Beyond the emissions reductions goals of a future U.S. climate policy, how should legislation encourage the development of technology and strengthen global partnerships? During today's E&ETV Event Coverage of a recent Resources for the Future event, a panel of climate experts discusses the broader objectives of a domestic climate policy. Panelists include, Ray Kopp, senior fellow and Climate Policy Program director at Resources for the Future, Nigel Purvis, visiting scholar at Resources for the Future, Linda Cohen, professor of economics and associate dean for research and graduate studies at the School of Social Sciences, University of California-Irvine, and Bob Simon, Democratic staff director of the Senate Energy and Natural Resources Committee.
Raymond Kopp: Let me welcome everyone back for the last session of today. I hope the lunch was ... that white bread is always a little weird, I don't know, but I hope they were tasty sandwiches. My name is Ray Kopp and it's my privilege to moderate this closing session today.
We're going to switch gears a little bit. The title of this session is Broader Objectives for U.S. Climate Policy. Hopefully it builds on the first two sessions, which dealt with greenhouse gas reduction of the primary policy objective, both internationally and domestically.
And really, we talked a lot an awful lot about one particular policy tool to achieve those reductions, which appropriately is a CO2 charge. But we're going to broaden the discussion a little bit today, at least this afternoon, and it's going to become a lot more interdisciplinary.
I don't think we have in CGE modelers on the third panel here, so you don't have to worry about your understanding of those particular aspects. What we're going to focus on or the other objectives that might be embodied in proposals for domestic legislation to control greenhouse gases.
Other than simply controlling those greenhouse gases there's a lot an awful lot more going on in these bills. And so we do want to talk about some of those other objectives.
We want to talk about some of the challenges that are certainly going to face the Congress and the president in designing this particular policy and passing it into legislation.
And talk about some of the issues associated, certainly, with technology and innovation and all of those things that are embodied in the current proposals that we see. And we have three excellent panelists to walk us through that discussion.
On your seats you had bios for everybody. Let me just briefly introduce them to you now and you can read a low bit more on the sheets if you wish.
The first will be Nigel Purvis, who is currently a visiting scholar at RFF and was part of the climate negotiating team when he served as Deputy Assistant Secretary of State for Oceans Environment and Science in the state department.
And after that, Nigel served as a vice president for policy and external affairs at the Nature Conservancy where he was intimately involved in the forest carbon issue, which you heard talked about this morning. So we're very happy to have Nigel with us.
Nigel being followed by Linda Cohen, who's a professor of economics and an associate dean for Research and Graduate Studies at the University of California Irvine. Linda's research focuses on economic, political, and legal institutions that bear on innovation within the United States, with a particular focus on energy technology.
And finally we have Bob Simon with us, who's staff director on the important Energy and Natural Resources Committee in the Senate. Bob coordinates the often difficult process of developing policies and passing legislation out of that committee and played a major role in the passage of the Energy Policy Act of 2005.
And so we've got a real stellar lineup. Without further ado I'm going to turn this over to Nigel and we'll follow the same pattern as we have done in the first two. After each presentation we'll take one or two questions of clarification. And then we'll move on to the next presenter, saving all the substantive questions for the end. Nigel?
Nigel Purvis: Well, thank you very much Ray. It's a great pleasure to be here at RFF, and I mean that in two different ways. As Ray said, I've had the good fortune of being in residence here for the last few months and I can say this is a wonderfully collegial place with a really high quality of researchers.
And it's a real pleasure to also be with you here today sharing with you the results of some research that I've done here at RFF on the nature of different kinds of international agreements.
And specifically, how the choice of the instrument that we may get the international level could affect our ability to achieve U.S. foreign policy objectives relating to climate change as well as to secure U.S. participation.
Much of my presentation will be based on a paper that is available on the RFF website, short title of which is called "Paving the Way: The Case for Congressional-Executive Agreements and Climate Change Protection Authority."
I'm a lawyer, so I don't have a PowerPoint for you. I have no data. And I'm also a diplomat and at the U.N. it's very hard to show a PowerPoint in the five official U.N. languages simultaneously. So I've learned to do without and I hope that I can, nevertheless, keep you interested here even without eye candy.
And giving you at least a couple of the conclusions that I've drawn recently from the research that I've done that maybe a little bit surprising or perhaps even controversial. And, therefore, I really look forward to your discussion.
One point, the Bush administration's climate change foreign policy, its current approach to international climate diplomacy is not nearly as bad as most people who care about climate change think.
And, in fact, I'd say there is very little difference between what a President Kerry would have done had he been elected and what President Bush is doing now, save one major exception, the level of effort, the amount of emission reductions that the current administration is prepared to pursue.
Very different there and that's a very important difference. But in terms of its architectural, structural elements of current U.S. foreign policy on climate change, it's actually quite consistent with where I think the political left in the United States would like to go. And I think that that's newsworthy.
The second point that I'd like to make is I think that we, despite that, are very much on the wrong track. We have two major processes moving forward.
Simultaneously there is an international negotiation which the U.S. has joined with the rest of the international community setting a goal of concluding a new agreement that would take the place of the Kyoto protocol or at least pick up from Kyoto for the period after 2012.
That agreement is supposed to be done by the end of next year. We have high expectations among some that a new Congress and a new president would pick up the cap-and-trade discussion that occurred just earlier this month here in Washington and really push that forward in 2009.
And I think that it's difficult observing both of these processes to conclude that the U.S. has in place both a process, as well as a substantive policy that is going to make those two efforts align in the way that we need them to align. So that's hopefully a little bit of a teaser of where I'm going and reason enough to stick around for at least a couple more hours.
So, let me remind you of the question that Billy and Ray asked me to address, which is really what do we need to do as part of our domestic climate change legislation to ensure that we have a sound international climate change policy and that we're achieving our broader foreign policy objectives?
And before I can answer that question, to the best that I can, I think really we need to get on the same page on three subordinate, kind of background questions.
Firstly, what are our climate change foreign policy objectives? Until we have a clear understanding and agreement on that it's hard to know how we would design a domestic bill in order to get there.
Secondly, to what extent is there a broad political support in the Congress and among the political and influencing class here that those, in fact, are our foreign policy objectives and how much political consensus has been built up around a set of principles?
And thirdly, what's happening in the international negotiations? What are the expectations that other countries have about the United States? And how likely are we able to move those negotiations in the direction that would allow us to achieve our objectives?
So, let me briefly cover those things and then I will hopefully spend most of the time that I have here at the podium talking about two specific recommendations. One, that we should stop negotiating climate change treaties.
And second, that we should make our domestic climate change bill much more outward looking and view the domestic legislation as really our primary tool for engaging other countries. So, that's a brief outline of the talk. Let me turn to those first three questions then.
What should be the U.S. climate change foreign policy? Well, I think there are four things that the United States or the next administration needs to do. We need to create an international policy framework for cost effective, equitable, and appropriate emissions reductions.
A lot of baggage in those words, particularly the word appropriate. What level of emission reductions are appropriate? I don't know, but whatever consensus we arrive at that, we need an international policy framework that ensures that the world, as a whole, will be marching toward that shared goal.
Secondly, we need to promote technology, research, and development. I think it was clear from the discussions that we've had already that just a business-as-usual approach will not get us there.
Many of these technologies are not currently available, whether it's carbon capture and storage for coal-fired power plants or a range of other transportation technologies that are just not commercially viable yet.
So the government has a role to play and that's not just domestically where most of our R&D has tended to occur, but really, as part of an international partnership with other countries.
I would point to the ITRE project, which is an international consortium of developed and developing countries that are working to create nuclear fusion in a facility in France for peaceful purposes, for electricity generation. That kind of international cooperation on technology R&D needs to be a complement to what ever domestic efforts we have.
The third objective and strategy really ought to be to accelerate the diffusion of clean energy technologies to rapidly emerging economies, the ones that are responsible, as we've seen from the various charts, for the lion's share of the emissions growth that we are going to experience globally over the next few decades.
And fourthly, and this is an issue that I think receives far too little attention so far here in the United States. We need to have a very robust and coherent strategy for helping the world adapt to inevitable climate change.
You know, we often talk about the mitigation side as though somehow that's the solution. And, certainly, unless you stop polluting you're going to have a continuing problem that will get worse.
But just the climate change that is already locked in is going to create very significant impacts, particularly for the poorest of the poor in the developing world where they have the least capacity to respond, where they have had a trivial contribution to the climate change that has occurred as far.
General Zinni, Anthony Zinni, former top military brass here, together with a blue-ribbon panel of full-chested medal compatriots concluded that climate change is the world's largest threat multipliers, that we are likely to see greater insecurity as a result of climate change.
So that in addition to the humanitarian concerns that we have about the poorest of the poor, we also have a self-interested need in order to be able to work to ensure that they have greater resilience to an inevitable climate change and the adverse impacts that they will experience.
So, those, I think, are kind of the basic pillars of a climate change foreign policy, but they don't really answer the question, well, how do you do that? And what would the strategies be in each of those areas?
And so that really gets me to the second point, how ready are we, as a country, to really carry forward a climate change foreign policy that would touch on all of those areas? And I think the answer is we're not ready at all.
We do not have a bipartisan vision of how the United States is going to lead on this issue and how we're going to engage the rest of the world. The kind of non-debate that we had in the Senate a couple of weeks ago was really just about the domestic emission reduction.
There was a lot of discussion of China, as in they're not doing enough, but not really how are we going to engage China? How are we going to lead? What is our responsibility and our contribution to assisting the international community move in the right direction?
So, if you think of it as a learning curve, we've started to climb the learning curve among our political folk on the question of design of a domestic emission reduction regime. But we are very low down on the learning curve in terms of the design of an international policy framework.
And that's a real problem. This, of course, is not a -- I'm not making a partisan point. This is not Democrats or Republicans and, in fact, I think you could argue that we've had 20 years of uncoordinated policy.
You have that yin and the yang from the Clinton to the Bush administration or from Bush to Clinton to Bush again, where the president and Congress were never really on the same page. And we really need to break that pattern of behavior and establish a durable climate change foreign policy around which there is a significant amount of consensus.
Even when the Congress has spoken, such as in the 1997 Byrd-Hagel resolution, it was really more of an admonishment to the president about what not to do. Whatever you do, Mr. President, don't bring back a treaty that looks like this.
Well, that's not the same thing as saying here's exactly what the treaty needs to look like. And I applaud the amendment to the Lieberman/Warner/Boxer bill that Senators Biden and Lugar, the chairman and ranking member of the Senate Foreign Relations Committee, introduced a couple of weeks ago.
But even that amendment just calls on the U.S. to negotiate an international agreement with legally binding commitments by all major emitters doesn't actually say what those commitments ought to look like and how we would go about securing those commitments from countries who, like India and China, may not be prepared to offer them currently based on existing U.S. policies.
So, we've got a long way to go in terms of establishing a clear and coherent vision and a set of deep strategies for a climate change foreign policy. And I think that there are real risks that are incurred with this kind of state of affairs, three that come to mind.
The first is we may fail to get a good agreement. And scientists tell us that we have probably one last, clear chance to avoid unacceptable risks of catastrophic climate change. And so if we don't get a good international agreement and engage in other ways with countries, we, I think, stand a good chance of blowing this last good opportunity.
If we are not clear about what we want how can other countries make the concessions that we need in order to be able to get what we want, in order to be able to participate in those agreements? Secondly, I think the lack of consensus within the political parties really creates the likelihood that the next president, regardless of whether that's John McCain or Barack Obama, will have a climate change foreign policy that the other party will demonize.
Because there's just too much of an opportunity to define, politically, the party that's not in the White House, to define its approach in opposition to the new president's approach.
Whereas, if we had, as we did in the Cold War with containment or as we have in our support for Israel in the Middle East, some kind of fundamental building blocks or pillars about what our foreign-policy would be, there would be much more constancy from one administration to the next. And that lack of consensus creates the opportunity for, I think, political mischief and political division.
The third real risk is that we, and this is really the topic of the panel, and which I want to focus on the most here, is that we will fail to use the opportunity that our domestic law provides to unilaterally create mechanisms and tools to engage other countries and to lay the groundwork for an international agreement that the U.S. ought to and could join.
And that would be a horrible outcome I think, if we are unable to close this gap and to define a vision and to use the opportunity that the domestic cap-and-trade bill provides in order to engage other countries.
So that's my sense of where we are, kind of the third housekeeping item before turning to the substance of the question, was just to give you my sense of a status report on where the international negotiations stand.
And there, I think that there have always been two negotiations going on simultaneously within the climate processes. There's a negotiation among developed countries and there's a negotiation between developed and developing countries.
And the quick report I would give you is that the negotiation among developed countries is actually moving forward quite nicely, with the exception of the total level of effort. But the structural elements for the new agreement have really come together.
Think back to this time last year, just before the G-8 summit that occurred in Heiligendamm, Germany. And think about the Bush administration's policy position on international climate negotiations. The president's policy at that time was we don't need a new agreement.
If we do negotiate an agreement it shouldn't be within the U.N. The U.S. should not make any legally binding commitments. There shouldn't probably be any commitments, but certainly not legally binding. And we don't agree with the IPCC and the European backed goal of reducing global emissions by 50 percent by the year 2050.
And if you look at those elements and kind of break them down like that and see where the Bush administration is now, it's really I think, night and day, quite a very different position. Last year, at the G-8 summit, the president said the U.N. is the right forum.
We should negotiate a new agreement. The U.S. is prepared to make commitments. We don't think we should have a national target and we don't think that all of the commitments should be legally binding. And on that 2015 goal, I'll think about it.
And that's, nevertheless, quite a lot progress. That position stuck through the Bali agreement and that's why at the last global conference we were able to secure an international consensus. But there ought to be a new negotiation that countries should consider commitments.
But it wasn't clear whether the 2050 goal of 50 percent emission reductions was going to be a global goal because the Bush administration was still thinking about it. And also it was not clear whether all major emitters would have legally binding commitments and whether those commitments would be reflected as national targets.
In the Rose Garden in April of this year President Bush said the U.S. is prepared to have a national target. We're going to grow our emissions until 2025, but nevertheless it's a national target of capping emissions and beginning to reduce them as of that point.
And secondly, we would be prepared to make that commitment legally binding if China, India, and other major emitters were also prepared to make it legally binding.
And then, just in the last couple of weeks, we've heard that in preparation for this year's G-8 summit, that the environment ministers of the G-8 countries have signaled that it's highly likely that countries have signaled that it's highly likely that either the G-8 leaders or at a meeting of the major emitters, the 17 largest emitting countries, that will occur the day after the G-8 summit, that there will be a consensus around this 2050 goal that Europe proposed a year ago.
That the internationally agreed-upon goal by the major emitters will be to reduce emissions 50 percent by midcentury. So that's a pretty significant shift in U.S. policy and not that dissimilar from what I think either McCain or an Obama administration would be pursuing.
What is left unresolved is what the U.S. goal will be and what the nature of the contribution or commitments will be from developing countries. And what other incentives, carrots, and sticks will need to be in play in order to make the whole deal happen.
And that's very significant. So I don't want to sugar coat it make that sound like the negotiations are all set and we're done. We're not, but there's nevertheless been very significant movement. So that's the international context.
We have lack of preparedness and readiness here in this country and really only the outlines of what a policy would be, rather than a well-developed strategy. So what do we do about that? And I guess I'd like to offer to kind of different sets of recommendations.
The first is procedural and the second set are substantive. So let me start with the procedural recommendations. My recommendation, and this is reflected in the RFF discussion paper which is available online, is that we need to fundamentally change the way the United States goes about negotiating international climate agreements.
And I said earlier, in trying to be a little provocative, we should stop negotiating international climate treaties and I mean that. But I don't mean we should stop negotiating international climate agreements. What's the difference between an agreement and a treaty?
OK, here's where it gets technical and legal and I draw on my experience as a former State Department lawyer. A treaty is a kind of agreement, but it's not the only agreement. An agreement is a document that codifies a commitment by one country to another country that is legally binding under international law.
Well, there are other kinds of agreements besides treaties. A treaty is a magic word in the United States because it's mentioned explicitly in the Constitution. Treaties, in our system of government, require the advice and consent by two thirds of the Senate in order for the U.S. to become a party to a treaty.
In fact, the vast majority of international agreements that the United States enters into are not treaties, they're a variety of different kinds of executive agreements. And executive agreements, of which there are several different kinds, do not require that two thirds approach.
And let me highlight one specific kind of executive agreement that I think would have a lot of benefits if we were to use it as a model. And it's called a congressional-executive agreement. This is an agreement that the president negotiates, but submits to both houses of Congress for approval by a simple majority vote.
And the cloture rules for a filibuster are in play in the Senate, so you ultimately need 60 in the Senate. But it's both houses of Congress and I would argue that this approach, which we use in hundreds of different areas and, in fact, 85 percent of the international agreements that the U.S. enters into in any given year, roughly about 300 of these international agreements are done as congressional-executive agreements.
Only 6 percent are done as treaties. So, why does this approach make sense for climate change? And really, I think that there are several reasons. The first is we're going to get a better deal. The second is that we're going to be able to participate and that's not clear that we would be able to do that following the treaty model.
Let me highlight how this might work because there are many variations on it, by turning to one prominent area of international cooperation where we do use congressional-executive agreements, and that's in the context of international trade.
The NAFTA agreement, the World Trade Agreement, these are congressional-executive agreements. So proving the point that it is not the case that all the really important ones are treaties and lesser ones are somehow something else. We have used the congressional executive form in many different instances that are incredibly important.
In fact, Hawaii became a state in the United States through a congressional-executive agreement, so really, as I said, over a hundred different areas. The way that it works in trade, at least in the modern process, and it used to be called Fast-Track, it's now called Trade Promotion Authority and it has five distinct elements.
And let me just highlight them. Firstly, the Congress, by enacting a statute, which has to go through all the requirements of any other statute, establishes the president's negotiating authority to negotiate international agreements. Second, it defines, by statute, the U.S. negotiating objectives.
These are obviously a negotiation between the executive branch and legislative branch because the president has to sign the statute in order for it to come into law, unless the Congress overrides a veto. So there's a joint effort to establish the negotiating objectives of the United States.
Thirdly, the statutes create mechanisms to improve coordination between the Congress and the executive branch, such as the creation of formal observer delegations in the Congress or mandatory reporting requirements by the president to ensure that the Congress and the president are on the same page throughout the negotiating process.
Fourthly, the statute establishes that the agreements that comeback will be handled as congressional-executive agreements, rather than as treaties.
And I should highlight that our courts have said that the president and the Congress have the authority to decide, at their discretion, whether an international agreement should be considered to be a treaty or considered to be a congressional executive agreement under U.S. law.
And both the NAFTA and the WTO for example were challenged in court. And in one case the Supreme Court upheld the classification of the NAFTA as a congressional-executive agreement. Even upheld the Fast-Track provisions, the kind of expedited approval process, which is the last point I'd like to make.
So the fifth distinguishing feature of these congressional-executive agreements in the trade practice is that the agreements, when they come back to the Congress, get reviewed in an expedited manner. It's specifically looking at the last trade promotion authority bill, which expired last year.
The Congress has a responsibility to vote a straight up or down vote with no amendment, no filibuster, no holes, within 90 legislative days. Now why did that make sense in trade? Every president in the last 30 years has said that they had to have trade promotion authority in order to be able to succeed in liberalizing trade.
Why? Well, because it works because by creating a clear path to U.S. participation by defining by statute what the United States needs in order to participate, we enhance the credibility and effectiveness of our negotiating team.
We create incentives for our negotiating partners to make concessions that are politically difficult for them to make, because they know that they won't be making them for naught, that if they make those concessions there's a very high likelihood that the U.S. will become a party to the agreement.
The United States, while trade is controversial in this country and we can look to the Pennsylvania and Ohio primaries for evidence of that, nevertheless, the U.S. becomes a party to almost all of the trade agreements that it negotiates.
And that's because whether the agreements are good or not is not my point, but rather that the Congress concludes that the president faithfully met the negotiating objectives that the Congress established. And, therefore, the Congress gives its consent to those agreements. And that same mechanism would work in climate change.
So I advocate the creation of climate protection authority or, if you will, climate and competitiveness protection authority, where the Congress would follow the same process we now use for trade agreements, enacting by statute, in the context, simultaneous to enacting a domestic cap-and trade bill.
We would create this authority, authorize the president to go negotiate these agreements, establish what the objectives are, and create a path to U.S. participation.
Let me just give you a quick -- and conclude with a quick political analysis of why this approach might make sense and how it might work in practice. The European Union has said that it will do 20 percent below 1990 emission mitigation if other countries don't join it in an ambitious new international climate agreement.
But as part of a new climate agreement it would achieve a 30 percent emissions reduction. The U.S. could take that same approach and say here's a first step. This is what the U.S. is prepared to do unilaterally because of our place in the world, because it's the right thing to do because of our emissions levels.
However, we would be prepared to make the newly enacted cap level more stringent if certain conditions were met. And it would be up to the president to go negotiate an agreement that satisfied those conditions.
Then the agreement would go back to the Congress and the Congress would be taking a straight up or down vote on whether the conditions had been satisfied. The number would be negotiated by the Congress in advance, so we wouldn't have 20 and 30 percent because those numbers are not realistic for the U.S. given our emissions growth.
But you'd have X and a Y, the international community would have an incentive to make the concessions because they would know that the level of U.S. mitigation would go from X to Y if they made those concessions.
So, just a quick political wrap up. The next president should love this for the same reason that they like it in trade and in other areas. Generally the executive branch has a preference for congressional-executive agreements over treaties. And this would provide enhanced credibility to our negotiating team.
The House of Representatives should find this approach attractive I would argue. The House plays absolutely no role under the Constitution for the review of an agreement, although they do get involved in the enactment of a treaty rather. But they do get involved in the enactment of implementing legislation.
Here, however, as they are in trade agreements, they're involved on equal footing with the Senate from the start. The Senate, of course, might have some questions and concerns about whether it should give up its treaty prerogative.
They've already done so in 85 percent of the cases and the question really has to be asked, why do we hold the line here on climate change? And it has many characteristics of trade agreements. It's economically significant. There are many, many countries.
The increments are incredibly hard to conclude, even more difficult to renegotiate. Those are all the reasons why we tend to follow this approach in other areas and why it makes sense for the Senate to acquiesce here.
Industry would find that there would be greater predictability. They would understand how an international agreement is going to interact with a domestic law, because the level of emissions reductions would be agreed in advance.
The contribution from China and others would be negotiated in advance and there would be less uncertainty about how an agreement that is concluded that the international level after the enactment of a domestic cap and trade would affect that cap and trade.
And I think many are rightfully concerned about locking in a deal that they think is going to last for a generation, when, in fact, it might be renegotiated in a couple of years because the international pressure.
And, finally, the environmental community should like this agreement because it provides a clear path to U.S. participation, which I think they rightly see as a precondition for really engaging the world and having a robust mitigation regime.
So time doesn't permit me to get into the specifics of what a policy would look like in terms of technology transfer and a number of other areas. I hope that I'll get some questions on that in the Q&A. I would just leave you, on that front, with some figures.
The cost of adaptation is estimated to be $86 billion annually. The cost of making sure that rapidly emerging developing countries grow in a manner that's consistent with the climate change emission reduction scenarios, stabilization scenarios that you saw this morning. That cost is estimated to be between 20 and 40 billion dollars annually.
The cost of ramping up government-sponsored R&D, just in the United States alone, to put it on par with the level of effort that we achieve in many other areas, whether it's the war on terror or it's the strategic Defense initiative from the Reagan era or whether it was the Carter era clean energy program, that, in today's dollars would be a 10 to 15 billion dollar increase in U.S. funding alone.
So we've got billions and billions that would need to be mobilized in order to provide incentives to developing countries to create the framework for international cooperation. And when one looks at the political reaction to the Lieberman-Warner bill, a lot of the opposition was centered around the perceived dramatic increase in the scale of government.
And so kind of the conundrum that I would leave you with is that in order to be able to have something to offer internationally and to be a partner internationally, we're going to need new government spending, either directly or through appropriations or spending that we channel through a market, such as a cap and trade program.
And yet a lot of the political opposition that we're seeing now to cap and trade is built around the cost of the program, the net cost and the net increase in government spending. And so we've seen amendments introduced to recycle the revenue, to return it to consumers.
I think these things ... this is a little bit of a tug-of-war that is going to have to be played out between the domestic expedience of returning the money to the consumer and the international necessity of being able to come into a negotiation with some carrots to be able to offer other governments.
Linda Cohen: First, as with all the other speakers, I'm so delighted to be here. OK, I'll stand much closer to the mic. I'm really delighted to be here. A few years ago I had the incredible good fortune to spend a year at Resources for the Future and it was a wonderful experience.
And I always enjoy coming back because it gives me the opportunity to catch up on the papers that researchers here have written, which always turn out to be extremely relevant to an awful lot of work that I do. So I'm really pleased to be here.
In this particular case, it turned out to be kind of frighteningly relevant because I was asked to speak, I hope, at least I understood that I was asked to speak about innovation policy and how this related to climate change. And there's been a great deal of research done by the people here at Resources for the Future.
And I'm actually going to be touching on some of that. So, I called my talk "Optimal Climate Change and Optimal Innovation Policy at Odds." After listening to Howard this morning I wish I had called it "Design Choice and Abatement Supply Potential." I don't think I'm quite there yet, but I'm hoping to get there.
This is fairly preliminary and I welcome comments and criticisms. OK, so what I'm going to do, let me go back for a minute. Where I'm going with this is that I'm going to talk a little about sort of fundamentals of what we know about the innovation process.
And then I'm going to argue that in trying to formulate a climate change policy, the basic strategies that have been used tend to emphasize static efficiency over dynamic efficiency. And this is a problem. In innovation you usually can't get a first best. We're always trying to balance different considerations.
And the same thing, I think, has happened here. And basically the direction that I'm going, and I will get there are certainly within 20 minutes, especially if you keep me -- I have to have a watch, is that I hope that some of these issues can be taken into account in the models that we heard about this morning.
Because I think that they mischaracterize what they call first best and second best. And I am going to try to argue that maybe we should switch those.
So, as I said, first I'm going to talk a little about these fundamental issues in innovation policies that I think are very familiar, but they have some consequences for greenhouse gas emission policy that maybe haven't been integrated into the way that we've thought about formulating policies.
OK, here are my curves. These curves probably look familiar. If you have a successful innovation, what we tend to see is the cost of it falls over time. And this is sometimes called the learning curve. Sometimes it just has to do with stale economies. I want to talk a bit about what's actually behind that.
And then the other thing that you see here is the so-called diffusion curve. And what we again see in successful innovations is that there's usually rather slow uptake. This is without government policy obviously. And then the penetration rate, if you will, goes up rather steeply and then levels off when everybody has bought it.
So these curves are pretty standard. Where are they coming from? Well, here's what we know. This is empirical regularities, but it's really very, very regular. There tend to be very large fixed costs associated with innovations, particularly important innovations.
One of the implications of that is that as you sell more, you're spreading those costs over more units, so of course the cost declines per unit. But sometimes the fixed costs are very, very large to begin with. OK, so keep that in mind. Second, after you've invented something that's a lot of innovation that happens after that.
Indeed, some economists argue that the major gains, Alec and Mallory have written about that, that really the major gains that happen in innovation is not with this original bright idea, but with all of these small, incremental innovations that lead up to deployment.
And here's where the learning comes in and there's really three pieces to it, learning by doing, which is economies of production. So you learn how to make it better and you learn cheaper ways of doing it for production.
There's the so-called learning by using and this is when people are actually using the technology they think of better, more effective ways to use it. This, presumably, feeds back into production and there's complementarities there.
And the third is what would happen with an important new technical innovation is that, and it's sort of part of learning by using, but I've put it separately, the development of complementary technologies that make the innovation much more valuable.
So, what one has over time, and the first little diagram I have up here shows average costs just sort of going back because we're thinking of better and better ways to do it. So it's the whole curve is shifting back. At the same time, we tend to see demand shifting out, because the product is not static.
We're not talking about just doing the same thing cheaper. With a new innovation we keep thinking of better ways to do it and ways therefore that give you a product that's more valuable or better ways to use it with. So this is the idea of complementary technology.
So, what you see is the demand curve shifting out. And when you put the two of those together, this is where you get what looks like this very sharply declining learning curve, because we're selling more and we're doing it cheaper. But, and here's sort of the key that comes in, when does the private sector thrive? When will this happen?
And the first point is pretty obvious, when you have a lot of money. And it's not so much, and this is a point that's sometimes made in climate change, that we're worried that we won't be able to charge a price equal to long-run marginal cost. The real problem with major innovations is we need a lot more money than that.
We sort of need some large share perhaps of the surplus that might be associated with it, which is the second little diagram that I have here. So, this is what we want to get at, that those fixed initial costs and the high expense of the initial units of any new technology that we might be selling, are going to be very expensive.
And, typically, what happens when you have major innovations is the innovator is going to be in a position to charge monopoly prices, but more importantly than that, to price discriminate. So it's sort of price discrimination that's making this world go around.
And if you can't do that, there's a good chance you're not going to be able to raise enough money to pay the fixed costs, especially given the sort of risks associated with innovation, that you need to actually get. So you sort of see where I'm going here.
I'm going to argue that we're going to have to price discriminate in order to get good stuff coming out of this business. And we're going to have to price discriminate, probably, at any given time across consumers. So that what you really want to be doing is some kind of Ramsey pricing.
It may be that rich people are paying more than poor people. It may be some other formulation here such that people who have very high demand, high value for the product, somehow are getting charged more than the other people. So that's one.
The second is across time. And here I've argued this with some of my colleagues and there's an issue. You could say, OK, we think this technology is going to get cheaper over time. So, what I'm basically saying is, true, Toyota did it.
They figured the Prius is going to get cheaper, more people are going to buy it, we'll get experience and so on. We can have a loss leader and sell them probably, from what I understand, they were selling them for some number of years below cost or, yeah, the price was below cost. They weren't making any money on them.
And now, maybe they're breaking even. But, in general, what you see with new technologies is you charge more at the beginning and you charge less later on. And I would argue that it's very difficult to try to finance the later profits, to cross subsidize across time. And partly it's because of a point that I don't have up here.
I think it might be on my next slide. Let's see if I can get there. Let me go back to the pictures then. Partly this is because there's so much uncertainty involved in innovation. So this is sort of another key feature, that you don't know who actually is going to be the person selling the good later on when it gets to be cheap enough.
Now, in fact, it did turn out to be Toyota. They're still selling their hybrid and they're still in control of the technology and they're still the leader there. But what's much more common, particularly in more competitive industries, is this will actually be a different firm.
So if you start out with your innovation and you are the loss leader, by the time the costs get down, because you've gotten down the learning curve, it might be somebody else selling it. As a result, it's actually very difficult to do that cross subsidization across time.
It's difficult to, for example, finance it, to borrow money from a bank and say finance my losses today, because in five years I'm going to make a lot of money on this invention. And instead what you see is, in fact, the price actually does go down.
This is this argument, that if you want to be successful, if you want to have a very pro, innovative policy, if it's going to be done by the private sector, price discrimination is going to have a large role to play in what's going on. A couple of other points, and I'll go through these kind of rapidly.
The industries that are dynamic, have a lot of innovation, they tend to be competitive. There's a lot of evidence, for example, that when industries were deregulated they had this huge surge in innovation and particularly deployment of new technologies.
Even when this is sort of going on at the public level and I'm going to talk about this a little bit more in a few minutes, where you have a lot of different agencies involved is another mark of a public set of policies that tend to be more successful.
Although, there's an argument here that it could be because the public bureaucracies are competing with each other and also it could just be because it's a really interesting idea, so everybody's trying to get a piece of the action. So I'm not going to push that one too much.
But certainly competition in the private sector is strongly associated with innovation. Not withstanding that, so I've argued on the one hand we have to sort of have a monopolistic situation, on the other, that you want some competition. As I was saying, there's conflicts that come up when you want to innovate.
And the balance that works well and has worked very well in the United States is, whether it's through the patent system or not through the patent system, having an industry which, while it's competitive over time, at any given point in time may be much less than perfectly competitive.
So, we have leaders that can exercise the extent of monopoly power that you might need for this kind of pricing strategy that I'm talking about at a given point in time, but can't do it for very long. And that's kind of the nature of the way a lot of the system of innovation works in the United States.
So, it doesn't conflict as much as one would think, the idea of being able to have some monopoly power at any given point in time and, nevertheless, having a competitive structure to the industry over time. So, this is sort of where the market is. You want to be able to price discriminate.
In order to do that, you want to be able to differentiate among your consumers. You want to have early adopters who will pay more. These are all pieces of what typically would go into a successful innovation strategy. So, that was mostly the private side. Now let's talk for a moment about the government side of things.
Again, there's very large literature here as well. This is sort of 30 years worth of analyses, of attempts by the public sector to promote innovation. And I'm just going to talk about a couple of aspects of that that I think are particularly relevant for climate change in the limited time that we have here.
More successful government programs. Well, first of all, in the United States, the kinds of institutions that we have for supporting research are considered to be very successful. Academics publish a lot of papers, this sort of where it comes down. That seems to be something that the government has figured out.
Between the various different organizations that contribute to research in the United States, we've had a lot of success. Programs directed at government missions, that is innovation connected with things like the space program and the defense program. There's been a lot of successes in those areas.
Where programs have been oriented towards industry and commercial technology, which in part is more what we're talking about, I'm going to have to qualify this a little bit more, but, again, there's been some very successful programs.
It appears that the programs that tend to work rather better, if you're really dealing with commercial technology, is when the public and private sectors work together quite closely. So the sort of cost shared, industry/government, public/private joint ventures have had some notable successes and even these kinds of collaborations with various kinds of consortium.
There was a study done, it's now about five years ago, that the National Research Council did for the Department of Energy that Bob Fry chaired. And one of the major conclusions that came out of that was when they chose a program that actually addressed some kind of market failure, those were the programs where they tended to be more successful.
Now, this isn't very surprising because if it was something where there isn't a market failure, there's no reason why the public sector should really be doing it in the first place. And it would be typically that set of programs where what was left, as it were, for the government agency to do wasn't necessarily the best idea.
That is, private industry, if they see money to be made, usually aren't really interested in sharing it with a whole bunch of other people in collaboration with the federal government and so on. So if there's seriously some kind of market failure in actual public good, that's good news for the government trying to get involved.
And those also turned out to be the types of programs where industries were happy to work in consortia and to work together with the government. So the three points that I have here actually mutually reinforce each other. More money, this may seem like a pretty stupid point, but more money helps.
But specifically, more money helps because there's real returns to scale as it turns out. And this gets back to what I was talking about earlier. If you have enough money that you can do four different projects, you have a vastly higher probability of success.
And it gets back to this notion that you don't know who it is it's going to come up with a good idea and that competition among people who are working on these projects is extremely valuable when you're dealing in innovation and where the government could deemphasize economic profits specifically.
Again, this may seem pretty obvious, but given that we see that the government tends to be successful when you're actually dealing with a public good, it's not surprising that there's not a lot of money to be made after you finally invent the product.
And what we found in our analysis of Department of Energy projects was that there were many that were extremely successful in actually reducing pollution in various ways, even some of the fossil fuel programs.
But usually they didn't make any money, so there was a lot of complaints about them from people who wanted to evaluate them in terms of how much money did they make? And they weren't making any money. That was why the government was involved in them in the first place.
So, if the political sector is such that they're willing to go with that and recognize that there's a public good here and you're not going to make any money on it, then the programs tended to have longer-term support, which got us out of one of the classic problems that you run into, which Nigel just mentioned, the yin-yang business.
That you're up and you're down in a lot of these projects. And most R&D is actually a long-term investment and that undermines them entirely. So these are the sort of conditions that held in the programs that were working better.
And I wanted to briefly mention three specific energy programs which many of you may be familiar with. So I'll just say a word or two about them. And it's because they come from very different areas. Photovoltaics was the research project that was done in the 70s and early 80s in photovoltaics.
It was largely through NASA. It was very successful at bringing down the cost. And what most of this was aimed at was an interesting kind of competition that NASA has set up among producers. So there was kind of an auction that went on and they kept re-auctioning it.
So that worked out very well. Wind power, costs have come down dramatically in the public programs that have supported wind technology. And here we're talking about really cost reductions from straight subsidization of users. So it's a very different strategy.
But, again, there were a lot of people involved on the user side and there was not much in the way of money that was to be made in either of these endeavors. Gas turbines is an interesting project, because the specific program I'm thinking of was largely a spillover from work that was done on airplanes.
So it's sort of three very different models, all of which, in fact, lead to some successful technology effort by the government. So there's many different ways one can do it and I was trying to just identify some of the sort of key features that seem to come of that. OK, climate change policy.
So where most of the analysts tend to agree is, first of all, they said the price of emissions is crucial, but it's not adequate. It's crucial ... OK, I better move on, crucial because we're not going to get the extent of evolutionary improvements through directed government programs.
That's the sort of thing that government really isn't any good at. There's too many different issues involved. There's too many different people who might have a good idea and we don't want them to all have to just deal with some government program, whether it be a prize, a subsidy, or whatever.
One wants to do that through some kind of price mechanism. I say inadequate because it's thought that the price is not going to be high enough and you saw on my little diagram, we need a lot of money here.
And it's very unlikely that the price that would ever be charged for your carbon permit would be high enough to support the kind of research that we're talking about. Subsidies, OK, this is government giving money to people, crucial, but inadequate. That's the reverse side of it. I already did the other half.
You need prices too. There's general agreement on both of those issues, less agreement on how to achieve policy stability. I'm going to mention a couple of these, we'll come back later if people are interested, about whether one should be using direct expenditures or tax expenditures.
There's a lot of trouble it turns out with tax expenditures. There's a lot of trouble with direct expenditures. I'm going to skip that as well. What I want to do is move on to cap and trade specifically. As I broadcast at the beginning, what I'm concerned about is that this so-called idealized scenario, which we heard about at length this morning, may actually retard innovation.
That if you're talking about some perfect global trading scheme, and I admit this is the cartoon version, but I think the point is here with offsets, credit, banking and borrowing, how are we going to price discriminate, especially if you can borrow?
What you're basically talking about, and this is my drug analogy here, is you want to set up a system where not only can you re-import drugs from Canada, Brazil, and India, but you can actually delay your illness until the generic drug becomes available. And that's not the way innovation works.
So, if you'll buy into that, and I'm happy to discuss this, then what I would suggest is that as part of this policy we should embrace price discrimination and product differentiation. And the idea of gradual accession, we want to identify the early adopters because that's going to be a critical part of trying to promote innovation.
Now, I recommend California since they actually want to do it. They're crazy. Let them go ahead. You know, they can be the early adopter for this stuff. The Europeans tried, OK? And I tried to think of a couple of other ideas. Like I said, this is pretty new, but I think what we have to think about are policies that are going to go with this idea of trying to set up markets and yet allow for imperfect competition.
So that means that there's going to be differences in how we want to treat different actors maybe and differences in how we actually want to set this thing up. Because actually going for something that looks more like perfect competition is unlikely to raise the kind of money that we want in order to promote this sort of learning which can't be rushed that much.
The business of trying to get back and forth from the users to the producers and think of better ways of doing it and complementary technologies, you can't sort of shove it all into a single amount of time. And if that's the case, then some different considerations I would hope would enter some of these models. Thank you.
Raymond Kopp: Linda, I'll just ask a quick question. So if I interpret what you're saying correctly, if there were a really high price in the industrialized countries and a very low price in the developing countries, the industrialized countries are acting like your first purchasers of the Prius. They were willing to pay a lot more for their reduction in order to finance kind of the investments in technology to be lower and then eventually ...
Linda Cohen: There's two pieces to it. One is somebody has to pay for this. So, at a given point in time we might be talking about a cross subsidy or it might not even be a cross subsidy, but it's different prices. So, it's the same idea as the drug is high in the U.S. and it's low in Africa.
And it means that everybody gets it. And if we could only charge a single price, it would be too high for the Africans, even though it might be somewhat lower in the U.S. So this is just at a given point in time we have a higher efficiency if we can price discriminate.
So that's sort of point one. The second is we want an early adopter so that we can move down that learning curve. And not everybody will be able to afford it at the beginning and putting that up as a constraint might mean that we don't get the technology at all if we can't somehow price discriminate.
So, what I'm concerned about is that if you have a cap-and-trade system, and think in terms of the drug, that instead of installing this technology in the U.S., where you have to pay a higher royalty fee to be an inventor, you can do it in Indonesia where you don't.
Then the inventor can't charge two prices in the two different places. So the global trading scheme undermines our attempts to geographically discriminate.
Question: So the feedback between invention and prices when you have a trade program, how do those interact with the drivers for innovation? And how does that compare then to the price certainty that you have when you have a tax program?
Linda Cohen: Maybe this is a question for later. I have to think about it first.
Robert Simon: Well, thanks very much, I sort of feel like the old lion that ought to be going along with the climate policy or technology innovation. Linda's done a really good job about that.
I decided to sort of pick on one specific area and talk in a little more depth about it, even though it's not as technically satisfying to talk about, perhaps, as some of these others.
And that's sort of, what are kind of the political challenges that face Congress and the president in trying to craft and enact? You can craft legislation, we get lots of bills introduced all the time. The tough thing is actually enacting them. And how do we do that?
Obviously, there are a million stories up on the Hill about how this might happen. I can only give you my perspective and I won't posit that it's the universal congressional perspective or necessarily even the perspective of everybody on my committee or I'm not sure that everything I'm about to say even my boss would agree with.
But I figured I'd at least give you at least one view that I've had. So, let's see. One of the things I think is true about a lot of legislation is that at the end of the day the general public tends to be ahead of Congress.
And so if we're thinking about the dynamics of enacting legislation on any topic, it's worth examining what's going on with the general public and what are they picking up and what are they transmitting to their elected representatives?
Congress can be an awfully conservative place, from the small C conservative place, in terms of risk avoidance. And so I think that's why it's interesting to sort of think about it. And I think that there are sort of two things generally that the American public at large needs to get, if you will, about climate change in order for us to get a bill through Congress.
The first one is they're well on the way and it's to get really how enormous the scale and the complexity and the urgency of the climate situation is, we have the media to thank for some of this. And we have the scientific community and satellites to thank for some of this because you see sort of pictures like this.
These are enormously helpful pictures because my mom can look at them and say, "Wow, that's a big change!" And, you know, my mom has lived a long time and so 1979 is just yesterday to her and so she looks at that and says, and this was just yesterday to me too, actually.
So she looks at that and says, "Wow, I can see a real change there. There's a real problem here."
And I think one of the things that has changed the willingness of legislatures all over the world to deal with this issue has been sort of a steady drip, drip, drip, if you don't mind the pun, of stories in the media about melting ice caps and swimming polar bears and the whole nine yards.
And so pictures like that are really worth more than thousands of words. Obviously, one of the things that is a little less intuitive to people, but I think people are catching up on, is that there are enormous impacts right around the corner. I mean it's not just the poles.
It's all areas of the globe and here is a nice graphic that shows the potential sea level rise on Bangladesh, as someone pointed out, a country that really has had very little to contribute to the problem. But we're talking about them losing about 16 or 17 percent of their land area and millions of people having to be relocated in a not very pretty way.
So people are sort of getting that. And I think that the scientific community, while there is still some good debate going along about whether the number of hurricanes are going to grow or decrease, the scientific community kind of pretty much can come to the conclusion that the intensity of hurricanes is certainly changing, intensity of storms is changing and certainly people see that.
And when they see stories like the Midwestern floods or they see stories about drought, they begin to get a sense that all of this seems to be somehow connected and that there actually really is a problem of incredible scale going on here that we need to address.
And the National Academy of Sciences and others are saying, but wait, there's more. It could be even a lot worse than you think because we're not looking at linear systems here.
And just as if I sort of keep moving this in a nice sort of linear way, at some point it becomes very nonlinear, the planet can become nonlinear and change ocean circulation, rapid glacier melting, change patterns of rainfall, of drought, declines in forest health.
I mean last year was probably our worst fire season in the American last. And we're already, I think, ahead of the game in terms of having an even worse one this year.
So people are seeing that there are some real problems and they're beginning to absorb, I mean this is a report that came out in 2002, but people are absorbing that there are step changes that are possible in the system and that could be very unwelcome.
So, again, to get people to really sort of focus on making the political system take a large step on this, you know, one of the things that's necessary is for people to really have and society at large to have a real understanding of the scale and the scope of the problem. So we're on our way on that one.
But the other thing that we need to get about climate change that we're much further from being well on our way towards is really the scale and the complexity and the urgency of the response needed.
You know, typically, when we try to get people to go along with a change in the political system that is sort of novel to them, the natural political instinct in every system is to minimize it. It's to say, well, it won't be all that bad. It'll be a little bit of this, a little cut here, a little tuck there and we will be able to solve the problem.
Sadly, for the case of climate change, that just isn't so. And I think ultimately to put together a public policy in a representative democracy that has a Congress that meets every year and have it have some stability over a long period of time, it just doesn't work to sort of slip something by people and say, look, don't worry, it won't cost the whole lot.
Then they discover that actually, wait, this really is a much bigger change than I bargained for. And then they come back in the whole thing gets repealed the next year. And we have gone through that in other areas.
We've gone through that in healthcare where we've made changes to our overall system of medical insurance and then people suddenly realized their premiums went way up and that was gone in a jiffy. And we can't stand to have something like that happen on something as important as climate change.
And let's just talk about some of the dimensions of the problem that is in front of us. And these are a bunch of figures that I have lifted from a report that's just been published by the International Energy Agency. We're actually having a hearing on it next week.
Ray Kopp is going to be one of our witnesses. The author, Neil Hearst, from the International Energy Agency in Paris is in town next week. He's giving a whole bunch of seminars. One may be here.
But he's going all around town talking about this and it's a very useful report because it really does layout in an admirable level of detail, but only still skimming the surface in many ways, of sort of where we were headed and what we need to change.
And so if you look at sort of the projection, the baseline of where we're headed with global energy use, we're sort of doubling it. Sort of in every sector that you want to look at, we're roughly doubling or maybe more than doubling our global energy use.
That's sort of the system that we're sort of looking at. And that makes a lot of sense because a lot of the world is catching up to our standard of living, which, on baseline technology, requires quite a lot of energy per capita.
If energy is going up global carbon dioxide emissions are headed up on the baseline pretty dramatically as well. And, again, as you look across the sectors you can see where we're headed is not in a very good place in terms of the world climate.
And, in fact, the other thing this report has are a couple of scenarios of how it might have to change. So, here you go. So, just to define the terms, the ACT map and the BLUE map.
OK, so the ACT may, in the year 2050, just gets you back to 2005 emissions. So that's the difference, just to sort of in 2050, not really to do much different from what we're doing today, just to get the world back to kind of where we are two or three years ago.
That's the delta between where we're headed in 2050 and where we need to be. And the BLUE map, of course is what would be required by this general agreed-upon goal of a 50 percent cut in 2050. So that's another factor of a half from the ACT map.
So, if you sort of look at kind of where we're headed and kind of where we need to wind up, you can see that's a huge change. That is not a trivial don't worry, we will nip and tuck here and you'll make money in the process kind of deal. Here is a chart that actually lays out some of the costs.
And of course cost was a huge issue in Congress as we sort of talked about this. Of course, we had the good luck or the bad fortune, only time will tell, to have had our climate discussion on the floor of the Senate just as people were coming back from a congressional recess where people were screaming about energy costs, particularly in the transportation sector.
And so this is a chart that a number of people have done. This is, again, from the IEA report. McKinsey has done sort of a similar analysis. You know, obviously, there are some interventions where you actually do make money. You do save money in energy efficiency.
But that doesn't get you very far in terms of where you need to be on the map. That sort of gets you over to here. Again, this ACT map, if you sort of look at the scale here, so to sort of get us back to where we need to be just to sort of stay even in 2005, is sort of a constant dollar figure of somewhere between $50 and $100 per ton according to the IEA.
And then, of course, to get to a 50 percent reduction there's a huge bound of uncertainty because largely these technologies here are all things that we pretty well understand what they are. We're not sure we can deploy them, but we're pretty sure we know what they are.
Here, to get to these kinds of reductions, we've already found everything we had at the wall, so it's all sticking to the wall. And now we're looking for other stuff. And in terms of getting carbon capture and storage to work in the industry as opposed to the utility sectors, to put CCS on cement plants is a lot tougher than putting them on power plants.
And then, of course, the whole business of trying to have at emissions reductions, deep emission reductions in the transport sector is really very tough. And so that's why the bounds, the costs and the uncertainties are so high. Obviously, the energy system is the prime culprit here.
I mean just the energy related carbon dioxide. But even that number of these other -- we have methane emissions, a piece of this junk comes out of the energy system. And, of course, high global warming potential gases like sulfur hexafluoride are used in the electric transmission/distribution system.
And so the energy system has a couple of pieces of this too. So the energy system is sort of ground zero for a lot of what needs to happen. And, again, without getting into all the business of what this is, if you just sort of look at the color coding here you can sort of see, now, wait a minute.
Here's kind of where we are on the baseline. You can kind of see the colors that are involved are the kinds of technologies. And one of the things that you notice right away is that we have an entirely different color scheme here than we do here. And that's the message, is that to stay even or to get to deeper reductions, obviously, some of the things that we do will involve efficiency.
So, we'll be using less electricity. But the way we generate electricity worldwide is going to be utterly different and that's a huge challenge both on the technology side and on the deployment side. The energy system isn't the only one. They go through a series of analyses.
Again, in the building sector there is a tremendous need for changes in the building sector, again, recognizing that there's going to be a hell of a lot more buildings in 2050 than there are today. And still we just want to have them collectively only use a little bit more energy than what we're using today.
Yes, using less energy. If you sort of think about that, that's a huge transformation. And finally, on top of all that, on top of all the difficulty of what we're looking at here, there's not a moment to lose. We do not have the luxury of sitting around and thinking about this for a good long time.
So, essentially, we're going to have to have a revolutionary transformation of the global energy system. At the same time, the world population is surging and most of the world population is not in the OECD. So that is not good. Obviously, we are continuing to build lots of capital stock all the time.
And the capital stock we're putting in place today, a lot of it is going to be around in 2050. And so if we don't get started as soon as possible, the longer we wait the more stuff we're wasting.
As it is, according to the IEA, to get to 50 percent reduction in CO2 means that a fair amount of our coal-fired capacity will have to be mothballed before its useful life is over, an economic cost to that. And then the longer we wait the worse things can get.
So this is a very substantial challenge to the political system because what's implicit in all of this then are changes that people are going to notice in their everyday lives. I mean you cannot get to this sort of thing without major sort of collateral policy changes.
And just to give you an example what one of them might be, and I don't want to get myself in political hot water, but look, there's no way of getting the electricity system of this country transformed without ratepayers figuring that out and figuring out some way of raising that capital and building transmission.
The amount of transmission that will have to be built to accommodate renewables that are cited at very remote locations from population centers so that we can access low carbon sources that might be remote, that's a lot of transmission.
A lot of those decisions are vested at the state level. If you wanted to get something done like this, with not a moment to lose, I don't know how you do that. That's the question and I will just simply ask it in the form of a question.
How could you possibly do that with the bifurcated system of federal and state responsibility for electricity transmission, distribution, use, and pricing? That is a very good question. But that is one of several.
I know we have third rail, fourth rail, fifth rails on this one. There are a lot of political third rails involved in trying to address this problem at the speed and with the intensity that we have to do it in order to basically get to a 50 percent reduction.
And trust me, there are many people who think a 50 percent reduction by 2050 is completely inadequate. We need 70 or 80 percent. So this is a very tough problem. So what are the domestic political challenges?
Certainly one of them is harnessing the White House leadership role. We generally don't pass major legislation in this country with Congress sort of operating on its own, sort of either with a disinterested executive or an executive that is actively interested in doing something else.
So, obviously, one of the first political challenges we will have in the next administration is to articulate a leadership role for the president and to harness that role, which is something that's actually much easier said than done if you've been around many White Houses.
Federal agency coordination, there are obviously a multiplicity of federal agencies that need to be involved in this. And there is a sort of almost magical belief in some people that I encounter around town that, oh well, after the election this will all get really easy because we will have President Obama or President McCain, take your pick.
And they'll get all these bright people in the agencies, of which there are lots, and they would be a tremendous asset to sort of get the brain cells of several tens of thousands of people in the executive branch who know actually a lot more about this stuff than most people in Congress do, working on how to sort of design a rational system.
However, as someone who spent a number of years in the Department of Energy and sort of observed a lot of it and was a member of a lot of interagency groups, interagency coordination at the executive branch, sometimes works about as well as inter-committee coordination does in Congress.
And so that is not necessarily a panacea, although I think a lot of people on the Hill aren't quite aware of how difficult getting the right kind of federal agency coordination done quickly and effectively is going to be. Congressional committee coordination of course, not too far behind.
I think one of the things that we're seeing in sort of the news reports out of the House of Representatives, over these past couple of days, is the emergence of other committees in the House who are sort of putting their hands up and saying, now, wait a minute. Next year, when we're doing this for real, we want to be involved.
And, of course, the same thing is true in the Senate as well. One of the big problems that we will have politically next year is the function of the bills that have been introduced. You know, when you put a cap-and-trade system together with allowances that have lots of value people very quickly figured out that we're talking about several trillions of dollars here.
And there was a vehicle on the Senate floor that allocated those to lots of people and people were parts of discussions that says, OK, now how much will my state get? How much will my industry get? One of the problems we have is next year all of these people are going to remember what they had this year and they're going to use that.
Instead of previously where they started off not knowing what they would get and so anything was kind of better than what they thought about before. Next year they're going to start thinking about, well, now wait a minute. I had 37.28 percent of the allowances. And now you're telling me I'm only going to get 29.56?
Wait a minute, there's a real raw deal going on here. So I think that one of the problems that we are going to face politically, in my view, is if we're going to put this thing together, we have created a whole set of expectations amongst a whole set of actors across society that they're getting money or allowances or something out of this for free.
And it is very unlikely that whatever the president and the federal agencies come up with, if they were to transmit to us the perfect proposal, it would be almost impossible for us to have been so prescient this year to guess actually what everybody is going to be getting out of this. And so that is going to be a real problem too.
Understanding and regulating the market forces that we're about to unleash on this problem. You know, we've been trading oil now for a good long time and oil has a wonderful physicality to it. You can have a barrel of oil somewhere and you can imagine that you put them on boats and put them in SPRs.
Even with oil as physical a commodity as that is, we have turned it into a virtual commodity and securitized it in all sorts of different ways and people are complaining mightily that there are these shadowy, not well understood, not well characterized speculative forces that are causing the price of oil to be where it is now.
Now, just imagine oil is kind of like ultimately a physical commodity. A CO2 allowance isn't really. And so we're inventing a new commodity, sort of literally out of thin air. And we're going to let market forces price it, trade it, decide where it is.
And that may be the most effective way of getting at the problem in an economically efficient way, but understanding ahead of time all the different ways that people can play games with that to the detriment of the general interest is a real problem that people are going to have to spend a lot of time trying to bend their minds around in order to pass a bill.
Because people are going to wonder, now wait a minute, all these speculators were putting up the price of oil. How do we know they're not going to bid up the price of carbon dioxide to some stratospheric level? And if you don't have a good answer to that question you're going to have a hard time passing the bill.
Finding an effective balance between federal and state action and I think that sort of comes in a couple of different ways. It comes in sort of the operation of the energy system as we have known it for the past 50 years or more, is certainly one piece of that puzzle.
The other piece of the puzzle that's going to be very difficult is to figure out how do we reconcile sort of a national system with these regional and state specific systems that are cropping up as time goes on? Educating the public, one of the difficult and necessary choices ahead, I think that's a real problem.
That was it. So I could come up with many more challenges than that. But this is going to be a very difficult enterprise to undertake under the best of circumstances. And we will be, in all events, undertaking this discussion in the United States and worldwide on the backdrop of a lot of pain and agony about high energy prices.
And I don't think that we are well served by explaining to people that, don't worry, putting a price on carbon isn't going to affect your energy bill, because I think most people get enough about how economics were to know that that probably can't possibly be true.
And so it is going to be a very difficult political environment under the best of circumstances. But it is, at the same time, absolutely necessary that we go ahead and do it. We don't have the luxury of sitting around and waiting for the price of oil to get back to 20 bucks a barrel before we have at the problem.
Because if we do, the ultimate cost of the problem, as everyone in this room knows, is just going to be magnified many times over what it would otherwise be. So, that's sort of my, I hope, not too depressing report on what we're up against here.
I mean, again, I think that the basic thing we have to keep in mind is that this is an incredibly important problem, which is incredibly difficult to solve. And it's incredibly important to get started right away.
And I don't want anything that I said about the difficulty to sort of be interpreted as saying we need to throw up our hands or that it's going to take a real long time or we ought to sort of kick the can down the road. We cannot kick this can down the road.
But I don't think that if we're going to be successful at this we will serve ourselves or anybody else well by going in with a naïve view of how difficult this will be even if we have strong White House leadership, a really good interagency process, a really good concordat amongst all of affected congressional committees and everybody decides to be altruistic about this.
I mean this is going to be really a very difficult thing to do under the best of circumstances and we have a lot of human nature we have to cope with in order to get this thing done.
Raymond Kopp: Well, that was quite good. I enjoyed listening to that. So, we had three, as promised, very different presentations. We had Nigel talking about the challenges that development of domestic policy poses for the formulation of new foreign-policy for the executive branch, which is all pretty important stuff.
So, Linda was talking about the difficulties in crafting these technology research and development and deployment policies which are shot through all of the proposals. And everyone assumes we will do this with a wave of the wand and that all of these technologies will come forward, but that may not be as easy as it seems.
And then Bob gave us a pretty frank and open view of how difficult it's going to be to negotiate the political roadblocks or hurdles or whatever is necessary to put this all together. So, we have a pretty good amount of time here for questions.
So if you would wait for a microphone, provide your name and affiliation. And if you could direct your question to any one of the particular participants, that would be good. And as Billy pointed out, questions are better than statements. So, I think let's have this person over here first, you, right there.
Question: Julie, I'm from the Department of Energy. I found your, Dr. Cohen, your presentation on price discrimination very interesting. And I was just thinking about gasoline prices. And I personally find high gasoline prices to be great. I see people take more public transportation.
But I also don't have to eat less food and stay in a smaller apartment because of high gasoline prices. So I was wondering if you had ideas about how to price discriminate in something like gasoline prices without having rich people buy bigger cars and poor people buying smaller cars.
Raymond Kopp: Let's just collect a few questions and then we will come back. We'll get Dick and then this person up here.
Dick Morgenstern: I'm Dick Morgenstern. I actually have a question for Linda and for Bob. For Linda, I guess the question is you gave an example of price discrimination with I guess you said the U.S. and maybe Indonesia. I've forgotten what other country you used, but how the same technology would be ...
Linda Cohen: I apologize to Indonesia.
Dick Morgenstern: ... priced differently. I guess if you could expand on that a little bit, because the one most obvious example I guess that occurred to me was in the energy bill a couple of years ago. I guess there's some big payoff for early nuclear plants.
I guess you'd kind of find that very attractive, but how you would apply that in a more commercial transaction, I wasn't totally clear, so if you could help me there. And for Bob, I don't know if you were here this morning when Howard Gruenspecht spoke, were you?
Robert Simon: No.
Dick Morgenstern: No. Well, he, like you, gave a very enlightening set of comments that had implications for the political process. But one of his suggestions was to broaden the scope of issues that Congress deals with in climate legislation.
So as to address not so much the problem of getting legislation through, which I think was the thrust of where you were going, but some of the kind of unintended consequences that might result afterwards to undermine the goals that were originally sought.
So the example he gave was if you wanted to contain costs, but also have a broad portfolio of technologies, that that might not be totally consistent.
And so one kind of, he didn't mention this, I don't want to pin this on him, but one idea might be for Congress to get involved in actually driving the process on siting or driving the process on technologies that might not be attractive to some of the same communities that were pushing the carbon constraints in the first place.
You know, kicking the ball further down the road and making probably more difficult political decisions, which would seem would perhaps sink the boat. But I guess if you could perhaps comment on how or whether something like that might be made to work.
Raymond Kopp: One more question, could you please pass the mic?
Alicia Griffey: Hi, Alicia Griffey with the Verdao Group. A question for Bob, given how much bartering is likely going to be needed in order to get any kind of legislation passed, I'm curious to get your thoughts on which sectors you think are most likely to be covered under a cap-and-trade system.
Linda Cohen: OK. Gasoline is really a different issue for a start. I was talking about innovative technology. This issue of wanting to discriminate among users is something that, as the technology becomes mature, doesn't become that relevant a concern. So, in effect, what I'm talking about is a transition strategy.
But the transition, I think, is really important in this particular case because it's too expensive now to do the kind of controls we want. And so technology is a major part of the issues that are going on. So it's sort of a different point in terms of gasoline prices.
As far as the early nuclear plants go, that's exactly the kind of thing that it seems to me, I mean this is where I'm thinking ... I was trying to think of something constructive to put in here. What could go along with it?
And if you want to try to maintain, as much as possible, the efficiency that is, in fact, associated with widespread trading, then we might want to think about the discrimination coming in through subsidies, although I don't think they'll be big enough.
And that's precisely what those early nuclear plant incentives were supposed to be. I would say that it has to go on for much longer, that it might be, in any given year, you know, there's a certain number of incentives available for the first group that grabs them within a given period of time.
I can immediately think of problems with that, which is that people in November are going to wait until January to build whatever they are so they can get in on the next year's quota of subsidized whatever it is we're talking about. But that's certainly the type of policy that one might think about.
Question: What about the U.S.-international ...
Linda Cohen: Oh, and one more thing on that. One of the tax incentives that was in the Energy Policy Act of 2005, it was a tax expenditure that only allowed for a certain amount up to $100 million I think it was for some type of power plant.
That's the kind of thing that you could marry to this sort of bill and then shift it around to the early adopters, up to a maximum. Tax expenditures, as a rule, are pretty expensive, but if you limit it at $1 million or whatever you want for a certain area, that's the kind of thing that would go along with being able to discriminate.
The international issue, I wasn't sure how to deal with that. We talked a bit about having these international permits and how many. Someone talked about it at the previous session, that maybe there would only be a certain amount of international permits that you'd be able to purchase.
I mean that's where, it seems to me, that we have to think about these two issues, whether it's better to try to promote static efficiency by allowing trading across all countries or not. And there might be some intermediate resolution which actually is better, that to some degree limits the extent of international trading.
That's where I want the modelers to try to think about this and put in some assumptions about how innovation works.
Robert Simon: OK, well, let me take a whack at the two questions asked me. If I understand Howard Gruenspecht's question is sort of, so, how can we make this even more difficult by adding more contentious issues into the fray? I'm not anxious to wander into my boss' office and say, "Gee, Jeff, I have a great idea for how to do that."
You know, I do think though that one of the realities of the legislative process is that people do bring important equities to it, sort of across a wide range of areas. And the nuclear example is, I think, very apt because there are a variety of sort of moderate Republican senators who are very interested in promoting nuclear power.
And there was a lot of reportage, you know, we never actually got to any amendments on the bill, but there was a lot of reportage that if we ever did, one of those would be a nuclear amendment, that Senator Lieberman was kind of OK with it, Senator Warner, Senator Voinovich.
These are the kind of names that were sort of bandied about as people who wanted to do something on the nuclear side. So, in terms of trying to address some of those issues, some of that actually naturally does happen because you do have a collection of a hundred people who are in the Senate and 435 in the House who are working their will on it.
And they all do bring different perspectives and desires and policy interests to it. And so in the process of trying to assemble sort of a sufficient coalition to get something passed, you almost necessarily have to pick up some of these ancillary issues, to some, to other people they're central issues.
But you do get this sort of diversity effect in it. So, obviously, there's an opportunity if you can figure out how to do that cleverly enough to do good and to do well at the same time. You know, that would be how you would do it.
I have to say that assembling energy politics generally, and climate politics is going to be like this in the same way, people always imagine that energy is a great partisan wedge issue. And at sort of the bumper sticker level maybe it is.
But when you get down into the actual nitty-gritty of it all it gets regional real fast, because different regions of the country have entirely different energy profiles and are affected in entirely different ways by energy legislation. And the same will also be true to a great degree of climate legislation.
And so that's always good news, is because if you can keep something out of a wildly partisan atmosphere, your chances of success are much greater. It means, however, that you have to then assemble interregional coalitions, which is sort of an interesting task in its own right.
The other question was what sectors I think would be first into the pool under a cap-and-trade system? I think that the way I would sort of think about that is I think that different sectors of the economy are at sort of different stages of acceptance of the inevitability of the cap-and-trade system and different stages of having sorted through, amongst themselves, how they might want to interact with it.
And so obviously the power sector, they've sort of seen this one coming for a while now. And so they have done a lot of thinking about it. I don't know that it's all completely jelled, but you certainly have some very prominent leaders of the power sector who have decided they needed to get involved in this.
And then I would put it after that general industry, the building sector, the general industry sector being energy intensive industries particularly. They sort of see that they've got some real equities at stake here and they need to be engaged in the process.
The building sector, I think a lot of people who are involved in building design see real opportunities here. A lot of people who are actually involved in building construction aren't entirely so sure they want to change all their construction practices overnight.
And so there's some tension there, but the building sector is a little further behind that. I think the equipment sector certainly sees a greater push in efficiency coming at them.
I think the sector that's having the hardest time trying to figure out how they fit into all of this is the transportation sector, both on the equipment side, you know, the vehicle side and the fuel side trying to figure out how the paradigm of a cap-and-trade system really applies or should apply to them.
And, of course, as you can see from the IEA thing, some of the hardest problems for deep emission reductions technologically are in the transportation sector. So that's how I would sort of rank order of those.
Raymond Kopp: Any questions? We'll take Jake Jacoby and then one in the back and then up here in the front.
Jake Jacoby: Jake Jacoby, at MIT. This is a question for Nigel. Going back to the discussion of the status of negotiations, would you say more about what's going on between the developed and developing countries, I suppose in Bali, and your view of how we should think about the interaction between these two venues and the United States different roles in them?
Raymond Kopp: We're taking a question from the fellow behind you.
David Zucker: Hi, I'm David Zucker with Defenders of Wildlife. My question is for Nigel is well and possibly Bob. You mentioned earlier the congressional-executive agreements and I was wondering if there is more enforceability with that in terms of having an agreement with another country with carbon reductions, if you have a greater opportunity for enforcement versus with a treaty or some other type of agreement?
Raymond Kopp: Wasn't there another one up here in the front somewhere? Right here.
Question: Hello, this is sent in from the Alliance to Save Energy. So I guess anyone can answer this question. But there is no perfect proposal for a cap-and-trade, we agree on that, and in terms of allocation of proceeds and allowances especially.
But there's also an agreement that we need R&D funding and perhaps much more than what's currently being discussed in the current proposals, Lieberman-Warner probably falls short of funding for R&D. And Nigel mentioned the need to increase U.S. funding on R&D by 10 billion to 15 billion.
But what's the equation for coming up with those numbers and how do we know how much and on what to spend the money on and perhaps through which institution? Is there any widely accepted method of this calculation or what's the academic literatures saying on this? Thanks.
Raymond Kopp: Nigel, do you want to start this?
Nigel Purvis: Sure. So I got three questions, the first is talk a little bit about the dynamic in the negotiations between the developed and developing countries. And in order to understand that I think I need to spend just a minute on the internal dynamic among developing countries now, because developing countries negotiate as a block.
But they've never had more diverse interests and as strong of feelings about the importance of their interests in the climate negotiations as they have now.
So we, for quite some time, have had the most vulnerable countries, particularly the small island states that are very low lying and very vulnerable to sea level rise and severe weather pushing for stronger action.
But that chorus from them is being joined by the many in Africa, many other nations that have not been as active in the negotiations. So the large emitters, the Chinas, Indias, Brazils, Indonesias if you include the land-use change, are finding more pressure from within their own negotiating block because all of the developing countries coordinate their positions in these negotiations.
They're finding more pressure from like-minded states and other states that normally haven't been the ones pushing them, at least in the Kyoto process. So I think it's a little too early to see quite how that plays out.
A good indicator of that will be the meeting that occurs in July in Japan after the G-8 summit.
This is the major emitters process that was launched by the Bush administration. I think you can't look at that as a test of whether China and India and other major developing country emitters are willing to do more because there's a political rationale for their cutting a deal next year with a new American president.
But, nevertheless, the willingness to change the rhetoric around those conversations, I think, will be an important signal about what they're willing to do. Bali itself provided forward movement of reading the tea leaves that the language suggests conditionality of action.
Whereas, the position of developing countries in the Kyoto process was no way, you go first. You caused this problem. After you show leadership, we'll think about it.
The language that was agreed to last year, and it says that the developing countries will take action, but it's conditioned on measurable, quantifiable financial assistance and capacity building assistance from developed countries.
So that willingness to consider action is evident so far. Precisely how that action is manifested and how it would be captured by an international agreement and whether it would be legally binding, I think we don't know yet.
And so the July meeting, probably more than the annual conference that will occur in December of this year, will, I think, signal where that's going. But really, I think, we'll have to wait until next year to really know the answer.
Second question was about enforceability of congressional-executive agreements. From a domestic and an international standpoint a treaty and a congressional-executive agreement has the same effect. Domestically it has the same enforcement as a federal statute, because it is.
And a treaty, under the Constitution, is considered to have the same status as a federal statute. Internationally they're both considered to be legally binding agreements. So our international negotiating partners should have absolutely no preference whatsoever as to how we choose to handle the agreement for purposes of our domestic, internal political review.
So it's really a question for the United States to decide, for the Congress or the president to decide without an international implication. I think the international community would welcome any change in the review process that would increase the likelihood of U.S. participation.
So the international perspective ought to be favorable. The question about R&D figures, I don't know how much is appropriate. I was just trying to look at the previous spikes in U.S. R&D spending that might be analogous.
So in order to get us up in real dollar terms to the high level of spending that we had in the energy area at the tail end of the Carter administration, we would need a 10 to 15 billion dollar increase.
Also, if you look at, again in real dollars, the amount of money that the U.S. spent on the Apollo project or the Strategic Defense Initiative in the Reagan administration or what we are now committing to the War on Terror, not Iraq, but the narrower War on Terror, the domestic homeland security is perhaps a better way of saying that, then that figure would approximate the amount that has been mobilized for these political challenges that arise and need to be addressed in a relatively defined time period.
So, what I take away from that, I don't know how much is needed, but I take away, as a little bit more of a political person, that that's at the scale of something that ought to be doable because we've done that in the past.
Robert Simon: I'll take a quick slice at these two questions, the congressional-executive agreements and their R&D funding issue. I agree. In fact, the examples you gave, I hadn't really thought about this very much, but the examples you gave, the congressional-executive agreements seemed to me to be a lot more even detailed than the treaties.
And we're talking about something that's pretty detailed here. I think one of the challenges that will emerge quickly for the concept of using congressional-executive agreements, for this purpose, obviously there will be a group of people in the United States Senate who never want to share with the House.
And so there's that problem. And there's people who will want this thing to require 67 votes because of their ideological predisposition and aren't going to want to have a 51 voter on something like this. Obviously, there is a fair amount of angst built up in the congressional system in recent years about Fast-Track procedures for trade agreements.
And that, I think, will spill over into this discussion. People, I think, may have sort of initial reactions, initial negative gut reactions to say, what do you mean? We're going to do this whole thing in kind of sort of in an expedited procedure.
And, although, if you sit back and think about it, it's kind of hard to see how to get there from here with a fully amendable kind of product. Still, I think that that's going to take a fair amount of thought by people.
And, ultimately, as most things in Congress and Washington, it's going to turn on sort of the level of trust that's in the system. We don't have a whole lot of trust that's kind of floating around the system right now on most any topic.
So I think that one of the crucial aspects of getting it done period, but certainly getting it done this way, will be to come up with a sufficient degree of institutional trust between key actors on the Hill and with key actors in the executive branch, that they would be able to contemplate something like that.
And that's going to be, I think, tough because, like I said, we're not in a real happy trust environment right now in any direction. With respect to R&D funding, you know, I do think that that's a really important question, how to size it.
It obviously needs to be way more than what we're doing now if we're going to have any grip on this problem in any real way, the kinds of budgets that we have been producing for energy research and development.
And, again, this is clearly not a political thing because the Clinton administration was just as bad on setting up good energy R&D budgets as the Bush administration was. It's been since the 80s, energy R&D budgets have been pretty miserably bad. I think there's a lot of congressional interest now.
We added a lot onto this appropriations bill. We added a lot to the requests that the president had, so there's a real bipartisan congressional appetite for higher budgets in energy, and that's a really good sign.
This report that I've mentioned, this Energy Technology Perspectives 2008 by the International Energy Agency, you can Google it. It's mostly about R&D after they sort of get through the scenario analysis. They pick 17 research and development areas and drill down to some degree.
There aren't full-fledged technology roadmaps by any means, but they drill down into them. One of the problems that we're going to have in boosting R&D funding here is we can appropriate lots of dough out of Congress, the question is can you spend it effectively?
And I've sort of have a nonacademic rule of thumb that if you really want to screw up a federal program, an R&D program, just keep giving it 100 percent increases every year because they can't spend it that well that fast. And there probably aren't enough good ideas that are sort of out there.
There's a real capacity building issue in our energy R&D system in this country that is going to be, I think, a very significant factor in figuring out how fast we can ramp these budgets up in a sustainable way where we're just not setting ourselves up for lots of GAO and Inspector General reports six years down the road.
Linda Cohen: I'd like to talk about the budget. I think that the idea of marrying the charges that you're getting, you know, something like a pipes charge that would be the sale of these permits. Taking that money and earmarking it for R&D is a terrible idea. I think it's bad economically, bad politically, and it won't work.
And I'll give you my true reasons why, OK? And I understand that the reason that it's attractive is it looks like a lot of money and we want a lot of money. But we've done this at the state level. At a large number of states there's earmarked funds that are coming in.
They mostly have come in on the deregulatory bills in California. There's quite a lot of money that's earmarked for R&D budgets but the state budgets work very differently.
And at the federal level what you're going to find if this money is automatically given to a bureaucracy without the oversight in Congress and doesn't have the political support that they might not wind up getting it anyway.
That is to say you don't wind up with agencies that are as independent as something like the California Energy commission can do, according to the entire structure, the way the government is set up.
And, yes, the Federal Reserve can get its own money, because they print it. But they also don't need an appropriation, they don't need an authorization, and it's not part of the executive branch.
So, if the Department of Energy or RPE had this money, and the president didn't want to spend it and Congress had lost interest in it, then I don't think that it would work in order to provide the stability that we are talking about anyway.
We have to think of a different issue in terms of stability. Now, my other two points on the political side, I would say here's all this money. Let's put it in to the general budget so everybody gets a shot at it.
What's happened in Europe, with their very high gasoline taxes is that it has become an absolutely critical part of the financial structure of these countries. And they're not about to get rid of them. And they're having riots now over trying to lower the taxes because of the high prices.
And I think it's going to take a while before they pull it off. In my own state of California, where we have a nice hefty sales tax on gasoline, it's coming in with some major dollars this year and it's going to make a real dent in the budget crisis that we're having. And nobody has mentioned cutting the gasoline tax.
And if it were all going to something like energy R&D, you can be sure they would look at this and say, "What is the Energy Commission doing with $4 billion? Let's have a tax cut!" So I think that you definitely, from a political point of view, want that money going into everybody's pot so that they get a stake in it.
On the economic side, the charges for those permits should be related to the externality costs associated with carbon dioxide emissions, whereas, the expenditures for the program should be related to the technological opportunities, to the amount of money that we can spend at any given time without it being a waste.
It's a completely different set of criteria that we should be using. So, those two policies should not be joined. And I'm really opposed to it. There's a famous article that Austin Goolsbee who is, I believe, Senator Obama's chief economic adviser now.
He's a professor at the University of Chicago, he wrote in the 1980s about what happened to the enormous amount of R&D, the big buildup under Reagan. I guess it was the early 90s that this piece came out.
Large R&D built up, mostly for military under Reagan. And largely what happened was a lot of professors salaries went up. It pretty much all went into labor and very little went into any increase in innovation or productivity. So you really have to be careful with dramatic run ups.
Robert Simon: Right, and there's a timing effect here too because most of the dough is going to come in 10 or 15 years from now on the R&D. Yes, and it needs to go up right away. So I think that that's sort of the allowances or auction revenue to R&D. You know, that there's a timing problem there to.
Nigel Purvis: Great. So it makes a lot of sense. I would just highlight a few challenges we've had the other way. So, for example the Bush administration has proposed spending, over the next three years, $2 billion to assist China and other rapidly emerging, developing countries to grow more cleanly.
And it made that proposal from the Treasury Department with, my understanding, very little consultation with the Congress. I think not any clear expectation that there would be appropriations.
When we talk about international cooperation on the environment we have a pattern of the president making commitments internationally that are nonbinding, but nevertheless they create very strong expectations among other countries.
And the Congress saying, well, that wasn't our commitment and going a very different route. So look at the funding for the global environment facility, which is an instrument that grew out of the climate change convention and out of the 1992 Rio Earth summit.
The U.S. has been well over $100 million in arrears on that. It's been a major struggle to get congressional support for that. So I understand the timing point. I understand the concern, but we also can't just assume that because it's a good idea that the Congress will be funding it.
Linda Cohen: Or the president.
Nigel Purvis: Or that the president will be asking for it. That's right. So I think there's an even broader challenge here.
Robert Simon: No, and I ... go ahead.
Linda Cohen: I wanted to mention one other thing about budgets. The Energy Information Administration has just come out with an analysis of federal subsidies for energy. And it turns out in real terms the energy subsidy, the way they've calculated from 1999 to 2006 actually increased from 10 to almost $17 billion.
The reason these numbers look really different than what you're thinking is because it used to be that, oh, 30 percent of it was ... a little more, about a third was in tax expenditures and most of those were actually subsidies for oil, for oil depreciation allowances.
And now the tax expenditures account for 8 billion out of that $17 billion. In other words, two thirds of the support from the federal government for energy now comes through tax cuts. It's not through direct expenditures.
Robert Simon: Yes, but the one thing I was saying, and I think it goes back to the point of collegiality and trust because there is one shining example of an international commitment that was sort of processed, it came about in a different way and has been very stable and that's PETFAR. That's the AIDS funding for Africa.
I mean that was a situation where at the front end there really was kind of a shared sort of commitment and passion by both the president and key people in Congress. And that sort of shows you how it can work. I mean that's an excellent example of how you ought to do it.
And that is not just to sort of go have a signing ceremony in some foreign capital saying we're going to have an energy cooperation agreement with you and then come home and say, oh, by the way.
You know, I think that looking at that model and how that happened and I think there's enough interest and passion in energy research in Congress that you can have that kind of dialogue and those kind of shared commitments.
Raymond Kopp: One more round of questions? Right up here and then we'll move to the back.
Alan Weinstein: Yes, my question is for Dr. Simon. Yes, my name is Alan Weinstein. I'm just representing myself. I'm wondering, you paint a rather gloomy picture on congressional progress for such a societally important issue.
I'm wondering, is there any precedent in the past for an equally pressing societal issue that faced so many roadblocks? And if so, how did they overcome those roadblocks in the past?
Raymond Kopp: Do we have a question in the back? Was there a hand raised? Right there on the aisle there.
Question: Yes, I'm David van Hoogstraten from Hunton & Williams and I wondered just if Nigel could respond to some of the points that Bob Simon raised about the number of the difficulties of doing this as a congressional-executive agreement rather than as a treaty.
And I'd just add one other, which is sort of the notion that the reason treaties require two thirds of the Senate to concur is that they're tough big issues that lots of people care about. I mean I'll look at the Versailles Treaty as an example where Wilson really did end up killing himself trying to sell that to the American people.
And in the end was not successful in doing so. But what would you say to those who would argue, well, you know, there's a Democratic president, a Democratic Congress, a Democratic Senate, don't we need the check or the balance provided by a two thirds Senate vote to make sure that something isn't rammed through?
And even though it may be constitutional, might there not be a public outcry akin to say what there was when Roosevelt attempted to expand the size of the Supreme Court for example? Perfectly legal to try to do, but politically it was a very tough sell.
Raymond Kopp: Please pass the mic down to the end of the row there.
Chris Hill: Thank you. I'm Chris Hill at George Mason. This is a question for Bob Simon I guess and it will have to spill over to Linda. It has to do with a comment you made Bob about the entitlements that were created, or expectation of entitlement created during the recent negotiations.
And that raises a specter of what a number of us have worried about, which is that in the end a cap-and-trade allocation system will become probably the mother of all pork barrel operations. And after it does that, it will then become the most corrupt program the government has ever seen.
So, if there's any, any validity to those propositions, despite the difficulty, might not it make more sense at this critical juncture in political change to put back on the table, much cleaner, neater, easier to manage, all of the economists get unemployed and go away, that we don't need these studies anymore, if we do a tax bill rather than cap and trade?
Robert Simon: Who wants to go first? I guess everyone's looking at me. Let me just start with Alan Weinstein's question first. Yes, I can think of two, Social Security and Medicare. I mean I think we have risen to large sort of multi-decadal societal challenges. Not very often.
I mean, you know, maybe once every 50 years, so maybe we're about due. They're very difficult. I think if you sort of look at sort of the history of either of those, they both required very strong presidential leadership and very strong partnerships between the executive and the legislative branch to get them done.
And both of them probably didn't work the first time around either. You know, most big bills that we do in Congress, and they don't have to be of this magnitude, most big bills that I can think of kind of croaked the first time through anyway. And that sort of the natural part of the education process in Congress.
I mean something that's a truly novel idea, a lot of people are going to approach with some real caution and the proponents aren't going to get it right either the first time because they're still planning the learning curve.
They're just like the proverbial assistant professor who's a couple of pages ahead of the students going through the course, right? And we've seen this, I mean I've worked on a lot of bills in my years on the Hill, where the first time around it seemed like a really stupid idea and it couldn't get any support.
The next Congress, everybody kind of figured it out and warmed to it and we learned some things ourselves. And you were able to sort of have a much more ... your success the second time around, you wouldn't have expected it based on the reaction everybody had the first time around.
So I mean I don't think that if you're sort of evaluating the difficulties ahead of you you're necessarily being excessively gloomy. We have done this kind of thing in the past.
I think the good thing about the Senate at least, and I think the same thing is true generally of the House, is that you have, on both sides of the aisle in the Senate, a lot of people who actually do want to make a viable system like this work.
And you probably have 60 votes in the Senate today of people who want a cap-and-trade system of some kind. Now, you clearly don't have 60 votes, anywhere near 60 votes for what we were talking about, but that's OK. A lot of people went through that debate and it made them crystallize their thinking on the matter and I think there's some real progress in that.
And I would imagine a lot of people on both sides of the aisle, amidst all the Sturm und Drang were doing some careful listening of what people were and weren't saying about it and I do think that there is, in the Senate, I'm confident from the conversations I've had with people sort of over the years on this, is that you've got a lot of people who do see this as a serious problem and do want to take a serious run at it.
So I think that is a very non-gloomy thing and I think that's what sort of going to keep the momentum for this for next year. I think Chris has got a good point about the perils of an allocation system. Yes, I think it's a bit of too much of a dichotomy between the allocation systems.
It becomes the most corrupt pork barrel in history and a tax. People tend to have, I think in my own personal view, magical thinking about the tax approaches to it. They say, "Well, wouldn't a tax be nice and clean and simple?" And I say, "Well, show me one nice, clean, simple section of the U.S. tax code and we can have that conversation."
Because once you get down into the details up in the same dynamics work either way. There are lots of very complex architectures around seemingly simple propositions in the U.S. tax code.
And so I don't think you're magically immune in either part of the United States code. I do think that it's just a matter of necessity, for any kind of climate change legislation to be passed it's going to have to be pretty simple and transparent to a lot of people.
And whether it's a cap and trade or it's something else, I think just as a necessity in order to get people to feel sufficient confidence that they understand what they're voting for it will have to be something that is relatively streamlined, that most provisions of it look directly on point. Those are the characteristics that I think it will ultimately embody. And I think that we will probably get there.
Linda Cohen: I want to entirely concur with what you just said about taxes. The Energy Policy Act of 2005, the latest one, is riddled with pork barrel tax provisions. It is just extraordinary! And I would argue that it's even worse than the pork barrel that you get in direct expenditures, for a couple of reasons.
First of all, you can even find out who's getting the money because people's tax returns are confidential. So you get into a tax bill and it's gone. I mean presumably the staffer who put it in knows who's getting the benefit, but nobody else will ever find out.
Robert Simon: Maybe not even him.
Linda Cohen: OK. And then on top of that people wind up going to the Treasury Department to get their deduction or their credit qualified. And ... is our friend from OMB still here?
Well, at any rate, I will tell you a story about one thing that happened last year when some of these bills came in and the people at the Treasury Department had no idea what they were looking at because they didn't know how windmills worked or what was a new technology or what was an old technology.
And they couldn't get ... finally, I mean OMB insisted that they bring in PPNL the next time they have the next round on how those tax incentives are going to work. But what you can wind up with in a tax bill is all that pork barrel plus no accountability is the way it works out. So it's really unfortunate. The idea, something like a value-added tax for carbon is wonderful.
Nigel Purvis: White House. I thought that Bob's summary of the difficulties that this policy recommendation that I'm making was excellent. He talked about the lack of trust that exists and how that's really important to establish and that what is done in the trade context will have some spillover effects, both in terms of what has been done in the past as well as what is that in the future.
I agree with that completely. I would just point out that one thing a well-designed congressional-executive agreement mechanism could do would be to include mechanisms that would build trust.
So mandatory consultations and reporting and formal observer groups so that there is a group in the Congress that is very aware of the negotiating dynamic and what is the best kind of international agreements that the U.S. can negotiate. And, therefore, is willing to be a champion for the best deal possible.
I think that those kinds of mechanisms could be very helpful in building trust. Jealousy between the Senate, in terms of its prerogatives, and letting the House in and also just losing the 67 vote and moving it down to 60 for cloture, those are very valid points.
I would note that the committee that would be most effective is the Senate Foreign Relations Committee with both Senator Lugar and Bidden having voted for McCain-Lieberman and voting for cloture on Lieberman-Warner.
And who, I think from even more of a foreign-policy perspective and less of a climate perspective, understand that re-integrating the United States in multilateral climate negotiations is one of the things that a new administration and Congress need to do in order to repair some of the damage that has been done to the U.S. standing in the world and our relationships with Europe and other key allies.
And so that there could be a positive political dynamic that unrelated to climate change that makes the committee that might otherwise be most concerned about that approach willing to go a route that would be instrumental and have a positive outcome from their standpoint.
In terms of the political reaction, you know, I think it really depends on the content of what the negotiating principles are. If the agreed-upon negotiating objectives for the United States are to the liking of energy intensive industries then this becomes a shield against the bad agreement as much as if it were a vehicle for bringing about U.S. participation in a good agreement.
So, a major component here on the political acceptability is what does the Congress say an agreement needs to include? And the interest groups and stakeholders that are actively involved in shaping the domestic legislation would presumably have as active a presence and voice in that process.
And so I would hope that we would be more likely to thread the needle in terms of getting the U.S. into an agreement that was internationally acceptable and domestically acceptable because of that advanced active participation in defining the objectives.
And so this mechanism, I think, provides reason to think that the political support could very well be there if the negotiating objectives were articulated appropriately. Finally, there may very well be the case that some folks really hate this approach, but ultimately it comes down to votes.
And I would just note that if an amendment to do it this way is offered in the context of a debate on a cap-and-trade bill, you only need 51 votes to have that amendment accepted.
And then, ultimately, you'll need 60 votes on the cloture, but I would just imagine that the senator's decision to vote for a bill or against a bill will be based much more on the overall cost to the constituency and other things that will be driving it rather than the coordination mechanism between the Congress and the president and the legalities of how an international agreement would be considered.
So, really, to get to yes for a congressional executive agreement, I think in the context of a cap-and-trade you need a simple majority and that's really quite different from 67 votes, which of course a treaty requires.
The 67th senator is twice as liberal or conservative as the 50th senator according to various objective indicators of this put out by think tanks around town. And so that's a major difference. So if you can get to 51 for a congressional-executive, it may be that 49 really hate it, but it doesn't matter.
Raymond Kopp: Thank you Nigel. Please join me in thanking this panel.
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