Issue #21, Summer 2011

America 2021: What Next on Climate?

The effort to address climate change stumbled with the failure to pass cap-and-trade. What should happen now? Five experts discuss the future of U.S. climate and energy policy.

While we should be offering a big vision, this is an incremental fight. We need to move the ball down the field, step by step, and there was too little willingness to do that.

Walsh: Joe, you were obviously a player in this arena. What’s your feeling on this?

Aldy: I agree that the politics are complicated by regional differences and interests. One of the things we learned in 2009 and 2010 is that there is growing distaste for big, complex federal legislation. If you were at the back of the line, as cap-and-trade was, it was going to be harder to get enough people to vote on something that was going be a tough vote for them. One of the lessons is that a simpler approach to drive new investment in clean energy would be more politically palatable.

Arroyo: Cap-and-trade was an idea that a lot of people really embraced. The left eventually embraced it, the companies said they wanted it, the Republicans said they were the fathers of it. And yet, when you got to the climate vote, people ran away from it. It might be that while theoretically it’s the most efficient way to solve the problem, such a piece of legislation ends up being very big and complicated. We had conversations back when I was at Pew with members of Congress who told us: “This is big and complicated. I like simple and sectoral, and something that I can see and get my arms around.”

Roy: This illustrates an important issue. We all talked about how complicated this cap-and-trade bill was, and how there’s a big aversion to passing big and complicated legislation. But the House just passed a continuing resolution, H.R. 1, that was unbelievably complicated, hundreds and hundreds of pages long. No one could possibly tell you the effect of that bill on the U.S. economy. It was probably one of the most complicated pieces of legislation ever passed by the House, driven by a Republican Party that has an aversion to big complicated government legislation. So it’s more the perception of complication than the actual complication that’s the problem.

Arroyo: But the allocation scheme in cap-and-trade, you have to admit, was complicated.

Roy: Definitely. But the EPA now has to come up with command-and-control power-plant standards as mandated by the Supreme Court in Massachusetts v. EPA. I bet they will be subcategorizing by fuel, by boiler type, by turbine type—that’s going to be an incredibly complicated standard. People don’t really understand how byzantine the EPA rulemaking process is. Also what people don’t focus on is that the EPA process does not give us incentives for new technology and innovation. You go into a factory today, and they’re using the same pollution-control technology the EPA based their standards on 20, 30 years ago.

Aldy: Manik, I don’t think we’re ever going to see a final power-plant rule from the EPA on greenhouse-gas emissions, so we’re not going to have to worry about how ugly and complex they are. At the end of the day, either because of some deal among Democrats and Republicans, or because the Democrats aren’t going to keep fighting to protect EPA authority, the rule will be modified or delayed or changed, one way or another. I just don’t think the politics are sustainable to maintain EPA authority.

To me, the open question is: Do the Administration and Senate Democrats actually reach a deal where they yield on EPA authority, but do so because they either move forward with the President’s clean energy standard or secure something else in the clean energy space?

Shultz: I have to disagree. I think when it comes to the EPA, fundamentally, it’s air, it’s water. And as long as it’s about those things, which come down to public health, it would be such a political nightmare for this President and even for Senate Democrats if the regulations were to go away, because the public overwhelmingly supports having the EPA clean up our air and water from all pollution—including carbon pollution. I think we’re going to end up with EPA power-plant regulations because of that.

Aldy: I guess we just disagree. I just don’t think the American people will fight for that.

Laskey: I don’t think it has to happen, and I’m hopeful that the environmental movement will get its act together to solidify a narrative here that the greenhouse-gas connection to health and economic viability is a real one. If we can do that, then in a second term, not only can we continue the authority of the EPA, the agency can actually start to regulate. I would hate to see us hand over that authority, particularly when even the Supreme Court said it’s legitimate.

One of the things that’s missing from this question of cap-and-trade, cap-and-dividend, or a carbon tax is that even if we are able to get these things passed, they are likely not sufficient to drive the innovation that we need. An MIT economist, Hunt Alcott, who did an evaluation of one of our programs, looked at demand elasticity, and essentially identified that the 3 percent reduction in consumption that my firm, OPOWER, is getting across households through better information is equivalent to the impact of raising the price by 16 to 30 percent. [OPOWER sends out regular individualized energy reports that help customers understand important aspects of their in-home energy consumption. The reports tell people how they’re doing compared to their neighbors—whether they’re efficiency leaders or energy hogs.] All to say, electricity demand is terribly insensitive to price, relatively speaking, and there are many other ways to motivate people. There needs to be more done to encourage innovation in this space, other than just price changes. And that can be accomplished through policy, primarily at the state level, and a commitment to government research and development.

Walsh: Certainly the President seems to have seized on R&D as part of his “Win the Future” idea. We talked about narrative, and some of the problems we had there. Is that innovation narrative something that could work better?

Arroyo: It’s a more upbeat narrative than just talking climate change. But it’s really semantics, because you still have to put a policy in place that helps to promote innovation. So you can say it’s great to innovate, but where’s the government policy? Right now, the government is broke, so it’s not really spending a lot on new incentives. And we seem unable to deal with the politics of setting tough requirements, whether legislative or regulatory.

Walsh: If you saw a vast increase for R&D on energy, something that really made energy research akin to the health and medical research at the National Institutes of Health (NIH), would that be effective?

Roy: I don’t think so, because I believe very strongly in the market. R&D actually has a problem that’s very similar to the problem with command-and-control, which is that in both cases you have government employees, whether they’re in Congress or an agency, deciding, “This is the right technology.” Sometimes they’ll guess right, sometimes they’ll guess wrong. Or maybe today’s right decision is tomorrow’s wrong decision. And one thing the government’s not very good at is identifying and liquidating its mistakes. The private market has a natural way of doing that.

Laskey: That said though, R&D and innovation, especially in this arena, even if they’re not directly government funded, are the result of government signals through regulation.

Arroyo: Or tax code.

Laskey: And tax code. Our business wouldn’t exist absent regulation in the states that demand energy efficiency from utilities. As a consequence of that regulation, this year we are going to be saving a third as much energy as the solar industry is supplying to the grid. And we’re just a small part of the solution. You look at the states where there are renewable portfolio standards [which require utilities to provide a certain minimum amount of energy from renewable sources] or energy efficiency standards, and there is private industry in those states, there’s plenty of venture-capital money, there’s plenty of investment dollars by companies like Honeywell and GE on top of small companies.

Shultz: There’s been a fair amount of R&D money spent already. I do think that standards are part of what’s really needed to diversify our energy sources, supply competition, and drive the market for renewables.

Walsh: Of course, that’s still picking winners to some degree as well. Looking beyond climate and carbon policy, every renewable energy subsidy is to some to degree trying to pick a winner. Is this avoidable? And is the renewable energy technology we have now sufficient to meet the kinds of goals we need? Do we need technological leaps? In which case, do we need some basic R&D, or is it a matter of making the market hospitable to those forms of energy and letting the businesses that exist now make that happen?

Roy: I think we do need some technological leaps. But as Vicki was saying, we need a combination of investment and incentives. Government-funded R&D alone won’t do it. We need to create policy that makes it absolutely compelling for the private market to jump in as well.

Shultz: I don’t disagree—down the line we’re going to need technological breakthroughs—but we haven’t even come close to taking advantage of the technologies we have right now. We can go much bigger, 25 percent renewable by 2025, and 20 percent by 2021, and that’s probably not all we could do. We need to encourage electric utilities to provide long-term contracts for renewables like they have been offering fossil fuels for years. Some of this is, frankly, taking the thumb off the scale for oil and gas and coal. In a way, we’ve been picking winners for decades. It’s really more about leveling the playing field and allowing the marketplace to work.

Aldy: We’ve got two fundamental problems here. The first is that we have insufficient incentive for people to create new knowledge and undertake R&D in the private sector, and that’s why there is a very clear role for the government to step in. The second major problem is that a lot of the energy consumed in the United States today doesn’t bear the full cost that it’s imposing on American citizens and people around the world. If we were to take the monetized damages from climate change and apply them to coal, we would double the price of coal. That’s a sign of how large the implicit subsidy is—they’ve been able to effectively dump CO2 into the atmosphere for more than a century without taking on that cost.

The question for policy is: Can we design it in a way that avoids this problem of picking technology winners? Bryan, you were talking about the examples of medical and health research through the NIH. A better model for how we think about energy R&D is ARPA-E [Advanced Research Projects Agency-Energy, a new government agency set up to promote and fund R&D in energy technologies], which would focus on big technological breakthroughs for the long term, but have a rigorous, merit-based evaluation that allows us to find the most promising ideas. It would really allow people who are trying to think long term to be creative and to seek out the high-risk but high-reward technologies. If you do that, and if you have a policy approach on deployment that is technology-neutral, then you can avoid this problem of the government deciding who’s going to win the game.

Laskey: There’s another thing on the R&D side that is secondary to these issues. Foreign-born students are a big part of R&D and have historically been a big part of our country’s well-earned reputation as a center of innovation. We are making it harder for them to come and stay, and many are going back home. This has implications for our economy in the long run. What makes the United States a center for innovation is that we have both great centers of education and policies in place that allow for entrepreneurship and innovation. But there’s also the network effect of having people come from all over the world to be a part of that. As soon as we eliminate that possibility, centers of innovation are dispersed and they work far less well. And it makes no sense to educate engineers here, but have immigration and workforce policies that compel them to build businesses and create jobs oversees.

Michael Tomasky: I’d like to reverse-engineer our conceit. Instead of America 2021, think back to 2001 or 1991 or 1981. What’s the biggest mistake we made? When you lie awake at night, what idea do you think you should have accepted then that you didn’t accept, or what deal should you have taken? I have a friend who worked in campaign finance for many years who once said, “We spent the 1970s rejecting things because they weren’t good enough, and if we’d accepted all these things we’d have pretty strong campaign finance today.” Have you thought such thoughts on anything?

Arroyo: I think about the disconnect between the U.S. international posture and the dialogue here at home going back to Kyoto and even before. In the run-up to the Kyoto Protocol in 1997, there were heated discussions about including major developing countries in any agreement to cut emissions. The Byrd-Hagel resolution [which stated that the United States not be a signatory to any protocol that did not mandate emissions reductions from developing countries and that could harm the economy] passed the Senate, and the Clinton Administration didn’t fight that vote.

Aldy: It did go 95-0. That was a tough fight, as someone who was in the Administration at the time.

Arroyo: But they didn’t try. They gave it a pass, thinking that it was never going to matter, and it mattered hugely as it was for years the stated position of the U.S. chamber that ratifies treaties. And it’s been the story of our lives in many ways since.

Issue #21, Summer 2011
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Laskey, do you need a "burning platform" to promote the KKK? Are you wanting to sell Acai berries smuggled from the Ivory Coast? The time to act against risk is always, for the gain is no less than civilization.

Jul 23, 2011, 5:52 PM

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