“Jobs, the Energy Sector, and Government”
February 16th, 2012
Capitol Hill, Washington, DC
Opening Remarks: WILLIAM SQUADRON, President, OurEnergyPolicy.org
- KENNETH P. GREEN, Resident Scholar, American Enterprise Institute
- JIGAR SHAH, CEO, Carbon War Room
- ROBERT H. TOPEL, Professor, Urban and Labor Economics, Booth School of Business, University of Chicago
- YOSSIE HOLLANDER (moderator), Founder and Chairman, OurEnergyPolicy.org
MR. SQUADRON: Thank you all for coming. There’s still a few people outside coming in, in a little bit of a line, but we should get started, because I know all of you have busy schedules, and we appreciate your taking the time to join us today.
I am Bill Squadron, and I am the president of OurEnergyPolicy.org, which is an organization just a couple of years old which is dedicated to creating a platform that is nonpartisan and broad-based for discussion of energy policy issues. The concept is to facilitate dialogue on these critical issues from all sectors of the energy field, from corporate, from academia, from government, from nonprofit, from law, from finance, really from every sector. And we’ve got already well more than 500 expert participants in that community, and it’s growing very quickly.
The other purpose of OurEnergyPolicy.org, which is up here behind me — and I would encourage all of you to take the handout that we have out on the desk, which also can give a lot of information about what we are doing — is not just to facilitate a discussion but to create a resource for everybody in this room and everyone involved in energy policy, whether at the local, State, or Federal level, or in the media, to be able to access information, opinion, insight, and creativity. So part of our site is a resources area where there is a comprehensive library of materials that is growing all the time in which we expect over time will become the go-to destination for people who are doing research and looking to get information on any energy topic.
So I would ask all of you, if you haven’t already, to visit the site, register as an expert participant, because what we do is define our expert community in a very broad and inclusive way. We want anyone who is actively engaged in the community. We want it to be a substantive and meaningful dialogue, and it is open, of course, to the entire public to look at, but we do limit the conversation to those who can contribute in a substantive and significant way.
Thanks again for coming. We have a great program today. I really don’t have to tell anybody here that in this election, your jobs is on everybody’s mind and tongue, and it’s certainly been a subject in the energy sector for a long time, as people have debated green jobs, non-green jobs, and the role of the government, if any, in helping to create, encourage, and support those kinds of jobs.
We have an outstanding panel who I’m sure is going to create a lot of very interesting and stimulating, perhaps provocative conversation, and then we are going to open it up to everyone here for questions.
Just to give you a brief introduction, all of these people to my right have biographies long enough, it could take up the whole time if I did it, but I won’t.
To my far right is Ken Green, who is a Resident Scholar at the American Enterprise Institute. He writes regularly on all of AEI’s platforms. He is an environmental scientist by training and also the author of several textbooks on energy and energy policy for the collegiate world and audience.
To his left is Bob Topel, who is — I want to make sure I get this right — the Isidore Brown and Gladys Brown Distinguished Service Professor in Urban and Labor Economics at the University of Chicago’s Booth School of Business and is a renown scholar who has done extensive work in energy economics, economic security, economic policy, and regulation. So we are delighted to have him here from Chicago today.
Then to his left is Jigar Shah, who is the CEO of the Carbon War Room, which is really a unique organization, which brings together investment organizations and private equity organizations with entrepreneurs, companies, governments, and NGOs to look at ways to overcome barriers to market and climate action. Jigar previously had been the founder and ran SunEdison, which was really the pioneer in the solar industry, including really the pioneer in creating the Solar Power Services Agreement, which then paved the way to the growth of a multi-billion-dollar industry.
We are delighted to have all of them here today, and what I am going to do is turn it over in a second to the chairman and founder of OurEnergyPolicy.org, Yossie Hollander. Outside, I just want to recognize — you met him as you came in — Matt Jordan, who is our program coordinator here in Washington, which is where our headquarters is. He can get you any follow-up information and work with you as we move forward. In fact, one of the things for those of you who work in offices here on the Hill, we have a particular program for Members of Congress that a number of them have taken advantage of where they can use our platform to reach out to the community, get input on energy issues of interest to them or legislation that they have introduced, and then use that as well to demonstrate to their constituency their use of the Internet to promote access to government and broad contribution and input on these issues.
Let me turn it over now to Yossie who founded this organization several years ago and is the chairman of OurEnergyPolicy.org. Yossie.
MR. HOLLANDER: Good afternoon. The goal of this exercise is a conversation. So, therefore, I will keep myself out of it most of the time, except for questions. Sometimes I may interject. We will start with 5 minutes by each of the participants. Then I will ask a few questions, and then I will turn it over to you. We will allow a lot of time for questions from the audience, and let’s have some fun.
First, I will start with Ken, 5 minutes about energy and jobs.
MR. GREEN: All right. Well, good afternoon. Thanks for coming today. As they said, I am Ken Green. I am with the American Enterprise Institute. If you want to find out anything about what I do or what I write, it is AEI.org. My e-mail, which I live in, is firstname.lastname@example.org, and you can read what I do on the Enterprise Blog. I blog almost every day now. We have an in-house magazine called The American, and you can find me on Twitter @KennethPGreen — or KennethPGreen, all one, KennethPGreen.
I have studied energy policy for about 15 years now at think tanks, free-market think tanks pretty much in North America, in the U.S. and Canada, and I recently wrote, as Bill said, a textbook for a college audience, supplementary text on energy policy. Prior to that, I wrote a middle school text on climate change. That was preparation for learning how to write for Members of Congress. You had to write to an eighth-grade reading level.
MR. GREEN: Over time, I have come to basically, especially in the course of writing this last monograph — I have decided to simply reject the prevailing narrative, to start out by rejecting the prevailing narrative on energy, or as we science geeks would say, I reject the dominant paradigm when it comes to energy, which is the prevailing paradigm that energy is bad, we’re addicted, we’re dependent, it’s destructive, we need to use less, it should be more expensive, it should be more scarce. I reject that entirely.
In fact, I think if you look at the history of human development, we are, in fact, an energy species in civilization. It is the underpinning of the foundation of liberal democracy entirely and civil government. It is what powers us. Literally, the word “empowering” means to give energy, and it is omnipresent in a life to the extent that people find unimaginable, your food, your water, your shelter, your clothing, your medicine, your education. They are all congealed energy, and everything you do represents the tip of a wave of energy that has come to you from around the world in historically unprecedented qualities.
That is, I suppose, what you would say is my philosophical orientation when approaching the issue. That being said, I also tend to overturn some other apple carts, which is you have sort of fascinations on both sides of the discussion. On the left, environmental left, you have a fixation on renewables, wind and solar power in particular, and on the right, you have a fixation on nuclear power in particular. Both of those fixations sat. They are sort of fixations.
What is needed, I think, is careful choosing if we are going to continue to grow as a technological society. How many people here have smartphones? Estimates are when you add up all the pulses of energy that go into your phone from Google searches, your e-mail, your tweets, your messages, your texts, et cetera, these phones have a footprint that’s comparable to a refrigerator. We are using vast amounts of additional energy because of those cell phones, which, by the way, save enumerable lives every year and have remarkable benefits. But as we grow, we are going to need a lot more energy, and so careful choosing is very important.
Since we only have 5 minutes, I am going to toss out what I consider to be some very important touchtones. When anyone talks about energy and says “I like Energy Form A versus Energy Form B,” these are the touchstones that I think need to be considered in the choice: Does it increase consumer choice and consumer empowerment? Does it increase the power of markets to provide the right kind of energy at the right price and the right place at the right time and efficiently allocate energy resources? Does it preserve abundance and the ability to let us grow when our economy roars? Do we have capacity to grow as opposed to just sustain? Is it affordable?
Not only here in the United States but around the world, a vast quantity of people live in abject energy poverty and are still hauling unsterile water by hand that they can’t sterilize to feed their children.
Is it affordable? Is it reliable? We have issues with reliability in this country, electricity reliability. It is all in good fun until the lights go out in the middle of summer and the air conditioning goes out in the middle of summer or the heat goes out in the middle of winter.
Does it have the necessary safeguards, environmental health, et cetera, “necessary” being the operative word, not extreme, not all, but necessary?
And does it make the best tradeoffs available? Understanding that there is no free lunch, everything is a tradeoff. With wind and solar, we trade land for density. With ethanol, we trade crops for animal feed. With petroleum, we trade environmental consequences and some land consumption. So are we making the best balance of tradeoffs available in a straight, honest accounting, inclusive sort of way?
With those sort of basic touchstones, I will stop, look forward to your questions, and I will turn it over to Bob.
MR. TOPEL: I don’t think I am up.
MR. HOLLANDER: We will start from the right, then we will go to the left, and then go to the center.
MR. GREEN: Okay, there you go. How balanced!
MR. TOPEL: I don’t know if I get a chance to have somebody to the right of me.
MR. SHAH: Exactly. I am not sure I have ever been accused of being left.
My point of view is probably complementary, but it comes from a different angle, I think, than most. I am what you call an energy practitioner. I mean, we have installed more solar in the U.S. than almost anybody else has, than anyone else has, and at this point more, almost globally than anyone else has.
When I moved to the Carbon War Room, what we did was we took what we learned from my experience at SunEdison and figured out what was ailing all the other technologies. For those of you who remember your history, most of why we are here today is because of the oil embargoes in 1970s. It is at that point that most people decided energy was actually valuable enough to talk about, and that they were going to spend billions of dollars to research whatever it is that they researched.
We find ourselves today with enormous amounts of innovation, whether it be ways in which we get increased amount of production out of agriculture. There’s now folks who are doing controlled environment agriculture where they put greenhouses on the top of Walmart stores and then sell the produce directly underneath, because it saves the 70 percent of cost that is related to transportation of that produce. There are folks who are doing distributed generation, whether it be solar or waste heat recovery or combined heating power or small wind in areas or fuel cells or whatnot that they do, and then there are lots of folks who are doing advanced industrial efficiency, mass balances to try to figure out how much of what we burn and how much of what we do is actually being turned into useful work and how much of it is actually getting wasted and is there an economic opportunity to do that.
What you find at the Carbon War Room is that, in fact, there is a whole host of technologies that have met their technology thresholds or their milestones. They have become cheaper than what they were replacing without subsidies, and yet they still don’t scale.
I will give you a couple of examples. In the shipping industry back in the 1970s, they invented a paint that they can actually paint on the side of ships that prevent barnacles from attaching to the ship, and it decreases fuel consumption by about 6 percent because you have less drag. Shipowners never installed it because, even though it’s a 6-month payback, they don’t pay for the fuel. Cargo owners generally pay for the fuel. It is a passthrough. So why would I spend a dollar on my ship if the contracts don’t allow us to do that?
So it’s the Carbon War Room for the first time on February 3rd, just a couple weeks ago, where we have actually introduced new contracts that Cargill and others could use to actually pass through savings back to the shipowners, such that they actually have an incentive to upgrade their ships. These are what you would call, sort of in MBA 101, “classic market failures,” information asymmetries; in this case, because Cargill didn’t know what the fuel economy of the ships were that they were actually hiring until we actually introduced fuel economy ratings for 60,000 ships globally, and then there’s other market failures, transaction cost issues, lack of financial instruments.
I will give you one more example. In the energy efficiency world, many of you probably know that since the 1970s, Amory Lovins has been saying how wonderful energy efficiency is and how it’s the low-hanging fruit that all of us seem to be too short to reach. What we were able to do is figure out an off-balance-sheet financing mechanism using something that someone else had come up with called “Property-Assessed Clean Energy bonds.” We got Barclays to put up $650 million to do that, and what it does is most building owners don’t want to spend any money on their building, because they would rather use whatever money they have in their pocket to buy another building as opposed to upgrading the buildings that they have. So this allows them to use other people’s money to upgrade their buildings, and it is considered off-balance-sheet because it is considered a property tax payment. So it is now owed by the building owner. At the time in which the building owner sells the building, the property tax obligation goes to the next person that is going to operate the building and not the person who sold it.
These types of innovations unlock capitalism and allows for entrepreneurs to have a more level playing field upon which to work, and that’s what the Carbon War Room does. What I would suggest, what we are finding, is that there are hundreds and hundreds of these things that occur all the time, and we work hard to actually eliminate them.
MR. HOLLANDER: Bob? I don’t say much in the beginning.
MR. TOPEL: I have a few things to say that are complementary to what the other speakers have said. With regard to sort of energy policy – and the title of this thing is “energy policy and productive jobs,” – I guess, as an economist, when you step back, you ask, “Well, why do we have an energy policy at all? Because there’s a lot of things in life that are important, but we don’t have explicit or large-scale policies to deal with them.”
One answer is it is the important part, but it is not a very satisfactory one. As Ken pointed out, energy is key to prosperity. If you look at a simple graph of living standards, say, per capita income against energy use, it slopes up, and we are right at the very top. If you look at changes in per capita GDP over time and changes in energy, it slopes up at about the same rate. Now, the message is that if we are going to maintain our own prosperity and spread that kind of prosperity to others who don’t enjoy it now, then abundance of energy sources is going to be the key thing. It might be the most important social problem of our time, but the fact that it is a social problem or an important social thing doesn’t necessarily mean that it requires a policy.
To an economist, a policy requires one of two things, and Jigar referred to them. One is an externality. An externality is when some action by us imposes costs on others. In the energy sector, the one that has been the most prominently discussed lately is that things we do today might have long-term cost because of climate change.
The other is a public good, and one of the things that is important to the energy problem is that basic research is a public good, because once you think of a new idea, it is really cheap for others to use it, so the private sector isn’t going to have the incentive to invest in that.
Given that there are externalities in public goods, it is tempting to say, “Well, that is sufficient to have an energy policy and to have government intervene in the process,” but market inefficiencies don’t necessarily mean that government intervention can or will make things better. That is sort of what I sometimes refer to as “the hubris of policy.”
Let me give you an example. Let me ask a question, and this is by raising hands. Sometimes I get different answers. I know I have got a biased sample today because I have got a lot of government people here. How many of you think the government is more effective than the private sector in spending tax dollars? I usually don’t get a lot of hands. How many think of it a little bit less effective? If the money were spent in the private sector versus the public sector, which sector is going to spend it more efficiently? How many think less efficiently in the public sector, in the government?
Once I got a hand who thought that it was going to be spent more efficiently in the public sector, and he was a Federal employee. I thought I might get a few of them today.
If you think about it, that has important implications for public finance and public policy, and here is an example. When the current administration came to town, the goal was to use carbon taxes or their equivalent to reduce carbon emissions by 20 percent by 2020. Now, in order to do that with a tax, if you are going to reduce this externality-causing activity by 20 percent, it turns out you got to collect — this has to do with triangles and rectangles, folks. You got to collect $8 in tax revenue for every $1 of externality that’s avoided because of the imposition of the tax. That is a lot. That is a pretty big ratio.
Now, if you also think that the government is less than 80 percent as effective in spending the money as the private sector would be, you got to take into account not only the inefficiency that is created by the existence of emissions that you could get rid of with a carbon tax, but you have to take into account that the government spends the resources. They have a dead-weight loss on their side too, and if they are less than 80 percent as efficient for this single example of a 20-percent reduction in an externality, then it is not worth doing it. The cure is worse than the disease, and if it is a small externality, 10 percent, it would be like 93 percent would be the cutoff.
So that the public sector would have to be awfully efficient in spending that money, probably more so than we think, in order to make the interventions worthwhile. The whole upshot of that is it is only really big things you want to go after. You don’t want to go after small externalities. That was the first principle of sort of economic policy.
The second one I want to refer to has to do with the title of today’s session, and that is, to an economist, job creation is not in and of itself a sensible policy goal. The goal is to promote economic efficiency, which is activities where benefits are bigger than costs. In the long run, the number of “jobs,” in quotes, is relatively fixed, because people find something to do. California doesn’t have more jobs than Maryland because they are really good at economic policy in California. It’s got a lot of people looking for something to do. What government policy can do, it really can’t create jobs. It can be an impediment to creating productive economic activities, but the creator of those economic opportunities is the private sector. So the public sector can facilitate that kind of thing, but it is not itself the creator of productive opportunities.
And it is important to keep in mind, because the coin of the realm in policy decisions has become how many jobs did we get. Before I got into doing energy policy, I was in health policy, so I gave talks about the NIH budget to the Senate Finance Committee and stuff. I remember one of the Senators told me — and we had all these great calculations about the value of medical research and innovations and stuff. He said, “Yeah, it’s really great, Professor. How many jobs will this create in my State?” The congressman wants to know how many jobs will it create in my district. Jobs is not the metric; it’s human well-being that is the metric. It is human welfare that is the metric.
The other danger of grabbing onto energy policy in this jobs issue is it leads to this pandemonium of rent seeking that seems to be associated with especially energy policy these days. Everyone thinks that their thing is really important.
I have a friend back in Chicago, who is a very, very successful energy sector entrepreneur, who happens to now be into wind. He thinks that markets are great and government intervention is bad, except in his industry, because in order to survive and produce his wind things, he needs subsidies, so he thinks that everything should be focused on him. That kind of leads to what I called that pandemonium of rent seeking, and we have seen evidence of it in recent economic policy here in the United States.
I will stop there.
MR. HOLLANDER: I will continue here with that question of subsidies then. This is probably one of the most powerful tools or powerful means at least that the government is using. It is trying to subsidize, whether it is oil, wind, solar, electric cars, whatever. They have all kinds of subsidies across the energy spectrum. I don’t know if it is the largest sector in terms of dollar subsidies, but probably among the largest. What do each one of you think about subsidies as a government policy in the energy sector? Should we have one? Yes? No? Where? Yes or no? Please, Ken.
MR. GREEN: Sure. No. I mean, subsidies by definition, subsidies destroy markets and reduce efficiency. And, by the way, whatever Bob said, I agree completely with all of it. I agree with Bob. A great presentation. In fact, I want your formula for when you intervene in an externality. I see you have got a formula derivation there. I want that.
MR. TOPEL: You may have it.
MR. GREEN: Generally speaking, no, you don’t want a subsidy. If you have a legitimate externality you need addressed, you can address it through an eco tax, but a subsidy inherently picks and chooses winning and losing technologies. I am talking about energy-specific subsidies, technology-specific subsidies.
Now the discussion that is going around [Washington] is how do we take away oil subsidies, but they are talking about things like standard depreciation schedules that all businesses have, but they want to confiscate it from the oil sector, because they don’t like them. That is not removing a subsidy; that is actually levying a new tax. So you have to distinguish between a real subsidy and industry standardized tax treatment, but, generally speaking, subsidies, bad.
MR. TOPEL: I kind of would say the same thing. When there are externalities, then the first-order economic from high altitude, the first-order economic principle is you can get people to internalize those since with a tax. We have known about that since A.C. Pigou.
But, as is often the case in policy, you can’t get there from here. All economists would have said when you come to them with an externality problem of, say, climate change, they say, “If it’s a real issue, let’s not argue about whether it’s a real issue. If it’s a real issue, then a carbon tax will do the trick.” Fine, all right.
So the current administration came to down a couple years ago, and they didn’t want to call anything a tax, but they had the thing that is isomorphic to a tax, which is cap and trade and prices on the permits, and they thought they were going to get $80 billion a year in revenue, because they could spend it on all their favorite programs. Fine. And they were going to spend it on those programs. It wasn’t going to get the double dividend of reducing marginal tax rates and expanding, low end rates expanding the base. But what they found out was you couldn’t get people on board politically for the auction of the permits, so they weren’t going to get their $80 billion. They had to hand it out to people to bribe them to support the whole scheme in the first place, and in the end, they found out that coal States had senators too, and you didn’t get anything.
Some people might argue, some economists would argue that the second best in that world, if you can’t do the first best, the second best might be to subsidize certain activities, but then I come back to the point I made before. Then the rent seeking really goes through the roof, because my buddy in Chicago comes up, and he says, “I need subsidies for windmills,” and the guy over here says, “I need subsidies for algae.” The first-order solution for market-oriented economists is “You don’t tax the bad thing and let markets do their thing.” But if you can’t tax the bad thing, sometimes the second best is to subsidize certain activities, but it is another situation where, as I said before, the cure can be much worse than the disease.
MR. SHAH: So maybe I can try to bring it down to the ground level. As a practitioner of these types of things — and for many of you in the room, probably say somebody who benefitted financially greatly from these solar subsidies — what I would suggest is — before I started solar, I worked at BP. I have a lot of friends within the oil and gas industry, and what they will tell you directly is that if you got rid of the intangible drilling credit, they would drill one-third less, because there is a lot of marginal wells that they drill that they only drill because the drilling costs are paid for by the Federal Government.
So I think the question really on the table becomes then how do you take a nascent technology — in this case, solar or wind, but in other cases battery-powered hybrids or other things — and how do you actually get it from where it is now to scale? Because for many of these technologies — and solar, I think has proven it more than most — now that we have achieved scale, we actually don’t need most of the incentive programs that we have, and we are actually slowly phasing them out around the world. The reason for that is because over 20 percent of electricity globally is actually sold, including for 80 utilities in the United States had power prices above what solar can actually generate power for. So you actually see in places like Oklahoma, Kansas, Kentucky, North Carolina, lots of places that aren’t just California, people are suffering by paying 19 cents a kilowatt hour because they had a utility that wasn’t managed well, and they have to charge a lot of money to be able to make up for the mistakes that they made. In those cases, customers don’t have choice, and so the choice that they do have is they can move to solar or geothermal or fuel cells or whatever it is that they decide to move to.
What I would suggest to you is on the practical side of this, I have written extensively about, I would be happy to get rid of all subsidies and not the depreciation ones that Ken is trying to use to sort of divert you from the real truth of this, but there actually is a lot of real subsidies that are provided to the oil, gas, and coal industry. So, if they are willing to get rid of them, I have actually laid out a blueprint about how you would actually phase out wind and solar and ethanol and other subsidies to make sure that you have a level playing field for mature technologies.
For technologies that are not mature, I actually think that the way that they did the hybrid vehicle tax credit was really smart policy and one that I would recommend that is used for all sorts of technologies, which is in the hybrid vehicle subsidy, they said, basically, once you have sold over 100,000 cars, it goes away for you. So that it is not there permanently forever. It is once you have reached scale and whatever that scale number is that the politicians can decide is the right number, then it goes away.
For instance, if it was me providing battery subsidies, which I think many of you know there are a lot of battery subsidies provided by the Department of Energy in the United States. Instead of providing capital subsidies, what I would have done is said for the first 100,000 kilowatt hours for the batteries sold by that manufacturing plant, I will provide a $150-kilowatt-hour subsidy for that battery plant. And then if they can actually go to a bank and get financing based on that, et cetera, great. If they can’t, then they don’t get built, and the Federal Government never spends that money. And if they go out of business 6 months after they have been created, the Federal Government has only paid for 6 months worth of kilowatt-hour production. So there are, I think, more efficient ways to bring technologies to maturity, but then once they do hit maturity, like ethanol has reached and solar and wind, I would say — has largely reached maturity for wind — then the subsidies have to be phased out.
MR. GREEN: Yossie, since my name was evoked, may I reply?
MR. HOLLANDER: Go ahead. Go ahead, please. If you feel like interjecting, you don’t have to —
MR. GREEN: Okay. Well, I’m interjecting. First of all, I acknowledge there are oil and gas subsidies. I would make three points. First of all, lots of the technology, in fact most of the technology we have today climbs neatly over the so-called “Valley of Death,” leapt from being an orphan industry to being in your pocket and on your back, and you’re sitting on it now, without government assistance.
So the argument that it takes government wisdom to bring a technology to market in the face of that, because there are preexisting competitors, makes no sense. There was a preexisting industry. It didn’t stop vehicles from being born and going into the market. There was a preexisting telephone industry. It did manage the slow the growth of cell phones and things like that, because it was a government monopoly. As soon as it was broken, there was an efflorescence of technologies.
So let’s acknowledge there were subsidies, but I would say two things. My mother always told me two wrongs don’t make a right. So fixing subsidies with more subsidies is not the right approach, and I will give you an example, which is we had a huge subsidy for the national highway system. I was just in a meeting with somebody who was saying, “Well, you know, we could solve the electricity transmission problem by just mandating that all the Federal highways be open to power lines, to long-distance power lines.
Okay. When you built the highway system, you violated property rights, left, right, and sideways, and you created the sprawl issues, transportation issues, fuel consumption issues, and greenhouse gas issues you now hate, and you want to now add to this by a second wrong by saying, “Well, now we’ll violate people’s property rights and rights-of-way and their ability of vote on power lines passing through their neighborhoods, because we have already done one wrong.” Well, you could actually say even more than that. Let’s bury power lines. Let’s just circumvent the whole pipeline discussion by the Federal Government saying every national highway, Federal highway, we can put a pipeline under it. How many wrongs are you going to use to fix historic previous wrongs?
So this idea that we need subsidies, I think is wrong from a basic morality principle, a basic principle of justice, and wrong economically. It doesn’t make any sense. You don’t need the government to bring out your PC or your cell phone or your plasma television or your vehicles or your hybrid vehicles, and by the way, about subsidies that don’t go away, the ethanol subsidy still hasn’t gone away. Only one of them has, and now the President in his most recent speech wants to raise the subsidy for plug-in hybrid vehicles from $7,500 per vehicle to $10,000 per vehicle to buy a $40,000 vehicle. The Federal Government is going to give you 10, so you will buy it from General Motors. That’s utterly absurd.
MR. HOLLANDER: If I may ask something, everybody knows that everybody says, as you just said, each one of you is leaning to one subsidy or another. You don’t want to be very, very clear on that, et cetera, and I share this sentiment, but let’s also be realistic. It is the power of politics and interest groups that will decide whether we will have these subsidies or not, okay? It is not the economic analysis of whether subsidies are good. So you all agree that will we fight subsidies, it is not going to go away.
But let me ask a different question on subsidies. We all played the game so far in the United States, but what if a certain technology that we do think is going to be critical for the future of this country, like we thought about chips in the past, computer chips, we think that it is critical to the future of this country, and yet another country subsidizes it. So should the U.S. then subsidize it or not? Bob.
MR. TOPEL: I will answer your question in a minute.
MR. TOPEL: At the risk of being branded immoral, there are some activities – I will return to what I said earlier – some activities like the production of basic knowledge that is a pure public good, and there may be no real effective way to produce that knowledge absent a subsidy to the producers. This will sound like the kind of rent seeking I was talking about before, because you give that money to universities, and where do I work?
But there is a key distinction, and that is that once you have got the ideas produced and they are in the stock of knowledge that people can use, to the extent that you can capture the returns on the applied research that builds on that placid platform of basic research, then I think subsidies are pretty dangerous things.
And there, I agree with Ken about the maturity claim and the scale claim about subsidies for certain industries. Unless those industries — I mean, capital markets are amazing things, and there’s a lot of people who can invest. Money flows the most productive activities, and they know how to calculate present values. So they will take losses for a long time if they think it is going to get this thing up to scale, and I would rather trust those kinds of decisions than the decisions of policy-makers to decide which kinds of activities we’re going to invest in.
Now, coming back to semiconductors, I can just segue off of that — or chips. In most cases, you’d say if somebody is willing to subsidize those chips for me — it’s like some guy came and says I’ll cut your lawn for free, fine. I don’t have to let one of my kids do it or hire somebody else. In some cases, you can make sort of a security or national defense public-good argument for that kind of thing, because if the stuff hits the fan when we’re against these guys that got all the chips and we can’t get any, then we are going to be in a pretty hard place, and we might want to subsidize certain industries or protect certain industries for national defense purposes.
Everybody can claim that. The steel industry can claim that. The automobile industry can claim that. The university industry can claim that. In some cases, it’s true, and the choice among those things is going to be really, really difficult.
I don’t agree that in general, chips, say, was something that we subsidized because it was important to the country. If somebody will make them cheap for us, you know, take them.
MR. GREEN: I want to register a point of agreement. I agree with Bob. Basic R&D is actually a legitimate function of government, and there is evidence it is underinvested in, compared to applied R&D where the evidence is that government investment displaces, not adds to, and, in fact, displaces disproportionately; that is, it displaces more than what has been invested in the first place by the private sector. So, on basic R&D, I agree with you.
To get to the question of chips, again, it goes back. If you couldn’t tell, I was raised by my mother, which is my mother’s answer to that would be — “Well, what if somebody else is subsidizing a technology? Shouldn’t we do it too?” My mother had a very simple answer for that, which is, “If your friend is going to jump off the Brooklyn Bridge, are you going to jump with him?” The answer is no, and as Bob said, if somebody wants to tell me at something at below the cost I can make it, buy, as much as I can buy, and then when they run out of whatever stuff it is they have selling below cost, they will be coming to me to buy the next round of things, and I will charge them more, because I won’t be charging below cost, so the same as technologies, you simply can’t pick them and choose them that way. I will leave it at that.
MR. HOLLANDER: I want to talk to you about the role of regulation, because we are talking about subsidies, and how much they are effective or not effective in causing certain market events, shall we say.
I just happened to sit one day with a guy who is one of the brightest automotive engineers in the country. He invented the turbocharger, so it’s a real guy, 52 years in the business. He said, okay, let’s make a competition how to improve your existing car by 30 percent, all cars that you currently drive, not the future car in 2025. I said, “Can you do it 30 percent?” He says, “No problem, I can do that. I can do that 20. I can sign 30 probably on all cars on the road.” I said, “Okay. So what is preventing you?” He said, “Regulations.” I said, “Okay. Suppose we were at a competition and there was a $10-million prize for the winner, would you take the prize? If the prize was that you are exempt from other regulation, what would you want? $10 million in the pocket or being exempt from the regulation?” He said, “Exempt from the regulation. Then I will have markets.”
So I will turn to Jigar who is probably an expert on how regulation can prevent you from doing business and maybe talk a little bit about government regulation maybe or deregulation as an enabler of the technologies that exist versus subsidies. Which one would you prefer?
MR. SHAH: Well, I think the first overall comment, I’d have to say I don’t think that the theoretical panel conversation that we are having is useful. This notion that basically my mother told me not to jump off the Brooklyn Bridge, I mean, you know, whatever. I mean, ultimately, the thing is that I’ve got — I mean, I can show you studies that show that the oil industry got to where it is today because they got rampant amounts of subsidies from the 1930s to the 1940s, to other places. I can show you that coal got the same exact subsidies in the form of rail and other subsidies. I can show you all sorts of things, and I’m a huge libertarian. And I’d love to actually like live in a world where we can have these conversations about public policy around chips and stuff.
I mean, I have been told and asked by the solar industry to defend against this Chinese tariff case, which every Republican and Democratic congressman worth their salt has wanted to like chime in about how much they hate the Chinese, and now that like the Vice President is here from China, like even the President got in on that with the State of the Union and said we’re going to actually defend to the death our ability to produce solar and wind.
I am a huge fan of actually getting panels in at the lowest cost possible to meet our policy objectives in this country, but the fact of the matter is, whether it be Dubai Ports World where everybody was anti Arab people at the time and now whether it’s the Chinese tariff case where everybody is against Chinese people now, it is what it is, and it’s the world that I live in. Unfortunately, I’m responsible for over 100,000 people who are actually employed in the solar industry in the U.S., and we have to deal with these.
With regulations, for instance, like — if you go to visit Sungevity in California, you will see there is an old Barnes & Noble store that was shut down that they took over, and literally, when you go in there, there’s over 150 people that are desk to desk to desk that do nothing but process permits. In Germany, you actually can get a permit for a solar system with two pages. Here, it’s literally every single jurisdiction is different. Some are electronic submission. Some you have to provide five copies in triplicate. Other place, you have to do whatever it is, and their average cost is around 15 percent of the entire install cost of a solar system is regulation for them.
When you look at vehicle efficiency stuff, there is a great company in Phoenix, Arizona — I think it’s Phoenix — called Local Motors where if you want to make your own muscle car, there’s an exemption in the rules. You can go down there, and you can make your own muscle car, and it doesn’t actually like have to meet whatever regulations. That’s great, and that could be an eco-car, it could be a muscle car, it could be whatever the hell you want it to be as long as it meets whatever the basic safety regulations are on seat belts and those kind of things. But if you try to sell that car to your neighbor, you’re screwed. If you go to Local Motors, buy a car, then sell it to your neighbor, then go back there again and buy another car, you can’t do it.
So the challenge is that when you talk to the folks at Department of Energy and you say to them, hey, like this loan guaranty program and whatnot, what they will say to you is that it takes $1.2 billion to start an auto company in this country; whereas, in electricity, all you had to do was go to UL in Chicago, get it tested. If it is safe to be on the grid, you can actually try to sell your wares. If it is cost effective, great; if it’s not cost effective, you don’t sell anything, but you actually have the right to do so.
If you create an engine or a turbocharger in this country and you wanted to try to sell to GM, et cetera, and they say no, you’re done. Unless you started PayPal beforehand, you can’t start your own auto company. One of the things you could do, even if you believed all this regulation was important, you could create an exemption process where you said for the first 500 cars you want to make, you can actually make it at Local Motors, it meets all the regulations and all the tests from a safety point of view, but you can actually do it. Then once you go above 500 cars, then you have to hire the 50 lawyers in D.C. to actually get through the process, but at that point, there’s a lot of people who probably will take a flyer on you and give you a $100 million to help build your car company, because you’ve proven you can sell 500 units.
So I do think that regulation is a big problem, but I don’t think it’s a problem in all cases. When you look at where we are today on clean air, clean water, and lots of other places, regulation has been hugely helpful. We don’t have rivers on fire anymore in Ohio. So I do think that we have to be careful about this.
The mercury regulation that everyone is talking about now with coal, 25 percent of women in the United States, many of whom eat fish on a regular basis, have mercury in their bloodstream that is 20 times what EPA says is safe. There is now University of Texas data that shows that that’s actually linked to autism.
At the time at which you actually start to get your head out of your ass and start looking at some of these things, some of these things on the regulation side does matter. There are people who are actually suffering who don’t know that they’re suffering because of some of this regulation, but others in terms of figuring out what was the regulation around — if you want to put an ethanol pump at your gas station, it was 75- to $100,000 of regulation you had to get through to just make that decision, and that’s a bad one. So it goes back and forth, I think.
MR. HOLLANDER: Bob?
MR. TOPEL: I didn’t hear anybody say up to this point that there shouldn’t be any regulation, so I didn’t quite get the last part of your comments.
I want to start at the beginning part, though, about the subsidies that occurred to the oil industry in the past, and let’s just stipulate that they occurred. I don’t know. You guys probably have a lot more information about that than I do. Let’s stipulate that it got us to the point where we are now, that the industry prospered because of those things and its position as an energy supplier today is partly dependent on that.
Well, you know, then that’s the point. The point is you are arguing there is some sort of path dependence, and if you subsidize something, it is going to be the dominant mode of doing things down the road, and maybe you’re going to regret it. Well, then don’t create the path dependence. Don’t create the subsidies that got you there in the first place by picking winners and losers.
Now, to come back to the practicality of this discussion. I am an economist. I am an academic. I am not entirely in the practicality business. The job we have as economists is to keep pushing the string uphill and saying these are good ideas, these are bad ideas, and if people don’t listen, just say it again, because if we don’t, then we end up in a situation where basically anything goes and there is no real analysis underlying the formulation of policy.
It’s true that creating policy is liked — what did D’Israeli say? I can’t remember. He said sausages and laws, you didn’t want to see them created. But the notion that good policy can trump bad policy is an important one, and we have tools for thinking about those things, and we have to keep saying what they are.
MR. GREEN: As for utility of an argument, I would have to respectfully disagree. I think if you are actually not setting out your principles broadly, there is going to be little utility to an argument if it is a matter of “I like my rent seekers more than you like your rent seekers.” If you don’t have the fundamental principles of whether that is a good or bad thing, you are not going to get anywhere except in circles.
As Bob said, nobody says regulation is all bad, but I would point out that regulation is basically a tax. It is either a tax or it’s a subsidy, but it is not a thing that stands outside of the rest of the economy. So it should be thought of that way.
With regard to just a few other things that were said, you can’t start a car company today — well, I don’t know. I can name two or three that have started in the last 10 or 15 years and folded — or in 20 years. DeLorean, right? You can start car companies. It doesn’t mean they are going to succeed in the market. You can start car and motorcycle companies.
Finally, again, as Bob said, I am not saying oil and coal didn’t get subsidies. They did, but what I find is amusing is the very same people who absolutely hate the outcome of the subsidies as they exist today are the ones who say that the answer are subsidies in a different direction, and that makes no sense to me whatsoever. If you are unhappy with the results, the externalities of your subsidies, the idea that you are going to have suddenly new wisdom that is going to give you 20 years down the line, evidence that you are going to have superior externality outcomes, I think is hubris and inconsistent, no offense intended, Jigar.
MR. HOLLANDER: One more. We were talking about energy as a job creator, so people say there’s green jobs, it will create one job, and there is an oil job that will create a keystone or whatever that create other jobs. What about the fact that maybe energy prices, primarily oil, are actually job destroyers in the economy? What do you think? Who wants to take that first?
MR. SHAH: I can start. I mean, I do think that the inability for us to actually have a robust marketplace around these things is far more important to me than whether one creates more jobs or the other. I agree completely with the other two speakers around the fact that jobs is not really an end product around which one optimizes these types of decisions. The jobs are a byproduct of actually creating a free and open marketplace by which you can have innovation in this space, and then as these innovative technologies succeed, you can actually pull some of these trade balance pieces back. Some of these are job substitutions between money that we’re sending to other countries and manufacturing jobs here. So there are all these things that go back and forth.
But I do think that what we have seen in the last 20 years is that, in fact, we do have a far more open marketplace in electricity than we do have in fuel. Looking at ethanol on the side, I am not suggesting for a moment that we should replace one subsidy with a bad subsidy. My point before was really we should actually get about the business of eliminating oil and gas and coal subsidies, and I am happy to phase out all the other renewable energy subsidies at the same time to create a level playing field.
But I do think that that by itself doesn’t actually create a level playing field in its own. There are a lot of regulations in the way that make it very, very difficult to, for instance, get your fuel into the retail marketplace. For gas station owners who actually want to put liquid fuels in there, there is a lot of regulations that prevent them from doing that.
I think that EPA went down the wrong road when they decided to have regulations for every region in the country for gasoline, and what it actually did was boost gasoline prices for everybody, but it made it a lot harder to figure out how you would actually enter a new fuel and then how to get it passed through EPA and to figure out all these other pieces. So I think there are a lot of practical approaches that we need to all, as folks in this room but also folks on my side of the table who are trying to figure out a way to allow entrepreneurs to have a fair shot. There are a lot of things that need to be done to actually provide a level playing field, and so I don’t think this is just about subsidies or just about regulations, for that matter.
I also think this is just about the way in which we actually design markets and allow for markets to flourish. In electricity, I think we have done a really good job by, for instance, having UL be the arbiter of what is safe to add to the grid as opposed to for fuels, where it is really the Federal Government and different agencies that actually make that decision, which is much more daunting for an entrepreneur to actually try to attempt.
MR. HOLLANDER: Bob? Ken?
MR. GREEN: I will go after you.
MR. TOPEL: On the topic of whether oil prices are job destroyers or job creators, the simple fact is that energy, as I said earlier, it’s a key input. It is like capital. If interest rates go up, then a lot of economic activities that were productive before become less productive or less valuable, and people have to go find something else to do. I wouldn’t single out this input as something that is peculiar to that phenomenon.
The question then becomes whether the changes in the cost of using particular types of energy that might cause shocks to the economy have been influenced by policies, so are they distortions in and of themselves, and I am not where to answer that question. I haven’t studied it in any detail, but that is when it would sort of rise to the level of public policy concern, I would think.
MR. GREEN: Yeah. I mean, our high oil price is a job killer. You could argue about that because we buy oil from somebody else. They buy goods from a third person. The third person buys goods from us. The money flows around, around, and around, so it creates different kinds of jobs. So we import the oil, but we refine it ourselves and that sort of thing. We export refined oil, refined energy products and all that kind of thing.
But I guess I would agree with Bob, which is even if you stipulate that it is, that high oil prices have negative economic impacts because costs of goods and services go up, do you have a cure that’s better than the disease? I would argue right now we probably don’t. Liquid fuel alternatives will rise to the world price because they are equally fungible. Nonliquid alternatives are not economically competitive, and so, at this point, we don’t want oil price spikes, but we would be hurting ourselves more if we managed to figure out a way to neutralize them than we’d be benefitting from it.
Plus, if we only did it ourselves and the rest of the world didn’t do the same thing, the oil price spike would bring down the world economy and bring us with it anyway. So you can only isolate yourself to a certain extent, so that’s the question.
MR. HOLLANDER: We could argue this point a very long time, but that is a subject for a different — the cost of alternative is a subject for a completely different session.
So, at this point, I will turn to you. Whoever wants to ask questions from the audience, please raise your hand.
MR. SQUADRON: Or call on somebody.
MR. HOLLANDER: Or we will call no you. That is even scarier. Just a second, so we can record it, please. Thank you.
MR. SCHRADE: My name is Jeff Schrade. I left the Hill 4 years ago to work for the natural gas industry. When I left, natural gas prices climbed dramatically. They were up $13, $14, and we’re now — there’s a shale development. We’re down at $2.50 this morning, so an incredible price plunge.
I was wondering if you could talk about natural gas and its impact on our economy from a carbon standpoint and just kind of broad topic in that area.
MR. HOLLANDER: Who wants to go first?
MR. GREEN: First of all, was it your leaving government that brought the gas price down? There was a distinct — I noticed there was a distinct correlation there. It was high and I left and pfft. I went to the gas industry, and then prices plummeted. I’m thinking that’s not a good thing on your résumé.
What about the natural gas issue? We seem to have vastly bigger resources than we thought. It’s unclear the size of them, because both — well, everybody has an incentive to misstate things in one direction or the other, so the environmental movement has incentives to understate. The industry has incentives to overstate. The price at $2.50 may be actually unsustainable and could put a bunch of small businesses out of business, causing price volatility. Nobody really knows, and it’s a local market to boot, so it doesn’t really have much impact. We are already — we have plenty of coal that’s cheap. Gas is cheaper. So it’s a transitional issue, not really a giant revolutionary one.
That being said, other than the greenhouse gas impacts — and even then, the estimates are natural gas is a third that of coal — natural gas has enumerable benefits compared to burning your coal directly.
Now, one has to keep in mind if we don’t burn the coal, short of basically slapping up walls or banning coal mining, the coal will be mined. It will be sent off to China, and it will be burned in less-controlled ways. So, if greenhouse gas control is your issue, natural gas is absolutely unimportant, unless you really somehow ban coal production, which would be leaving massive amounts of wealth untapped.
I think it is interesting and exciting, and if you are really sort of a “gee whiz” kind of person, you could think, “Well, if we have natural gas for 2- or 300 years’ worth of supply, then we tap methane hydrates, it’s natural gas all the way, a thousand years or more, but that remains to be seen.
MR. SHAH: I’ve been in this industry for a long time with BP and others. What I’d say is that for me, it’s really around trying to level the playing field. Natural gas was nothing until the 1980s when we spent 50- to $100 million to actually get natural gas to be recognized as a fuel that actually mattered.
In 1998, BP, Exxon, and Chevron couldn’t actually use natural gas as part of their reserve or placement ratio for Wall Street, so it wasn’t until John Brown bought Amoco and actually lobbied Wall Street for an entire year, and now Exxon gets 70 percent of its reserve replacement ratio from natural gas.
There are all these nuances that end up not leveling the playing field. For instance, if BP or Chevron or others wanted to invest in other types of energy sources, whether it be renewables or otherwise, unless they can convert it into reserve replacement ratio, their stock price would go down, and Chevron said this publicly, so it’s not new stuff to you, hopefully.
So I do think it matters that we actually level the playing field, and where I think it matters for natural gas is not in electricity where I think we’ve done a really good job of leveling the playing field but in fuels. So methanol is something that the Chinese and others are using in a big way. It is ridiculously easy to convert natural gas into methanol, and we already have a huge methanol industry, but we don’t seem to have any pathway by which methanol can actually be burned in any of the cars that we have in this country. And so you don’t actually have proper switching. At the time at which oil prices hit a certain point where it’s actually cheaper to move to methanol, which is now, you don’t actually see it happening, because there’s no pathway by which the playing field would be level. If somebody wanted to go into EPA and say we want to do this, I don’t even think most of us know how they would accomplish such a thing.
And then the auto industry doesn’t seem to be overly enthusiastic about leading that charge either in the U.S., and so you are in this weird situation here the natural gas industry is plagued with very low natural gas prices, because they have so much of it. I think they would love to have another market where they could actually dump it into, like the fuel industry, and they can’t figure out how to do it. That is largely what the Carbon War Room does on a regular basis, is try to figure out — and we’re working with Yossie on trying to figure out how we actually identify what’s making the playing field unlevel and then maybe even do something about it.
MR. HOLLANDER: If I may add just to the numbers and to show you how there’s a market failure here. The United States is increasing its natural gas production at the rate of 1 billion Mcf a year. 1 billion Mcf a year at 2.5 dollar in Mcf, that’s 2.5 billion, which is what the natural gas producer paid for that increase every year.
If you took that amount of natural gas and converted it with no technology, no ratios, to methanol — and you know what the ratios of methanol to gasoline is — you would be replacing 7.5 billion gallons of gasoline. The value of that in the market today is $22.7 billion. So we have the same amount. If we just take this 2.5 billion and move it to the transportation sector, which represented 22.2 billion in gasoline price today, we got 20 billion margin in between every year, additional new one, that can be translated into cheaper margin. It is not going to be the same price as oil. It will meet somewhere in the middle. That is how it works in every market. Nothing gets done, because if that would have happened, then MCI would still have long distance at $3 a minute, all right?
So the way it works is the new technologies that are cheaper comes in, and the market starts. In the beginning when it is just starting, the prices are closer to the leader in the market, and as they grow, the prices start to come down. So that will happen, but it is not happening for a very simple reason, because the regulations and the structure of the system does not allow it to happen right now, and that’s a huge financial opportunity for the country and for jobs.
MR. GREEN: I will just make one quick comment, and then Bob will explain why the fuel will rise to the world price of transportation equivalent probably, or maybe he will.
My comment would be that this is an area where we agree. I have written before about the pernicious effect of the boutique fuel requirements. I think it shouldn’t be understated how much the oil companies themselves have had a fight with these things. When a refinery goes down in one place, they can’t move gasoline to another. They had to put on vapor recovery nozzles in their gas stations, and their pumps had to be redone. The idea of putting an ethanol tank in the ground, ethanol being slippery — when I was a student of environmental science, we used to joke that the acronym for leaking underground storage tanks or the term “leaking underground storage tanks” is an oxymoron, because all underground storage tanks leak, not to mention it was a badly named acronym. But I think we agree there that the point is the regulations are a barrier to entry.
I think the vehicle companies should actually be fuel-neutral. If I want a car company, I don’t want them to care what the fuel is that goes in. I want the car to perform a certain way. The car company should say, “I really could care less if you put wood chips in the back or what you put in the back. It is not their business to pick the fuel, so I want them to be fuel-neutral, but I agree the regulations, particularly fuel formulation requirements, are a large problem that is given too little attention.
MR. HOLLANDER: More questions, please.
MR. KREUTZER: I’m David Kreutzer with The Heritage Foundation, and I want to ask a question of Jigar.
You said that — I think that either solar and/or wind were close to mature enough that they didn’t need subsidies. Would that also count — would you also say they don’t need a mandate for renewable fuels? Could we get rid of that as well? Would they still work?
MR. SHAH: Well, but the electricity market is a level playing field in general, so new technologies have the ability to go to UL, get approved, get integrated into the marketplace. You have got a private sector person who might want to take a flyer on the losses in the first few years to actually get to where you want to go.
I think on the renewable fuel side, the challenge that we have right now is that we don’t actually have the ability to do as perfect switching as you do in electricity. I mean, a kilowatt hour is a kilowatt hour.
MR. KREUTZER: I am talking about the electric market where we have renewable fuel standards for electricity.
MR. SHAH: Oh, renewable portfolio standards. The challenge — I mean, it’s fine with me, because I do DG, right, and so distributed generation is led by the 21 percent of Americans who hate authority, not the 7 percent of Americans who care about green. So most of the customers that we have for distributed generation just want to give the bird to the utility company, so we’re fine.
But I think the biggest challenge you have with the RPS standards, it is in the central generation side of it. So, when you talk to most utility companies, they sort of ache for the 1970s again and how wonderful it was, and so they haven’t really created a pathway by which lowest cost wins. So what happens is they always have some weird thing around, well, instead of doing very low cost demand response and load control technologies like EnerNOC or Comverge have to be able to load-level their grids. They’d rather use natural gas peaker plants, even though like there’s huge studies showing that that’s much more expensive than actually using load control and demand response. They do it anyway because it’s preference, right? It’s sort of like, well, I did it this way, and my father did it this way, and this is the way our regulations are written in.
So the RPS standards helps to force utilities to actually accept some of those technologies. I would be much happier if it went to an open fuel standard like they are talking about with liquid fuels, but an open fuel standard on the electricity grid, where you actually helped put together performance characteristics and then actually did a proper RFP, but today we don’t have that. PG&E routinely, for instance, in California figures out secret ways to actually make things like not quite a level playing field when they did their RFPs.
So you have to solve the problem before you get rid of the RPS, because the RPS is, in my opinion, not about renewables. It’s a proxy for keeping the utilities honest.
MR. CLARKE: Yes. Hi. Dave Clarke with Clean Energy Report.
This is a very complicated conversation you’ve been having, a lot of different elements, but the way I’ve been listening to this debate over the past year or so, the driver really is greenhouse gases and the need to deal with climate change, and so, if you don’t have the subsidies and you don’t have the regulations, how do you tackle that problem just with a nonsubsidized, nonregulated environment?
MR. SHAH: I can start. I think, going off of what Bob and Ken had talked about in terms of basic R&D, we are at a stage now where a tremendous amount of basic R&D has actually come through the pipeline to maturity, and so I think what the War Room is talking about is not doing any new government policy but actually figuring out how we actually level the playing field for the folks who have actually already existed the funnel to scale up.
People have known for years that waste heat recovery is at 3 to 6 cents a kilowatt hour and very, very cost effective, yet it doesn’t scale in this country where it has in Denmark and lots of other places. The same thing is true for things like demand response and load control, where that’s been around for years. In fact, the way that the Japanese government actually load-leveled their grid after Fukushima was by using advanced amounts of Internet communications technologies to actually low-level the grid from demand response to load control to other distributed generation sources.
So I think part of what we’re saying at the War Room is that you can actually through existing technologies which are largely considered mature get to the 17 gigatons of climate reduction that you need to get to by 2020 if you actually leveled the playing field for all these technologies to complete fairly, and so that’s a lot of what we’re doing. And we’re doing that without interacting too much with policy. We do a lot of it through new financial instruments that we’re creating through standards through information, transparency through reduction of transaction costs, and some of the other things that you would look at.
MR. GREEN: I want to give a few words after Bob does.
MR. TOPEL: Then I’ll give as few as possible.
MR. TOPEL: With regard to climate policy and taxes and subsidies, I think we have come to the realization that we are unlikely to achieve the type of homogenized international cooperation that would be required, and an independent, say, set of carbon taxes in the United States where others don’t go along is really largely a self-defeating policy. It will just drive the carbon somewhere else, and the atmosphere doesn’t much care where the stuff came from.
So that is consistent sort of with what Jigar was saying that solutions are going to come from innovations on the supply side, and the one thing that really helps that is high energy prices, because that’s the incentive that people have to invent new things.
So looking ahead, this is another cure maybe worse than the disease kind of thing. You might argue that, well, we need then subsidies because we can’t do the taxes, and then you are into this quagmire of what exactly are we going to subsidize, because everybody’s hand goes up when you announce you are going to do that kind of thing.
I guess I am a bit of an optimist when I think somebody will think of something, and it might not be a something that is explicitly targeted as solving the climate change problem. It is going to be explicitly targeted at the problem of supplying energy at lower costs than the current alternatives.
MR. GREEN: Right. I would just add I think we have quite a lot of agreement here.
The guys at the Breakthrough Institute have talked about this as well, and their point is that the answer to this is cheaper, better technologies that go into the market because people want to buy them, because it gives them more energy and more savings and more opportunity; and, hence, more R&D is probably a good investment.
Another way I would argue is actually everything we do that promotes economic growth is itself a benefit, because growing economies, especially market economies, de-carbonize at a rate of around 1 percent a year, and they de-materialize in terms of the amount of materials they use at a steady state as well over time. The developed countries have already leveled out in their greenhouse gas emissions. The growth is in the developing world, and the faster they transition through their economic transition, the better it will be for everyone.
I think right now, the cure is worse than the disease, but technologies and promoting the natural market processes of de-carbonization of fuels and de-materialization of goods are the way to go.
MR. HOLLANDER: One last question.
MS. DICKERSON: My name is Lauren Dickerson. I work for the United States Energy Association here in D.C., and my question goes to the very heart of what you were just talking about.
When you talk to people in industry about R&D and whose responsibility it should be, a lot of people, particularly in the oil and gas sector, will say the Federal Government should really have to take the lead on this, because if we do it, then it’s proprietary, and we don’t want to have to share our trade secrets with our competitors. So what role do you guys see as being really the optimal role for the Feds and also for the private sector in partnering on R&D in the U.S.
MR. HOLLANDER: The question, for those of you who didn’t hear in the back, is what’s the role between private sector and public sector on funding R&D, and what is the vision? Since we are almost out of time, if you want to also add a few concluding remarks?
MR. GREEN: Subsidize think tanks. No.
MR. GREEN: I think basic R&D is important. The challenge is preventing the basic R&D from being perverted into applied R&D and rent seekers R&D and also from being sort of frittered away by people with no responsibility for the outcome of the investment, and so you want some sort of checks and balances that — the military tends to better, for example, with R&D in many cases than civilian agencies. They have a better track record because their mission is more tightly constrained and the deliverables are more tightly defined. So we need to work on that, but R&D is, I think, generally necessary, and it should be basic R&D. It really needs to be university level and not applied-level kind of R&D, which I think is the way to go.
And concluding remarks, I’ve already taken up enough of your time. Thank you for being here, and if you want to get ahold of me, I gave you my information, and my door is always open.
MR. HOLLANDER: Bob.
MR. TOPEL: I can stop.
MR. SHAH: Maybe just to complement that statement, I think on the R&D side, there’s two pieces to this. One is actually performing R&D, which is we need to do basic research, someone should pay for it, but the other part of it is actually inspiring investors on the other side that there is actually a level playing field for which reason they would actually invest in the conclusions of the basic R&D and actually take it to the next level. Today, we don’t have that.
If you look at some of these areas, whether it be industrial efficiency or energy efficiency for buildings or fuels, for fuel switching, you see hundreds of technologies that are actually cost effective, quick paybacks, all those things that are actually not scaling in the marketplace. So, if I am a venture capitalist or a private equity firm, why the hell would I invest in one of those technologies out of the National Labs or out of one of these things to actually take to the next level. So I do think the government has a responsibility to set the rules of the game, and obviously, they can do it badly as well. So we have to be careful, but they should set the rules of the game such that these playing fields are more level. And the more that they can do that, the more likely it is that the R&D will actually be enthusiastically embraced.
My sense is that part of what happened during the climate bill work in ’09 and 2010 is that a tremendous number of people thought that it was going to be a tax, because it wasn’t going to actually lead to further deployment of these technologies, because they have seen before that they have been thwarted by the marketplace, and so they are sort of like, “Fine. So you are going to put this extra tax on things. You are going to make it more expensive, and I’m just going to have to pay it because the companies that are in that chain aren’t going to then implement these common-sense solutions that are there.” So, if the government can actually give people more confidence that these can happen, whether they do it through upgrading their own military bases and other things or whether they do it through other purposes, I think that would help get people excited about funding more basic R&D.
MR. HOLLANDER: I will add a few other words. I think the bottleneck today is not technologies. Those people who say we need new technologies are absolutely wrong. I will say it categorically. All the technologies we need to get cheaper, better, safer, cleaner, whatever way — category you want to say, exists already, some of them even in multiple forms. What’s preventing them from scaling is financing, and financing is not available because the market is blocked by the previous interests that don’t want it to be changed. So, if government can do anything, it is open the market, because there’s tons of money sitting on the sidelines in the United States right now.
I am part of that money. I am sitting on the sidelines. I can’t invest it. Why can’t I? Why can’t your pension fund invest it? Because they can’t sell it. There’s hundreds of products that cannot be sold in the market because of regulations. If there is anything the government can do, it is open the market for competition. There is just enough technology. Investing in more technology right now, it is not where the problem is.
Thank you very much, everybody. Thank you, our panelists.
MR. SQUADRON: I will make one final comment.
MR. HOLLANDER: And one final comment from you.
MR. SQUADRON: I want to thank Ken Green, Bob Topel, and Jigar Shah for a great conversation, and this is just the start of the discussion. As we mentioned at the beginning, our mission is to facilitate a broad-based dialogue, just like you heard today. So the transcript of these comments will actually be the springboard for continuing discussion on OurEnergyPolicy.org. It will be up probably within about a week and then open to all of you. Hopefully, you will get on there today and register and get a login and open to our community of more than 500 expert participants to continue the dialogue online, and then probably about a month from now, we will actually create a transcript of this discussion and distribute it.