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.

Max asks:

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.

Comments

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Wilmot, a couple things. First, devoting auction revenues to compensating consumers does not mean subsidizing utility bills to offset rate increases. If you give money back to households via a straight check (dividend) or a tax credit, they will be able to afford dealing with rate increases. However, since the rates (cost per unit) still go up, they are still incentivized not to purchase as much electricity or carbon intensive goods. So it doesn't end up all back with the power companies. Second, none of the auction revenue is "committed" yet, so hopefully some does go to research. But research usually gets overlooked in the rush to subsidizing deployment, because (I think) research labs aren't as heavy campaign donors as (even clean) energy companies. Finally, what presents a bait and switch for unrelated spending? Hopefully, political accountability, remember there was a bit of a push to spend this money on healthcare a little while ago, but that really rubbed a lot of people the wrong way, so its been dropped.

By Max Epstein on 2009 04 24

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Max -- You say "the high carbon price isn't a big deal if you compensate consumers for the price increases that come from cap/trade" and you are probably right on that. The recent Senate vote on consumer indemnity amendments seems to indicate which way the wind is blowing. Consumers want their cheap power to continue, and are not willing to make substantial sacrifices to pay for pollution controls. Politicians therefore have to promise them that cap revenues will go to offsetting the rate hikes that can be expected when the utilities go to their local PUCs. So what then is the purpose of the auction, if the proceeds will wind up back in the power companies due to compensating rate hikes? Practically none of the proceeds will go to research and development because they are committed to consumer indemnity. And how about the possibility of a bait-and-switch to get more revenue for non-related spending, a repeat of Social Security? What prevents that?

By Wilmot McCutchen on 2009 04 23

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Jesse, I'll respond to your FIRST/SECOND/THIRD points with 1/2/3 below...

1. You write: "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."

There will always be domestic offsets available for lower than the market price of an allowance, in any program that has any pretenses of offering fewer allowances each year than the year before. The market for allowances is so vast-- and the price difference between the allowances and offsets will always be too large to be arbitraged away-- that there will always be a backlog of investments in pending offset credits. By using public funds to deploy more wind farms, you are not reducing offsets but just incentivizing a few more coal plants to fire longer before they pass the baton to a gas-fired generator.

2. You write "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." Exactly, that's what makes it efficient. Then you write "But the prices of clean energy alternatives are NOT uniform." This is where policy gets dangerous. If solar is unfairly hindered by a collective action dilemma where no one is willing to step up and invest in a 2 year expensive project to discover a new catalyst that all other will then profit from, increase the appropriations for the DOE Office of Science and get started on it. If its 3-5 times more expensive than wind because...its 3-5 times more expensive than wind, than the system should deploy 3-5 times (or really way more) wind. Or set the equal "subsidy" (I'd call it a Pigouvian tax) and force solar to compete by becoming competitive, forcing the kinds of breakthroughs like CSP that will save us all money.

3. Jesse, I never dispute the need for public research, I even highlighted it in my question. But you're talking about something else entirely. On deployment of existing technology to satisfy existing market demand, private investors playing with their own money and playing for keeps will deploy capital much more efficiently than any Congressional PV spending program.

You also keep bringing up this ominous specter of the too-high carbon price, but the high carbon price isn't a big deal if you compensate consumers for the price increases that come from cap/trade. I know you guys keep harping on what the polling data shows but you can get a polled public to tell you anything you want. You could easily assemble polls ostensibly showing that the public strongly opposes everything Obama has done or plans to do. Do the policy right so that you can tout the environmental accomplishments without bankrupting voters and the public will go along with it just fine. You have to put more thought into how you compensate consumers than Congress is doing now, considering not just income but geographic variation in energy price increases they'll be exposed to, but it can be done.

By squandering the revenue on non-public-good functions that the cap will already motivate private actors to do, you are providing less compensation for consumers, prices will still go up, purchasing power will decline, and you will have no chance of strengthening the cap later (before or after passage of original bill). This is as much a threat to put a damper on a strong incentive for private sector investment in clean energy as any legislated cost-containment. That will also have adverse consequences for any chance of us discovering anything exportable to China and India, who, by the way, seem intent on becoming the next France and leaving us in the dust anyway.

By Max Epstein on 2009 04 22