One of the most important pieces for the future of transportation, energy, and climate is how we power automobiles. An interesting piece from the Wall Street Journal's "Environmental Capital" blog discusses a new study on the future of global oil supplies:
Here's an intriguing thought: Global oil supplies are indeed set to peak within a few years, and no, that is not bullish for oil. Quite the contrary—it will spell the end of the "oil age."
That's the take from Deutsche Bank's new report, "The Peak Oil Market." In a nutshell: The oil industry chronically under invests in finding new supplies, exemplified both by Big Oil’s recent love of share buybacks and under-investment by big oil-producing nations. That spells a looming supply crunch.
That will send oil to $175 a barrel by 2016—and will simultaneously put the final nail in oil's coffin and send prices plummeting back to $70 by 2030. That’s because there's an even more important "peak" moment on the horizon: A global peak in oil demand. That has already begun in the world’s biggest oil-consuming nation, Deutsche Bank notes:
US demand is the key. It is the last market-priced, oil inefficient, major oil consumer. We believe Obama’s environmental agenda, the bankruptcy of the US auto industry, the war in Iraq, and global oil supply challenges have dovetailed to spell the end of the oil era.
The big driver? The coming-of-age of electric and hybrid vehicles, which promise massive fuel-economy gains for short-hop commuting but which so far have not been economic.
Peak Oil, which used to be dismissed by many as kind of wacky theory (even though the idea was originally formulated by an oil company geologist), seems to have arrived firmly in the mainstream with the likes of Deutsche Bank onboard. Some argue that the arrival of peak oil will generate a massive shock to civilization, but, true or not, it will certainly be a game-changer that necessitates and speeds the deployment of new technologies. So if the Peak Oil believers are right, it's incumbent on us to start investing in these technologies today: Oil prices spikes have generally been economically problematic – or worse – some have triggered recessions.
For more on the "coming-of-age of electric and hybrid vehicles" and the general future of clean transportation and automaking, join us at NDN at noon today for Insights into the future of Clean Transportation, which will showcase speakers from the Center for Automobile Research, the Auto Alliance, and Better Place. If you can't make it, watch the event live online.
Albuquerque, NM - At the Hispanic National Bar Association's 34th Annual Convention, I just presented on the issue of "Immigrant Rights." So I was going to just show a blank screen since immigrants don't enjoy the most basic due process rights in immigration proceedings. Actually, I provided an overview of the latest actions taken in this area by all three branches of government and and I made the case for passage of immigration reform this year. My first impression: very encouraged by the fact that the decent size room we were provided was completely full, not one empty seat. Now, keep in mind that most HNBA members are in private practice and "public interest" law is not exactly part of the day to day work of the pool of mostly corporate litigation, corporate transactional, and criminal lawyers. So I was encouraged at the sight of a full room, and at hearing our topic discussed over and over at breakfast plenaries, during lunch key note speeches, and even in the corridors of the convention hall. This tells me that the violations of basic due process and human rights under the guise of immigration law have so permeated our society - particularly our demographic - that even "unusual" suspects, corporate lawyers who have not had immigrants in their families for centuries, are in tune and outraged at some of the most shocking violations of the Constitution in the name of "enforcing immigration law."
This elite group of Hispanics could all report having clients who have suffered due to the broken immigration system, people who through no fault of their own have been discriminated against as "illegals" merely for the color of their skin, and some reported even being the object of this persecution themselves. It is clear that the toxicicity of the issue of immigration has spilled over even into our judicial system. There was a great deal of consensus among judges that the sharp rise in Hispanic defendants sentenced before them is largely due to Hispanic legal residents and undocumented immigrants that are caught in immigration enforcement efforts.
Judge Martha Vazquez, Chief Judge for the U.S. Circuit Court of New Mexico, called the current immigration broekn system a "system of de facto immigrant criminalization," and highlighted the excessive penalization of immigrants in sentencing because illegal entry is an offense that calls for sentencing enhancement for past offenses. And U.S. citizens might be guilty of illegal entry - she highlighted the case of a U.S. citizen who travelled to Mexico and while there was robbed of all his documents and wallet.
This defendant decided to just walk back into the U.S., but upon crossing back, he failed to go through customs inspection, which constitutes illegal entry. Over a decade earlier he had been sentenced for assault and had served his time. He committed a subsequent offense years later, and because of his "illegal entry," record of prior sentences must be taken into account to enhance a subsequent sentence by several years. Judge Vazquez's point is that this person was essentially doing time twice for the same offense - he had already been judged for the original offense and carried out his sentence. But the second sentence forces the judge to have this person serve time again for the prior offense.
New York City--This past weekend, Vice President Biden made news when he said that the economy was probably in worse shape at the beginning of the year than anyone thought. Although he told George Stephanopoulos that it is premature to speak of a second stimulus, the implication of his remarks is that more economic aid may be needed. Indeed, Democratic-leaning economists such as Paul Krugman and Laura Tyson have floated the idea of a second stimulus. Meanwhile on the other side of the aisle, Republicans are already campaigning against a second stimulus. What is driving the talk of a second stimulus is the poor jobs number last month that suggested the green shoots are turning brown. This, therefore, may be an appropriate moment to look at what has happened to the first stimulus. Is it working? If not, is another one needed? Is anything impeding the flow of funds. Alternatively, should policymakers be looking elsewhere for more economic fuel.
During the initial debate over the stimulus, I argued on behalf of a board--an idea first suggested by Dick Ravitch, former head of the New York MTA--to accelerate infrastructure spending. We did get a board but its focus is to track the stimulus not carry it out and a website, Recovery.org that President Obama said would provide unprecedented transparency regarding the stimulus. Here is my take on the stimulus so far.
First, the website and accounting surrounding the recovery package really does provide unprecedented transparency for a large government initiative, even allowing readers to comment on and discuss recovery projects. The good news is this allows us to debate the stimulus on the basis of thorough data. The bad news, however, is that six months into the Administration, the data show that only about $65 billion worth of projects have been started, or about 8% of the total two year budget. A far smaller amount of money has probably been actually dispensed. As I anticipated, the strategy of moving the money through the normal bureaucratic channels as opposed to an emergency board has slowed its disbursement and therefore moderated its stimulative effect. On the other hand, using existing channels provides a degree of oversight. In the inevitable tradeoff between speed and oversight, implementation of the the recovery package has erred on the side of oversight.
In many ways the most interesting portion of the stimulus--the part I first proposed last year--was that directed to clean energy. The success of these funds in stimulating clean energy innovation is important to America's future, but for the most part, it is too early to measure their effect. DOE recently announced procedures for giving out the approximately $4 billion in smart grid funds. However, companies have been hampered in applying pending agreement on smart grid standards. The Administration is doing everything right in this respect, spearheading a drive to accelerate the development of open standards. However, this money, therefore, has yet to be spent.
As another indicator of the development of renewable energy, the price of photovoltaic panels has dropped this year. The rate of decline about 1% per month, however, cannot be attributed with certainty to any one factor and probably is more related to Spanish policy than what we have done in the United States.
Around the country, work is beginning on numerous infrastructure projects. However, the normal delay in government contracting--even for "shovel ready" projects means that the bulk of stimulus funds remain to be spent. In contrast, as the New York Timesreports today, the French have been much more successful in rapidly deploying stimulus funds. However, they are able to do this, in part, due to their more centralized governmental structure.
In its first months in power, the Administration framed its policy response to the economic crisis as consisting of three key initiatives: first, pass a recovery package to stimulate demand, second stabilize financial markets to leverage financial activity around that demand and finally, address the mortgage crisis. This framing was in my view correct.
So how are we doing on each? The first policy response, the recovery package to spur demand and create a multiplier effect is underway but money is entering the economy slowly so that we won't really feel it until the end of the year. There is a silver lining to this timing. It will hit at about the time that some are afraid we may be approaching a double dip. However, the slow pace will keep us on tenterhooks well into the fall. The rescue package for the banks has been reworked a number of times, but the fact that the large banks have been making profits and that some have repaid their loans from the TARP indicates progress has been made on this front--most due to the effect of reversing the mark-to-market rules that were forcing massive market-roiling markdowns of illiquid securities--and the high tailwinds for the industry provided by low cost money from the Fed. Finally, the mortgage industry remains largely as it was in February with the combination of initiatives suggested by an interagency taskforce yet to really take effect. People are still losing their homes to foreclosure.
So does this mean we need a second stimulus? On the contrary, it means that as of now the stimulus funds have yet to really hit the economy and talk of a second stimulus is, as the Vice President stated, premature. What would be more useful is to try to accelerate the spending of the funds already allocated. Much progress has been made on banking. More should be done to reduce the cost of mortgages and keep people in their homes.
While retrofitting buildings is leading to some new green jobs, clean energy which I believe must be an important driver of future growth has yet to impact the economy in a major way. To fulfill the President's goals, it is time to think seriously about roadblocks to the development and uptake of new technologies in the energy sector as well as the deployment of renewable energy. The American Clean Energy and Security Act recently passed by the House and now slated for consideration in the Senate provides some incentives to modernize our electricity grid. Key to the process is opening up the close-knit industry to innovation. One of the subjects we are researching most aggressively at NDN is how to remove roadblocks in the energy industry that block innovation, open markets to new players and technologies and unlock the full economic potential of the energy network.
In short, as I argued last year, how recovery money is spent and how quickly it is spent--not whether we do a "second" stimulus--will ultimately determine the speed of recovery.
Ever since the Waxman Markey American Clean Energy and Security Act or ACESA began congressional hearings this spring, many people have predicted its demise. Yet the bill which will create a cap and market system in the United States--in preparation for climate discussions early next year in Copenhagen--create a renewable electricity standard and address other climate-related issues has moved steadily forward, first through committee and now to the floor of the House. Today, President Obama made calls to critical House members whose support is needed to pass the bill. The bill may come to a vote as soon as tomorrow but probably only if Speaker Pelosi and the House leadership believe it has the necessary votes to pass.
This is an important piece of legislation. As I have argued, this year represents the best chance for passage of a bill to put a price on carbon in many and probably for the forseeable future with a new President in office, Copenhagen coming up next year and with sizable Democratic majorities in both the House and Senate. As the critical moment of truth approaches, proponents are actively working phones, faxes and email to bring support to bear.
Polls show that Americans support the bill. Most major environmental organizations support it as well, though some environmentalists wish it were stronger. As I have argued, however, one cannot expect perfection in landmark regulation of this nature. Just getting the principle of limiting greenhouse gas emissiosn on the books would be a historic legislative accomplishment. On the other side, the American Petroleum Institute and some business groups oppose the legislation. However, the bill includes substantial incentives to explore carbon capture and additional measures to allow coal producing regions to diversify their economies over the long term.
It remains to be seen if the bill will pass, but it has come a long way and--if past is prologue--will go the distance.
Those interested in trying to push the bill across the goal line can find out what groups are doing here.
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.
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
Yesterday, the Obama Administration released a long awaited, definitive government report on the impact of climate change on the United States by region, economic sector and social outcome. In what might be called an American version of the Stern report, prepared by 13 government agencies, it confirms the large existing body of scientific work on the reality of climate change and then specifically charts the impact on the United States today and far into the future.
Significantly, it argues that climate change has already impacted the US through heavy downpours, rising temperatures and sea levels, thawing permafrost, earlier snowmelt and alterations in river flows. And change will accelerate in years to come. Indeed, the report underscores that much of the impact of climate change will be via water. In some areas, increased precipitation will stress water management resources, leading to flooding. In others, it will lead to drought. Changing water paterns will impact agriculture, coastal regions and public health.
If this report cannot drive home the point that the cost of climate change is far greater than the cost of a cap and market regime to address it, nothing may. The real threat of climate change is that its mechanism for wreaking havoc is so broad: rain, rising rivers, drought and other changes in our overall habitat can seem too diffuse to pin on one cause. This report shows that there is a cause, however, and it is greenhouse gases.
As the House prepares to debate the American Clean Energy and Security Act (ACES) next week it would do well recognize that the problems of climate change do indeed transcend regional or parochial boundaries and only the political courage to see the big picture, will enable America and the world to take the steps needed to solve this complex problem.
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.
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.
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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