NDN Blog

Last night's compelling and in many ways inspiring State of the Union speech by President Obama should come as good news to the clean technology community and anyone who cares about the climate, energy independence and American economic leadership.  The President not only higlighted clean energy throughout his speech, but also signaled his continuing view, shared by many, that it must be at the heart of America's economic revival.

While clean energy has advanced since last year's clean-weighted stimulus bill, the critical stage of moving clean technology from a promising funding category in Silicon Valey to a major engine of economic revival remains ahead.  Here is how to accelerate that process.

First, as the president indicated, innovation is key.  But innovation is not just about advanced research and grants to large companies--the focus of last year's stimulus. To really get the job machine revving, we need to move innovation into the marketplace.  And we need small companies to turn into large ones.  That is where job creation really occurs--in the transformation of a startup consiting of a two enrepreneurs into a massive global company employing tens of thousands.  (Think Apple, Yahoo or Google.) As I have long been arguing, the major obstacle here is a complex and highly regulated energy landscape that presents a roadblock to the purchase and uptake of clean technologies.  It is time to change that landscape. 

Second, we need to direct R&D funding toward smaller businesses.  Since the 1980s, American industry has had a problem that while we may invent great technologies in our universities, other countries reap the commercial benefits because of a lower cost structure and also because they have efficient networks of small companies backed by large ones or other sources of funding able to exploit cutting edge American technology.  We are seeing in batterty technology today precisely what we saw in semiconductors and LCDs in the 1980s.

During the 1990s, Silicon Valley helped address this problem by funding the stage between reserach and commercial exploitation in California, specifically around Stanford University.  A disproportionate share of entrepreneurs came from Stanford and the surrounding community.  But there is great science going on around the country that needs development funding to begin producing American jobs.

The answer to this problem are programs such as the Advanced Technology Program introduced in the 1990s to help startups survive the Valley of Death, more small business innnovation and research (SBIR) grants and other funding opportunities available on a peer reviewed bases to startups.  Virtually all of the smart grid money in the first stimulus went to large utilities.  However one 50 million grant to a utility could fund 500 grants of 100,000 to startups.  The latter is, by far, the better bet for our nation's money.

Third, it's not just about money.  In many cases, the key to innovation is getting government out of the way.  This was essential during the Internet era.  Many policy efforts currently are focused on getting the government more involved in the energy space, when in fact, the more cure--since government is already heavily involved in protecting incumbents is to remove those protections so as to give new technologies and new players a shot. 

Finally and most importantly, the public must be engaged.  Only people can make a revolution.  Until consumers are part of the action, clean technology will move forward awkwardly.  During the Internet era, consumers downloading new software, building websits, rigging up home networks, starting online stores and staying up to write code were critical to the revolution.  To move clean tech into high gear, we need to empower the American people to generate power, use new technologies and fight climate change.  At NDN, we have been working a great deal on how to empower people to lead the clean technology revolution and I will be debuting a paper on the subject shortly.

The president has set the correct overall direction.  It's up to his policy experts, those in Congress and stakeholders to craft a set of policies.  But it will be up to the American people to create the clean technology revolution.

Yesterday, Massachusetts voters, Democratic by a 3 to 1 margin, elected Republican Scott Brown to fill the seat formerly occuped by Democratic lion, Ted Kennedy.  It is truly a shot from the Bay State heard round the world.  However, it need not spell disaster for the Obama Administration providing the Administration interprets it correctly.  Here are six lessons from the vote that the Administration absolutely needs to internalize.

It was not about Martha Coakley.  Contrary to some spin that is emerging Martha Coakley was a strong candidate and the real deal for Massachusetts Democrats.  Her mother was one of twelve in a working class Irish family.  One of five, herself, she worked her way up to Attorney General and handily beat Rep. Michael Capuano in a hotly election that hyperpolitical Massachusetts pols had been anticipating for years.  She was coasting to a landslide right up to the Senate Vote on healthcare.

It was and is about the Healthcare bill.  Brown managed to make the race a referendum on the health care bill and Democratic governance and Coakely gave the impression she would go along with the leadership. The American people--as this vote should make clear--don't like the health care bill.  They don't like the process and they don't like its content.   Had Democrats crafted a bill able to get at least a few Republican votes, one that cured the obvious problems of portability and exclusion of pre-existing conditions, had no individual mandate and did not tax health care while claiming to lower its cost, neither Coakley nor the President would have seen their poll numbers collapse. 

It was about the voters.  Scott Brown won not because of anything elected officials--or Fox Commentators did or said but because of how voters feel.   The voters, genuinely angry, are the obstacle to health care and the Administration's course, not the machinations of any politicians, other intermediaries or people in the media.  It is the people who are unhappy about this health care bill and what it signifies.  Democrats need to face this fundamental truth.

It was about Democratics and Independents, not Republicans.  In a state with 3 to 1 Democratic registration, Scott's win, moreover, had nothing to do with Republicans who were practically bystanders.  The revolt was by Democrats and, to a degree, Independents in this bluest of blue states.  Democratic voters did publicly what Democratic legislators have only been willing to do privately, voice their disatisfaction with a bill they don't like.   The problem for the Administration and Congress is not with Republicans, but with their own voters.

If you go partisan, you better get it right.  The partisan strategy has a fatal flaw--you are on the hook for every letter and word of a law and can't blame it on compromise with the other party.  If the Democrats had managed to get at least one Republican vote, voters might not have blamed them exclusively for provisions of the bill they don't like.  Instead, acting alone, they have come up with two bills that fail to satisfy.  The partisan strategy exposes a party that employs it to total responsibility for what they produce. 

Finally, it's about the economy.  As Simon argues below, the single greatest problem facing America today has to do with jobs and wages and people want their leaders to solve it.  To justify so much effort on health care as opposed to the economy in a time of double digit unemployment, the Administration has tried to argue that high health care costs are hurting the economy and hurting family budgets.  In fact, health care costs have little to do with the cyclical state of the economy that (as one learns in Economics 101) determines employment and economic well being.  The public quite simply isn't buying.  The second argument that health care costs eat into budgets is true.  However, few Americans believe either the House or Senate bill will address this.  Further, Americans want to choose their level of health care, more, less or none (unless it is free)--the reason they oppose elements of this plan like the health care tax and individual mandate.  Most Americans view the health care debate as a distraction from what they want right now: jobs and a return to prosperity.

Will the Democrats absorb these lessons?  That is the crucial question.  The time to change course is now, not in November.  The Democrats should pass a stripped down health care bill as quickly as possible, if they can, that does what the people want--provides portability and ends exlusions, shorn of complex and controversial provisions that people don't like.  The Administration should then focus on that elements of the economy people want fixed--more jobs with rising wages  The latter isn't easy.  But it is critical.  On the two legislative items next on the agenda, financial reform and energy, Democrats ned to reach across the aisle to find Republican votes. 

True, Republicans will probably resist these changes so as to keep the anti-Democrat momentum alive.  That only proves how important changing course now really is.  The alternative, staying the course that led to last night's election shock will only lead to more elections like that in Massachusetts this fall.

Note:  Ordinarily, I write about clean technology matters, but the Senate health care vote today is so important to the country's future that I want to weigh in on the issue.  In my view, certain provisions of the bill raise grave issues. There is still time, however, by fixing key provisions, to make a better bill and prevent political disaster.  In casting their votes today, members of the Senate should make it clear that they reserve the right to modify this version of the bill in the final House and Senate package.

This morning, Christmas Eve, at 7AM, the Senate is expected to vote on party lines to pass a Health Care bill. All Democrats and two independents will vote for.  All Republicans will vote against.  The bill will pass but not in the way that anyone likes to see important legislation advance.

It is no secret that opponents of the bill have been virtually on the point of taking up arms. Supporters from Democratic leaders to Paul Krugman in the New York Times have generally argued that the bill has issues but contains more good than bad.  It caps a period that has been among the worst for any political party in recent history, sending President Obama's approval ratings plummeting from overwhelming positive to below 50%, the generic Democratic Republican matchup from about +10 to -9 and Congressional approval ratings lower.  Harry Reid is now trailing in polls in his home state.  In short, the bill has already exacted a high price from Democrats but is likely to exact an even greater price this fall. 

Here is how to improve the bill and stave off a political and policy disaster.

First, the bill has some features that enjoy broad support, notably a Patient's Bill of Rights that prevents exclusion for pre-existing medical conditions.  This is good policy and good politics.  This alone would have been a major accomplishment and political winner for the Obama Administration.  Unfortunately, this positive element has been lost in discussion of other elements of the bill. Two provisions, both of which punish key progressive constituencies, stand out as so deeply flawed they should be deal killers.  If the majority party is to recover from this chapter in political history, it must remove these provisions from the final House Senate version of the bill.

First, both the House and Senate bills force all Americans to purchase insurance from a private company or face the legal consequences.  President Obama campaigned against this idea, the so called individual mandate, which owes its existence in both the House and Senate bills to the relentless pressure of insurance company lobbyists.  The impact of this provision will fall most heavily on the young, poor and minority who have the least money to purchase health insurance and the least organizational skills to comply with a federal mandate.  Bruce Western at Harvard University who studies criminal justice has shown that the huge expansion of prison population in recent years has occurred among minorities locked up for the most part for administrative crimes like missing court dates not traditional common law offenses.  Once in the system, they no longer have a shot at upward mobility and often see their lives spiral downwards.  The health mandate will create a new category of offense that will disproportionately impact the young and poor.  More fundamentally, however, forcing American citizens to write a check every month to the Aetna corporation for the privelege of turning 18 runs deeply counter to the American tradition of freedom.   The provision which has so deeply troubled liberals like Howard Dean must be dropped from the final bill.

Second, the bill imposes a tax on good quality health care plans.  This is baffling politically as it targets union workers, a mainstay of the Democratic party--as well as anyone who has what the bill is supposed to provide.  The union struggle for quality health care has been at the center of the fight for social equality for more than a Century.  Taxing union benefits is deeply punitive to the labor cause as it will not only take money away from members but have the secondary effect of making it harder to organize.  Anyone with quality healthcare will instantly see a decline in their welfare from the bill.  More fundamentally, however, normally, one levies excise taxes on undesirable things, for example, cigarettes and alcohol.  Indeed, taxes on "bads" impacting health such as tanning salons which subject people to UV rays make sense in a healthcare package.  Taxing quality health care plans, in contrast, as the Senate has done in a bill designed to provide just that is not only counter-intuitive but imposed in place of a general tax or one on the wealthy, deeply regressive.  This provision, not present in the House bill, must be dropped in any final bill.

One can debate the political wisdom of pushing ahead with a bill that the American public so disklikes.  However, that debate is over.  The task now is to change the bill so that there is less to dislike, allowing the parts that do work to stand on their own and make the bill better as a result. 

In short, it is late in the game but not too late to fix these two flawed provisions. Failure to do so will have steep policy and political consequences.  Fixing them is not only good policy but good politics. 

Well, it's over.  The 2009 United Nations Climate Change Conference ended not with a bang, a whimper or a treaty but rather with something akin to a scream from developing countries--some like Tuvalu that may one day end up under water--whose objections to a plan cobbled together at the last minute prevented the conference from reaching a formal agreement.  Instead, the organizers "took note" of an accord forged by the US, China, India, South Africa and Brazil  that now lacks even the mild imprimateur of formal endorsement by the UN conference. 

And what of the Accord reached by those five countries that other countries may now sign onto?  Given the fear and loathing that broke out earlier in the week between the developed and developing nations that with disastrous logistics threatened to make Copenhagen the Seattle of climate change negotiations, it was as good an outcome as could have been hoped for by the end.  However, the deal struck--to commit to reduce emissions with transparent reporting--was far weaker than what appeared achievable earlier in the week let alone expectations for the conference.  It keeps the idea of a global climate change accord alive but just barely. 

In retrospect, the idea of forging an international agreement requiring the acceptance of every country on earth during the greatest global financial crisis since the Depression to deal with a crisis whose greatest effects may not be felt for decades, may have been overly ambitious.  The promise of a global agreement on climate change that began in Rio made sense for many reasons.  The atmosphere moves across the face of the globe so that gases emitted anywhere impact global weather.  However, the bar for concerted action--a global treaty with billions of zero sum dollars at stake--is clearly high.  It can take the US years to negotiate a tax treaty with a single county.  With the Accord a guide to a more formal agreement,  countries will work over the coming year toward a binding agreement in Mexico.  But in the wake of Copenhagen, action appears no closer than before and perhaps further.  The Accord does give President Obama something to show Congress to encourage action on climate change.  But what form should the action take?  The centerpiece of the House bill is, of course, a US cap and trade system.  Cap and trade has proved effective in lowering NOX emissions .  However, it is a mistake to view action on climate change and cap and trade as synonymous.  Europe has had cap and trade in place for several years and has not succeeded, for the most part in actually reducing emissions.  A cap and trade system like a carbon tax provides an incentive to adopt new technologies or change behavior to produce less carbon.  But it is only a means, not the end.

What is the end?  The end is new low or no carbon technologies that are the necessary and sufficient condition to lower greenhouse gas emissions.  Emissions will go down when electric cars powered by renewable electricity replace gasoline cars and industry, homes and business run not on carbon-intensive fuels but on clean, renewable energy.  While a cap and trade system or carbon tax would make high carbon technologies more expensive, the real long term goal is to lower the price of clean alternatives.  That means breakthrough technologies and disruptive innovation.

Fortunately, breakthrough innovation and transformative technologies are their own reward and do not depend--in the long term--on making carbon more expensive.  There are other ways to accelerate innovation.  In the context of electricity, a key task is to break down barriers blocking the uptake of clean technology.  One such barrier that will remain whatever happens to the price of carbon is the cumbersome process by which utilities, heavily regulated and incented to do the wrong thing, not the right, currently source--or don't source--clean technology and renewable power.

The good news is we still control our destiny since if the US can pioneer new technologies, not only will we reduce our own emissions, we will harvest the economic benefits of selling this technology to others.  Whatever happens in Congress with cap and trade and with international climate negotiations, it is vital that we move forward on accelerating clean innovation now and tear down barriers blocking the free flow of clean technologies and energy to market.

New York City - With President Obama's speech today before the UN meeting on climate change, convened by UN Secretary General Ban Ki-Moon, the release of excerpts from an IEA report on the climate Sunday and climate on the agenda at the G-20 meeting in Pittsburgh, this week has shaped up as a remarkable one in climate discussions.  On Sunday, the IEA released sections from its forth coming Energy Outlook  that are remarkably optimistic about the climate.  Today, President Obama gave a forceful--if thematic--speech to the UN--notable more than anything else for the reversal of US policy on the climate that his presidency brings relative to his predecessor.  And later in the week, the G-20 will take up the issue anew after failing to make major progress in London.  All of this is happening with Copenhagen now just around the corner.  At this point, it is worth taking stock of where the world is on what Sir David King has dubbed the hot topic.

First, the IEA report in its suprisingly positive findings shows above all, that action on climate change is within our reach.  The IEA found that the EU effort on climate has succeded more than previously thought.  It also praises China for its efforts and the US for improving fuel economy  Most notable, however, is the huge decline in emissions that has evidently accompanied the current recession.  The sharp dropoff in emissions shows that the word can cut emissions dramatically over a period of months and still survive.  In effect, it sets a boundary.  Obviousy, we don't want to see unemployment at 10% in the US in order to lower emissions.  But it shows that a lower emissions world is attainable. In fact, we are living it right now. 

The President's speech, though criticized by some environmentalists for lacking specifics, in my mind hit the right notes and reverses one of the troubling elements of much of the discussion before.  While noting that the developed world needs to do more, the President also called the developing world to account.  This strikes a slightly different note than many dicussions up to now that have reprised the poverty debate with the developing world asking for aid and the developed world expressing guilt over previous sins.  Climate change discussions--though they touch on issues of development--are not about equity between North and South but rather the survival of the planet.  Progress on saving the climate cannot be about apologizing for the last century of industrialization.  That was a necessary phase of economic development that although it raised living standards first in the developed world, in effect, paved the way for industrialization everywhere.  Nor was industrialization in the west a free ride for the workers who toiled in factories or even those who enjoyed its fruit as the high mortality of the indsutrial wage and bloody 20th Century attest.  The developing world although slower to industrialize in many ways inherits the technology, transportation network and markets created by the developed world's industrialization.  And developing countries have an even greater stake in addressing climate change because they stand to suffer disproportionately from rising sea levels, disruption of food supplies, extreme weather and other potential consequences of a hotter planet.  The President was right to call on the developing countries to be as serious as the developed ones about facing this issue.

The discussions underway at the UN and those that will be part of the G20 process, however, are not moving at the pace that anyone would like.  Although President Obama took pains to mention the passage of climate change legislation in the House, he could not point to a unifed American position as our basis for international negotiation.  The simple fact is that there is a very real possibility that a comprehensive global agreement on global greenhouse gas emissions will not be ready by Copenhagen.

If that is the case, however, as the IEA repot makes clear, that does not mean all is lost.  Rather, the US like China and, indeed, all countries needs to move forward on the many other fronts available to address the problem of greenhouse gas emissions.  Since the recent interruption of growth was, we all hope, temporary, as I have written before the answer ultimately must be technology.  In order to incent the private sector to accelerate the rollout of low carbon technologies, government needs to put the right policies in place.  That means improving fuel economy, building more efficient buildings and creating a new, smarter, more open electricity network to spur a renewable revolution. 

Regardless of what happens this week in New York and Pittsburgh, or what happens in Copenhagen the problem of climate change will not be solved in a day a month or a year, but only through the consistent application of private industry and government in all their actions to introducing that technology.  That is the real imperative underlying this week's focus on climate change.  And it must be the real goal of a wide range of policy efforts going forward whether the world secures a comprehensive agreement or not.

As the New York Times reports today in an editorial, the decision of Senators Kerry and Boxer to put off introduction of their climate bill until the end of the month is likely to push Congressional action on climate change that much further into the future.  With the fate of health care legislation in doubt, there is little appetite for moving climate change legislation to the floor.  However, as the Times also points out, that does not mean all is lost.  The EPA is moving forward on rules to regulate carbon dioxide as a greenhouse gas.  Perhaps even more importantly, however, the Senate has already passed legislation to create a renewable electricity standard.  Indeed both the Senate and House have passed numerous provisions--that while not as dramatic as putting a price on carbon--attack the climate problem in important ways.

The current situation highlights the fact that while putting a price on carbon through a cap and trade system or carbon tax--as France just announced it will do next year--has achieved symbolic status as a litmus test for seriously addressing climate problem, it is only one policy tool.  Indeed, as the EU's experience with cap and trade (and carbon taxes in Finland, Sweden and Denmark) shows, there is no silver bullet for reducing emissions.  There are policies.  And all of these policies ultimately must accomplish the same thing: accelerate the development and use of new, cleaner technologies.

Assuming continuing growth of human civilization, only new low emissions technologies that replace carbon intensive ones can sustain growth without warming the planet.  Conservation--getting by with less--is helpful in the short term.  So is reforestation.  Over the long term, however, as population grows and living standards rise, forests will be cut and emmissions rise, leaving new technologies as the only long term answer. 

The appeal of putting a price on carbon is that by internalizing the social costs of emissions, it lets the market select the best way to reduce them.  The difficulty, as the EU has discovered, is that allocating the right to pollute or even crafting a fair and harmonized carbon tax is an inherently political process that provides a golden opportunity to free ride on the reductions of others.  Since climate change is something taking place over decades, governments have an even greater opportunity than usual to postpone pain.  To date, Europe's success in reducing emissions through cap and trade has been real but modest and its efforts offset by exploding emissions from India and China. 

This does not mean that cap and trade is not a good idea: only that is just one tool in the shed.  Which brings us to alternative approaches. 

Europe has had success with a feed in tarriff to encourage deployment of renewable energy.  The US equivalent of tax credits has been useful though less transformative.  A renewable electricity standard such as that in the EU and those already passed in separate bills in the House and Senate will also help replace carbon intensive energy with renewable energy. 
 
However, there is an additional problem.  While building is going green--most new large commercial buildings are seeking Leeds certification, power generation is changing far more slowly.  The reason is its regulated status.  While the telecom industry is now turning over its entire network infrastructure every five years at a cost of billions and consumer businesses must continually invest in new products and technologies to stay in place, heavily regulated power utilities face no real competition and, instead, major barriers to innovation.

True, regulated utilities normally earn a guaranteed rate of return on investment which, all things being equal, should incent them to make new investments.  However, they also require the approval of regulators whose mission, above all, is to contain costs to consumers.  A consumer preference for renewable energy rarely expresses itself in the market since consumers don't get to choose their source of power. In  short, the structure of the utility industry is currently blocking the renewable revolution.

I support prompt action on cap and trade as one tool to address the climate problem. However, as valuable as it is, it is one tool of many.  Regardless of how quickly this tool becomes available, it is important to take all of the other steps available to accelerate investments in clean technologies.

Last night's speech by President Obama in support of health care legislation, fiery yet thoughtful, and designed, as E.J. Dionne remarks today, to seize the autumn after a summer dominated by his opponents, increases the chances of passage of a health care bill this year.  By engaging directly and forcefully with Congress and the American people, last night the President injected himself into a debate including all of its details that until now he has largely tried to steer clear of.  The strongest parts of the speech were those where steeped in detail he argued for the overall package on the basis of its component parts.  The speech was significant not only for the prospects of health care legislation this year, but also for the President's entire agenda, including the next large legislative item on tap: energy and climate change legislation.

As with health care legislation, the President's strategy on energy and climate has been to set broad goals and encourage Congress to tackle the details.  As a former Senator himself, it is not surprising that he would have confidence in the ability of Congress to write law.  In the case of climate, the House did pass a bill this year and though the cap and trade component was weakened in drafting, the bill contains a meaningful Renewable Electricity Standard and other provisions critical to stimulating the growth of renewable electricity. 

While that strategy worked in the House, the Senate chose to postpone action this summer until after healthcare.  One rationale for postponement was to use the momentum created by health care to move energy as well.  Now, however, it appears less likely that health care will grease the skids for energy legislation.  Instead, the mobilization of Republicans against health care may carry over to energy.  Nonetheless, the health care debate suggests some important lessons for moving energy legislation.

The first lesson is that moving a bill--particularly one with a climate change component--is likely to require direct presidential engagement.  Currently the Administration does not have positions on many of the specifics of the energy bill.  It should develop positions and thorough arguments to back them up.  Absent direct engagement, it will be to easy for opponents of the legislation to suggest postponement.  While health care is the topic now at the top of the agenda, the Administration should begin laying the groundwork now for engagement when energy comes up later in the fall.

Second, the Administration has to decide whether to pursue a partisan or non partisan strategy.  Either way, it is critical that the Administration win over moderate Democrats.  Without them, it cannot pursue a partisan strategy.  And without them even a non partisan strategy becomes that much more difficult.  This too will require direct presidential engagement to determine which Senators require which changes to the law to feel comfortable supporting the overall package.  The key argument to be made to moderate Democrats is the economic one: that the US needs to take leadership in developing new energy technologies lest leadership of this vital sector pass to other countries.  The second most important argument is energy security.  What could be more absurd, after all, than fighting two wars in the Middle East and sparring with Iran over politics, while continuing to import large quantities of oil from that region.  The time to begin reaching out to the Democratic moderates is now.

Many commentators have correclty observed that the current Administration, at times seems to have learned too well the lessons of the early Clinton years of not trying to be overly prescriptive with respect to legislation.  However, the opposite is also true: the Administration cannot stay out of the fray.

To pass energy legislation as with health care, the Administration will need to engage and, yes, sweat the details.

New York City - On Friday, the US Energy Information released new monthly statistics for renewable energy output as well as output of traditional forms of power.  The good news is that renewable energy in May, the latest month for which statistics have been compiled, is at its all time highest level, accounting for 13% of total power.  The bad news, however, is that the vast majority of this, about 9.4% comes from traditional hydropower.  The other renewables, wind, solar, biomass and geothermal accounted for just 3.6%.   Wind accounts for 1.8, biomass, 1.3%, geothermal 0.4% and solar 0.3% of the total. 

All of the sources of renewables grew, but the growth rates were modest.  Wind grew year-on-year by 12.5% and solar by only 3.5%.  These growth rates might be passable for mature technologies with a huge starting base.  However, for comparatively new technologies with a tiny denominator, these growth rates are not impressive.  True, the data do not reflect the full force of the Investment Tax Credit (for solar installations) extended last fall and the American Recovery and Reinvestment Act passed this winter--because of the lag in the data.  Still they tell at best a story of an industry surviving the recession.  They do not tell a story of economic rebirth based on the promise of a low carbon future.

There are reasons to hope clean energy would be growing much faster than these rates--the goal of lowering greenhouse gas emissions--essential to addressing climate change--and the goal of creating a new wave of clean technology-driven growth.  (The goal of energy security is less dependent on renewable technologies since coal is present in the United States but is nonetheless also served by replacing oil in our nation's energy mix.) 

However, there are also reasons to expect clean energy to be growing far faster than it is: the declining cost curves of renewables relative to fossil fuels, the large subisidies the government has put in place and the huge push America is making, from the President's speeches to the T.Boone Pickens Plan for energy independence on down.  In many states, renewable energy is even mandated through a Renewable Electricity Standard.  Looking abroad, Germany produces 7% of its power from wind, about four times what the US does and Spain's solar power capacity grew 364% in 2008.  Now that is the type of growth needed to have a real effect!  The fact is US growth rates in renewable industry are not meeting reasonable expectations for clean energy growth, let alone desirable targets.

I have been studying the question of why clean technology is moving so slowly into the marketplace in the United States and my research suggests that adoption of clean technology and renewable energy must be about more than pricing and incentives.  It is about decisionmaking and removing obstacles to the deployment of clean energy.  These obstacles are present, once you peer into the complex world of the electricity industry,in a host of non economic barriers to implementation.

To understand why clean energy is not--even with large incentives in place--displacing dirtier forms of energy, it is important to recall the extraordinarily complex nature of the industry.  Like all large industries, the electricity industry has incumbents.  These incumbents--unlike say car manufacturers or computer companies, are protected by regulation.  During the 1990s, the industry was partially deregulated so that market forces were introduced in some parts of the industry in some regions.  However, the work of regulatory reform proceeded only part way leaving the industry in a sort of limbo  Today, some regions of the country have wholesale competition.  Others have limited retail competition.  Still others have wholly vertically integrated companies supplying their customers with soup to nuts service unchanged from a half century ago.  And there is limited trade in electricity, this in an era, when frozen dinners served in the United States are made in Thailand and fresh flowers cut in Bolivia.

Indeed the electricity industry is quite rare today in remaining geographically divided.  With some exceptions it is illegal for a utility in one region to sell to customers in another.  There is effectively no such thing as national competition. There are, of course, many precedents for these legalized restraints on trade.  Banking used to be organized this way prior to reforms in the 1980s and 1990s.  Telecommunications after the breakup of Ma Bell but before the 1996 Telecom bill and development of national communications services was similarly organized by region.  In the case of electricity, besides the legal restraints on trade there are major physical restraints in the form of lack of capacity on the grid to move power where it is needed.

The absence of universal market allocation of power, means that decisionmaking--of what types of power to buy, what types of clean technology to implement and what types of infrastructure to build--is left, frequently to a small group of decisionmakers who are also incumbents and have a rational bias towards decisions supporting their incumbent position.  A transformative technology, for example, could reduce the value of their legacy assets.  Building a new transmission line to connect wind power to the grid, may make a plant they own obsolete.  It may therefore be entirely rational for them to discourage rather than encourage the deployment of new technology. 

It would be one thing if the decisionmakers were acting on their own.  However, typically they make decisions under the rate base system that provides a guaranteed rate of return on anything they can place in the rate base.  This would ordinarily incent them toward overinvestment.  However, since regulators oversee these rate cases and generally try to lower costs, the decisionmakers at utilities have a conflicting mandate to gain a high rate of return but also keep costs down.  This can lead to a bias toward investments that pay off immediately and against investments that pay off longer term.

The upshot is that getting the type of growth rates of renewables needed to unlock the economic and social potential of clean energy is likely to take more than economic incentives and mandates.  It may well require reform to remove obstacles to the deployment of new technology.

The energy bills now working their way through Congress contain some measures to address these problems.  But my research suggests more work needs to be done.

In this weekend's Sunday New York Times Greg Mankiw, the Harvard professor of economics, criticizes the cap and trade bill working its way through Congress for giving out instead of auctioning off many allowances.  Mankiw who in the past has supported a tax on carbon as a simpler alternative to a cap and trade system, correctly points out, quoting President Obama, that a cap and trade system that auctions allowances can resemble a carbon tax.  If the auction revenues are used to offset other taxes, as with a carbon tax, any negative effect of the regime on the economy can be minimized. 

He goes on, however, to make an oddly flawed argument that should not go uncorrected. 

Criticizing the House bill that gives away allowances to utilities in lieu of auctioning them off, he says this will harm the economy by requiring consumers to pay more without recapturing revenues that could be used to offset taxes. The current bill by encouraging "lower real take home wages, reduced work incentives and depressed economic activity", he argues, will harm the economy.

Not true.

To the degree allowances are handed out at the beginning, consumers as well as utilities are given a pass and do not have to pay more for energy.  Some inefficient producers who need to buy credits on the exchange may raise prices to consumers or earn less profits.  However, other efficient producers will receive income from selling credits, letting them lower prices or increase profits. The overall impact on the economy of a cap depends on the level of the cap.  If sufficiently low, everyone will have to invest in new technology to cut emissions.  If sufficiently high, no one will. 

The real difference between auctioning off and handing out allowances is the first sends a stronger, immediate price signal, while the latter sends a weaker one likely to kick in later. 

Auctioning the allowances, like a tax, is a transfer away from industry and consumers to the government.  At best, the government can return the money by, for example, cutting a different tax.  If it keeps the money, the auctions act like a fiscal drag.  In contrast, granting allowances postpones the economic impact.  (For the record, there are reasons one might want to put off pain: first the current economic slump and second, the fact that low carbon alterantives to current fuels are growing steadily cheaper, meaning the cost of cutting emissions may be lower in the future.)

I have argued that with a new president in office and Cophenhagen coming up next year, this is the year to pass climate change legislation.  The bill can be strengthened later.  Others may disagree.  However, while auctioning credits may make for a stronger signal than granting them, it will not reduce the impact on the economy. 

This week the Center for Automotive Research in Detroit is holding its annual conference on the future of cars.  Entitled “Today's Turmoil: a Foundation for Success”, the four day conference allows the global industry to hear the insights of people like Akio Toyoda, the new president of Toyota who is shaking up the company started by his grandfather and discuss subjects such as manufacturing and how to make sustainable cars.  A new face this year: Ed Bloom of the US Auto Task Force in the role of the industry's new partner, government.

With global sales down almost 50% from their peak, it has, indeed, been a brutal year for the industry, especially so for the Big Three, now really One and a Half.   From this new low base, however, the industry is certain to rebound.  The question is whether it will rebound in America or whether the center of gravity of auto manufacturing will continue to shift away.  After the decades-old decline of the Big Three's market share, all the management studies and manufacturing initiatiaves, capped by GM and Chysler’s bankruptcy filings, some would argue the US industry is past recovery.  I disagree. 

I believe US carmakers can be part of the global rebound.  I also believe they must be if the US is to benefit from the clean economic revolution.  However, recovery of the industry won't come easy.   The US car industry needs to reinvent itself with help from policymakers and by listening to people outside the industry, especially the customer..  The good news it that auto manufacturing tends toward decentralization.  The weight of cars, variations in standards by country and a healthy measure of politics combines to encourage localized production.  There is no risk yet of a laptop-style shift of the entire industry to Asia.  The challenges are best described as severe but surmountable.  Here are six things the US auto industry needs to do to re-emerge in strong shape from the Great Recession of which government has a role in three:

First the industry needs to rediscover innovation.  In its glory days, passionate engineers invented new tires, transmissions, solutions to the problem of knock, the octane system of gasoline, ball bearings and other breakthrough technologies of the day, the equivalent of Twitter or Facebook or in the auto industry, new battery technologies, electric drive trains, carbon fiber materials, computerization, and energy economy technologies today.  One idea would be for US car companies to put venture capitalists from Silicon Valley or prominent scientists on their boards and move their R&D operations to Silicon Valley.   VC-backed Tesla, for example, is making major strides from its Palo Alto base. Palo Alto-based Better Place is similarly working with Renault and Nissan to pioneer new charging technology for an all electric car.  Cars are a technology product and it is time to remember this.  They are also a lifestyle product.  The Big Three should draw more design inspiration from places like New York and Los Angeles.  In its early days, GM had its headquarters in New York and it would behoove the industry to reconnect with centers of excellence across the country.

Second, the US car industry needs to recapture its ability to anticipate changes in consumer taste.  In My Years at General Motors, Alfred Sloan discussed how hard this always was, yet how essential: “Even though it takes years to develop a new product, it is our job to be ready with it when there is an effective demand”.  He was describing a problem that bedeviled the industry even in1957: a sudden desire by Americans for small cars—something in which the rest of the world even then excelled due to smaller streets, high priced gas and shorter distances—that caused imports to leap.  In that crisis, the Big Three responded with cars like the Corvair a year later to recapture the lower end of the market and bring imports from 10% back down to a negligible level.  The Big Three were far less successful after the oil shocks of the 1970s when imports began building market share.  They face an even sterner challenge in the wake of last year’s oil shock.  Message: be ready with small cars when they are needed.  And in the wake of climate change which is not going away: improve fuel efficiency.

Third, the US industry must try to reinvigorate its supplier base which has suffered even more than the OEMs in recent years.  A focused effort by industry to source locally and government support to high tech companies making batteries and other parts can help fuel the substrate necessary to a sound industry going forward.  Alan Mullaly at Ford is already shifting Ford toward greater outsourcing of parts.  To insure long term sustainability, it is important to rebuild the North American infrastructure.  As discussed below, this should be an element of negotiation with companies entering the US market.

Fourth, much has been made of the so-called cost disadvantage of the Big Three’s legacy costs which supposedly added $2,000 to the value of each car.  In fact, the appropriate way to deal with liabilities was always on the balance sheet as a capital item not as an operating one.  The GM and Chrysler bankruptcies put an end to much of this liability.  However, properly accounted for and written down, these legacy costs should be a footnote on the balance sheet, not a drag on operating profit..

Fifth, much has similarly been made of the supposedly high wages paid by US carmakers relative to foreign companies that have set up shop in the South.  While the gap is overstated, labor costs are lower in the South due to lower costs and the absence of unionization.  Here the US needs to act carefully but act on labor rules that have created an unfair playing field.  Due to our state system of regulation, the US has both right to work states and others where unionization is common.  Taking advantage of US federalism, foreign manufacturers even if their own countries are 100% union have set up shop in the South. A notable exception to this stratifaction is the unionized Toyota NUMMI facility in Fremont, California, where GM was a partner however, there is talk of Toyota closing that plant in the wake of GM’s pullout.

The answer to this is not heavy handed change in our federalist system.   However, as Bob Reich has argued, the US, as a whole, loses when states and even towns bid against one another for new factories.  He proposed a body or at least baseline standards to negotiate on behalf of American manufacturing sites.  It would not be unreasonable to require new factories to offer employees a chance to organize at some point after the plant is built, require some level of local sourcing of parts and at least try to negotiate for research and development investments.  Until other countries relax their standards for foreign investment, we should not give away the store.

Sixth, and here government is the critical player, the industry needs a reasonable exchange rate.  For about a quarter century, since the end of the 1982 recession, a high dollar has benefited our financial sector at the expense of manufacturing.  Something similar happened in England’s transition from manufacturing to finance capitalism in the late 19th Century when it shifted from a trade surplus to deficit (driving a quest for colonies.).  The dangers of over reliance on finance are clear.  Recently, Laura Tyson floated the idea of retooling our economy more toward investment and manufacturing in lieu of finance, in part, by lowering the value of the dollar.  Dollar policy is not something that is widely discussed or even understood yet it has an immense effect on the structure of our economy.  Perhaps like war it is too important to be left to the generals and should be the subject of an open and intellectually rigorous academic and industry discussion.

In short, cars will continue to be built in the United States.  The question is whether we will be leaders or followers, designing the breakthrough cars of the future, or building cars introduced somewhere else a few years earlier.

To this point, of the top 5 cars purchased under the Cash for Clunkers program, four bear Japanese nameplates.   (The rankings are Toyota Corolla, Ford Focus, Honda Civic, Toyota Camry and Toyota Prius.)  Of these, all but the Prius are largely made in the United States and Toyota will begin making the Prius in Mississippi next year.  While Japanese, German and Korean investment in factories in the United States is a win win, creating jobs, economic activity and tax revenues, it does not amount to leadership. 

In conclusion, the US auto industry faces huge challenges.  But the bottom of a cycle creates opportunity and the decks are now clear for a rebound.  It was not long ago that the US industries—after suffering through the 1980s--mounted a partial comeback, improving quality and inventing breakthrough products of the day such as the minivan and SUV—formats soon copied by others.  US industry and policymakers should begin taking action now to lead recovery when it inevitably comes.