue that doing so is far too costly. That frame, that energy transformation will hurt the economy, is alive and well in the media. Today's Washington Post features a front page article asking, "As Fuel Prices Fall, Will Push For Alternatives Lose Steam?" The analysis, in which Steven Mufson talks to energy experts from Greg Kats (who spoke to NDN on August 1) to Shai Agassi (March 12), makes the point that lower cost conventional fuels (oil), will hurt the ability of alternatives to compete.

This analysis is fine, but, as Kats points out, lower energy costs should not be thought of as a reason to place a hold on changing energy policy. The Post’s editorial page also goes after the cost of enacting climate legislation, arguing that cap and trade may be difficult because of the current recession. This is a political problem, not an economic one, as any climate change legislation will not actually begin capping emissions for well until after a recession has passed. (The Post’s solution, incidentally, of recycling revenue from cap and trade, is a novel idea, and is similar to a tax shift that has been studied extensively by NDN’s Dr. Robert Shapiro.)

The real point here is that moving toward a low carbon economy must be done to ensure future prosperty. When enacted properly, energy policy shifts can be game changing. Today’s New York Times tells us that California’s energy policy, which, since the late 1970’s, has kept per capita energy use stable while the rest of the country’s has increased, has been a boon for the state.

California’s energy-efficiency policies created nearly 1.5 million jobs from 1977 to 2007, while eliminating fewer than 25,000, according to a study to be released Monday.

The study, conducted by David Roland-Holst, an economist at the Center for Energy, Resources and Economic Sustainability at the University of California, Berkeley, found that while the state’s policies lowered employee compensation in the electric power industry by an estimated $1.6 billion over that period, it improved compensation in the state over all by $44.6 billion.

"Consumers were able to reduce energy spending," the study said, adding that "these savings were diverted to other demand."

"When consumers shift one dollar of demand from electricity to groceries," the report said, they create jobs among retailers, wholesalers, food processors and other businesses.

So, instead of being afraid of changing energy policy in the midst of a recession, we must realize that the status quo has far greater costs. Congress and the president-elect will have an excellent opportunity to begin this crucial transition in mid-November, when a lame duck session is likely. They must pass a stimulus package that invests in clean infrastructure, which will both create jobs now and ensure future prosperity. Moving forward, policy makers must consult with leaders in the energy field like Kats and Agassi, as their innovation will be key in creating the 21st century economy.

Gee, That Was Easy!

New York City--After the US took a page from Gordon Brown's book and decided to spend $250 billion of the funds originally allocated to buy bad securities and instead inject them directly into banks as an equity stake, the market gods appear to be happy.  Markets soared yesterday (when the bond markets were closed for the Columbus Day holiday) and were quiet today. 

Does this mean the financial crisis is over?  As Yogi Berra said, it's hard to make predictions,  especially about the future.  And the answer is probably not yet.  But clearly the Brown strategy (also pressed by Senator Charles Schumer and others here) seems to have worked far better than the original Fed/Treasury plan to calm markets and has at least provided breathing room to consider the impact on the real economy of the financial crisis and what we can do about it. 

In this regard, investing in clean infrastructure should be a key part of the stimulus package Congress is now considering.  So should keeping people in their homes, not only becaue of the potential impact of large scale evictions and foreclosures on financial markets but also because of their toll on neighborhoods and families.  As we have suggested before and as Senator Obama urged in his speech on the economy yesterday, the only way to resolve the housing crisis over the long term is to replace unsustainable loans with sustainable ones--and in the interim, people acting in good faith, should not be evicted from their homes. 

Obama Puts Energy First

One of the most daunting challenges any new president faces is prioritizing all the programs that were promised as a candidate. Last night, despite all the grumblings about format, Tom Brokaw got in a very important follow up, when he asked the candidates to prioritize energy, healthcare, and entitlement reform.

Obama, who went second (after McCain argued that we can handle three of the largest issues in a generation at the same time) and made a choice:

We're going to have to prioritize, just like a family has to prioritize. Now, I've listed the things that I think have to be at the top of the list.

Energy we have to deal with today, because you're paying $3.80 here in Nashville for gasoline, and it could go up. And it's a strain on your family budget, but it's also bad for our national security, because countries like Russia and Venezuela and, you know, in some cases, countries like Iran, are benefiting from higher oil prices.

So we've got to deal with that right away. That's why I've called for an investment of $15 billion a year over 10 years. Our goal should be, in 10 year's time, we are free of dependence on Middle Eastern oil.

And we can do it. Now, when JFK said we're going to the Moon in 10 years, nobody was sure how to do it, but we understood that, if the American people make a decision to do something, it gets done. So that would be priority number one.

This debate had a tremendous amount of discussion on energy, which, Americans have realized, is at the center of almost every major issue of the day, from getting the country out of a recession to limiting the power of an emboldened Russia. The fact that Obama has made it clear that energy is his first priority is an extremely welcome sign, and the strong focus on energy policy last night is a watershed moment in Presidential politics.

As Simon pointed out, current proposals on how to reform energy policy illustrate that we may need to come to a much different understanding of the urgency of reducing our dependence on fossil fuels and exactly how much that might cost. If one wants to put energy reform in the context of the Apollo project, it is worth noting that Apollo, in its peak year, represented 2.2% of the federal budget. The proposed $15 billion per year would be more like 0.005% (compared to the 2007 spending). If energy reform is to truly be a major national priority, it must be thought about in that context. 

Friday Buzz: Fox News, Bailout Blues, and More

It's been quite a week for NDN in the media.

Yesterday, Fox News gave Michael Moynihan and NDN's Green Project a lot of the credit (or blame? You Decide...) for getting legislation to create a Clean Energy Investment Bank into the House. Michael also got good mentions from the Carbon Tax Center and Carbon Control News.

Rob and Simon's critical work on solving the financial crisis and keeping people in their homes was covered in The Wall Street Journal, The Associated Press (twice, here and here), The Chicago Sun-Times, The Huffington PostThe Hill, and The Phoenix.

NDN's work on immigration reform and Hispanic issues was covered by several major news sources this week, including Newsweek, The Guardian, and NPR, as well as Fort Collins Now, The Miami New Times,, and Scoop.

The Washington Post and covered the expansion of NDN affiliate The New Policy Institute's Adelante campaign, which has new ads airing in the DC Metro area in addition to Colorado and Nevada. The Statesman also covered the campaign.

Finally, Simon is quoted in The American Prospect this week on the internal dynamics of the evolving Democratic majority in Congress.

Launching a Clean Infrastructure Investment Agenda

Last week, NDN Fellow and Green Project Director Michael Moynihan released an essay calling for an investment in new, clean infrastructure. Clean infrastructure investment, which includes electricity grid modernization, public transportation, renewable energy and efficiency, and a variety of other ideas, is crucial in both ensuring near-term economic growth and long-term prosperity, as we create a low-carbon economy.

Saturday in the New York Times, Thomas Friedman issued a similar call, arguing to "Green the Bailout."

The point is, we don’t just need a bailout. We need a buildup. We need to get back to making stuff, based on real engineering not just financial engineering. We need to get back to a world where people are able to realize the American Dream — a house with a yard — because they have built something with their hands, not because they got a "liar loan" from an underregulated bank with no money down and nothing to pay for two years. The American Dream is an aspiration, not an entitlement.

Indeed, when this bailout is over, we need the next president — this one is wasted — to launch an E.T., energy technology, revolution with the same urgency as this bailout. Otherwise, all we will have done is bought ourselves a respite, but not a future. The exciting thing about the energy technology revolution is that it spans the whole economy — from green-collar construction jobs to high-tech solar panel designing jobs. It could lift so many boats.

A national agenda focused on investing in new, clean infrastructure has the potential to begin to pull America out of the current economic downturn, enhance energy security, confront climate change, and ensure future prosperity through the creation of dynamic new 21st century, low-carbon economy. Stay tuned to the Green Project’s work on clean infrastructure moving forward.

On the Bailout

New York City -- With the terms of the historic $700 billion bailout of the U.S. financial system now evidently fixed, it is appropriate to offer some reflections on what we know, what we may surmise and what we don't know.

What we know is as follows:

  • As noted by Wolfgang Munchau, Daniel Gros and Stefano Micossi in the Financial Times, banks in some countries are now too big for their governments to bail them out and, in the United States, the overall financial sector is too big for the government to bail it out.  This is an important sea change in finance.  For this reason, the bailout offers a reasonable chance of stabilizing the system, but not is not a guarantee.
  • Other countries from our allies in Europe to our enemies elsewhere are already crowing in glee at the U.S. comeuppance as the penalty for our previous hubris.
  • The failure of the U.S. financial sector -- and it is a systemic failure -- will humble U.S. exceptionalist claims for some time to come.
  • The United States is in need of radical redesign of its financial regulatory and bank supervisory regime.  Congressional hearings and a blue ribbon commission to study this and come up with recommendations -- rather than a clubby insider process run by Wall Street -- should be at the heart of overhaul of the system.

We may surmise that:

  • The bailout will work and that the recovery will occur more rapidly than, say, that in Japan in the 1990s.  Our chief advantage here -- and let us hope we retain this advantage, is the flexibility of our more capitalist system.  The mark to market rules for troubled holdings that arguably accelerated the onset of the crisis but may also acclerate working through it.
  • Treasury will use the cryptic authority granted it by Congress to minimize foreclosures.  As the eventual holders of much of the non-performing paper, the government should have the ability to alter loan terms to keep families in their homes.  However, it is up to Treasury and Congress to determine whether this happens or not.

What we don't know is as follows:

  • Whether and how quickly the bailout will restore calm to financial markets.  While the promise of debt relief is designed to restore trust in the markets, how quickly that trust returns remains to be seen.  It is not entirely inconceivable that we may see further runs on vulnerable institutions.
  • What Treasury will pay for securities and what securities they will buy.  The goal of the plan is to make banks solvent.  This means Treasury will have to pay more than market value for securities.  As they will have to allocate the $700 billion across numerous financial institutions and classes of securities, the devil is in the details.  The possibilities for abuse and simple incompetence are immense.  (This is why many economists favored direct government investments in the firms with equity rather than overpaying for bad assets.)
  • Whether the plan will work long term.  A key flaw identified immediately in the Paulson plan but never resolved is that the plan leaves the system largely unchanged and has no explicit method to replace the bad debt with good.  What is to prevent banks from making more bad loans?  How can we be sure that other loans don't go bad if the economy tanks  And why should we expect non-performing loans to ever begin to perform if loan terms are not altered?  In accepting the Paulson plan, Congress rejected proposals by Alan Blinder, Nouriel Roubini and Hillary Clinton to create a Homeowner's Loan Corporation that would have issued affordable mortgages in place of predatory or unaffordable ones.  This, in my view, would have not only turned bad loans into good ones but helped people stay in their homes.
  • How the crisis will impact the real economy.  Last quarter, the economy grow by a respectable 2.7%.  Most analysts now expect a recession.  How long and deep the recession goes is unknown.  However, with interest rates already as low as they can go, judicious fiscal stimulus in the form of investments in clean infrastructure, as I have argued, and other worthwhile spending, are the only real option for limiting the depth and duration of the recession.
  • How the crisis will affect the willingness of foreigners to buy our debt and the dollar's role as a reserve currency. While this crisis has been difficult, it is nothing compared to what it would have been like if the United States did not have the luxury of borrowing in our own currency and continually selling the new debt we accumulate daily due to our deficits to overseas investors, a luxury we enjoy thanks to the dollar's position as a reserve currency  Some would like to see the Euro replace the dollar as a reserve currency just as the dollar replaced the Pound after the Suez crisis. 

These are all critical questions and how the government manages the use of the $700 billion authorized will be critical to determining whether this crisis ends up being a footnote in history or a painful chapter.

Senate Passes Renewable Energy Tax Credits

Last night, the U.S. Senate passed tax credits for renewable energy, including extending crucial tax credits for solar and wind energy. NDN congratulates the Senate for mustering overwhelming bipartisan support for this legislation, and encourages the House to follow suit and deliver this legislation to the President's desk as soon as possible.

WASHINGTON (Reuters) - The U.S. Senate Tuesday approved a package to extend $18 billion in tax credits for using renewable energy sources like wind, solar and geothermal and also provide incentives to cut energy consumption.

The move, which alternative energy companies had been lobbying for all year, sent shares of solar power companies higher in after-hours trade. The delay in extending the tax credits had been a major damper on those stocks this year. The Senate was seen as the biggest roadblock after it shot down the extension eight times this year.

"Getting past what has been largely the deal-breaker in the past should be positive," Wedbush Morgan analyst Al Kaschalk said of the impact the vote would have on solar stocks.

Under the proposal, which will be part of a much bigger tax bill, the tax credit for producing electricity from wind would be extended for one year. The credit for other renewable sources, such as wave and ocean tide projects that generate power, would be extended for two years.

The residential and business tax breaks for solar energy would be extended for eight years.

"Solar is the winner here," Raymond James alternative energy analyst Pavel Molchanov said.

For more on the importance of solar energy to the American economy, read Solar Energy: The Case for Action, an extensive report released in August by NDN Green Project Director Michael Moynihan.

The Highest Oil Price Spike in History

New York City -- What did it mean when oil prices today spiked by their largest amount in history, $16 in one day?  It means something is seriously wrong with the oil price market.  Analysts had no obvious explanation for the rise other than to say that it may have had something to do with the October contract expiring.  But a price spike of this magnitude --oil prices have now traveled from lows in the $90s last week to $130 today --is alarming. And oil price volatility of this magnitude in the absence of any magic changes in supply or demand is frankly unacceptable over the long term for a commodity on which so much of our economy depends.

A hint into the source of this volatility was provided at the U.S. Senate's recent summit on energy.  The fireworks commenced when Senators Bill Nelson of Florida and Maria Cantwell of Washington asked Goldman Sachs' COO, Gary Cohn, about the need to reign in speculation in the oil markets.  The Senators cited a recent study by Michael Masters, manager of a hedge fund and a trader himself, blaming volatility on speculation on indices. 

Northwestern CEO Doug Steeland echoed his belief that speculation was responsible for the bulk of volatility in the price of oil. Cohn answered that Goldman's position was that market prices were set by supply and demand and, in support, he cited a recent CFTC, trade by trade analsysis, that showed no outright market manipulation.

However, Cohn also noted that in setting up the index market, Goldman and others' goal was to create a buy side among pension funds and other long term investors for oil futures to balance the supply side of oil producers seeking money for exploration.  And, indeed, pension and others have become large players in the index market as energy futures have become another investment "class."

Today's volatility showed signs of institututions or traders shifting large blocks of money into an asset class to balance chaos in other markets.  This is not outright market manipulation.  But the emergence of oil futures indices as an asset play for huge non-energy investors, chasing yield, may be responsible for the unacceptable volatility in these markets. 

Congress and the CFTC should be examining whether this is the case and, if so, devise measures to reduce the the exposure of this nation-critical market to large shifts in money and what hedge fund traders like to call, cross market correlation.  

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