Climate Change

Jack Hidary at NDN Event on Cash for Clunkers

With the Senate considering refilling (sorry) the funds for "Cash for Clunkers," here's a video of clean-tech entreprenuer Jack Hidary speaking about such a program last year at an NDN Green Project event on "Energy and the American Way of Life." Jack calls the proposal "Jack's Jalopy Law," but it's the same idea.

Thu 8/6 Roundup: Bad Banks, Confirmation, Wearing Pants While Being a Woman

- The Obama administration intends to announce today a new plan for detaining undocumented immigrants facing deportation.

- The "gang of six" will roll through the White House today to talk health care with the President.

- The government is considering stripping Fannie Mae and Freddie Mac of their troubled assets, and putting them in a bad bank.

- Sotomayor will likely be confirmed this afternoon.  The GOP will vote against her.

- The Senate will likely inject an extra $2b into "cash for clunkers."

- In the WSJ, Erica Alini writes that wages are stagnant across the country, but DC is in better shape than most.

- Nouriel Roubini looks to other countries that seem to be doing fairly well despite the global recession.

- A Sudanese journalist, facing a sentence of 40 lashes for wearing pants while being a woman, will contest her conviction all the way to the highest court-- and if she loses, she asks for not 40 but 40,000 lashes.

- The Argentine soccer league has ground to a halt thanks to crippling debt.

- Last, Lou Dobbs is a huge racist:

Trade and Carbon

This past weekend, Secretary of State Hillary Clinton traveling in India received the message, courteous but firm, that India has no intention of capping carbon.  The rationale provided is that India has low per capita emissions.  This is, to be sure, India's best argument.  Her overall emissions are soaring as her population spirals upward--India only two thirds as populous as China a decade ago, will pass China to become the world's most populous country of almost 1.5 billion people in 2030.  India's per capita emissions are rising too from industrialization.  But they remain below those in developed countries.  China, the other key holdout on capping emissions can make a similar per capita argument though it recently passed the US to become the world's largest emitter and its emissions are soaring as it develops.

While the posture of India and China are problematic on their own, they make it harder for other countries to take action.  After all, if the world's two most populous and dynamic economies growing at about 7% (down admittedly from China's 13% growth in 2007), won't opt in, why should the US which contracted last quarter at a 5.5% rate.  With America's standard of living under siege putting America at a further competitive disadvantage--no matter how much carbon we emit per capita--is a tough sell to voters.  And what emerges is a classic collective action stalemate.

This dilemna highlights one of the diferences between greenhouse gases and other environmental issues. Unlike cleaning the air or water where the benefits are realized locally, keeping costs and benefits within one country, reducing emissions benefits the entire planet but costs whomever does it growth.  This is what makes a global solution--such as that promoted by the UN through the Kyoto and now Copenhagen process so attractive.  However, if China and India won't come to the table, what should the US do?

One solution attracting interest of late is the use of trade policy to punish carbon havens. Indeed, at the last minute, the House inserted into the Waxman Markey bill a provision to impose tariffs on countries that do not take action to limit emissions.  In announcing his support for the House bill after its passage, President Obama flagged the provision as troubling insofar as it runs counter to free trade principles.

So is trade policy a valid tool in climate policy?  The New York Times recently argued it is if enacted multilaterally but not if unilaterally.  Paul Krugman, my professor of trade policy at Princeton, has endorsed the idea in theory.  My view is that trade policy is a problematic tool from a practical standpoint that would require significant new infrastructure to work at all.

The problem with using trade policy for an environmental purposes are fourfold.

First, trade actions have an unfortunate tendency to invite retaliation and provoke trade wars even in a multilateral context.  No matter how good your case, other countries can respond in kind.  The result is then a lengthy negotiation or WTO process that ultimately harms both parties.

Second while the temptation to use trade policy to protect clean domestic industries against dirty foreign ones may be great, the track record for mixing the environment with trade is poor.  More often than not, environmental regulations have functioned as non tariff trade barriers.  Domestic companies claim them when threatened economically and verifying them becomes a political football. 

Third, as with food safety regulations, labor regulations and other hard to measure quantities, measurement is labor intensive and becomes an impediment to good regulation.  This would complicate administering any tariff.  It might overwhelm the WTO.

Fourth, increasing the price of an import to protect a domestic industry can have the adverse consequence of increasing the price of inputs for other domestic products.  A classic example is that when the US slapped a tariff on LCDs to protect LCD domestic manufacturers in the 1980s, it drove American laptop manufacturing offshore.  Taxing imports from carbon havens to protect domestic industries could raise manufacturing costs for other companies causing the latter to shift their production to carbon havens. 

Those are the arguments against. On the other hand, giving imports a total pass not only harms domestic producers but is tantamount to a cordial invitation to domestic companies to shift production--and jobs--offshore.  This issue came up, of course, in the NAFTA debate.  Ideally, there ought to be some middle ground.

To view how a tariff might succeed or not, consider the case of electricity intensive aluminum production.  Rio Tinto as one example, produces aluminum using a hydro power in Canada but coal-based power in Australia.  Were the US to slap a tariff on aluminum produced with coal-based power (hard enough to determine in and of itself), aluminum produced with hydro power would be cheaper. One outcome would be for Rio Tinto to phase out coal in favor of hydro in the production of aluminum.  Were that to occur, one might call a US tariff an environmental and economic success.

Another possible outcome, however, would be for Rio Tinto to fulfill US demand with an unchanged mix of product that would cost buyers more due to the tariff.  In that case, US companies might decide to shift the production of products using aluminum overseas.  This would be an environmental and economic failure.  The deciding factors between the two outcomes would probably be Rio Tinto's ease of substituting zero carbon energy source for coal and the domesic companies' difficulty of moving production of products using aluminum oversas.

In short, it is hard to predict in advance just how the tariff would impact the market, but it is clear, the more carbon havens exist, the greater the likelihood that production will seek them out.

Currently a workable regime is not readily at hand.  Were a trade regime to ultimately be invoked, here are some thoughts to guide its development.

First, as with the capping of carbon emissions themselves, putting a price on emissions in imports should be pushed as far up the value chain as possible. This is because as products grow more complex, tracking their carbon footprint becomes more difficult and trade restrictions multiply.  Any trade-based taxes on carbon intensive goods should be directed upstream at basic goods such as steel or aluminum, not at finished products made from those commodities.  While this could drive downstream industries overseas, on balance, I think, it would be far less distortionary to address a few commodities than many products.

Second, some sort of standardized process for measuring carbon footprints needs to be devised.  However, it would be preferable for some private body to administer standards rather than a governmental organization.  A number of creative startups are trying to devise novel ways of tracking carbon.  One such ventures is which uses crowd sourced information--or information gleaned for free by numerous reporters to track the environmental profile of products.  Others are working on more industry-focused products.  Whatever system is used should involve as little bureaucracy as possible consistent with being stable and standardized. 

Another idea, admittedly bold, would be to devise some sort of average duty--product independent--to penalize countries that choose not to limit their emissions during production.  Such an approach would have to be administered multilaterally, lest it lead to an immediate trade war, thus it is not something the US could do in and of itself.

The very complexity of using a trade hammer shows that it is far preferable to develop a coordinated multilateral regime than to use trade policy.  Free trade has created wealth since the days of the Minoans and since then for the Athenians, Carthaginians, Romans, Indians, Venetians, Portuguese, Spanish, British and yes, Americans to name only a few.  It is, in contrast, a clumsy tool for achieving environmental goals.  Nonetheless, if India and China--and for that matter the US,  refuse to address the problem of a changing climate, the pressure to use trade policy to achieve those goals will only increase.

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"Sponsored by Friends of the Earth, one of the few environmental groups critical of the Waxman-Markey bill,the briefing drew about 100 people.It featured carbon tax supporters like Robert Shapiro,a former Clinton undersecretary of Commerce."

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Robert Shapiro said: “We are on the verge of creating a new trillion dollar market (through) financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market.”

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Its cap-and-trade system, reports Rob Shapiro, "has no provisions to prevent insider trading by utilities and energy companies or a financial meltdown from speculators trading frantically in the permits and their derivatives."

Brits Bid for Climate Leadership

While Al Gore may be the intellectual godfather of climate action, since the beginning of the decade, leadership on climate issues has passed to the Europeans.  On Wednesday, in the wake of the inconclusive G-8 summit in Italy, Britain announced a new muscular and not inexpensive set of measures to strengthen its climate effort.  The goal of the Low Carbon Transition Plan is to make sure that Britain meets the goal of reducing emissions 34% by 2020.  It includes a commitment to creating 1.2 million green jobs.  It will also give the government new powers to ensure that the UK produces 40% of its energy from renewable and nuclear sources six times what it does today, by 2020.

After the dispiriting Bush years that saw the rollback of environmental progress, many in the climate community, including many in Europe had been looking to Barack Obama to play the role that Al Gore might have played had he been elected president. President Obama has reversed the Bush policies, however, he has elected to leave most of the details of climate policy to Congress.

The British plan released in conjunction with a plans for Low Carbon Transport and Renewable Energy is clearly designed to stake out a British leadership position ahead of the Copenhagen meeting.  The British goal of reducing emissions 34% by 2020 is far more aggressive than any targets set here in the US which typically run closer to 20% by 2020 and postpone major reduction far into the future.

Before breaking out the champagne to toast the British, it is important to note a portion of the expected low carbon electricity will come from nuclear sources.  France already generates 80% of its electricity from zero carbon nuclear plants.  Britain's inclusion of nuclear sources in its overall target means that the roadmap is about tapping nuclear as well as renewable power.

However, if a large share of 30% is from renewable power as anticipated in the roadmap, that would be significant.  A 15% renewable electricity standard is present in the Waxman Markey bill just passed by the House and a Senate energy bill championed by Senator Bingaman has a similar standard.  (The British Renewable Energy Strategy plan calls for 15% of all energy including that for heat and transport to come from renewable sources by 2020.)  In the wake of the British announcement, Al Gore renewed his call for the US to produce all its electricity from renewable sources within 10 years.  Currently, Denmark gets about 20% of its power from renewable sources and Germany gets about 15%.  (By comparison, the US gets under 3% of its electricity from non-hyrdo renewable sources.  To catch up with Denmark or Germany, Britain and the US have a long distance to go.

Britain's plan also appears to include a large government role--perhaps a larger one than would be advisable for the US since while government leadership is important, the innovation needed to create new industries and jobs is better left to industry.  It would be a mistake, for example, for the British to roll back what has been one of the more successful electricity deregulation regimes.

Ultimately, however, the British plan is to be commended insofar as it shows that Britain's Labor Government takes climate seriously.  The US should view their bid as friendly competition as we refine our still fuzzy strategy for addressing climate change.


Clean Technology and Competitiveness 2.0

Clean technology clearly holds great promise for future economic growth.  However, as development of new clean technologies accelerate in the United States, it remains an open question whether US firms and workers will capture the economic activity or whether the bulk of the benefits will flow elsewhere.  The issue cropped up in the recent passage of the cash for clunkers law which will reward consumers for trading in clunkers for newer fuel efficient cars.  The law will benefit American consumers and carmakers but also benefit carmakers and overseas suppliers selling into the US market.  And, indeed, it shadows the entire issue of clean technology driven growth. While the transformation to a clean economy will pay important environmental and security dividends no matter what, how the economic promise of clean technology ultimately gets divided will vary by country. 

Call it Competitiveness 2.0.  It is the subject of a penetrating article in the current Harvard Business Review by two Harvard professors, Gary Pisano and Willy Shih entitled "Restoring American Competitiveness: Why America Can't Make a Kindle". The professors examine a wide range of technologies from computer equipment to software to clean technology and find America at a growing competitive disadvantage. Both the data they cite and the case studies they include should serve as a wakeup call to anyone thinking about clean technology and the future of the US economy.

While innovative ideas continue to flourish in the United States -- think Twitter, Ning and Facebook--the US has become a technology laggard among the OECD countries in critical measures. The US trade deficit is old news but the authors point out since 2002, the US has been running a deficit even in high tech goods and services. The main export of the US is capital.  And there are precious few bright spots in the technology firmament. 

In the case of the Amazon's Kindle reader, which the authors examine in detail, though engineers in California designed the product, there is simply no US capacity to make the components.  (If the US lacks the capacity to make a Kindle could it make a military computer in a pinch?)  In aircraft, Boeing continues to lead the world but it now relies on a network of global suppliers and has cut its American workforce.  Managing this complex supply chain led the company to delay delivery of its Dreamliner.  All but the highest end computers are now made abroad. And even complex software tasks, from writing software to using it for engineering, are moving overseas.

In clean technology, leadership in battery technology lies abroad. GM's Volt, scheduled for introduction next year, for example, will source batteries from South Korea. While a few companies such as Tesla are developing advanced auto technologies, the US lags Asian and European companies in hybrid and other technology.  With most growth in the world's auto sales likely to take place in China, India and the developing world, companies like Tata and Chery (originally a Chinese knockoff of Chevy) will have a homefield advantage. Chinese, Japanese and Korean companies dominate all PV production of solar cells except in thin films -- the most advanced and promising technology where US firms still lead the way. In smart grid technologies, US companies face roadblocks in the form of an excessively complex and highly regulated utility industry.  Installing new smart grid meters and retrofitting old buildings only gets you so far in terms of new jobs and new businesses.  All told, while the US has the potential, thanks to our still- unmatched system for financing innnovation, to develop the technologies of tomorrow we are, all too often, behind in the technologies of today.

What are the sources of our competitiveness problem? America continues to lag in primary and secondary education. Our universities may be the best in the world, but most of the spots in top PhD programs now go to more motivated students from overseas.  (Community colleges are a US strength that can be scaled as Rob Shapiro has argued and the President recognized today in calling for their expansion.)  The relentless search for low wages continues to send capital out of the US. American firms still can receive tax breaks for moving jobs overseas. Short term thinking, driven by the next quarterly results dominates corporate strategy.

On the macroeconomic level, the US continues to stress consumption over production. This bias, which derives from a strong dollar that keeps imports cheap as long as others lend us the money to buy them, encourages overseas instead of domestic production. A weaker dollar and shift toward a producer and investment-led economy would temporarily lower standards of living, but may be what is required to create the foundation for long term growth. Recently, former NEC head, Laura Tyson, proposed just such a shift in national priorities. While these are complex questions, a real debate over our priorities -- toward consumption--or production is in order. 

In the 1990s, the US made major strides in reversing its competititiveness deficit so that by decade's end it was leading the global economy. However, as Pisano and Shih make clear, those strides were temporary and the problem has returned.  The competitiveness issue, the authors show, is far more problematic today than  at any time in American history.  And if this issue is not satisfactorily addressed, the US will not see wages, standards of living or other metrics of welfare rise. As NDN has long argued and as the HBR authors note as well, stagnant wages combined with rising expectations led to the absurd borrowing that precipitated the latest financial crisis.

In short, if the US is to reap the economic rewards of a clean technology revolution, we need to seriously examine our competitiveness posture and take the steps needed to put us back on track to leading, not lagging the global economy.


The Stimulus So Far

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, 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 Times reports 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.

DOE Turns on the Money

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.

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