October 17, 2008
What are Clean Energy Investments Good For?
Max Epstein is a sharp young policy thinker at the University of Maryland (UMD) in College Park. You may remember him from a kind of point-counterpoint debate about carbon pricing Max had here on our blog with Breakthrough Generation fellow Zach Arnold last summer. Well, Max continues to follow our writing closely and asks smart questions frequently. Today, his excellent question about the role of clean energy investments spurred a response that I'm turning into a separate blog post here.
Jesse, what exactly is investing public money in deployment of wind farms and PV arrays supposed to accomplish if you do it [along] with a carbon cap/trade? Its one thing to address market failures like a lack of research and transmission, but deploying extra carbon-reduction measures in sectors covered by the cap will not compel emissions reductions beyond what the cap mandates. What am I missing?
Below the fold, you'll find my reply, which articulates three reasons why clean energy investments are critical to climate objectives. We'll leave the part about how investing in a clean and prosperous energy economy is also a politically powerful proposition that strengthens the political appeal of climate policy for another day (check here if you're interested (pdf)).
Here's my reply:
Hi Max. You're missing a few things actually, but thanks for asking. First, the goal of investments is not to compel emissions reductions beyond what the cap mandates. The goals are actually several-fold...
FIRST: you assume that the cap's mandates will be met without any further assistance. That assumption is wrong if any cost containment provisions, including safety valve/price offramps, discretionary price controls, massive use of offsets and/or borrowing from the future mechanisms are included. They are. In the Waxman-Markey bill (the latter two) and in every other climate legislation enacted or given serious consideration anywhere in any political economy in the world. If the bill has cost containment, there isn't really a "cap." There's just targets and a price signal. The only way the "cap's" mandates will be met is if there are readily available emissions reductions opportunities that are cheap enough to be deployed at scale without triggering the cost containment measures. That's where investment and a "tech push" is critical to maximizing the chances of meeting emissions reductions goals and to making up for the shortcomings of the "price/market pull" approach of cap and trade/carbon taxes.
SECOND: a carbon price is a uniform subsidy. It applies the same to all clean energy forms. If it's $10/ton, then clean energy is that much more affordable relative to competitors, all forms of clean energy. But the prices of clean energy alternatives are NOT uniform. Wind is only a bit more expensive than coal (plus needs infrastructure build out) while solar is 3-5 times more expensive than coal, for example. Why should we want to make ALL dirty energy more expensive than the MOST expensive clean energy source we want to spur? Why not make dirty energy moderately more expensive, provide some market pull, and then use the revenues to fund targeted tech push strategies to push the development and drive down the costs (subsidized at first, real eventually) down to the price where the carbon price will take over? That gives you the same reductions, a better technology development pipeline and lower cost of compliance to the economy? Carbon dollars do double duty: first as modest market pull, second as critical funding source for targeted and effective investments to spur emerging technologies to scale and down the price curve.
THIRD (and probably most importantly): we don't want to make clean energy cost competitive with coal WITH A CARBON PRICE. We want and NEED to make clean energy cheaper than coal. Period. Anywhere. In China and India and Brazil and everywhere else where the bulk of expected energy and emissions growth will occur, they demand affordable and scalable energy sources. Right now, fossil fuels are just about the only thing that foots the bill. The leaders of those nations have been pretty clear, over and over, that they won't put much of a price on carbon, if any at all. At least not for a LONG time. Since global warming is, after all, a global problem, we can't ignore this massive demand for affordable and abundant energy. How will that demand be met? With more coal plants, or with new clean and cheap energy sources? The answer will make or break our chances to stabilize the climate. Knowing that, the explicit goal of climate policy in the rich nations of the world should be to MAKE CLEAN ENERGY CHEAP. That argues for a limited role for making dirty energy more expensive through carbon taxes. We don't want to rely on a $50/ton carbon price to make clean energy sources competitive, for example. Especially not if there's little incentive in our policy design for those technologies to get much cheaper than that. We can rely on a modest carbon price to do some useful market pull and bring more mature clean energy techs to scale faster (and therefore down in price somewhat). But the real work can and should be done by tech push investments that can be targeted appropriately and steadily lowered in price as clean energy techs reach scale and achieve price and performance improvements. That's a strategy to MAKE CLEAN ENERGY CHEAP and to make coal obsolete in China eventually. If a climate strategy can't ultimately do that, then we're sunk. How does cap and trade do that?
Thanks to Max for the questions and as always, looking forward to hearing our readers' thoughts here at the Breakthrough Institute blog.