Energy Independence

The extraordinary success of the Cash for Clunkers program--$1 billion worth of credits dispensed in about a week--is an outstanding validation of the power of green stimulus that we at NDN began championing at the beginning of last year.  Not only is the cash for clunkers program a win for the environment--about 250,000 clunkers will come off the road, replaced by the same number of fuel efficient cars, the program has provided a shot in the arm to the beleaguered auto industry and also put $1 billion of stimulus out onto the street when we need it.  You might call it a win, win, win: a victory for the environment, auto manufacturing and the broader economy.

The program is so successful that Congress should dramatically extend it.  As a thought exercise imagine what would have happened had Congress enacted a $10 billion program at the beginning of the year that might have sold 2.5 million cars--about the number that the auto industry would have needed over the last six months to be profitable.  It might have put the auto companies into the black and possibly avoided the GM and Chrysler bankrtupcies and billions in taxpayer support. 

While it's too late to turn back the clock, it's not too late to extend the program--perhaps quadrupling it to $4 billion as Congressman Ed Markey has suggested, with the goal of replacing a million jalopies.  An extra $3 billion is worth it, in my view, to improve fuel efficiency, to protect the taxpayer's investments in GM and Chrysler and as quick stimulus now.

Last week the Department of Energy released part of the $25 billion in loans provided for through the Advanced Technology Vehicles Manufacturing Loan Program, included in Section 136 of the Energy Independence and Security Act of 2007. The delay in releasing these funds had been one of the longest running scandals in clean tech policy. Upon taking office, the Obama Administration vowed to expedite their release and Secretary Steven Chu had made finalizing rules needed to administer the program a key priority. In the first installment of the loans, Tesla, the VC-backed California maker of an all-electric sports car, founded by Ebay veterans, will receive $465 million to make its compact, all-electric Model S sedan. Ford will receive $5.9 billion to retool 11 factories across five states to improve the overall fuel efficiency of its fleet.  Finally, Nissan will receive $1.6 billion to retool a factory in Smyrna, Tennessee, to make an electric vehicle that is being developed and initially manufactured in Japan. The remainder of the money will be released next year.

DOE's announcement comes on the heels of the release of its formal $3.9 billion smart grid funding solicitation last week. The Funding Opportunity Announcement spells out the conditions and terms for those seeking funding for smart grid investments under the American Recovery and Reinvestment Act, the offical title of the stimulus bill signed into law earlier this year. These two developments, coming one after the other, are evidence that the DOE is moving rapidly on the President's goal not only of getting money out into the economy to create jobs and drive demand, but also of making investments critical to a clean energy future.

In the case of the auto loans, they could not be more timely. Autos are a capital intensive business and with credit markets still impaired, it would have been very expensive or impossible for Tesla, for example, to borrow this money on its own. However, that does not mean that the loan is not good business for the government and Tesla. CEO Elon Musk indicated he thinks that Tesla may be able to repay the loan ahead of schedule. Tesla, despite some speed bumps in its early phase, is now profitable on a unit basis, meaning the approximately $120,000 price of its sleek sports car -- which has a long waiting list -- exceeds the cost of components.  Having also recently sold a stake to Daimler Benz, the company is now reasonably well capitalized. Recently, investor Steve Wesley indicated that Tesla's sales are on track to pass $100 million, a common bar for conducting an IPO. If Tesla continues on its current track, it may be the first home run of the clean transportation industry. In any case, the DOE funding puts it on track to move from the sports car niche to the mainstream where it hopes to leverage the glamour associated with the roadster. While Ford and Nissan have greater access to the capital markets, these loans -- provided for in the 2007 energy legislation in exchange for a commitment to higher fuel efficiency -- will help achieve that goal.

In the case of the smart grid, the major barrier to moving forward has been undeveloped standards.  Normally, standards evolve slowly as industry players forge alliances and choose standards that already enjoy market adoption. In this case, the desire to stimulate the economy has accelerated this process. Secretary Chu and Commerce Secretary Gary Locke are overseeing an effort led by NIST to fast track standards for the grid to facilitate adoption. The disbursements made by DOE will indeed help establish standards insofar as the money spent will validate standards and increase adoption.

It is important that standards be as open and uniform as possible to create the broadest and fairest playing field for innovators to enter the smart grid technology market.  Because a smart grid is necessary to get clean energy online and also to drive the creation of new energy products and services, this is an area I believe is absolutely critical to determining whether clean technology can live up to its promise. 

While it remains to be seen how the smart grid will develop, these two announcements from DOE show that the Administration is on the case. These developments should be encouraging to anyone concerned about America's clean energy future.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Even as GM files for bankruptcy, the economy has faded to the background, with the nomination of Judge Sotomayor taking up most of the oxygen in the political media this week. That said, it is crucial that we continue our focus on the economy and the struggle of everyday people. We have lately seen, with the automakers, climate and energy legislation, and a variety of other economic initiatives, policy coming to what might be considered a bad solution - except for all the alternatives. As was recently said about everyday in the Treasury Department: it seems like there are no good choices right now, only less-bad ones. On top of the lack of good ideas, the Republican party has chosen to make itself irrelevant, opting for its failed race-based playbook and no new ideas.

• Conservative Republicans "Just Say No" Approach Shortchanges Critical Economic, Sotomayor Debates by Dr. Robert J. Shapiro, 5/28/2009 - Shapiro points out the the Republican approach to Sotomayor is the same as their approach to the economy - just saying no. The effects are the same as well: more political problems for a decimated party and a worse-off country.

• Fuel Economy in Context by Michael Moynihan, 5/19/2009 - Moynihan welcomes the Administration's steps on fuel economy, but points out that CAFE standards are imprecise tools that must be viewed as part of a larger series of complex policies.

• The Courage, Cunning and Shortcomings of the Administration's Health Care Plans by Dr. Robert J. Shapiro, 5/14/2009 - The Administration’s health care focus, goals and priorities are right in the ways that matter. Now they need to provide a more detailed blueprint of how they intend to reach those goals and achieve those priorities.

• Cap and Market This Year by Michael Moynihan, 5/14/2009 - Moynihan argues that those who care about enacting serious climate change legislation should embrace the compromise on permit allowances, as Waxman-Markey is the only bill with the chance of passing this year.

• The Economic Conversation Enters a New Phase: Putting Consumers Front and Center Now by Simon Rosenberg, Huffington Post, 5/14/09 - Rosenberg writes that the Administration's turn in the national economic conversation from the plight of big institutions and the financial system to what is perhaps the most important part of the story of the Great Recession still is not adequately understood - the weakened state of the American consumer prior to the recent recession and financial collapse.

• Should We Try to Save the Damaged Brands? by Simon Rosenberg, 4/30/2009 - Rosenberg asks if these mainstay, now troubled American brands - AIG, Chrysler, Citi, GM - can be saved by being propped up by the government or if their brands are permanently insolvent.
• Spend? Save? The debate continues by Simon Rosenberg, 2/11/2009 - Building on a previous post, Rosenberg follows the growing debate about whether American families should be focusing on saving.

• 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.

• 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.

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

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

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

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

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

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.

Anyone following the debate over cap and market legislation has probably noticed the growing alarmism voiced by opponents. Leaving aside the substance of attacks, their tenor has grown increasingly biting. During recent hearings held by Chairman Markey, opponents unleashed a fusillade of arrows ranging from dire warnings to shrill personal attacks on Vice President Gore who testified in support of cap and market legislation. What is most remarkable about the alarmism, as Paul Krugman point out in his column today, however, is that it is coming from the same people who ordinarily have an unbounded faith in markets to cope with any obstacle. Newt Gingrich, for example, who has at times been an evangelist for markets and the future, testified at the same hearing that putting a price on carbon would be devastating for the US economy. In fact, as Krugman writes today, the impact of a carbon regime is likely to be mild and gradual. Yet junk economics, he argues, is becoming as widespread in the climate change debate as junk science. While a cap and market regime is likely to increase prices of emissions-intensive commodities such as electricity, cement and steel over time, the increases will phase in slowly. According to data from MIT's Emmissions Prediction and Policy Group, cited by Krugman, even stringent limits would lead to a reduction of only 2% in consumer demand by 2050. The short term impact on GDP--from higher prices--would be almost negligible. Yet there is more to the story. While any negative effects would not show up for years, Krugman points out that a carbon regime might well stimulate growth in the near term. Were congress to mandate caps to begin phasing in three years from now, the impact on prices would be negligible in the short term, but the prospect of caps would stimulate capital investment today, driving up the investment component of GDP and exerting a multiplier effect on consumption--exactly what the economy needs during a slowdown. In short cap and market legislation won't hurt the economy much, will at most trim demand in the future and might actually help the economy now. If you throw in the fact that developing new technologies is something the US has to do if it does not want to compete with countries such as china and India solely on cost, the economic case for putting a price on carbon is there. Oh, and there is also the benefit preventing the very real costs of higher temperatures, rising sea levels and climate instability.