IT CAN COST MILLIONS TO RUN FOR CONGRESS. WHERE DOES IT COME FROM? WHAT DOES IT BUY?
Why has our energy policy been so focused on fossil fuels for so long, despite the obvious problem with importing oil and the issue of climate change?
On the one hand, you have a lot of special interests [companies] that have made a lot of money for a long time selling fossil fuels, and on the other hand, perhaps more insidious, you have an infrastructure that’s set up to deliver fossil fuels. You have natural gas pipelines running across the country. You have the whole system for distributing gasoline. You don’t have any of that for the alternatives.
What are your thoughts on putting a price on carbon emissions?
Putting a price on carbon is an important part of climate policy, but it’s not the only thing we need to do. It won’t do the job alone. It’s important to do it because we need to start sending the price signal that you’re imposing a cost on everyone else when you emit carbon dioxide, any of the other greenhouse gases, and on the other hand, when you reduce those emissions you’re doing a favor to the world. You should get the advantage of producing something that doesn’t pay that cost.
What is cap and trade?
Logically, there are two ways you can put a price on carbon emissions. One is you could have a tax. You could just announce what the price is. That’s the simplest way to put a price on it. Americans have unfortunately had 30 years of training in frothing at the mouth when taxes are mentioned, so as a matter of practical politics, that’s unlikely to happen.
The other method, which has become much more popular, is to put a limit on the total amount that can be emitted and then people have to buy or people can sell the rights to emit that limited amount. The lower the limit is, the more valuable the rights to those emissions become, the higher the price will go.
What is necessary to get a shift of our energy path in a more green and renewable direction?
In order to solve the climate problem, in order to really create a renewable energy system, we need to launch a whole new set of technologies. We need to change course into a whole new set of technologies that are only beginning to exist and they aren’t entirely profitable yet. It’s a problem that has occurred before. How do you launch a whole new set of technologies?
I think it’s useful to think about the way that microelectronics were launched. Once upon a time, computers were giant, hulking things that took up whole rooms and now computers fit into your briefcase.
The same kind of revolution in technologies is needed to make energy from solar power, to make energy from wind, to make lower and lower energy devices. So we have to create that new technological path. That’s one of the reasons why I think that putting a price on carbon is necessary but not sufficient. We also have to give a push into the direction of the technologies that we would create.
There are a lot of energy technologies that could play a role that are currently expensive. Wind power is one of the success stories. Thirty years ago, the first round of energy crisis, wind power seemed like one of those far-out ideas. It got a lot of government subsidies, from the federal government, from California. Americans gave up on it in the ‘80s but Europeans took over pushing wind power and subsidizing it. And now after 30 years of subsidies, wind power is becoming competitive with other sources of electricity. Wind power is an important piece but it’s not enough.
Solar power is at a much earlier point in that curve. Solar power can be created. You can create electricity from sunlight in several different ways. None of them are really competitive yet, but some of them could be with 10, 20 years of subsidies. Those subsidies are what’s needed to push us into that path, to jump-start that whole process.
Opponents of the current bill that’s in the Senate say that cap and trade will destroy the economy.
That cap and trade proposals in the recent legislation in the Senate and the House would cause a smaller change in energy prices than the oil price run up of 2007, 2008 — much smaller than that. The fact that the economy survived those oil prices did not cause the financial collapse. That was caused by people speculating with other people’s money in real estate and so on. We survived those oil price increases without the economy collapsing. When the oil price went up, we paid those huge prices to people who own oil wells, mostly in other countries.
If we have a cap and trade system and if the allowances are auctioned, as I hope they will be, we’ll be paying that money into the Federal Treasury, which can give it back to Americans, which can use it to sponsor new green technologies, offer less disruption of energy markets than we lived through a few years ago.
To do cap and trade or to shift subsidies or tax incentives away from fossil fuels toward renewables is going to send jobs overseas.
Every time environmental regulation is proposed, the affected industries or someone who’s opposed to the regulations says that we’re going to lose business overseas. The notion that there’s a pollution haven, that companies will run away to wherever they get the best deal on environmental regulation has been proposed over and over again. It’s been studied by academic researchers who almost universally failed to find any evidence of it. A few studies found weak evidence. Most studies find no evidence at all. Environmental regulations are not expensive enough to move a company overseas.
Production has moved to China because of labor costs. China’s comparative advantage is not in energy-intensive products. It’s not in pollution-intensive products. China’s comparative advantage is in labor-intensive products. China also burns a lot of coal and has a generally dirty economy, but its trade advantage does not come from being dirty. Its trade advantage comes from having relatively skilled, very low wage labor.
Why risk the economy with cap and trade and be going to a technology that may or may ever exist?
Is it risky to invest in new technologies? Of course it is. We know that it’s even more risky to refuse to invest in new technologies. The cost of inaction on climate change will be mounting environmental costs, mounting losses to a more violent and unpredictable and inhospitable climate. So the challenge of doing something to stop that looks like a gamble we need to take. Do you know exactly what comes out of a new technology when you start it? No. That doesn’t relieve you from needing to try, because the alternative looks much worse.
It’s important to remember that the US government has gambled and won on new technologies in the past. In the 1950s, the 1960s, nobody but the government could afford to buy transistors and integrated circuits. They were exotic and new technologies. They were very expensive. The Pentagon and NASA, which at the time had virtually blank checks to buy whatever they wanted to make the exotic new hardware that they were making, bought these and after just 20 or 30 years of massive government subsidies, microelectronics became a private industry success story.
That’s the sort of future that one has to look to for the new energy technologies, with the proviso that this time, we’ll be making things that make life better rather than nightmarish weapons, which we fortunately never used.
There’s no evidence that just getting the prices right and letting the market decide has ever led to technological revolutions that we need or even led to environmental progress.
The case that’s often referred to by people who are talking about cap and trade and the wonders of market mechanisms is the acid rain program for reducing sulfur emissions. Starting in the 1990s, the US adopted a cap and allowed trading of sulfur allowances. Sulfur emissions have gone down. That helps to deal with the acid rain problem. It’s a very important cause of acid rain. Less sulfur coming out of power plants means less acid rain.
What everyone forgets when they talk about the wonders of the market is how many other things were going on at the same time. Railroad deregulation had just come in so that it was cheaper to bring low sulfur coal east from Wyoming to the Midwest. Low sulfur coal became competitive in midwestern plants with high sulfur Appalachian coal. Some states had adopted separate state regulations that required even more reduction in sulfur emissions than the Federal program, so that states were already over complying, and the price of scrubbers, the relatively expensive technology that removes sulfur emissions, had come down rapidly due to innovation, I believe in Europe, that had reduced the price of these. So there was a price mechanism. The price mechanism helped, but the price mechanism was not on a level playing field.
The point is that the playing field is tilted in the direction we want it to go. With that tilt to the playing field, the price mechanism helped. That’s the lesson that should be taken from the sulfur trading. That’s what you need to do again. Yes, set a price mechanism, but be sure that you do everything else that makes it possible for the price mechanism to be effective.
Without going into the sulfur example, the idea that letting the market do what it wants to do is going to solve all the problems with regard to shifting our energy path.
It’s certainly important to set a price in order to create incentives for a new energy path but there’s no reason to think that the market can do it by itself. It’s important to do everything we can to help move the economy in that direction along with the price incentive.
Countries that have developed successfully have always picked winners. It’s important to know when to stop subsidizing a loser and moving on to pick the next winner. There’s no hope of avoiding picking winners and there’s no hope of avoiding making occasional mistakes. The government has to be resilient in bouncing back from those mistakes and moving on to pick more correctly next time. There’s no evidence that anyone has ever made a major economic transformation with a completely hands-off policy.
Would it be true to say that fossil fuels have had plenty of government help to reach the state they’re at?
Absolutely. Fossil fuels have had a long history of subsidies, complicated tax breaks for oil wells, land giveaways, breaks on environmental regulations in one area after another, there’s decades of massive subsidies, some of which have finally now been cut back on oil, but which were in the tens of billions, hundreds of billions of dollars for years and years, so that we got to where we are through a program of picking winners, through a program of subsidizing what looked like the winning industries of the day — which is exactly what’s proposed for renewable energy today.
Consumers are going to end up paying for this. The cost of energy to an average household is going to skyrocket.
If there’s a price on carbon, then carbon-intensive products will cost more. That’s the point. That will cost you more if you have no alternatives. Some of the scariest economic analyses that purport to show that we’re going to be destroyed by a carbon price assume that no one ever has any alternatives. Everyone just pays the higher prices. No one ever changes. If there are changes you can make, if there are more fuel-efficient cars you can buy, if there are ways that you can improve the insulation of your house, ways that you can buy a more energy-efficient refrigerator.
The carbon price will make those things attractive and as you make those changes, your costs will go down. The cost per unit of dirty energy will go up. That’s the point. It has to, but if we have a society that creates choices, the economy creates choices, your total costs of living a comfortable life need not go up, might in fact go down.
Keep the subsidies where they are rather than go to new technology that has to be developed. Clean coal is a possibility, as is shale oil, tar sands, offshore drilling and there’s ANWR. Also, they don’t believe in the end of oil.
I actually think peak oil has been oversold myself. The notion that the United States has plenty of fossil energy so why switch horses now misses the entire environmental impact of these fuels. If there were a way to use coal cleanly, then it’s true we’ve got plenty of coal and we could do it — we’ve been spending money for decades trying to find clean ways to use coal. It’s gotten a little bit cleaner, not nearly enough. There’s no sign yet of a breakthrough. If carbon storage, carbon capture and storage from coal plants were to some day be perfected that’d be an interesting change. It doesn’t work yet. It’s a technology that doesn’t work yet despite having been subsidized.
In terms of oil, there’s a lot of discussion of the peak oil theory — that we’re running out of oil. What we’re running out of is oil that can be produced relatively cleanly. It’s true that we’ve got a lot of oil. Canada has even more oil, if you’re willing to engage in increasingly dirty production.
Shale oil involves enormous destruction. It involves a bit of energy use to get the oil out of the ground and it involves a lot of destruction of the areas that it comes out of. Canada and Venezuela both have a lot of dirty oil. Parts of the US have dirty oil. So the idea of continuing to drill our own oil — the relatively clean supplies in ANWR or something like that are very small.
What a policy of continuing to drill American oil means is fracturing more and more of the landscape, destroying more and more mountain landscapes and leaving a wreckage that formerly only Appalachia enjoyed behind as we engage in these worse and worse ways of taking oil out of dirtier and dirtier deposits. That’s not a future that anybody would look forward to, even without the climate problem, which makes it so imperative to change course.
Cheap energy is what made this country great. Why change horses?
The American economy boomed on cheap energy. There’s no question about it. At the same time, we have periodically run out of energy sources and started looking for other ones. Wood was the first big energy source and as wood got scarce, close to cities and industries, we looked for other things. Whale oil looked like a really good source of lighting for a lot of the 19th century and we started to run out of whales and the discovery of petroleum made it possible to stop looking for the last few remaining whales to keep our lights burning.
Petroleum isn’t cheap anymore. The price of oil has gone up. If we go to dirtier forms of oil, they’re expensive to produce. If we go to deeper offshore, farther into the Arctic — that’s not cheap anymore. It’s the same fuel, but it’s more and more expensive. We’re getting to a point where making wind power work, making solar power work, making energy efficiency achieve its potential — looking for the new forms of renewable energy — that’s going to be the cheap energy of the 21st century. The cheap oil has been used up.
There’s a second tier of costs that no one likes to talk about – new grids and power lines.
Some of the new energy technologies that are talked about require changes to the electric grid. Not all of them, but some of them do. Bringing power from remote places where the wind blows a lot of the time into cities requires that the grid be in better shape. The electric grid needs work. We’ve started to have power outages that ripple through different parts of the country. You have to spend money maintaining infrastructure and the US in its budget-cutting mania the recent decades has been cutting below the sustainable level of maintaining infrastructure and the electric grid as in other places. So we’re overdue for some updating of the electric grid.
If one of the costs of developing clean, ultimately very cheap electricity is that we spend a little bit more on a new smart electric grid for the 21st century — that seems to me like a good deal. There is no free lunch. This looks to me like one of the cleanest ways to spend money. We will create jobs doing that. Spending money on things that we need to make the country work doesn’t make us poorer — it puts people to work and at a time when a lot of people have been out of work for a long time that doesn’t sound so bad.
Are green jobs a sham?
There are a lot of different ways in which jobs are created by energy investment. There are always more jobs in the construction phase than there are in the operation of a power plant. So building a nuclear plant, building a big coal plant creates a lot of jobs and then almost no one is required to keep the plant going once it’s running.
The same thing is true for a lot of renewable technologies. A clean energy path involves spending money on a lot of things. Energy efficiency, improving insulation, installing new devices, installing tighter fitting windows and doors and so on, involves a lot of construction workers. So there’s a steady flow of construction jobs in constructing the buildings, the built infrastructure that’s needed for a clean energy path. So there are more jobs servicing energy efficiency than there are in fossil and nuclear energy.
Studies of the job creation from fossil and nuclear energy on the one hand, and from solar, wind and renewables on the other hand find that there are more jobs in the construction phase, more jobs throughout the life cycle from the renewable alternatives compared to the same amount of energy from traditional sources.
So new energy technologies are starting to be talked about around the world. The United States is no longer at all in the lead in this. Europe has taken quite a lead and China is now trying to catch up, not with the United States, but with Europe. So there are new sets of technologies coming.
I believe the United States will eventually realize we need to produce, we need to buy them and the question is, will we produce them or will we import them from China? Do we want to make things in Silicon Valley and Route 128 outside Boston or do we want to be the importers of the technologies that everybody else started making 20 years before we realized they were important?
What haven’t I asked you that you think is important?
The claims of gloom and doom about the economy, the suggestions that a mild-mannered climate policy will somehow destroy the American economy are documented, if at all, with studies from a few consulting firms hired by the US Chamber of Commerce and the National Association of Manufacturers — two lobbies which had made up their minds in advance what the answer was and found consulting firms that would say it to them. No one else can reproduce those numbers. No one else’s studies finds huge costs. The US economy’s a $14 trillion a year economy. It’s not going to be blown away by a small charge on energy. Prices go up and down all the time and the economy survives that.
The same free marketeers who like to talk about the wonderful elasticity of the market and how it can respond to this and that and the other change when they’re beating back government intervention in other areas talk as if, when faced with regulation, suddenly this elastic mechanism has become a delicate crystal — you touch it, you broke it. I think they got it right the first time. The market is elastic enough to deal with these kind of changes.
The Chamber of Commerce is pumping a ton of money to make sure this bill dies in the Senate.
Yes. Yes. And they’ve got their two consulting studies that are unlike anybody else’s studies, without going into the technical details.
So here’s my one other favorite piece of this. Climate policy looks like we need to spend some real money on it year after year for quite a few years in developing the clean energy technologies and installing them in the United States and around the world.
So the question is, can we subtract a few percent of our output from current consumption and spend it on a distant threat? And the answer is, yes, we already do. The military budget has never fallen below four percent of GDP in the United States in the post-World War II era. China as well as the United States spends four percent of its output on the military. It’s very hard for me to picture anyone invading either the United States or China if they switched half or two-thirds of that money to a clean energy strategy.
In fact, in the early Cold War years, we spent much more than that. We spent eight to ten percent of GDP. In the Eisenhower years, when the economy grew rapidly, when the top tax rate was 91%, we spent a lot of money on the military. Some of that money was stimulating the creation of the microelectronic industries, which went on to be the growth engine of the late 20th century. So well-chosen spending on new technologies does not destroy the economy. It works. We’ve shown that it worked with the spinoffs from military spending before we spend money defending ourselves, several percent of our output every year — we need to spend money defending ourselves against the new threat of the 21st century.
We may not know what kind of climate change and when it actually kicks in and becomes catastrophic, but spending some now is the same thing.
Oh, fire insurance. Insurance, yes. So there’s a lot of debate about what’s the most likely climate outcome but a lot of the fears are about worst cases that we’re not sure of, but they might happen. This is a problem that people face in their daily life all the time. The number of fires to US households is 0.4% of the number of housing units. That means that there’s a fire in the average house once every 250 years. By far the most likely number of fires you will experience is zero. No one cancels their fire insurance when they learn this. Everyone buys insurance against something that has a probability in the low tenths of a percent.
When young parents buy life insurance, they’re making the same calculation. If you’re under 40, your chance of dying next year is under 0.2%.
So people buy fire insurance for their houses — young people buy life insurance to protect their kids. They’re insuring against events that have a low tenths of a percent probability of happening next year. You’re more than 99% confident that you will not need it and yet people do. Also, if you don’t need your fire insurance, you don’t complain that you failed to get your money’s worth because your house didn’t burn down. You’re happy that the money was well-spent and the house survived.
If we apply that kind of thinking to climate policy, if we say, what are the risks which are as likely as the things people buy insurance against, I think they look a lot scarier than the absolutely most likely outcome and I think it’s well worth spending a few percent of our income, as people do on fire insurance and life insurance, on climate insurance, on insuring the future of the planet.
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