Energy Policy:

The Economist's energy correspondent weighs in on climate change, China, India

Is there a grassroots revolution brewing on issues like clean air and climate change? Vijay Vaitheeswaran, energy and environment correspondent for The Economist thinks so. In a wide-ranging OnPoint interview, Vaitheeswaran describes the push from U.S. states and cities to create new policies on global warming, and also applauds Bush administration efforts to partner with China and India on climate issues. Drawing from his own reporting and a 2003 book, "Power to the People," Vaitheeswaran also looks ahead to the future for renewable energy and fuel cells, and questions whether high fossil fuel prices are truly here to stay.

Transcript

Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining us today is Vijay Vaitheeswaran, he's is an energy and environment correspondent for The Economist and author of the book "Power to the People." Vijay thanks a lot for being here today.

Vijay Vaitheeswaran: It's great to be here.

Brian Stempeck: The book covers a real wide range of topics. It's just out in paperback, after you released it in 2003, but the real crux of it is the fact that we're really at a crossroads in the comes to energy policy. Where have you seen things going in the last two years since you wrote the book?

Vijay Vaitheeswaran: Well, I would say the single biggest difference is that we have had a wake up call in America. America matters most in the world, obviously. We're the world's biggest energy consumer, about a quarter of the world's oil, almost half the world's gasoline. And this is where we haven't had a real conversation, in my opinion, about energy policy. And I include the run-up to the energy act, which just past the summer, as part of that non-conversation. I would say the impact of the two hurricanes that we've had in the U.S., devastating, terrible hurricanes, one impact of this has, in terms of energy policy, is that we are really having a national conversation now about how to think bigger about energy vulnerability, infrastructure vulnerability, about energy 'independence,' at least how to think about the future and conservation, efficiency. So I think now we can actually begin to have a real conversation, now that we've gotten the energy act and all of its various pork barrel projects out of the way let's start talking.

Brian Stempeck: So do you think there was any value in the energy bill that passed last summer?

Vijay Vaitheeswaran: I think it's one of the worst bills to have been passed in the last decade, in any sector, not just energy. Was there any value? Of course, the democratic process always has value. I don't want to diminish that. And of course there are some good things in it, but if you ask me is this the right way to look forward to this 21st century? And what I argue in the book is that our energy systems are un-innovative. We're locked into old ways of thinking about energy, including whether it's the electricity sector where more than half our power plants are over 30 years old, very centralized, very rigid. Brittle systems as they're called in the technical language. That means we're vulnerable not just a hurricanes, but the black out a couple of summers ago that knocked out power to 50 million people. A more distributed innovative, even a digital system that's akin to the Internet. I call it an Energy Internet. That's the way to look to the future. Unfortunately, the energy bill actually locked in a lot of the ways we did things in the past and sort of threw a few crumbs in the direction of how we can encourage innovation towards a new energy future. That's why I say let's not look to the past. We have an opportunity now, let's look to the future.

Brian Stempeck: Do you think Congress is doing that? I mean as we speak the House is voting on a bill to expand refining capacity. A lot of the ideas we heard, basically throughout the energy bill debate, that were kind of cast aside at the time. You see any evidence of any new innovation in Washington right now?

Vijay Vaitheeswaran: Well, I would say that the refineries bill is the last gasp of the energy act, that some of the things that didn't get into the energy, original energy act, are still working their way. They have their friends in Congress and fans. I don't think the refineries act really gets at the real problem. In my opinion, there is not a problem of refineries in the United States. People will often say there's been no new refinery built in 25 years, or some words to that effect, and that's true. But the right question to ask is, so what? We should look at refinery through put. In other words, how much are refineries producing? The reason there's been no refineries built, in fact, the number of refineries has come down dramatically, is because there was consolidation in the sector and those refineries that were remaining were the best and most efficient. They've dramatically expanded their production through better catalysts, better technologies. We actually have more and better products coming out of those refineries. If you say is there no problem at all? I'd say no, no, there is of course some infrastructure issues. NIMBYism is a problem. It's hard to site a new refinery. And secondly we have a real hodgepodge of environmental regulations in this country. I'm a big fan of clean air, don't get me wrong, but we don't need to have multiple standards for states and cities that are right next to each other. We could have a much more sensible approach that would not have such a Balkanized market that makes it very inefficient for refineries to produce batches of products. So when I say when you look at the issue, there really isn't an issue of shortage of refining production, in my opinion. That's not the problem and so the bill is addressing the wrong problem.

Brian Stempeck: Now I mean in the book, I think the interesting thing you say is you talk about the same arguments that we hear all the time, whether it's increasing oil supply by opening up ANWR and the offshore areas, whether it's raising fuel economy. These ideas that basically keep coming around every year when we talk about energy. Where do you see the new ideas coming from? The book, in this sense, is a very hopeful one. You talk about the various solutions that people are working towards. When you look at Congress, when you look at the White House, where do you see the ideas that give you hope?

Vijay Vaitheeswaran: Well I think that there are some drivers for change that will change the debate and change how people think that give me hope. One of them, for example, there's long been interest in clean air. Of course Californian's have lived with dirty air because of the smog in L.A., but the same in Pittsburgh. Pittsburgh cleaned up its air and that's something that every American can understand. They don't want their children to have asthma. The relationship between combustion of dirty energy and our local pollution is very clear. Increasingly I think you're going to find climate change as one of those motivators. Now there is no federal law on global warming. We know this. And America will never pass the Kyoto Treaty. That was a bipartisan rejection of it in the Senate when it was contemplated in the sense of the Senate resolution. That's not what I'm talking about. I'm talking about some two dozen states, across the country, which have legislation on carbon dioxide already, with California in the vanguard moving into the automotive sector. What that's reflecting, and this is bipartisan, we have Republican governors in New York, Massachusetts and California joining with Democrats as well, they're reflecting popular opinion in their states. And that, to me, is the next grassroots revolution in American politics. That means there's interest and motivation and Washington had better respond if it wants to keep in tune with constituencies. And I think this, within the next few years we're going to see the idea of some kind of action, meaningful mandatory action, at the federal level on climate change. And when that happens we're going to see the entire energy industry begin to be transformed, because what that will do, it will send a signal to the marketplace that innovators will be rewarded for coming up with clean energy. And at the moment the signal is exactly the opposite, that this issue doesn't matter, in terms of the federal government, and if you make investments you may not get rewarded because Washington is going to work against trying to help you.

Brian Stempeck: Now don't you think that that kind of the impetus for that type of change could be there now? I mean a lot of people think we're in a time where oil and gas prices are going to stay high from here on out. That we might be looking at these fossil fuel prices for some time to come. But I know you don't think that's necessarily the case.

Vijay Vaitheeswaran: No, that's an excellent question. Often I hear the argument made that high oil prices, I mean they've gone up from $10 a barrel in '99 to, they touched $70 a barrel earlier this year, that this is a great boon for clean energy. And I know, I talk to the venture capitalists involved in this space, the flurry of solar deals, fuel cell companies are getting money. GE has launched a big eco imagination campaign related to clean energy. And many people think oil prices are here to stay and that's going to help. Here's my word of caution, don't bet on it. First of all, oil prices are volatile. I'd like to find the CFO or the chief risk officer of one of these companies, or the banker, who's willing to bet his or her pension that oil prices will stay at their level for the next 30 years in real terms. That means inflation adjusted terms. I'll bet you, you couldn't even find one. If they had to put their own money and bet their pension, nobody would bet that. And the reason is oil prices are volatile. We don't know what will happen with OPEC five years, 10 years hence, but when you make investments in oil you're betting for, or in clean energy, you know, a petrochemical refinery, a coal plant, these things last 30 or 40 years. And you're not doing your duty to your shareholders as an investor if you don't consider what's the likely downside to oil prices and likewise, what might be the carbon tax or cap-and-trade regime coming out five, 10, 15 years from now? Just because we're not acting on climate change today at the federal level, in any meaningful sense, doesn't mean there won't be something like a carbon price in America five or 10 years from now. So this is how business really thinks. This is how people who are ready to put money in this business, like Warren Buffett for example, the billionaire who has said he will put in huge amounts of money into this business. He's ready to put some money in. This is how investors like this think and I think that's why I would offer a word of caution to people who say high oil prices, they're here to stay. Let's invest in everything that's going to be a great boon for clean energy. No, don't count on it. It's got to come through public policy that sets the direction for the markets. The markets will innovate. Don't pick the winners. That's the job of entrepreneurs. But reflecting society's goals, that's the job of government.

Brian Stempeck: Let's talk a little bit about the international folks, a lot of the articles you write for The Economist talk about what's happening in China and India. As we're at this energy crossroads, I mean we're seeing China basically build as many coal-fired power plants as they possibly can to meet electricity demand. Are we headed down the wrong path when it comes to helping out China and helping out India and some of the developing nations?

Vijay Vaitheeswaran: No, here I actually think we're headed in the right path and I think, in particular, the Bush administration's plans on hydrogen, clean coal, carbon sequestration are absolutely the right way to go. In my opinion the administration has come up with the right long-term vision that is a commitment to zero emissions energy over the long term. And that has to include not only renewables, which I think will be a big part of the future, but also fossil fuel based sources, natural gas for sure, but particularly coal. And here's why. You hit the nail on the head, China, India, South Africa, the developing giants of the world have vast quantities of coal and you know what? They're burning it. They're going to burn the supplies of coal and they're going to build dozens upon dozens, in fact, hundreds upon hundreds of coal plants. If China alone just develops on business as usual, no special environmental policies or changes, all the coal plants that it will build in the next 20 years will make it impossible to reach any of the targets to prevent the worst damage from climate change. Forget about Kyoto. It doesn't matter whether the U.S. joins it or not. Anything the rich world does becomes irrelevant from the carbon shadow cast by China alone. Whereas the new technologies that only the rich countries, like the U.S., can develop, can innovate, like IGCC, which is a way of producing cleaner energy from coal; carbon sequestration technologies, which take the carbon out of the hydrocarbon, stick it in the ground. These are things that we can innovate. We can buy down the costs. We can make commonplace and then the Chinese and the Indians will adopt these technologies. We can help with that. Well that's part of the administration vision and I think that's a great idea. Where I fault the administration is not for also having the short- to medium-term policies that will help propel that vision. The vision is right, but you've got to walk the talk as well through shorter term actions on public policy, whether that's on carbon, whether that's on fuel economy standards. You have to do both, but the vision I certainly give them credit for.

Brian Stempeck: I mean that's one of the faults a lot of people have with the Bush administration, talking about the long-term efforts on fuel cells and carbon sequestration and things like that. Talk a little bit about what's happening though in the short term. I mean in the book you talk a lot about fuel cells, about micro power, Ballard, one of the companies up in Canada that's working on fuel cells. What is happening right now and what's happened in the two years since you wrote the book, in terms of moving it along in the short term towards getting say a car powered by fuel cells?

Vijay Vaitheeswaran: The first thing to say is fuel cells are coming on the market already, first of all, but they'll come to the sexy application, which you just asked me about, which is the fuel cells for powering cars. That's the one we hear about. That's the one that GM or Toyota, sexy cars that we all want to get our hands on. Those will be the last application where we will see fuel cells. Why? Because the cost of the internal combustion engine is actually extremely low, $50 a kilowatt, but if you compare the cost of the coal plant, it's about $1,000 a kilowatt. You compare the cost of the battery that goes in your laptop, the lithium ion battery, that's $10,000 a kilowatt. And each of these things the fuel cell can compete against. And right now fuel cells are already cheaper and better than the laptop batteries or iPod batteries. And that's the first market. We're already seeing a couple of companies coming out with fuel cell devices that can power up, can you imagine a laptop that can go 30 days without needing to be plugged back into the wall or an iPod that can go forever? Virtually, I'm exaggerating for effect, but those kinds of fuel cells are already coming and will come very soon. Stationary power, meaning competing with coal or windmills or something, that's the next and already happening kind of phase of fuel cells. But vehicles, we'll see buses, we'll see fleets, UPS, FedEx. In the last couple of years the fleet operators have begun to try out fuel cells in the U.S. Post Office, but the last will be your car in your garage. Just because there are a number of obstacles to get from here to there, but once you sequence the fuel cells this way it suddenly begins to make a lot more sense. So that's just what's happening on fuel cells. I would say the bigger point in what's changed in the last couple of years is the world has come quite a long way towards moving towards a zero emission world, because Europe and Japan are already into Kyoto land. Now we don't like it here in America. We're going to do it our own way, our special way, that's fine. But make no mistake, the European Union has moved very far ahead in terms of having mandatory rules on climate change, on rewarding people who come up with clean cars, clean power plants and so on. And California is behaving more like that clean vision of the future than much of the rest of America. And a number of states, New York, New England, others, have said they're going to adopt the California regulations. So I see a real groundswell of support that's going to help move us towards a clean energy future, whether that's fuel cells or not, it doesn't matter that much unless you're an investor in fuel cell companies and I'm not. We should be concerned as citizens that we move towards cleaner energy and I think that's coming for these reasons.

Brian Stempeck: All right Vijay, we're out of time. We're going to go ahead and stop there. Thanks a lot for coming on the show.

Vijay Vaitheeswaran: It's my pleasure.

Brian Stempeck: I'm Brian Stempeck. This is OnPoint. Thanks for watching.

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