Obama's Way Forward On Energy and Climate Change

Another major piece of the Obama agenda expressed yesterday is on energy and climate change issues. The President called for a cap and trade system to shrink carbon emissions:

Thanks to our recovery plan, we will double this nation’s supply of renewable energy in the next three years. We have also made the largest investment in basic research funding in American history – an investment that will spur not only new discoveries in energy, but breakthroughs in medicine, science, and technology.

We will soon lay down thousands of miles of power lines that can carry new energy to cities and towns across this country. And we will put Americans to work making our homes and buildings more efficient so that we can save billions of dollars on our energy bills.

But to truly transform our economy, protect our security, and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy. So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. And to support that innovation, we will invest fifteen billion dollars a year to develop technologies like wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient cars and trucks built right here in America.

First to what has already been passed. There are great incentives through tax breaks and public investment programs in the stimulus pacakge to get people to change their lifestyles to a more green and energy-efficient one. The build-out of a national clean-energy smart grid is one of the most exciting infrastructure projects of the past 30 years. Too much of our wind and solar energy systems would be best placed in areas that are not currently fed by high-voltage transmission lines back to any grid. Streamlining this would save billions in power already generated by reducing congestion and inefficiency, and open large spaces up to renewable energy.

But the biggest two parts of this, the legislation that Obama is calling for, are the RES (renewable energy standard) and a cap-and-trade system. The RES has the votes and will get done, and hopefully the Congress will shoot for a high percentage of electricity from renewables by 2020 (50%? Dare to dream?). As for cap and trade, here are some details:

On energy policy, Mr. Obama’s budget will show new revenues by 2012 from his proposal to require companies to buy permits from the government for greenhouse gas emissions above a certain cap. The Congressional Budget Office estimates that the permits would raise up to $300 billion a year by 2020.

Since companies would pass their costs on to customers, Mr. Obama would have the government use most of the revenues for relief to families to offset higher utility bills and related expenses. The remaining revenues would cover his proposals for $15 billion a year in spending and tax incentives to develop alternative energy.

This may be surprising to Congressional Dems, some of whom may expect to be using for a variety of energy and environmental purposes.

But I’ve been saying for a while that, as a matter of politics, the vast majority of the revenues from the auction will need to be returned to taxpayers — that is to say, the vast middle class. I think at least 60% to 80% needs to be refunded to start with, rising to 80% to 90% within 10 years. Otherwise conservative opponents will simply attack this entire effort as a tax. Yes, they’ll do so anyway, but if the bottom of three to four quintiles are made whole, the argument can be refuted.

What is cap and trade? Kevin Drum has a pretty thoughtful article about it at Mother Jones.

The theory is straightforward. Suppose you have two plants, and the first one is able to eliminate one ton of pollutants at a cost of $10,000. The second plant, perhaps because it uses a different fuel or newer boiler technology, can do the same for only $4,000. Under command and control, if you required them to remove one ton each, the cost would total $14,000.

But what if all you mandated was that two tons of pollutants be removed overall (the cap part) and allowed the plants to work out how to do it? Naturally, the first plant would just pay the second plant $4,000 to remove an extra ton of pollutants from its emissions (the trade part). At first this seems suspect: The first plant is being allowed to merrily pollute away. But you've still removed two tons of pollutants, and since it was done more cheaply—for $8,000 instead of $14,000—you can afford to ratchet down the cap. You can require that three tons of pollutants be eliminated overall, and since this still costs only $12,000, everyone comes out ahead. The public gets cleaner air, and the plants save money.

There are ways to make cap and trade essentially a carbon tax refunded to consumers, and that's by ensuring that the carbon credits are sold at auction. There are drawbacks to it, particularly if the rest of the world doesn't go along, but Europe is already on board, and while initially the results were mixed, they are effectively pricing carbon now, and we can learn from their early mistakes. It's not the end of the fight, but it's a good tool. Drum concludes:

"Cap and trade is just a tool," says the NRDC's Bryk. It might be the backbone of any effective long-term carbon reduction policy, but it's not the only tool we need. Or even necessarily the best. If you want to improve vehicle mileage, for example, raising federal fuel-efficiency standards is "much cheaper for consumers than raising the price of gas," she says. Michael O'Hare, a public-policy professor at UC-Berkeley, emphasizes the need for the government to take a more active role than just setting carbon prices. Sure, higher energy prices might motivate people to change their behavior. "But," he points out, "even if I want to take the tram, I can't do it if there's no tram."

In other words, command and control will remain absolutely necessary. As will taxes. Even with a well-designed cap-and-trade plan in place, we'll need tougher efficiency standards, higher fuel taxes, more sensible land-use policies, green research programs, and plenty more. But in the same way that cutting calories is the core of any weight loss no matter which fad diet you follow, raising the price of carbon is the core of any climate plan. With luck, this could be the year we finally figure that out.

Ultimately, I think technology is the killer app here. Raising the price for carbon output will spur the innovation to find clean energy solutions, and if industry is successful, we'll see a major paradigm shift. What's most important about this is that those solutions will eventually require millions of green jobs and a return to the American manufacturing base that held us in good stead from the beginning of the Industrial Revolution to the beginning of the outsourcing craze. Major legislation on the climate wouldn't just be good policy - it's essential.

You can become a Climate Precinct Captain able to help with building a grassroots movement around these issues at 1sky.