Clean Infrastructure

Putting the Green in Green Shoots

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

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

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

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

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

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

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

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

Envisioning the Future of the Auto Industry

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

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

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

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

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

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

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

To register for this event, click here.

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

Please join me for this important and exciting discussion.


Monday Buzz: Hispanics' Widening Clout, A New Liberal Era, a Greener Grid, More

Simon was quoted in the Houston Chronicle and United Press International on the increasing political power of Hispanics in the United States. From the original article by Richard Dunham, the DC Bureau Chief for the Chronicle:

In addition to 33 positions requiring Senate confirmation, Obama has chosen 26 Hispanics for White House staff jobs— more than any of his predecessors. Civil rights advocates hail the increase in Latino employment in the West Wing and beyond.

“This is a new America,” said Simon Rosenberg, CEO of the Democratic group NDN, which specializes in demographic and technological change. “America is going through one of the most profound demographic transformations in all of its history. The Obama administration is simply reflecting the emerging reality of America in the early 21st century.”

But the record-setting pace of appointments reflects more than simple demography. It also reflects the complexity of a president who proudly calls himself an American “mutt” — the nation’s first biracial president, the son of an immigrant, a person who has experienced racism and benefited from affirmative action.

Simon was also quoted in Politics Daily on the prospects for immigration reform:

At the moment, though, there is no immigration legislation, just a vague Senate timetable. New York's Chuck Schumer, an adroit dealmaker who took over the immigration subcommittee from the ailing Kennedy, has promised to have a bill ready to send to the Senate floor by the fall. Senate Majority Leader Harry Reid (running for reelection next year in Nevada, a state in which about one-sixth of the voters are Hispanic) said last week that he wants to pass an immigration bill this year "if it is at all possible." But then there is the black hole known as the House of Representatives. Simon Rosenberg, the founder of NDN, a center-left Democratic think tank which supports immigration reform, said, "In the Senate, you have knowledge and sophistication on the issue. In the House – which has never gone through a serious debate on immigration – you have more ignorance and fear."

Simon also appeared extensively in an article by Chuch Raasch in the Statesman Journal called "Has a new liberal era begun?" From the piece:

Some leading Democrats believe demographic and technological trends have created a "new progressivism," in the words of Simon Rosenberg, founder of the left-leaning New Democratic Network.

"Allow us who survived the Bush-DeLay era to have at least a year of happiness," he joked. But in a seminar called "The Dawn of a New Politics" that he has given to Democratic leaders on Capitol Hill, Rosenberg argues his case based on serious demographic facts:

— Obama won by more than 2-1 among voters under age 27 in 2008. They are part of the "millennial" generation, those between ages 6 and 27. Its 93 million Americans are 9 million more than the baby boomers. Rosenberg argues that voting patterns people establish in their 20s don't dramatically change later in life. But Indiana Gov. Mitch Daniels, a Republican, says younger voters tend to be more malleable — and that this group is increasingly wary of the debt being piled upon it.

— Obama reopened a gap among Hispanic voters, winning them by roughly 2-1, after Bush had attracted 44 percent of the Hispanic vote in 2004.

These two groups help constitute "the most profound demographic change in all of our history since the Europeans arrived here in the 15th, 16th and 17th centuries," Rosenberg said.

Rosenberg also says that like Franklin Roosevelt did with radio beginning in 1933, the left has embraced social networks and other new media more readily than the right. Obama organized volunteers and raised hundreds of millions of dollars on the Internet and is using the Web to push major policy initiatives, like health care, from the grassroots.

He says FDR's "progressive era" lasted for nearly 50 years, giving way to a quarter-century of "conservative ascendancy" that Rosenberg argues ended in 2006.

But whether Obama's "new progressivism" lasts is dependent upon several factors. One is whether median income rises; another is whether Obama gets comprehensive immigration reform passed.

Obama's selection of Sonia Sotomayor as his first Supreme Court nominee was significant to Hispanics, Rosenberg said, but he cautioned that if Obama doesn't do comprehensive immigration reform, it will be "a tremendous letdown" for this community.

Finally, Michael Moynihan argued for investment in smart grid planning in the Salem News:

"Before you spend billions of dollars on new lines, you have to spend millions of dollars on design work," said Michael Moynihan, green project director of Washington, D.C.-based think tank NDN. "Nobody had been thinking about this much money."

Most scientists and activists are touting that an investment of 2 percent of United States gross domestic product would solve carbon loading to the atmosphere. In the movie "A Sea Change," one expert compared the money needed to achieve green energy to spending an extra 10 cents on a bottle of cola.

David Brooks on the Conservative Economic Legacy

David Brooks has a very good column in the NYTimes today about how we got to where we are today, and the daunting economic challenges ahead.   His sober analysis of our economic situation is part of a growing tide of recent analysis looking beyond the momentary crisises, and which are beginning to move the economic debate beyond the stale, brain-dead bromides of the terribly disapointing age of Bush.  

Here’s one way to look at the politics of our era: We’ve moved from The Age of Leverage to The Great Unwinding.

For about a generation, the U.S. surfed on a growing wave of debt. The ratio of debt-to-personal-disposable income was 55 percent in 1960. Since then, it has more than doubled, reaching 133 percent in 2007. Total credit market debt — throwing in corporate, financial and other borrowing — has risen apace, surging from 143 percent of G.D.P. in 1951 to 350 percent of G.D.P. last year.

Charts that mark these trends are truly horrifying. There is a steady level of debt through most of the 20th century, until the mid-1980s. Then there is a steep accelerating rise to today’s epic levels.

This rise in debt fueled a consumption binge. Consumption as a share of G.D.P. stood at around 62 percent in the mid-1960s, and rose to about 73 percent by 2008. The baby boomers enjoyed an incredible spending binge. Meanwhile the Chinese, Japanese and European economies became reliant on the overextended U.S. consumer. It couldn’t last.

The leverage wave crashed last fall. Facing the possibility of systemic collapse, the government stepped in and replaced private borrowing with public borrowing. The Federal Reserve printed money at incredible rates, and federal spending ballooned. In 2007, the federal deficit was 1.2 percent of G.D.P. Two years later, it’s at 13 percent.

The crisis response more or less worked. Historians will argue about the Paulson-Geithner-Bernanke reaction, but the economy seems to be stabilizing. And now attention turns to the task of the next decade: slowly unwinding the debt that has built up over the past generation.

Americans aren’t borrowing the way they used to, but the accumulated debt is still there. Over the next many years, Americans will have to save more and borrow less. The American economy will have to transition from an economy based on consumption and imports to an economy with a greater balance of business investment and production. A country that has become accustomed to reasonably fast growth and frothy affluence will probably have to adjust to slower growth and less retail fizz.

The economic challenges will be hard. Reuven Glick and Kevin J. Lansing of the San Francisco Fed estimate that Americans will have to increase their household savings rate from 4 percent to 10 percent by 2018 to restore balance. That, they write, will produce “a near-term drag on overall economic activity.” Meanwhile, capital and labor will have to flow from sectors that depend on discretionary consumption to sectors based on research and investment.

But it’s the political challenges that will be most hellacious. Basically, everything that a politician might do to make voters happier in the near term will have horrible long-term consequences. Stimulate the economy too much now and you wind up with ruinous inflation down the road. Preserve failing companies and you wind up with Japanese stagnation. Cushion the decline in living standards with easy money now and you just move from a housing bubble to a commodities bubble.

The members of the political class face a set of monumental tasks...

Read on to see his recommendations, all of which are a little less compelling than his narrative on how we got here.  What is most interesting to me, however, is how Brooks' analysis is itself a complete condemnation of the cultural and economic impact of the recent conservative ascendency.  His story rightly points out that this "Age of Leverage," or as Paul Krugman has called it, "The Great Unraveling," was a manifestation of the Reagan Revolution.  Rather than being conservative in the classic sense, Brooks has correctly and helpfully begun the labeling of this era of our history as it will be known to future generations - a terribly reckless, irresponsible time where our leaders, in the grip of impractical ideologies, failed to do what was required to ensure American greatness and success in the 21st century.  

Digging America out from the hole that been dug by years of reckless, ideological and impractical conservative government remains the greatest governing challenge of this early part of the 21st century, a job that increasingly looks like - given its depth - will last long past the Obama Presidency. 

Finally, for all these reasons, I think it is time for us to move beyond the concept of "recovery" as a goal of our economic strategy.  Who wants to go back to what we had? A time of bubbles and declining wages, of a policy designed for the few at the expense of the many? Obama has begun to move beyond this frame with his recent attempts to use the term "new foundation."  But there is an urgency to this mission - for I think very few Americans are interested in recovering - or going back to - that old economy of the late 20th century and this terribly destructive conservative ascendency.

Seizing The Smart Grid Opportunity

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

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

NDN Backgrounder: The GM Bankruptcy and the Future of the Auto Industry

With General Motors filing for bankruptcy this morning, and the federal government taking a 60 percent stake in the company, NDN offers some recent thinking on the American automobile industry.

  • Fuel Economy in Context by Michael Moynihan, 5/19/2009 - Moynihan welcomes the Administration's steps on fuel economy, but points out that CAFE standards are imprecise tools that must be viewed as part of a larger series of complex policies.
  • Here in the Real World They're Shutting Detroit Down by Morely Winograd and Mike Hais, 4/30/2009 - NDN Fellow Winograd and Hais pont out that GM's problems come at a time when the inherent tension between the investor class and the country's manufacturing sector have never been greater.
  • Should We Try to Save the Damaged Brands? by Simon Rosenberg, 4/30/2009 - Rosenberg asks if these mainstay, now troubled American brands - AIG, Chrysler, Citi, GM - can be saved by being propped up by the government or if their brands are permanently insolvent.
  • Carbonomics by Michael Moynihan, 4/2/2009 - Moynihan looks at the connection between pricing carbon and the future of the American automobile industry.
  • Sympathy for the Car Guys by Michael Moynihan, 12/5/2008 - Moynihan compares Capitol Hill's treatment of Wall Street CEOs to that of the automakers.

Russian Affairs

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

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

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

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

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

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.

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