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Scaled-Back Climate Bill Likely to Strand Energy Innovation

[Updated, 6/29. See below]

As President Obama prepares to sit down with a gaggle* of 23 senators tomorrow to try to cobble together a path to passage for energy (and climate?) legislation this year, there is a lot of talk about a scaled-back cap and trade bill as a possible fall-back plan. The proposed “utility-only” cap and trade system would exempt fossil fuels consumed in the industrial and transportation sectors from regulation and focus in only on the electric power plants responsible for roughly one-third of U.S. greenhouse gas emissions.

Whether the diminished ambitions of a utility-only cap are sufficient to attract 60 senators to the plan is still in doubt. But what is certain is that a scaled-back cap and trade system is even more likely to leave America stranded, lacking the critical energy innovation funding needed to truly confront the nation’s energy and climate challenges.

Put quite simply: a utility-only cap equals less emissions permits (or “allowances”) and that means even less allowance auction revenue from cap and trade to allocate to clean energy innovation.

The Brookings Institution’s Mark Muro clearly notes the implications of this simple math at the National Journal:

[I]t’s pretty obvious that with few emissions allotments to auction off much less revenue would be generated through a utility-only program than under an economy-wide pricing system. That’s a problem because not only do we need to get a lot more money into the innovation system as soon as possible (so new technologies can roll out in time to help reduce climate change in this century) but because a smaller revenue pie will only intensify the inevitable interest group scuffle over the money to the detriment of the R&D claim.

Already, energy innovation funding has been given short shrift in each climate proposal to surface in Congress, from the House-passed Waxman-Markey bill to the current contenders in the Senate, the Kerry-Lieberman and Cantwell-Collins proposals.

So while a nation serious about getting off of oil and coal and re-powering the country with clean and affordable energy technologies would be devoting roughly the same scale of public resources as are invested each year in health care R&D ($30 billion) or defense research (over $80 billion), the typical U.S. energy R&D budget languishes below $5 billion. Meanwhile, each of the three bills mentioned above would add no more than a couple billion to that figure.

R&D spending: health vs energy

As Muro notes:

Bill by bill, energy innovation remains an afterthought, the potential yield for R&D remains paltry, and the temporary burst of investment applied through the stimulus package continues to look like a one-shot wonder without follow-through.

While inside the Beltway, clean energy research and innovation goes ignored, a chorus of voices from across America are crying foul, calling on Congress to finally dedicate the long-term, dramatically increased funding needed to develop a suite of clean and affordable energy sources ready to truly power the globe.

The ranks of those challenging Congress to ramp up clean energy funding by a factor of three to ten includes several leading energy policy think tanks, a group of 34 Nobel Laureates, essentially all of the nation’s leading research universities, and a new council of high-tech industry titans that includes the richest man in the world (Gates), the CEO of the biggest VC firm in Silicon Valley (Doerr), the former CEO of the nation’s largest defense contractor (Augustine), and the current or former captains of the companies that basically invented the electric appliance, plastic and polymer, and personal computer industries (Immelt, Holliday and Gates again).

As these captains of industry made clear, if the U.S. does not level the scale of investment needed to spur both incremental and transformative innovation and improvement across a suite of clean technologies, any other proposal — be it cap and trade or otherwise — “will not do much good. Incrementalism will neither fill the gaps, nor create the sweeping change this nation needs in energy. Bold action is required.”

“In that sense,” Brookings’ Muro concludes, “what bears watching is not just the breadth of whatever carbon initiatives emerge in the coming weeks but their seriousness about financing a new push for energy innovation.”

Stay tuned…

[Update, 6/29 @10am Pacific]: E&E News is reporting ($ub required) that Senator Jeff Bingaman, chair of the Energy Committee is now working to draft a utility-only cap-and-trade bill:

Sen. Jeff Bingaman (D-N.M.) is writing legislation to cap emissions from the utility sector, an approach that is gaining traction in Washington amid fresh concerns about what carrots might be dangled in front of power plants as incentive to sign on.

The Senate Energy and Natural Resources Committee chairman said yesterday that he has a bill that would cap greenhouse gas emissions from power plants. “I’ve done some work on that, but I haven’t introduced anything,” he told reporters, adding it has some “significant differences” from the Kerry-Lieberman cap-and-trade measure.

The article goes on the highlight the likely horse-trading necessary to secure utility-sector support for this new strategy, getting back to the dynamic Brookings’ Mark Muro warns is even more likely to leave energy innovation funding out in the cold…

Although addressing the electricity sector may be the route to setting a price on carbon dioxide emissions, that path is not without potholes. Because not every sector will be covered by a carbon cap, environmentalists worry about possible incentives that may be necessary to sweeten the deal for the power industry.

Utilities are divided on the approach. Some say a cap on just their sector will offer certainty and is better than none at all; others are reluctant to go it alone. … Getting the industry’s buy-in could require some political horse trading … “There’s concern that they would want something in return for being the only sector that’s under a mandated cap,” said Joe Mendelson, director of global warming policy at the National Wildlife Federation.

According to E&E, the Democrats slated to attend today’s meeting at the White House are Sen Majority Leader Harry Reid, Energy Committee Chair Jeff Bingaman, Sen. John Kerry, principle architect of the Kerry-Lieberman American Power Act, as well as Sens. Max Baucus of Montana, Mark Begich of Alaska, Barbara Boxer of California, Sherrod Brown of Ohio, Maria Cantwell of Washington, Tom Carper of Delaware, Byron Dorgan of North Dakota, Blanche Lincoln of Arkansas, Jeff Merkley of Oregon, Bill Nelson of Florida, Jay Rockefeller of West Virginia and Debbie Stabenow of Michigan. Sen. Joseph Lieberman (I-CT), who caucuses with Democrats, is also expected to attend.

Republicans invited to attend include Sens. Lamar Alexander of Tennessee, Susan Collins and Olympia Snowe of Maine, Judd Gregg of New Hampshire, Richard Lugar of Indiana, Lisa Murkowski of Alaska and George Voinovich of Ohio.  E&E reports that Senator Lindsay Graham, who worked with Kerry and Lieberman to draft a bipartisan climate and energy proposal before bailing on the initiative earlier this year, is not planning to attend the White House meeting, citing conflicts with an Armed Services Committee confirmation hearing for General David Patreaus as commander of the forces in Afghanistan. According to E&E:

Graham said he asked the White House to move the meeting but was refused. “I’m just not going to run down to the White House and do that meeting and miss the Petraeus thing,” he said.

“It’s pretty clear that after their caucus there’s divisions about what to do with the oil spill legislation and how much carbon pricing you can attach to it,” Graham added, referring to last Thursday’s Democratic caucus meeting. “So it seemed to be a long way away from consensus on their side, much less our side.”

Passing energy and climate legislation this year will require Democrats to secure support from at least a handful of Senate Republicans, a task that has so far proven illusive. 

[Update, 6/29 @11am Pacific]: President Obama and a bloc of key senators appear to have emerged from a 90-minute meeting this morning on energy and climate policy with little concrete to show for it.  According to Politico’s Darren Samuelsohn, Senators Kerry and Lieberman, architects of a stalled senate climate proposal, emerged from the meeting with no clear message about a route ahead.  Samuelsohn writes:

Key Senate Democrats offered to scale back their ambitious plans to cap greenhouse gases across multiple sectors of the economy on Tuesday during a White House meeting with President Barack Obama and skeptical Republicans.

Sens. John Kerry and Joe Lieberman told reporters after the 90-minutee West Wing meeting that Obama held firm in his calls for a price on greenhouse gases. But he acknowledged that he could agree to a more limited climate and energy bill than what they previously drafted.

“We believe we have compromised significantly, and we’re prepared to compromise further,” Kerry said.

Lieberman said a couple of Republicans in the meeting promised to keep talking about the prospect of a less ambitious climate program that includes a price on carbon, though he didn’t name names.

Meanwhile, the handful of Republicans attending the meeting, representing a key bloc of votes needed to secure passage of any Senate energy measures, had a different message coming out of today’s meeting:

Republican Sens. Lamar Alexander, Susan Collins, Judd Gregg, Richard Lugar, Lisa Murkowski, Olympia Snowe and George Voinovich also attended the White House meeting, but left with a much different message than their Democratic counterparts.

“We’ve got to take a national energy tax off the table in the middle of a recession,” said Alexander, the chairman of the Senate GOP conference.

Gregg, who previously has backed emission limits just on power plants, urged Democratic leaders to focus solely on an energy bill that includes incentives for renewables, but no price on carbon emissions. “Our goal should be reducing our dependence on oil from people don’t like us,” he said.

What do Energy Collective readers think?  Is their a route forward this year for carbon pricing? If so, is it likely to be effective policy? Are there alternative paths that could secure bipartisan support and yield substantive progress? 

* — What’s the appropriate term for a group of Senators? If it’s a herd of cattle or a flock of geese, is it a filibuster of senators? Or would that imply a group of 40 or more? Reader suggestions hit the comments below.

Jesse Jenkins's picture

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Jesse Jenkins's picture
Jesse Jenkins on June 29, 2010

Ed,

The point is that you can’t “save the world from AGW” — nor accomplish any other energy objectives, be it energy freedom or building a new competitive clean energy industry — without a roughly order-of-mangitude scale-up in funding for energy innovation to accelerate cost reductions in existing technologies and invent the next generation of affordable, scaleable low-carbon energy sources.  That’s the conclusion reached across the board by energy experts from the IEA to Secretary of Energy Chu to 34 Nobel Laureates, leading think tanks, the nation’s research universities, and business leaders… 

You just can’t get there with the technologies we have on the shelf today.  We can get started, but we’ll never scale at the pace required, nor penetrate markets in the developing world (where the vast bulk of growing energy demand resides) that cannot/will not sustain high carbon prices, regulatory imposed prices, or sustained clean energy subsidies, unless we make energy clean and cheap.  And that requires a massive influsion of innovation funding on the scale of other national innovation priorities, from NIH and Defense R&D to Apollo and Manhattan: all were about an order of magnitude greater endeavors than our current meager energy R&D spending. 

Jesse Jenkins's picture
Jesse Jenkins on June 29, 2010

Shifting the tax code to encourage private sector investment in the buildings blocks of an innovation economy — capital, research and innovation, workforce development and education — would be smart economic policy.  But we can’t rely on the private sector alone to deliver the innovation necessary.  Even with tax incentives, there are simply research quests the private sector will not take on.  That’s why, when a true public priority emerges, this nation always levels the public investments necessary to overcome it, and in the process, galvanizes even greater private sector innovation, investment and leadership.  We need a collaborative, national public-private partnership to develop the clean and affordable energy sources needed to repower the country and the world, and that will require not just changes in the tax code (as wise as those would be) but active federal investment as well.  That’s how we tackle health care innovation (investing $30 billion annually in public money which leverages an additional $60 billion in private investment) and defense R&D, and how we encouraged the IT and communications revolutions, the birth of nuclear power, wind and solar, radios, microchips, radar, GPS, the Internet, etc. etc…  And that’s precisely why the industry titans in the American Energy Innovation Council — the folks most practiced with private sector innovation — are calling on the federal government to get off the bench.  Will Obama and Congress listen?

Bill Hannahan's picture
Bill Hannahan on June 30, 2010

Ed, you and JJ hit the nail on the head, “the focus of federal energy and environmental legislation and/or regulation has shifted from “saving the world from AGW” to creating a new federal revenue stream.” “You just can’t get there with the technologies we have on the shelf today.”

Europe has had artificially sky high gas prices for decades. So why isn’t Europe covered in battery powered cars, solar powered cars, hydrogen powered cars etc. The answer is that practical technology to do that at an affordable price does not exist. The idea that a little Cap N Trade, or even a lot of Cap N Trade will end the fossil age is naive.

We should be spending $100 billion per year on R&D, mostly D, to develop ways to make energy cheaper than burning fossil fuel.

Jesse Jenkins's picture
Jesse Jenkins on June 30, 2010

“It shouldn’t be much of a trick to find $25 billion in a $3 trillion annual federal budget to fund basic research on a true national priority.”

You’d think so!  But easier said than done!  Carving $25 million out of the existing budget requires you to take it from somewhere else, and you’re instantly in a big fight.  We did manage to expand NIH funding by a similar order of magnitude (doubling funding from $15b to $30b over about five years) but that was during the surplus years of the late Clinton-era.  Finding $25 billion in today’s budget is no easy feat, as fiscal constraint is the word of the day.  That points to the need for a new revenue stream to “offset” the new investments in energy innovation, and cap and trade or a carbon fee looks to be an ideal revenue offset.  So far, that ideal has been pissed away…

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