Clean Energy:

Nordhaus, Krupp weigh options for clean energy innovation policy

What path should the United States take on clean energy policy in the coming years? During today's E&ETV event coverage of the Information Technology & Innovation Foundation's Energy Innovation 2013 conference, clean energy experts debate the future of clean energy policy and the role of subsidies and regulatory mandates. Panelists include Ted Nordhaus, chairman of the Breakthrough Institute; Fred Krupp, president of the Environmental Defense Fund; and John Broder, reporter for The New York Times.

Transcript

Robert Atkinson: If I could have everyone's attention, please. So we're going to get started with the last part of our program today, and we will adjourn no later than 1:30. So we've heard this morning about four important technologies to get to a zero carbon future, a little bit about what are the challenges with those technologies, where they stand today, and a little bit about what the policy is to get them farther down the field. But the really central question I would argue is how do we go about thinking about a policy framework in the United States to get there, and I think we're at a unique time in our history. We have the President recently in the State of the Union spoke eloquently about the importance of clean energy. We have partisan differences clearly in that issue, but we also have two new energy chairs in the Senate who are interested in working across the aisle together and coming up with new solutions. 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. Before I introduce our moderator, John Broder, I just want to point out ITIF's Clean Energy Team Matt Stepp, Megan Nicholson, and Clifton Yin. I don't where Clifton is, but they do a fantastic job in research and analysis, and I encourage you to go online and read their work. And increasingly, Matt's work, Matt is now a blogger at ... Fortune? Forbes? One of the Fors. And I encourage you to look at that. So if I could ask our folks to come on up. This panel is going to be led by John Broder, who you all know, should know. He reports on energy and environment for The New York Times. He's here in the Washington Bureau. He's been a reporter since 1973, and has covered local, state, and national government, banking, defense, intel, White House, and numerous political campaigns. Previously, he was LA Bureau Chief for the Times. He was also at the Los Angeles Times newspaper for over 12 years. He's lectured at many, many universities, Yale, University of Michigan, et cetera, and is really one of the leading members of the fourth estate when it comes to writing eloquently about these energy and environment issues that are so important. So John?

John Broder: Thanks very much.

[Applause]

John Broder: I'm glad to be here, and I'm hoping to learn some things myself. It's commonplace for a person who's introducing a panel to say that the panelists need no introduction, and in this case they don't, because their bios are in the little booklet that you got when you walked in. I think Fred Krupp, the longtime president of the Environmental Defense Fund, will be speaking first. The one thing that I will say, because this sets up the dialectic that I'm hoping we'll see today, is that EDF has been one of the leading voices for the use of market forces to address problems of the common, like pollution. And EDF was instrumental in pushing the Waxman-Markey Bill across the finish line in the House. The Senate, as you all know, proved to be a tougher nut to crack. And perhaps Fred will talk a little bit about where market can be effective in addressing pollution, like in the 1990 Clean Air Act amendments, and how it addressed the acid rain problem, and where so far in climate change it has not yet been that successful. Ted Nordhaus is the chairman of the Breakthrough Institute, longtime affiliated with Yale University, and he is a fellow that keeps me honest as a reporter, because I often refer sort of the classic economic approach to a pollution problem, saying that it's usually either addressed by market forces, as EDF will explain, or by regulation, and every morning that I publish such nonsense, I get an email from the Breakthrough Institute, saying, you left out innovation, and that scientific innovation and the minds of entrepreneurs sometimes turns out to be the best way of addressing these problems. With that, I'm going to let our panelists take it over, and I hope you will be passing forward questions at a rapid clip to make my job easier. Thanks very much.

Fred Krupp: Thank you, John, and good afternoon. I agree with what Rob said just a few minutes ago, that this is a very interesting moment in the history of this issue, a very interesting moment particularly in our country, because we have a confluence of technology coming together, investment coming together, and perhaps most important, the reemergence of political will, at least political will in one important place, the White House. Over the years, I've read with great interest many of the things that Ted has written, not all. Sorry, Ted. But many. And I know Ted has been a great advocate for the importance of making clean energy cheaper, and that is important, and it is very appealing. Sometimes Ted has suggested that the focus needs to be there, and it's misplaced to try to make dirty energy more expensive. I actually think we need to do both. We need to make clean energy cheaper, absolutely. But we can't afford to rely, put all of our eggs in that basket, because we don't know for sure that clean energy can ever be cheaper than dirty, uncontrolled burning of coal and other fossil fuels. So I fully endorse the idea that we need to invest in research and development, and also have policies that spur private investment in research and development, in addition to government money. At the same time, I think we need to make sure that when folks burn fossil fuels and throw pollution into our atmosphere and our lungs that the full social costs of doing that, using the atmosphere as a garbage can or our lungs as a receptacle, are included, internalized, by the businesses. Now admittedly, that's been very difficult to do at the federal level, very difficult. To me, though, just because it's hard doesn't mean it's unnecessary. I continue to think that it's going to be very important for us to do that in the United States and around the world. Now the Environmental Defense Fund is made up mostly of scientists, economists, and people that are expert about politics. The scientists tell us about the problem. The economists tell us what needs to be done to fix it. And those that are expert in politics advise on how it can be possible to thread the needle in our political system and get things done. Now the scientists right now are pretty blunt. What they are saying is that we're making progress, but not nearly quick enough, that we need to reduce emissions of carbon pollution and methane and other short-lived forcing gases a whole lot pretty quickly, or we're screwed. The economists start, that's, by the way, not a scientific term. 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. The political experts at EDF are perhaps the most blunt. They say that no matter what's needed, this Congress is not going to deliver a cap or a tax on carbon. So they also tell us that when we do get to a point where it's possible for a Congress to deliver a market signal, that the politics are going to have a dominant hand in shaping what sort of solution, whether it's a cap, whether it's a tax, whether it's some hybrid solution, of the two. 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. This week, the price is very low, so those who think that the objective is a high carbon price will point that out. I actually think the objective is low carbon emissions, don't you? And from that standpoint, it's working very well, although certainly could use some refinements. 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. The idea is not that any single policy is a silver bullet. The idea is that we need to get emissions down fast, and that should be the test of any policy that's put out there. In the meantime, what happened, since Congress is not likely to give us any of the above, this Congress, in the near future? Well, it turns out that the meantime is pretty damn important, because as Rob started us out here this afternoon, saying this is a pivotal moment, and some big decisions are being made. Power companies are deciding whether they should cut, shut down coal-fired power plants or retrofit them to meet the new EPA regulations, and it's likely that whatever investment they make is going to be a very important factor in shaping what exists in the long haul. It's sunk capital, and regulators will be very reluctant to strand those costs to shut those things down once new investments are made. So this is a critical moment. It's likely that's what built in the next five years or what's retrofitted in the next few years will be around for the rest of at least my lifetime. And so I think there are three very important objectives right now. First, the President needs to go forward and finalize health standards for power plants. That's an immediate thing that he needs to do, and that in of itself will help drive cleaner choices. Second, we do need to proceed with research and development and employment, both policies that fund research, we've seen that R&D can make a big difference in the clean energy space, particularly when it occurs at the same time that government is regulating to require cleaner air. And I'm happy to say that the Alliance to Save Energy also has a series of suggestions coming from their Commission on Energy Efficiency that I served on. That will be out next February. That will be out this February 7th, next week. So not that long to wait. I think it is possible to double America's productivity for the same unit of energy, and I think there'll be a series of ideas to do exactly that. All of those things to, investing in research and development and R&D, investing in policies that deploy energy efficiencies and renewables help. They help reduce the political resistance to actually getting the real tough climate legislation we need to put a price on carbon or a cap into place. As part of that, we also need a whole series of new policies, and our public utility commissions, our FIRCs, our regional transmissions organizations. You know, I'm reminded that when I was growing up, a phone looked like a pink princess phone, or a beige wall set, or a black phone. Now we've had an IT revolution. We had an IT revolution because of government policies, and government policies in the energy sector can achieve the same level of innovation. Right now, there are just too many obstacles in the way of innovation in the energy sector, obstacles that keep the system looking pretty much like what Thomas Edison designed. We can put in place policies that speed a modern grid, a smart grid, energy efficiencies, smarter appliances, cars, airplanes, and everything else that burns fuel and emits carbon pollution. My last point, my third point, is the natural gas revolution that is underway. We need to work very hard to make sure that that is done in a clean way, and that is done in a way that harvests the maximum climate benefits. A year ago, in the Proceedings from the National Academy of Sciences a paper was published that was very important that shows that if the emissions of methane are above three percent systemwide in natural gas, that actually if that were to be the case, that converting coal to natural gas would be worse for the climate over the immediate next 20 years, which is a pretty important timeframe, if you're worried about positive feedbacks, the melting of the tundra, the disappearance of coral reefs. And so the fact of the matter is, we don't know what the leak rate is in the United States. EDF is cooperating with a lot of companies and participating in a series of studies now to nail this, but I already know enough to tell you that we need to work to reduce emissions, and it's very possible to do that. Sixty-seven percent of the emissions come from just ten percent of the wells. So we should continue to debate solutions, but as we're debating them in theory, we should do the things we need to do now to maximize the gains we can make over the next couple of years. Thanks.

[Applause]

Ted Nordhaus: All right. Well, John, I'm going to correct you again. Thanks for the great introduction. I am actually not the Nordhaus affiliated with Yale.

John Broder: Oh, I'm sorry. I'm sorry.

Ted Nordhaus: That's my Uncle Bill, who probably actually agrees with Fred more than I do.

[Laughter]

Ted Nordhaus: But, and Fred, thanks for I think actually sort of giving a pretty succinct sort of view of I think what has been sort of the conventional view on how to deal with this problem. And I'm going to offer I think a fairly different perspective on this. So I want to do a couple of things. I want to suggest sort of three things that I think point to where we're going, and then I think I want to talk about three other things that we really need to get focused on doing. So in terms of where we're heading, 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. And when we say make clean energy cheap, we don't mean just subsidize it so it costs less, or make dirty energy cost more. We actually know how to make these technologies cheaper through public investments, a range of public investments, but that takes time and it takes money. The third point is that I think that the path that the Obama administration appears likely to take in the second term has been perceived as a kind of plan B, what you do when you can't get a cap or a price on carbon, but it's actually what we should have been doing all along, and point, actually is reflective of the way that we've actually always successfully dealt with these kind of problems. And if you want to sort of summarize that, what I think that is going to be is modest pollution regulations, mostly around pollutants that people actually experience and don't like, conventional air pollutants, continuing investments in innovation and deployment of low carbon technologies. 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. So I think that's sort of the picture, that's where we stand today. I think those are the lessons that we should be learning from really what is now 20 years of effort to deal with this issue. What do we want to do now? Well, I want to, you know, actually, I think there's a bunch of things that I would agree with Fred on. I would really comment EDF for their really actually kind of leading the environmental movement towards actually dealing with gas as opposed to trying to wish it away. And in fact, I would argue that we need to actually double down on the gas revolution, and Fred's right. That means we need to clean it up, both so that we can deal with some of the methane and other pollution problems, and also speed the acceptance of the technology, not only here, but around the world. You know, we need to continue to expand gas production and gas demand. And we need to continue to raise the bar for coal so that we don't backslide if gas prices, as they almost certainly will, rise again, already are. Second, we need to continue to support clean energy innovation. As a number of people earlier in the day have pointed out, that is not just R&D. That's important. But we actually need to support innovation at every stage, from basic research all the way through to early stage commercialization. And we need to have both patience and a high tolerance for failure. You know, DOE in this town especially has sort of been a very convenient whipping boy, but the reality is, there's no gas revolution in this country without 30 years of DOE investment and support for that technology. And those programs were vilified throughout the '80s and '90s by both the environmental movement and the anti-tax movement as massive government boondoggles. Yale University now concludes that shale gas revolution over the last five years has added $100 billion annually to the U.S. economy. That's a very conservative estimate, he economic benefits, at a cost of somewhere between $10 and $20 billion over about 20 years in federal investment. In fact, if you count up all federal investments in all energy technologies since 1950, the annual benefit of the shale gas resolution is about one-eighth of that total investment every year. So eight years, you pay for the 800 billion in all subsidies, R&D, deployment, tax benefits, everything for fossil, renewables, nuclear, all of it, eight years. So when we talk about the payback on sustained public investments in technology, that's the kind of payback we see. And every technology isn't going to do that. There's going to be failures. But you don't need a lot of successes like shale gas to more than pay for it all. Finally, even as we continue to support energy innovation, we've got to reform our energy innovation programs and institutions so we get more bang for the buck. I think that means a couple of things. It means less money for basic research and big science, and more for applied research. It means closer coordination and collaboration with private firms that are attempting to develop real technologies to bring to market. And it means that we need to subsidize innovation and not just output. Our subsidies for energy technologies need to function less like agricultural crop subsidies, which is basically the way they work now, and more like defense procurement, where government plays the role of a demanding consumer paying for better performance at lower cost to drive the costs down and the performance up of these technologies. And as we're doing that, we need to phase down support for mature technologies. We're already seeing that, for instance, with the PTC. We've also seen it with ethanol. But at the same time, we need to continue to support deployment of earlier stage technologies that have greater potential to see big leaps in performance and declines in costs. So for instance, we may phase out support for on shore wind turbines. We might want to continue to support offshore wind. We might want to continue to support wind in, designed for lower wind sites, places where it's hard to economically build wind turbines now. And I think the same goes across a range of other technologies. So we need to actually be much more granular in looking at how we support technologies, at what stage they are, and how we drive, continue to improve the performance and drive the costs down. So on that note, I'll wrap things up. Hopefully, we have some good discussion and debate, and also have time for lots of questions from the audience.

[Applause]

John Broder: Both, can you hear me? Good. Both Ted and Fred talked about the shale gas revolution. I'd like to continue that discussion a little bit more. Natural gas is a fossil fuel, and some refer to it as a bridge fuel to some unspecified future, but aren't we just substituting one fossil fuel for another, gas, which is somewhat cleaner than coal? Again, if the fugitive emissions are controlled and other losses in pipelines and drilling, that could leave us, you know, 50 years from now still dependent on sucking resources out of the ground, and will it get us to 80 percent reduction by 2050? Will it keep us below 2 degrees? What does the science tell us about this? Is this a bridge to more fossil fuels? Fred?

Fred Krupp: Well, I would say, John, am I on here? Yeah. I would say that 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. I think we should be recognizing reality, and not, as Ted said, assuming we can wish it away. And what that means is we have to clean up natural gas so that neighbors are not victimized. There haven't been a lot of examples of water contamination through fractures, but there have been thousands of cases of water contaminating through surface spills or the drill casing not being well lined. There are people getting sick. I was in Washington County last year and met a woman who had been forced to move, abandon her family farm. Her son was living with neighbors so he could attend school, because of the noxious fumes coming out of the wells. So we have to clean this up, both for the neighbors and for the atmosphere. If we do that, then we maximize the benefits that we get in the real world, where people are switching out of coal and into natural gas. But I don't think we should be promoting it. On the contrary, I think we should be doing whatever we can to lock, to avoid excessive lock-in in new natural gas plants. Right now, a lot of the new natural gas electrons are coming from existing capacity. And we should be locking in energy efficiency gains and renewables instead.

John Broder: Ted?

Ted Nordhaus: Well, I'll go a lot further than Fred. I think we should be promoting natural gas for a bunch of different reasons. One is it is the killer app for coal in this country, and has the potential to do that a lot of other places. And there is literally really nothing else anywhere in the world that has done that. So, you know, full stop, and we should remember that gas has made some real headway in comparison to coal here, but coal is still king pretty much everywhere else in the world. There are problems beyond the fact that, you know, it's half the carbon, which means it's still a lot of carbon. There are problems with gas. But the problems, and I think Fred alluded to this, and, these are problems we know how to solve. You know, it's basically pouring concrete casings correctly. It's fixing leaky pipes. That's a hell of a lot easier technologically to deal with than intermittency, than low energy densities, all of the problems that really plague our current renewables technologies, for instance. The third reason is that gas is actually a really important platform for renewables. Right now, our ability to scale renewables is pretty much entirely dependent upon having gas, and it's a lot easier to do if you have cheap gas to back it up. And without that backup, the limits to what you can do with wind and solar particularly are quite substantial. And if you don't have gas and you're trying to, you know, ramp coal plants, for instance, up and down, it's not even clear that there's any actually carbon reduction benefit from intermittent renewables. The fourth reason that I'll point is yes, there is a sunk, you know, you build new infrastructure, there's sunk costs in it. But of all the infrastructure we could build, gas is probably the least capital intensive. It is a, and most dependent on the fuel cost. So as you move to gas, you build gas infrastructure, you're building infrastructure where you have relatively less sunk costs than almost any other energy technology, and as you have a demand response, you see prices go back up. I think it's going to be a lot easier for us to get out of gas than it is, for instance, to get out of, it has been to get out of coal, and I think, for that matter, than it will be to get out of enormous sunk costs in renewables that, you know, really are going to be very limited in their ability to scale, given the current technology we have. So for all of those reasons, I think we should be, as I said, doubling down on the gas revolution, and I think we need to kind of get out of that old view that because it's fossil, it's bad. I mean, I'll take some progress over basically no progress any day, which is what sort of really had prior to the gas revolution.

John Broder: A quick note on coal I saw just as I was heading over here, a report out from the Energy Information Administration that indicated that in 2012, China burned as much coal as the rest of the world combined. Interesting note. I just got a question from the audience which actually sparked something that I had been thinking about, too, and that is the potential of using the plentiful natural gas we have now as a transportation fuel, either in compressed natural gas form or in gas to liquids, which a number of the larger oil companies are starting to explore. It's very expensive now, but as long as there's a big gap, a delta between gas prices and oil prices, it can make some sense. Does either of you have any view on that, gas to liquids or natural gas as a transportation fuel?

Fred Krupp: Well, I can see a motivation to do that for national security reasons, and I can see a potential win there for the environment, or an incremental gain. But at the moment, we need to look at the science. The science says that when you switch from diesel fuel to compressed natural gas, the break even point as to how much methane could be emitted between the well and the truck, how much methane you take out of the ground that leaks, fugitive emissions, is one percent. Now why is it one percent instead of three and a half percent with coal? Well, it's one percent because diesel engines are very efficient, and because diesel fuel has a lot less carbon per Btu than coal. Right now, the EPA estimate, and it's probably a wrong number that could be low, could be high, but the EPA estimate is two and a half percent leaks. So right now, every truck we switch makes the climate problem worse.

John Broder: Worse than burning diesel?

Fred Krupp: Worse than burning diesel. That's for CNG. LNG is even a lower break even point, because the energy that you have to put in to make LNG, same with gas to liquids.

Ted Nordhaus: I actually agree with Fred. I am not particularly optimistic on gas as a climate strategy for ...

John Broder: Transportation.

Ted Nordhaus: ... transportation. And I think as opposed to in electricity and other sectors where we use gas, I think you actually, if you're going to really make a big move to gas, there are huge sunk costs that make it very difficult to move beyond it. You have to go build an entire new sort of infrastructure to support it. So at least from a sort of climate perspective, I think it's probably a bad idea.

John Broder: Ted, in your remarks you mentioned that innovation in the energy world takes time and money. The scientists tell us we don't have a lot of time. Congress I think will tell you we don't have a lot of money. We spend $90 billion in the Recovery Act, in the stimulus. We got a lot of benefits, but those programs got a lot of criticism, too. I don't think this Congress is going to ante up anything like the kinds of money you think is necessary. So where does this funding come from?

Ted Nordhaus: Well, I mean, I'll make a couple of observations, both on the time and the money. I mean, at this point, you know, I think anyone who tells you they think we're going to stay at 450 or 2 degrees, you know, needs to have their head examined. I think there's very little evidence that it's going to happen. I think we should remember that there's a lot of climate science saying we should try to avoid climate change. That number was basically arrived at at a political process. It's a fairly arbitrary number. I'm all for trying to meet it, but at the end of the day, you've got to go as fast as you can, reduce emissions as much as you can, as quickly as you can, period. And I think all of the talk about X target or Y target, is it 350 or 450 or 550, has just been an immense distraction, wishing, sort of arguments about what we're going to do four decades from now, and the real question is what are we going to do now? So that's sort of one, and frankly, do we have time to kind of bet on a bunch of technologies? Well, the reality is we're all betting on those technologies. I think we in our view are perhaps a bit more explicit about that. But what's implicit in the longstanding environmental climate agenda was that if we set a cap or a price, that technologies will materialize. And we kind of go, we've got to go get the technologies, and if we go get the technologies that we need, we can actually do the heavy lift, the political lift, the regulatory lift, the pricing lift, whatever it is, gets much, much easier to do.

John Broder: That leads to a question that just came up here from it appears to be Andy Cameron from Augur-Nexus. Wall Street will not invest in carbon numbers unless carbon is accurately counted. Is there a plan of instrumentation to count carbon emissions?

Ted Nordhaus: I'm not quite sure ...

John Broder: I'm not either.

Ted Nordhaus: ... what that means. Maybe Fred knows.

Fred Krupp: Scripps is putting online regional sensors that both measure carbon and methane emissions, but it's pretty easy to measure carbon emissions. I mean, when you know how much coal you burn, you know how much carbon you put out. Same with gasoline and diesel sales. Methane is the hardest, when it's because you're not burning it. It's the unburned methane, the unburned natural gas, that's a problem, so that we need to do a better job getting sensors on. 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. And I know it's going to be really hard, but what makes me hopeful, and there's a difference between hope and optimism. Optimism is a prediction that it's all going to be fine. I don't know that I'm optimistic. But I'm hopeful. Hopeful is a verb with its sleeves rolled up. I'm hopeful because why are we in this fix? 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. Ted says, well, it's not going to happen. We're not going to price carbon. We're not going to cap carbon. I've exceeded that in the United States in this Congress, but the four biggest countries in the world are Indonesia, the United States, China, and Brazil. 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.

Ted Nordhaus: Well, I just have to say it's not actually pessimism. It's, my point is I actually, that these numbers are actually sort of a distraction, that the old, I mean, you have to realize that this cap and trade idea is just literally picking up the old what we call pollution paradigm, which goes back to the early, much earlier air and water pollution laws. It goes, we're going to go set a scientific standard. Based on that, we're going to regulate emissions, and that's how we'll solve the problem. And that worked pretty well ...

Fred Krupp: But it worked.

Ted Nordhaus: ... for local and regional and national water and air pollution laws. It is not going to work well for energy. 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 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 ...

John Broder: Let me just interject one question, and try and get a relatively quick answer. If a cap and a tax are politically impossible, regulation is politically difficult, and it will be for President Obama in the second term, the one sort of bipartisan/cowardly approach is often taken, is the renewable electricity standard, or the clean electricity standard, which sets an overall goal of clean electricity, and lets the market take over from there. Does that meet your criteria as a signal to the market that might work?

Ted Nordhaus: I think it actually, in terms of deploying clean energy technologies, I think it demonstrably works better than pricing.

John Broder: Fred, is that something you guys ...

Fred Krupp: We're supportive of renewable portfolio standards, too, especially in the absence of pricing or cap. So we agree.

John Broder: Okay. So maybe that's something that can move in this Congress, and President Obama has spoken about it in his last two or three States of the Union addresses. Okay. We're going to, I'm going to try and get through as many of these questions as possible, so I'll ask, some of them are specifically directed to panelists, too. This one's for Ted. Where or who should be the federal innovation sponsor? Should it continue to be the Department of Defense? Will that be adequate for orphan technology?

Ted Nordhaus: Well, I think, I mean, when you look at ...

John Broder: What is orphan technology, by the way? I'm not sure I understand the term.

Ted Nordhaus: I think Armond Cohen earlier today described nuclear and CCS as orphan technologies. I think that technologies where there's just not sort of any place to go get them done, I think that, as I said, I think we need to take a hard look at our whole innovation system, and I think it actually goes beyond energy, but obviously energy is a really important place. And one of the reasons, I mean, really, so much innovation has come out of DOE over the last 50 years, and we're actually doing a fair amount of clean energy innovation there. And if I were making bets on where the kind of next big breakthroughs came through, I think I'd, as much as I sometimes feel like I have to defend DOE, I think I'd put my money on DOD because they're actually a consumer of the technologies that they're developing and investing in, and I think that's a really, really important characteristic. I think one of the big countries, questions on energy, but beyond energy just more broadly on innovation, is if we're entering an era where we're actually going to be sort of continuing to scale back our investments, you know, how much money, how much of our budget we put into DOD, which has been this incredible innovation engine for a half century, how are we going to make up that, we, if we hadn't had DOD, we've have had to go invent some institution to do something like it over the last 50 years, if we were going to experience the kind of affluence that we've experienced. And I think sort of one of the big questions for policy makers long term is if we're not going to continue to do that through DOD, how and where are we going to do it?

John Broder: I'm going to summarize this question, which begins clean coal, oxymoron, threat, or menace? Is this a realistic technology? If there's one technology that the Department of Energy has spent nearly as much money as on fracking, it's so-called clean coal. Is this a viable solution, Fred?

Fred Krupp: Well, the only clean coal would be coal where you sequester the carbon, and I would say that we are not going to have firms sequestering carbon until there's a requirement to do that. So yes, Ted and I agree, we should be making coal cleaner in terms of conventional pollutants. He's a little more tepid on the CO2 emissions. I don't see what's different about CO2. I think in the history of the world, we've solved pollution going into the air when we've regulated it, and so I think EPA should be aggressively going after CO2 for existing as well as new power plants. Acid rain, by the way, was all about power plants and the electric sector and the energy industry. 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 E.U. ETS is working, despite Ted's protestations to the contrary.

Ted 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. But let me get to the meat of it. I actually kind of, I'm actually in some ways more optimistic about capturing carbon from gas than from coal, because I think it's a technologically easier lift, and if you got lots of cheap gas, I think it's potentially certainly a starting place. I actually agree. I don't have any problem with CO2 regs under the Clean Air Act. I think we'll do them. I think they'll be quite modest. And I think if you have a lot of cheap gas, they can have a big impact. But this goes to the larger point, which is that when you have a cheap, clean substitute, anything is possible. The cap and trade stuff worked because in the decade prior to that, we actually developed cheap substitutes, mostly because of command and control regulations, as well as a number of other things. That cap and trade program, again, pretty overwhelming in the literature that it sparked very little actual innovation. But I think that, you know, if you look at those CO2 regs and the air pollution regs that have both come online, the fact that we had a lot of cheap gas just made the political lift much easier, and really puts the wind at the backs of the regulatory and political efforts to shut down coal, as well as creating market dynamics that make that easier.

Fred Krupp: Ted, let me give you one concrete example of innovation. Maybe you don't consider it innovation because it's not big, fancy, whiz-bang new device, but after the acid rain law came into effect, and it made it profitable to reduce sulfur by as much as possible, and you could even trade those extra reductions to another factor that couldn't figure it out. In New York, where I live, the boilers that had existed for, you know, decades, knowing that it was impossible to mix low sulfur coal into the boiler at more than ten percent, they figured out, well, let's try 15, because if we can make it work, we can make more money. And 15 worked. So they pushed it to 20. They pushed it to 25. Soon, they got over 50 percent. OK. That's not a gee whiz piece of innovation, but it wouldn't have happened without the profit motive and the people on the factory floor knowing they had a reason, they could make their boss and their company more profitable by tinkering. Now you may see ...

Ted Nordhaus: But you don't know that, Fred.

Fred Krupp: Well ...

Ted Nordhaus: I mean, you don't. You don't ...

Fred Krupp: Resources for the Future has, you know, written papers about this ...

Ted Nordhaus: Yeah, and actually they concluded that there was very little innovation from the R, from the cap [unintelligible] the SO2.

[Crosstalk]

Fred Krupp: Not the papers I've read, but ...

Ted Nordhaus: I read, I just, I just wrote a paper and cited it.

Fred Krupp: Now we have similar things with energy efficiency and demand side management that is possible. Tinkering can be done if there's an incentive to do it, but we won't be deploying a lot of existing technologies, you know, without regulations. And absolutely in the next couple of years in the United States, we should try all the approaches, we should invest in R&D. But to say that regulation on carbon can't and won't work, well, I think that's a big mistake.

John Broder: This question recognizes of course that CO2 is a global problem, and it's, that addressing it in this country has only a limited impact. If fossil fuels are the problem wherever they're burned, should the U.S. export gas or coal to other countries? The low price of gas has driven down the price of U.S. coal and increased its use in Europe. What about exports?

Ted Nordhaus: I guess my view is, well, a couple of things. I think the gas export issue is just a red herring. I don't think we're going to build enough, even under the most optimistic scenarios, we're not going to export that much gas. It's not going to have a big impact on U.S. prices, nor is it going to have a big impact on anyone else's emissions, because just once you get to the cost of exporting gas, it just raises the cost pretty substantially. So I think we'll export to Europe, we'll export to Japan. I don't think it's going to have much impact. The thing that might have an impact is if we start exporting the gas technologies, so to China, India ...

John Broder: The drilling technology?

Ted Nordhaus: Pardon? The drilling technologies.

John Broder: The drilling technologies.

Ted Nordhaus: You know, on coal, I mean, I think it's going to be actually interesting to see. I mean, obviously coal exports are up, but we're also shutting down coal mines. So I don't think that we're going to export all of that coal that we are, and I think there's a couple of new studies that conclude that there is some leakage in emissions with coal being displaced here and exported elsewhere, but it is not nearly, it does not nearly equal the decline that we've seen from the switch from coal to gas domestically.

Fred Krupp: We are exporting a lot of coal to Germany, and their emissions are going up, the fact of the matter is. I agree, though, that I don't think natural gas exports will end up being huge. It's a long term, multibillion-dollar bet of what the prices of natural gas will be. I think it's unlikely a lot of people will be willing to make those multibillion-dollar bets.

John Broder: Here's a question for both of you. With our current ethanol industry needing other feed stocks than corn and soy because of food versus fuel problems, is it really an established industry that can afford to lose financial and policy support? Does ethanol continue to need federal price support and subsidies?

Fred Krupp: It's a mystery why we have an ethanol mandate in this country. It's certainly, from a climate perspective ...

John Broder: A mystery, perhaps not. You have political people on your staff, don't you?

Fred Krupp: From the standpoint of ...

John Broder: An economic mystery, perhaps.

Fred Krupp: ... scientific rationale or what's good for our country, to have so much of our corn being turned into fuel without significant greenhouse gains or energy gains is deplorable.

John Broder: Any opinion on that?

Ted Nordhaus: I don't really have anything to add to that.

[Laughter]

John Broder: OK. All right. I'm just going to read this. I'm sure not what the question is in here. In either of the futures you advocate, natural gas is a bridge, but minimize as much as possible, Fred, or double down, Ted. Do you know what the science says about the climate impacts this century? The IEA says in the best case scenario, golden rules for the golden age of gas, with gas is about four degrees, I presume for this century. With one to three percent leakage, it could be as much as six degrees. Is this acceptable?

Ted Nordhaus: I think anyone who tells you, you know, the dirty secret of these models is that they're just completely based on, decide the outcome you want and then put in your assumptions about how clean or dirty a coal plant, a new coal plant in 2060 or 2070 is going to be, what the leakage rate is, what the climate sensitivity actually is. It just goes on and on. I just find these kind of debates sort of a distraction. I, it just, anyone who thinks they can tell you, you know, what the future looks like, and therefore what the temperature is going to be in 2100, I just don't believe it.

John Broder: 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.

Ted 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 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.

John Broder: Fred, last word?

Fred 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.

John Broder: Quick question, just since we do have another minute or two. President Obama in his second inaugural address spoke more assertively about climate than he had since 2009. Does either of you have much hope or optimism about substantial progress, either domestically or internationally, over the next four years? In the political climate we're in today?

Ted Nordhaus: I think U.S. emissions are going to keep going down, so I'm optimistic about that.

John Broder: As a result of policy, or as a result of ...

Ted Nordhaus: Yeah. Well, I mean, if you, first of all, you know, the shale gas revolution is a result of policy.

John Broder: Right.

Ted Nordhaus: And don't let anyone tell you different. Secondly, you know, with the existing air pollution regs, I think they're going to do more. I think that's going to work. I will say one other thing, which is that the reason that he spoke to freely about climate is that he took the toxic policies off the table right after his election, when he went out and basically said, I ain't going to go die on that carbon pricing hill again. That's why he felt emboldened to then go talk about how he was going to do something about climate change. And I think there's a lesson there.

John Broder: Fred?

Fred Krupp: You know, we've had in the last year, just in 2012, 12, 11 storms in the United States that have cost over $1 billion. We had Derek Jeter, shortstop for the New York Yankees, in Davos last week, saying something is going on. We had Christine Lagarde from the IMF saying, if we don't get serious about climate, we're going to be toasted, roasted, fried, and grilled. I think at the center of the economic system now, the president of the World Bank, Dr. Jim Kim, spent seven of his ten minutes from the podium at Davos talking about climate change. The center of our economic system, people realize we've got to do something. I'm not optimistic that we're going to have some Copenhagen-like multilateral agreement, but I do think there's a chance for some bilateral agreements with John Kerry as Secretary of State, passionate about climate, with the President passionate about climate. And I do think there is a chance for the President in this country to lead a conversation, which he's promised to do, to connect the dots for people so that people understand this is not about Republicans or Democrats, conservatives or liberals, but about our children. And I thought his line in the inauguration that if we don't get this right, we are betraying our children, was exactly what, was the right thing to say. You know, talk isn't action, but silence for the last two years has been very expensive.

John Broder: Thank you.

[Applause]

John Broder: You can all, you can all stay.

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