January 31, 2013
Breakthrough’s Nordhaus vs. EDF’s Krupp
Krupp Declares Opposition to Expanding Natural Gas Production
Shale gas is the "killer app" in the fight against coal, Breakthrough chairman and cofounder Ted Nordhaus argued in a recent debate with Environmental Defense Fund president Fred Krupp. The goal of climate policy must be to advance a zero-carbon revolution. Krupp called for more regulations and carbon pricing as well as opposition to expanded gas production.
In a recent debate, Breakthrough's Ted Nordhaus and Fred Krupp of the Environmental Defense Fund articulated clashing visions over what roles technology, regulation, and natural gas should play in the future of US energy policy.
The split over natural gas was particularly acute, with Krupp opposing new gas wells and Nordhaus arguing for an acceleration of the ongoing switch from coal to gas, fueled by the shale revolution and the cause of the largest US emissions reductions in recent years.
“I don't think the Environmental Defense Fund nor anyone in the environmental community who cares about this issue should be promoting the use of natural gas,” Krupp said. “On the contrary, I think we should be doing whatever we can … to avoid excessive lock-in in new natural gas plants. … And we should be locking in energy efficiency gains and renewables instead.”
Krupp called for stronger regulations and a “market signal” — in the form of a carbon tax or cap — as essential requirements for driving down harmful carbon emissions. “While I welcome this debate, to me, the only criteria that's important is what gets emissions down fast.”
Nordhaus strongly rejected Krupp’s approach: “If there is one thing that is really now clear, it's that, or should be, it's that we are not going to price, cap, or regulate our way to a low carbon future,” he said. “The reasons for that are part political and part technological.”
Current low carbon resources face severe technological hurdles, coming up short in terms of scale, cost, intermittency, and other non-market barriers to widespread deployment. Meanwhile, “no political economy in the world has been willing to raise the cost of energy sufficiently to deploy significant amounts of zero carbon energy” because of the importance of cheap energy to living standards and economic competiveness.
“The key to making progress, both politically and substantively, meaning actually putting policies in place that actually have an impact on emissions, is developing energy technologies that are clean, cheap, and abundant,” Nordhaus argued. He pointed to decades of government support that helped bring about the shale gas revolution as an example of how public funds should be used to accelerate the development of new clean energy technologies.
Krupp countered by claiming that, with a price on carbon, the private market will bring about the investment in and development of new technologies needed to combat climate change.
“We're in this fix because the people invest in things that are profitable, and things are profitable when you don't price carbon,” he said. “Once we get capitalism and entrepreneurs harnessed to invent, have a profit motive to bring to market the technologies that are clean, there's reason to be very hopeful.”
And yet, Nordhaus said, in an important exchange highlighting divergent views over how innovation happens, “there's almost no evidence for that hypothesis in response to environmental pricing.”
In the end, the effectiveness of any attempt to regulate or price carbon depends on cheaper and cleaner substitutes for coal. Those energy technologies are far more likely to come from major public investments than the private market, with or without a carbon-pricing scheme.
“Our argument is,” Nordhaus said, “do some regulations here and there as you like, but the main event here is actually investing in the technologies, in developing the technologies that we need — that is a public good. It is the central challenge. And if we are not, sort of, centrally focused on that, we're not going to make much progress on the problem.”
Watch their debate below:
Transcript compiled by E&E News and edited by the Breakthrough Institute.
Rob Atkinson, President, Information Technology and Innovation Foundation: So I think we're at a pretty important and interesting moment in our history as to whether we can move forward, and that's the focus of the next panel or debate, is really to honestly and openly air some of the debates that we have, if you will, inside this movement. There's obviously a big debate, if you will, between this movement and the movement that doesn't believe in the first three things I listed: climate change is real, it's a problem, or that it's something we need to be focusing on. But among the people who believe that, we certainly by no stretch of the imagination have unanimity. There are folks who think we should set a price or set a cap. There are other folks who think we should do more R&D, and et cetera, et cetera. So that's really the focus of this next, of this next discussion.
Fred Krupp, President, Environmental Defense Fund: Now the Environmental Defense Fund is made up mostly of scientists, economists, and people that are expert about politics. …
But the economists start out equally blunt. They tell us that we absolutely need a market signal to internalize the externalities, to drive down the use of high carbon energy sources. Things get a little less clear after that, what kind of signal is needed, but at least they agree on the first proposition. …
Now everyone that I know of in this area has favored policy ideas. EDF has long favored a cap because it gives us certainty about environmental emissions, about carbon emissions. And the studies that have been done show that it's working very well in Europe. It's working well to bring emissions down. …
In California, we've just put in place a A.B. 32 cap and trade system in California. I realize that despite these two experiments, there are those like Greg Mankiw and Kevin Hassett who argue for a carbon tax. There's a whole camp that argue for cap and dividend. There are lots of possibilities out there. Australia has a carbon tax that morphs over time into a cap. But while I welcome this debate, to me, the only criteria that's important is what gets emissions down fast.
Ted Nordhaus, Chairman, Breakthrough Institute: I think if there is one thing that is really now clear, it's that, or should be, it's that we are not going to price cap or regulate our way to a low carbon future. The reasons for that are part political and part technological.
Technologically, present low carbon technologies simply can't scale at the scale that we need them to if we're actually going to have much impact on climate change, and that's because, as I think we've discussed at some length earlier in the day, they're too costly, they're intermittent, and there are, as Fred rightly points out, a number of other, a wide range of other non-market barriers to their deployment.
Politically, I think what's become clear is that no political economy in the world has been willing to raise the cost of energy sufficiently to deploy significant amounts of zero carbon energy, and that is because cheap energy is too important to living standards in the developing world, and too important to economic competitiveness pretty much everywhere. So that's my first point.
Second, the key to making progress, both politically and substantively, meaning actually putting policies in place that actually have an impact on emissions, is developing energy technologies that are clean, cheap, and abundant. And I think if you look at what has happened with the gas revolution in this country over the last five years, you get a pretty powerful example of how quickly we can make progress on emissions when we have a technology that is better, cheaper, and cleaner than the incumbent fossil technology, which in the case of the United States, has been coal. …
That is what has driven the drop in U.S. emissions over the last several years, and I think it presents a pretty marked contrast to what's happened in Europe, where they've had a cap and trade program in place for almost a decade now. Europe's emissions are down, but it's not clear that their cap and trade program has had much to do with any of it. In fact, there's a new UBS analysis that I think came out just this week that concluded that there's, the ETS, unless it's completely revised, is unlikely to have any impact on European emissions until at least 2045.
Krupp: But I just want to say, John, that I hear a lot of pessimism from Ted. I'm sure you think, Ted, it's realism, but I'm not ready to give up on 450 or 2 degrees…
We're in this fix because the people invest in things that are profitable, and things are profitable when you don't price carbon, when you don't price that externality. Once we get capitalism, the greatest system that's ever been put together to organize human activities, unfortunately with a seamy underside, one of the seamy undersides being it chews up nature and the atmosphere, once we get capitalism and entrepreneurs harnessed to invent, have a profit motive to bring to market the technologies that are clean, there's reason to be very hopeful…
Indonesia and the United States don't have a cap on carbon, although the United States does in California, which is after all the biggest state. Brazil has a cap on carbon. They still need to figure out the rules. They've made more progress than any other nation on earth, reducing carbon emissions. They've vastly decreased their deforestation rate. And China, well, China's over a billion people, but now, today, 250 million people live in cities and provinces where they are doing in the Twelfth Five-Year Plan cap and trade programs.
So two of the four big emitters are moving, plus the European Union, plus Australia, plus New Zealand, and, you know, a handful of other countries, including South Korea, which is a big engine. So the idea that no one's going to do this anywhere in the world, we can't make 450, let's, you know, we're going to sail through 450. We just have to accept that. I just don't accept that.
Nordhaus: Well, I just have to say it's not actually pessimism …
And the point actually about the political constraints on this is not that you can't get Australia or Europe or China to do something that they call a cap and trade program. It's that the program is not going, the way these programs, by the time they go through the political process, get set up, the meat grinder of politics and interests, and the fact that no politician actually wants to bring the pain to their constituents, you get programs that can't actually have much impact on emissions.
I mean, this is the conceit of carbon pricing theory was that you could go set up this sort of platonic ideal of a carbon price, whether it was through a cap and trade program or a carbon tax, that would uniformly and in a consistent, economywide way internalize environmental externality. And what we see again and again and again is that it doesn't happen that way. And what we get out the other end are things like the ETS, which again, there's no evidence whatever that the ETS has had any impact on the basic trajectory of Europe emissions, and there's not much reason to think that any of these other programs are, either. So that is the critique.
I want to say, go to one other thing, which is Fred's sort of magnificent paean to the market and capitalism and prices. Well, the actual evidence on what's called induced innovation, which is what, the fancy word for what Fred was talking about, we set a price signal, and private firms, entrepreneurs, the market will go and do the innovation, there's almost no evidence for that hypothesis in response to environmental pricing. In fact, there is a new London School of Economics paper that just came out that actually uses U.S. panel data to demonstrate that market-based environmental policies have been inversely correlated with private sector R&D spending, and there's a bunch of reasons for that, but ...
Krupp: The same argument Ted makes today, that it could not work because electricity prices needed to be low was made then. We showed that you could decouple the pollution from power plants from electricity prices. Electricity prices, you know, went down. Pollution went down, too. So, and on the E.U., I just might add, Ellerman, et al, is one great study with evidence that the EU ETS is working, despite Ted's protestations to the contrary.
Nordhaus: Well, I'll, without getting into sort of dueling papers, I have looked, I actually have looked at Ellerman, and what it finds is through fairly extremely torturous calculations, essentially trying to create a counterfactual of what emissions might have been without it, they conclude that it achieved quite modest reductions. You know, as I said, there is, you know, and that was in a period when you had relatively high carbon prices, which we don't anymore. …
John Broder, New York Times: I see we have around eight minutes, giving each of you about four minutes to sort of respond to things you've heard earlier, or sort of make some kind of closing remarks. I think Fred went first, so Ted, why don't you summarize what message you want this audience to take away.
Nordhaus: Well, I think Fred has sort of framed this at times in ways that I think is actually a little misleading. Is it, the question isn't do you need any regulation, should you try to regulate carbon or not. It's a question of sort of what's the dog and what's the tail? And our argument, you know, continues to be that technology is the dog, and that you're not going to wag that with regulation, that as you get better technologies, I think you create the possibility of having effective regulations.
And I think as we see with gas, you can do it through conventional air pollution laws, you can do it through CO2 regs, under the Clean Air Act. You can ultimately do it with a cap or a carbon price. But every one of those is dependent on the existence of cheap substitutes. Our difference is actually where those substitutes come from, and Fred makes an argument that price incentives, private firms, and the market will sort of do the heavy lifting here. I don't think it's well-supported in either the literature or our experience, either in theory or practice.
And our argument is, you know, do some regulations here and there as you think, but the main event here is actually investing in the technologies, in developing the technologies that we need — that is a public good. It is the central challenge. And if we are not sort of centrally focused on that, we're not going to make much progress on the problem.
Krupp: Well, just two points. One, on intermittency, for 100 years we have known that in order to have the electric grid work, you have to have the right voltage. So as demand has gone up and down, we have modulated supply up and down. Today, we know through our experience with the internet and other modern pieces of infrastructure, unlike the grid, today we know that we can not only modulate supply to make it hit demand, but we can modulate demand, too. We can give consumers the option of allowing their electric car batteries to be charged overnight, or their refrigerators, instead of being, defrosting at 3:00 p.m. in the afternoon, to receive a signal from the power company to defrost at 3:00 a.m.
And so there are now companies making tens of millions of dollars selling demand side management into the system. In other words, agreeing to reduce their demand during peak hours, during large parts of the year, not just summer peaks. And that means a smarter grid really does help a lot with the intermittency issue, which is a real issue, but also a solvable one. And my second and last point is that, you know, there's a lot we do agree on, and I don't think the two approaches are mutually exclusive. Absolutely we need to do a lot with R&D. We need to support the development of new technologies through non-regulatory measures, and we need to regulate, too, in my world, we want to have that backstop, that legal limit. I agree, more clean technologies make it easier to regulate.
No doubt about it, more evidence that these two ideas, two approaches both have to proceed apace, as fast as we can, because there is no time to lose. Humanity has its back up against the wall, and as I said before, I think there's a lot of reasons to be hopeful. Hope is a verb with its sleeves rolled up, and I'm counting on all of you to have your sleeves rolled up.