Clean Infrastructure

New York City -- In today's Times, Thomas Friedman, who has been writing about environmental technology for some time and is well credentialed in this space, not only due to his platform at the Times, but also due to his relentless exploration of energy issue, expresses his support for a carbon tax in lieu of a cap and trade plan to put a price on carbon. 

In so doing, he joins others with true green environmental credentials such as Al Gore who supported a carbon or BTU tax before cap and trade was even invented and many economists, including NDN's Rob Shapiro who has written extensively on the subject. 

It is important to recall that Al Gore, arguably the father of the carbon tax, also supports cap and trade and indeed the two approaches need not be mutually exclusive. Several European countries including Denmark, widely praised for its switch to renewable fuels, have a carbon tax and participate in the EU cap and trade system. 

However, as with the Yankees and the Mets, cap and trade and a carbon tax both have passionate advocates.  An advantage of a carbon tax, supported by many economists, is that taxes -- something the government has long experience collecting and companies paying -- are probably easier to administer than a system for trading carbon credits.  With financial markets less esteemed than only a year ago, opponents of a carbon tax worry about gaming of the carbon market. Supporters of a tax also argue that it may result in less price volatility in energy at the expense of less precision in reducing emissions since it fixes price rather than quantity.

Most environmentalist scientists consider a cap and trade system to be critical to addressing climate change because in theory it imposes an absolute cap on emissions.  If one takes seriously the science on the issue, the argument runs, we have less time and leisure to avert major damage to the climate than commonly believed and only a fixed cap provides certainty about lowering emissions.  Companies could -- under a tax regime -- continue polluting and simply pay more tax which, in some cases, they might be able to pass onto consumers, giving them broad license to continue emitting.

Of the two approaches, cap and trade has gained far more traction. It is already in use in the European Union. Ten northeastern and mid-Atlantic states recently launched a mandatory cap and trade system called the Regional Greenhouse Gas Initiative (RGGI) and a similar initiative is underway in California and other western states. However, carbon taxes --generally smaller ones than those that would be needed to achieve deep carbon reduction --are employed in Denmark and, indeed, most European countries, in several US states and, indeed at the national level, by commodity, as in the retail tax on gasoline.

Rather than take a position on these cross cutting arguments, Friedman focuses on the immediate politics of the issue: the fact that coal companies and others are now trying to paint cap and trade as a tax to block its passage. If opponents are calling it a tax, he argues, why not just go ahead and pass a tax?

In fact, many of the staunchest supporters of cap and trade such as U.S. Rep. Ed Markey who oversees a key subcommittee and, with House Energy and Commerce Chairman Henry Waxman, has introduced cap and trade legislation has indicated he understands the arguments for a carbon tax as well as cap and trade but believes that one must be mindful of political realities which, for the time being, favor cap and trade.

Friedman argues that a tax could be sold to the American people by marketing it as vital to America's defense and economic priorities. In supporting Congressman John Larson's proposal to tax carbon but cut the payroll tax by an equal amount (an idea proposed by Rob Shapiro) he advocates employing the President's National Security Advisor, General James Jones, to make the case. (Jones worked on climate policy for the US Chamber of Commerce prior to entering the Administration, to the consternation of some environmentalists).

Is Friedman right?

Here is my view on the issue of how to proceed on putting a price on carbon. Ultimately, cap and trade and a carbon tax have more similarities than differences. Both put a price on carbon and neither one invalidates the potential value of the other.

Cap and trade will probably pass the House this year and needs about four to five more votes in the Senate than it has yet to achieve cloture and become the law of the land.  It will enjoy the deserved support of the vast majority of environmentalists as debate unfolds in coming weeks and months. It is important that the carbon tax not be used to undermine cap and trade support.

However, a carbon tax also deserves a hearing and the idea of reducing payroll taxes with the revenues is particularly appealing.  It should receive, at the appropriate juncture, the full attention of the Congress to determine how much support it has at what level of tax.  We probably need at least a ten cent increase in the gas tax later in the year to restore the Highway Trust fund to solvency and one legislative approach might be to include this as part of a wider carbon tax proposal. 

Commenting on a discussion between Brad DeLong and Tyler Cowen on the ability of the fiscal stimulus to be effective, Matt Yglesias writes:

I think that when considering these issues it's perhaps useful to think back to 2006 and 2007. I don’t recall that many market-oriented economists were saying back then that there were huge underlying structural problems with the United States economy. I recall some people saying that, mostly on the left, mostly being dismissed as unduly pessimistic and/or motivated by partisanship, and generally now supportive of fiscal stimulus.

Well, maybe there weren’t that many, but certainly NDN's Dr. Robert Shapiro (who is inarguably a market-oriented economist) did make that argument, pointing out that globalization had created structural changes in the economy that allowed wages to stagnate and incomes to decline even as GDP and productivity increased over the last eight years. In June of 2007, Shapiro wrote:

We cannot entirely avoid these hidden costs of globalization, but we can outsmart and outrun them. There are many proposals to cushion their effects, through measures such as wage insurance. Those measures may help for a while, but by themselves they tacitly accept the underlying dynamics as inevitable and inalterable. A better approach focuses directly on affecting those dynamics. To begin, we will have to relieve some of the cost pressures on businesses which in the more intensely-competitive environment of globalization, hold down wages and job creation even as growth and productivity increase. Reforming our health care and energy practices, in short, is now the number one jobs and incomes issue, and one on which American workers and American businesses have real common cause. Both areas are already major public policy issues. Recognizing how the enormous increases in health care and energy costs of recent years directly and substantially affect wages and jobs should give greater sense of urgency to finally addressing both areas, in specific ways that will slow those increases.

In addition, we also should expand our public investments and other commitments in those areas in which American workers and businesses have advantages in the global economy. In an increasingly idea-based economy, the education of every American child should specifically include advanced skills in information technologies...

Shapiro's crucial policy recommendations go on, you can read them here.

Of course, NDN supported President Obama's stimulus, but I don't see that as contradictory to seeing problematic structural dynamics in the American economy. As Shapiro wrote this fall, the stimulus should work for the long run by correcting some of structural problems through investing in the prerequisites to economic growth that he outlines above. Indeed, the priorities Shapiro and Simon Rosenberg lay out in this memo track well with the American Recovery and Reinvestment Act. The most important part of ARRA may ultimately be the "Reinvestment" that, as Obama works to reduce health care costs, invest in infrastructure, and reform America's energy policy, leads America past recovery and to a truly 21st century economy.

In the current New Yorker, David Owen has a provocative, cautionary article on the difficulty of addressing climate change that points out that the only thing ever shown to truly lower CO2 emissions is a well timed industrial implosion.  Greenhouse gas emissions are the result, generally, of prosperity. 

While the article has many interesting observations, Owen draws a fine point on a subject that is often neglected and has relevance both to proposals to put a price on carbon and the future of Detroit, namely the mathematical equivalence between cheaper gas--anathema to many environmentalists--and, paradoxically, higher fuel economy 

The centerpiece of emissions policy for decades has been higher fuel economy standards.  However, as Owen notes, if higher gas prices such as those last summer lowered miles traveled and stimulated use of mass transit, then their mathematical equivalent, improved fuel economy or fiddling with the other side of the equation, can only reverse those trends. Higher fuel economy and, indeed, to a degree energy efficiency writ large suffer from the same problem.  Both encourage greater consumption of energy as cost declines.

Although Owen does not explore the next question, consider the impact of higher fuel economy and energy efficiency on energy independence--another major driver of efforts to get off fossil fuels.

Higher fuel economy which is to say cheaper driving if it leads to more driving as it appears to do may not reduce consumption of gas or oil and therefore either their price or money transferred to oil producing states.

This does suggest an interesting difference between hybrid and pure electric cars.  Whereas hybrids by improving gas mileage may promote more driving, limiting their effect on emissions, pure electric cars such as the planned Chevy Volt should unequivocally lower carbon emissions and oil consumption (since electricity generally produces less CO2 than gasoline thanks to its use of hydro, nuclear and natural gas-fired power not to mention renewables.)

But you say didn't cutting back on gas use last year after prices spiked, cause the price of oil to collapse, reducing payments to foreign oil producers?

First, the falloff in driving followed a price spike.  It only showed, therefore, that people consume driving like other normal goods, using more when costs drop and less when they rise.  The subsequent collapse of oil prices is much more tied to the collapse of the global economy than to any conservation efforts.

All of which brings us to the other main proposal for reducing emissions, the one now gaining traction in Congress: putting a price on carbon through a cap and trade system or tax.  In contrast, to better fuel economy or energy efficiency writ large, a cap that absoutely limits emissions or a cap and trade system that allows emissions at a price, by raising the price of fossil fuels should lower their consumption and thus greenhouse emissions.

This is not to say it will be easy to implement a cap and trade system or tax. However, it does suggest that we ought to try as the focus on fuel economy and energy efficiency alone will not get us to a lower carbon economy.

Today is the first day of the three day Virtual March on Washington, organized by T. Boone Pickens, to promote the Pickens plan to get America off of foreign oil and onto new cleaner forms of energy.  The Pickens plan, in a nutshell involves increasing electric transmission capacity to bring wind power onto the grid and replace gasoline burning cars with those running on natural gas or, for lighter uses, electricity.

While opinions vary on whether there is enough natural gas in the US at an affordable price to ultimately replace foreign-imported oil, there is no doubting Pickens' energy and passion to promote his cause--or his ingenuity in using diverse media from television to Facebook to Twitter and partnerships with the NAACP, Rock the Vote, Ted Turner, AWEA and others--on its behalf.

If you haven't seen the commercials, you can learn more about the Pickens plan and the virtual march at www.pickensplan.com.

Yesterday, Representatives Waxman and Markey, Chairmen of the House Energy and Commerce Committe and Energy and Environment Subcommittee, respectively, introduced draft energy legislation.  The ambitious bill lays out a sweeping agenda for energy reform that shows the intensity of commitment in this Congress to energy reform and dramatically increases the chance for passage of important energy legislation this year.  Today, the White House endorsed the legislation, further increasing the chances of action.

Key proposals include a cap and trade system to reduce emissions 83% by 2050, modernization of the grid, a renewable portfolio standard and support for new energy technologies including the politically important one of clean coal.  Coming on the heels of the major investments in clean energy included in the $787 billion ARRA legislation passed earlier this year, America is on the verge of the largest transition in energy priorities in our history--away from carbon based energy--toward new cleaner forms of energy.

Speaker Pelosi has already signaled her intent to move the legislation forward in the House where it will likely pass.  As usual, the key battleground will be the Senate where cap and trade legislation appears to be about four to five votes short of the 60 needed for cloture.  If cap and trade falls short, the Senate could move forward on the energy portions of a bill.  However, this would weaken the US negotiating position in Copenhagen next year.  Bringing a few more Senators on board is thus the key to comprehensive action.

The four titles of the bill map the major countours of the energy discussion, support for clean energy and clean technology including electric cars and a modernized grid, energy efficiency, a cap and trade system to limit heat-trapping pollutants and a transition title to minimize the disruptive impact of change this large on industry and consumers.

In addition to the Waxman-Markey bill, a variety of bills on the smart grid, grid modernization, renewable fuels, energy writ large and the reduction of carbon emissions through cap and trade or a carbon tax are also in play.  Some, such as Senator Harry Reid's transmission bill and Senator Bingaman's energy legislation have the imprimateur of highly influential legislators. 

While the Waxman Markey draft legislation is not designed to be the final say and leaves some details unspecified, we at NDN look forward to working with these leaders, the Administration and others to advance the legislation's critical energy goals.

The time has never been more ripe for moving America and the world decisively away from the carbon-laden fuels of the 19th and 20th Centuries toward a new, low carbon, renewable energy future.  That, in turn, should help drive the next great wave of economic growth one would expect from a major leap forward in the single most import imput--after people--in the economy, energy.

The gutting of the US auto industry is a negative development for the economy, the consequences of which have not, I believe, been fully thought through.  And the contrast between the treatment of banks and the auto industry gets to the crux of what underlies at a very deep level our current economic malaise and long term prospects for recovery.

Further on this subject, the cover article in the current Harper's by Thomas Geoghegan, a Chicago lawyer, explores how both the financial and manufacturing crisis stem from a single cause, the elimination of contract rights and usury caps protecting people in recent years that have seen credit card rates jump from a few percent to 30% or more. Usury or excessively high interest rates, Geoghan points out, is something that societies have regulated since Biblical days for good reason.  Sky high interest rates simultaneously impoverish those at the bottom while monopolizing capital at the top in the pursuit of huge but inevitably unsustainable profits.  Echoing Kevin Phillips argument that  declining societies turn to finance as the only way to support--if temporarily--excessive consumption, Geoghan describes how the prospect of absurdly high returns siphoned capital from productive sectors leaving us doubly impoverished.  He writes:

Some people still think our financial collapse was the result of a technical glitch--a failure, say, to regulate derivatives... In fact, some New Deal-type regulation was actually intoduced in recent years...think of the Sarbanes-Oxley Act.  The problem was not that we "deregulated the new Deal" but that we deregulated a much older, even ancient set of laws.

The first of these were contract rights.  "As one company after another "reorganized" in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in these future-oriented ways.  No wonder people in our country began to live for the moment and take out loans and start running up debts.

And then we dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter's term, and which had been so taken for granted that no one ever even mentioned it to us in law school.  That's when we found out what happens when an advanced industial economy tries to function with no cap at all on interest rates.

Here's what happens: the financial sector bloats up.  With no law capping interest, the evil is not only that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking.  When banks get 25 to 30 percent on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits like auto manufacturing.  ...  What is history, really, but a turf war between manufacturing, labor and the banks?  In the United Sates, we shrank manufacturing.  We got rid of labor.  Now it's just the banks. 

Geoghegan's unusually provocative article is worth a read.  More broadly it raises an important question.  Will the United States undertake real reform to strengthen contract rights, limit usury, downsize our financial sector and upsize our productive base.  This is an outstanding opportunity for meaningful reform to address the middle class impoverishment that, as NDN has long noted, lies at the root of our current crisis and whose reversal is also critical to our democracy.

Yesterday, the Obama Administration's task force on the auto industry concluded that America's auto industry must downsize.  Drastically.  Cutting 50,000 jobs at GM--the company's proposal--is inadequate, the Administration concluded in its review of the GM plan.  Nor can GM continue to sponsor so many brands which the task force dubbed distracting to management.  Instead, the Administration believes GM should pare back to perhaps Chevy and Cadillac.  As for Chrysler, the Administration ordered it to sell, ie. hand itself over to Fiat or file for bankruptcy.

At issue is the $6 billion or so the industry needs to keep going. 

Does anyone else notice the irony that this pronouncement came on the heels of a plan to provide 1 to 2 trillion dollars to banks to take bad loans off their books with no concessions, no plan for a turnaround, no paring of brands, no industry review or task force, in fact, nothing at all required?

I support bailing out the banks.  And I support doing it without micromanaging the business beyond changing management at the top--and securing warrants to reduce the cost to taxpayers--as I don't think government is well suited to managing businesses.

But I don't think anyone in the government including the task force after reading the industry's plans and conducting one or two trips to Detroit know more about cars than the car industry itself.  Nor does anyone in the government know more about cars than about the banking industry which the government regulates and has been bailing out--and therefore learning about--for over a year at the cost of trillions. 

One other thing about the government's dual standard for financial services and autos bothers me, namely wrapping condemnation of the auto business in environmental rhetoric. While the car industry took a hit from high gas prices last summer--an external shock it could not control--and has shown a consistent tin ear to fuel economy, its problems today have little connection to the environmental profile of cars.  From a strict profit and loss perspective, investing in hybrids and electric cars--though critical to a future that may no longer exist in the United States--is not good for present cash flow.

The primary problem facing all the automakers today, not just GM and Chrysler but Toyota, Honda and the rest is that sales have fallen off a cliff becasue of lack of financing.  Few people can pay all cash for a car.  And currently only those with sterling credit can get a car loan.  The auto industry, from Honda whose sales are down over a third to Chrysler, is a casualty of the financial crisis created by our banks.  But it and the hundreds of thousands of Americans who work in the auto supply chain will now have to pay a far higher price.

The Big Three have one problem the Japanese carmakers don't, their legacy healthcare and retirement costs from when times were good and unions were strong.  These have been exacerbated, however, by the stock market collapse--again a financial problem not of their making. 

If America is serious about reaping the economic benefits of a clean technology revolution that encompasses transportation--as I believe we must be and the President has indicated he believes we must be as well, we can't do it with a gutted auto sector.  By gutting the auto sector, we are only making ourselves more dependent on financial services as the chief engine of our economy--a strategy that has proven ill advised.

To rebuild our economy we need more engineering and less financial engineering.  And to do that we will need a healthy auto sector.  In a previous post I outlined some of the reasons that finance is advantaged in the policy process relative to manufacturing.  Until we address the anti-blue collar, anti manufacturing barriers in our policy process, we will not succeed in placing our economy back on a sustainable path to long term growth.

Today, as Republicans release a manifesto labeled as an alternative budget and President Obama meets with CEOs of major banks, we're pleased to present you with some helpful thinking on these issues.

First, though, I'd like to draw your attention to an April 1 NDN event: The G-20 Summit and Beyond: Challenges Facing The Global Economy. This event, to be held at NDN and hosted by NDN President Simon Rosenberg, will feature NDN Globalization Initiative Chair Dr. Robert Shapiro and Dr. Moisés Naím, the Editor-in-Chief of Foreign Policy magazine. Click here to RSVP.

• The New Treasury Program: Sound Economics, Resting on Some Wishful Thinking by Dr. Robert Shapiro, 3/25/2009 - Shapiro points out that, since we've never seen this kind of crisis before, there's little way to know what will work to fix the financial system, but that doing nothing is unacceptable.

• Hope and Optimisim II by Michael Moynihan, 3/16/2009 - Moynihan looks at some recent developments in the financial world and sees cause for cautious optimism. 

• Weekly Kos Poll, GOP Still at 16 Percent, Messaging the Economy by Simon Rosenberg, 3/14/2009 - The strongest argument for President Obama's economic plan is that, despite strong productivity and GDP growth over the last eight years, the typical American family saw its standard of living decline.

• How Long the Recession Could Last - and Why It Matters So Much by Dr. Robert Shapiro, 3/12/2009 - Shapiro arguest that the Great Recession is anything but traditional, so there's little reason to expect a traditional recovery.

• Sustainable Funding for Sustainable Infrastructure by Michael Moynihan, 3/9/2009 - The old system for infrstructure funding is inadequate for creating a robust, clean infrastructure driven future.

• GOP Economic Policy as an Exercise in Grief Management: Denial, Anger & Rush Limbaugh by Dr. Robert Shapiro, 3/5/2009 - Shapiro puts on his psychologist hat and argues that the only explanation for the current Republican thinking on the economy is that they are angry and in denial about losing.

• The Utter Bankruptcy of Today's Republican Party by Simon Rosenberg, 1/28/09 - Rosenberg argues that Republican opposition to the economic recovery package represents the ideological bankruptcy of the party.

• A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.

• Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure by Michael Moynihan, 10/18/2008 – NDN Green Project Director Michael Moynihan outlines a strategy for investing in clean infrastructure that will help create long-term prosperity.

• Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.

• Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

• Making the Struggle of Every Day People the Central Focus of the National Debate by Simon Rosenberg, 8/17/2008 - As the 2008 presidential campaign entered a crucial phase, Rosenberg argued that political leaders must focus on raising the wages and incomes of Americans.

From the White House Press Office yesterday:

Today, President Barack Obama announced that Jon Wellinghoff, currently serving as Acting Chairman of the Federal Energy Regulatory Commission (FERC), will be designated as Chairman. 

This announcement, both welcome and expected, likely signals a new era in FERC's energy regulation. Wellinghoff is a visionary on grid issues, as demonstrated last November when he spoke at an NDN Green Project event in November entitled, "A Vision for a Modernized Electric Grid: Clean Infrastructure for a 21st Century Economy." 

Take a look:

New York City -- This past Friday, Princeton University's PRIOR Center and the NYU's Rudin Center convened a conference on what's next in transportation. The speakers, who included Mort Downey, former Deputy Secretary of Transportation and leader of the Obama transition team for transportation, Tony Shorris, former head of the New York and New Jersey Port Authority,  current PA chairman Anthony Coscia, and others agreed that we are at a crossroads in transportation policy. 

On the one hand, there has never been more enthusiasm for new modes of transportation such as high-speed rail and new approaches such as vehicle mileage tolling and congestion pricing. Billions in the stimulus bill and the Obama budget for rail have set off a frenzy of excitement about building high-speed rail in the United States. At the same time, however, the old system of funding infrastructure, the Highway Trust Fund, fed by gas taxes, has never been under greater stress. With a new transportation authorization bill likely to move this year, we stand at a key juncture in U.S. transportation policy.

Transportation reform is vital to building a clean economy. Not surprisingly, therefore, much of the discussion at Princeton focused on the irony of trying to fund the reinvention of transportation out of a five-cents-per gallon gas tax -- at a time when reducing gas consumption has emerged as a national security, economic and environmental priority.

Currently, the Highway Trust Fund, built on nickel-a-gallon gas tax accounts for the lion's share of infrastructure funding in the United States -- not only for roads, but for mass transit as well. But the fund essentially depleted (having required a bailout last fall to stay solvent).  Additionally, with construction prices higher but gas usage falling, the gas tax now provides only about half the purchasing power needed to sustain our current system, let alone make improvements.

As a result, many people have been talking about switching to a Vehicle Mileage Tax or VMT as an alternative to the gas tax. A VMT would toll mileage, not gas, enabling the country to reduce gas consumption without starving its infrastructure. However, the "t word," as Mort Downey has described it, whether that refers to taxes or tolls, is highly controversial and recently White House Press Secretary Robert Gibbs struck down a suggestion by new Transportation Secretary Ray LaHood that switching to a VMT is on the table.

One alternative that would sustain historic levels of funding but would not provide funds for much new investment would be a dime-a-gallon tax. That would be the easiest -- if least imaginative -- fix.

A bolder idea is to create a national infrastructure bank as proposed by U.S. Sens. Chris Dodd and Chuck Hagel to tap private money for infrastructure investment, an idea endorsed by NDN. Indeed, the Obama budget would fund such a bank. However, in the current environment, private money is not as available as it was.

Last week, U.S. Rep. Earl Blumenauer, who spoke at NDN's clean infrastructure event in January, introduced Clean Tea legislation to tap 10 percent of revenues from a cap-and-trade system of the type contemplated by the Administration's budget for transportation. Given the key role of transportation in emissions and cleaner transportation in reducing emissions, this makes a great deal of sense. 

Everyone recognizes that the old system of a nickel-a-gallon tax combined with earmarks isn't working. There is a great appetite to reform the basis for funding infrastructure and this year, a real opportunity.