The recently roiling world energy markets barely registered on the French radar. The French do not depend much on oil. The French need neither cap and trade nor carbon tax. When energy prices rose, the last thing they had to worry about was inflation. They live on a tranquil “island” even as a hurricane rages around them, having already achieved what the rest of the world, at this point, only aspires to do by 2050.
The hurricane few dare to enter is not as much the price of oil as it is the debate about the policies to reduce the dependence of the nations of the world on this depleting resource. Careers have depended on this debate since the last oil shocks nearly 40 years ago, especially in a wonkish town such as Washington, but to no avail. It is likely that this same careerism could torpedo sensible U.S energy reform this year because ironically, at issue is not oil. It is the all abundant coal that gave the world the steam engine. The defining factor driving the cap and trade policy debate is coal which produces most of U.S and Chinese electricity, making the United States and China the largest emitters of green house gases on the planet, along with Russia and the E.U.
To accomplish the goal of reducing green house gas (GHG) emissions of the United States and to move away from the ever scarce fossil fuels (the Central Intelligence Agency reserves estimates project that the world will run out of them by 2050), the United States Congress wants to pass a cap and trade bill and a renewable electricity standard (RES). RES, as it is being written in the American Clean Energy Leadership Act (ACELA), will require power producers to meet the 15% renewable energy requirement by 2021. What should be the RES goal for 2021? Is the 15% that is currently in ACELA sufficient incentive for Boone Pickens to build out the wind tunnel across the middle of the country or for Al Gore’s Repower America to achieve its goal of 100% clean energy by 2020?
A major concern that the markets and policymakers currently have is inflation which is intimately dependent on food and energy prices. Both cap and trade and carbon tax raise prices for consumers and hence have the potential to trigger inflation just as high oil (and hence gasoline) prices would. The ideal option therefore, is for the markets to invest the current cheap money supply in clean energy technologies to replace coal with some combination of the clean alternatives and/or cleaner coal to meet U.S GHG reduction objectives. If coal is clunkers, then there is plenty of cash at the moment to buy it out clean.
This means that the transition cost of replacing the unclean technologies must be borne through targeted corporate tax reductions predicated on domestic US investments in the clean energy infrastructure by US corporations, domestic or multinational corporations (MNCs), to create local jobs which would in turn increase tax receipts because of economic growth. This administration however, thus far, is averse to corporate tax reductions besides the production and investment tax credits in the American Recovery and Reinvestment Act (ARRA).
A friend of mine from many years ago had recently asked for some advice about a product his startup in Silicon Valley is making. It is called Flaii, a clever take on the freedom to fly by being able to use the web and your desktop together in tandem, more flexibly. He told me they wanted to focus on Microsoft’s windows computers because Microsoft has 94% of the market share. As a startup, perhaps they were doing the sensible thing by targeting the biggest slice of the computing market, just as perhaps many in the energy business want to target coal and oil which make up close to 90% of the U.S energy market at the moment. De facto monopolies exert a self-sustaining gravitational pull that is hard to resist let alone get away from.
I had responded to my friend to write their application for Apple’s iMacs and iPhones even though the market share of Apple is small, because Apple is defining the future. It is leading the structural change in computing, just as Microsoft and Apple had led it 30 years ago. If Microsoft is becoming the General Motors of computing, Apple is the Tesla Motors.
Just as writing software applications to meet the high quality standards of Apple and then adapting them to the Microsoft behemoth is the sensible thing to do, so would be investing in the future of energy and the automotive sector as a priority. The adaptation of clean energy to autos would be hybrids with natural gas or gasoline until the time when all that the roads see are the likes of Tesla. The future always leads the present.
President Barack Obama gave an important speech in Florida on energy policy. Just as he had unveiled the American Recovery and Reinvestment Act (ARRA) on the premises of the small solar company Namaste Solar in Denver, he signaled the need for the country to move toward large solar by speaking at the DeSoto Next Generation Solar Energy Center in Arcadia, Florida. The 25 megawatt center of Florida Power and Light (FP&L) is the largest photovoltaic power producer in the country. Yet, his speech did not mention the bridge to the future that ARRA is envisioning: fossil fuels, as they are used today.
With the smart grid, the reason for the President’s speech, even as the country prepares to shift to large wind, large solar and nuclear power to cleanly accommodate the energy needs of the country as fossil fuels completely deplete over the first half of this century, the process of depletion of fossil fuels must also be clean over the proposed time horizon of 2050 in the energy bills in the Congress. This means fossil fuels must be used more cleanly from as early as tomorrow, if not today.
Small solar, small wind, trash burning, non-food based biofuels, geothermal, hydroelectric and so on can grow, led by small, roof top solar to substantially reduce the dependence of residential and business users on coal, which currently produces more than 40% of the country’s electricity and more than a 1 to 1 match in percentage terms of the pollution. If pollution were the output from coal, technically, coal’s production can be called “increasing returns to scale” with a constant returns to scale (or a 1 to 1 ratio of input to output) electricity output. Besides, coal, albeit being an inferior product, is just as locked in as oil and Microsoft or just as the video format VHS had in competition with Beta.
It takes time, at least a decade, to build the infrastructure that is necessary for the large clean energy projects, if we begin now, including the development of clean coal technologies which have led the President’s list of the energy alternatives he had in mind. In the meantime, however, there is a fossil fuel which many of us use to cook at home every day: natural gas. It did not make the President’s list, like an “A” student left out of the Dean’s list when, in fact, it could be the quickest way to clean up coal by retrofitting existing coal plants as cogeneration plants which already have tax incentives. Cogeneration is the easiest way to go for the coal states to comply with the proposed pollution control rules of the Environmental Protection Agency (EPA).
The shift to natural gas has a long history. Former Federal Reserve Chairman Alan Greenspan had testified to the Congress about the need for a better global natural gas market when he was the Chairman of the Fed because it is the next “oil”, but far cleaner, until the country and the world can move permanently out of fossil fuels by mid-century. To make matters easier politically, every major global oil company, many of which are American, have a stake in natural gas. With natural gas, it would be easy for Americans to fill up at home until they can plug in at home. If they want to fill up on the way, they can use the natural gas stations at the truck stops on the highways.
The Congress of the United States is considering an alternative transportation solutions bill, the NAT Gas Act, which has its origins in the President’s Chief of Staff Rahm Emmanuel’s term in Congress. California and Nevada along with a few Northeastern states want to do something close to the Vice President’s heart: upgrade Amtrak to high speed rail. HSR, as high speed rail has come to be known for budget purposes, is the big kahuna. It is the future of the country’s transportation, just as the interstate system was for President Eisenhower. Natural gas for transportation can be added to HSR just as the incentives for more natural gas production are a part of the energy legislation being considered by the Congress.
The Boxer-Kerry bill in the Congress, which has dominated the U.S policy debate sidelining ACELA in preparation for Copenhagen, is making a grave error by insisting that regional greenhouse gas consortium (RGGI) and California policies be imposed on the rest of the country before Copenhagen. The states must be given the flexibility to use cap and trade and/or carbon tax, locally. Ten northeastern states from Maine to Maryland have already formed an RGGI and California has its own tax structure to encourage the shift to renewable energy. The country, however, must not be bound to policies that raise prices for the sake of more government revenues, putting the clean energy transformation potentially on a dead-end road similar to the solvency of social security, because of the lack of budget discipline. Policies which raise prices would be unsuitable in the context of the current economic environment when there is fear of stagflation. Even Denmark which implemented a highly successful carbon tax policy because it had the budget discipline, is now reconsidering its approach.
Given that inflation is a serious concern at this stage of global economic recovery, the best option is neither cap and trade nor a carbon tax, but simply targeted corporate tax cuts for clean energy and transportation, the minimum eligibility for a corporate tax cut being at least 15% RES as of the date of the passage of ACELA , and the tax credit increasing to 100% (meaning zero corporate tax liability) if the coal plants convert to 100% renewables or to clean coal technologies anytime they can.
For the United States it should not matter what Russia, India and China do. An agreement or a lack of it in Copenhagen does not matter for the interests of the United States. The U.S has to commit unilaterally to reducing GHGs 85% from the 2007 levels by 2030, not 2050, using targeted corporate tax cuts, not the inflationary cap and trade or tax increases. US MNCs can still be subject to foreign cap and trade regimes where they operate outside U.S borders, such as in the E.U, but need not necessarily be subject to it in the United States.
The world has the clean bridges it needs for a clean energy future. We only need to begin using them to get to the other side. Doing so sooner would be better for all because the world, this time around, simply cannot afford to wait another 40 years doing nothing and because clean energy is the indispensable necessity for clean air, water, food and shelter: the four basic building blocks of world peace similar to the four natural elements: earth, air/wind, water and fire.