David Gold

Go ahead -- call me a hypocrite.  I claim to be a cleantech venture capitalist yet I tell you here and now that I am not convinced of anthropogenic (human-caused) climate change (aka global warming).  And I will audaciously tell you that my convictions on climate change in no way run contrary to my strong belief in the need for a cleantech revolution

Many supporters of clean technologies make it seem as though anthropogenic climate change is an absolute fact.  To some of them anthropogenic climate change is almost like a religion where any debate or doubt is not tolerated.  Some of them may call me a heretic just for writing this post.

At the same time, those on the other end of the spectrum are equally religious in their fervor and certainty that anthropogenic global warming is a fraud.  They are certain that human emissions of carbon dioxide and other “greenhouse” gases could never impact our climate.  And they may twist this post to use it as yet another data point against claims of global warming and added rationale to do nothing except increase fossil fuel exploration.

In both groups, it is my perception that most have read little about the topic other than the popular press.  And I find both groups equally sad in their myopic viewpoints.  If both of these camps would open their eyes, I suspect there would be much greater agreement on the need for action on clean technologies rather than the divisiveness that their polarizing views create.

There are solid scientific theories and extensive data, anchored by the UN Intergovernmental Panel on Climate Change Report, that indicate the possibility that over time man-made emissions of greenhouse gases could impact the global climate and may have already begun to do so.  To dismiss them out of hand because there is some reasonable doubt is irrational.

Similarly, to speak about anthropogenic climate change as a certainty or to claim that there is no disagreement among scientist is simply incorrect.  There are large numbers of  reputable climate scientists who remain unconvinced.  The reality is that all predictions of global warming are based on very complex climate models. We can forecast the weather a few days out with reasonable accuracy but if you try predicting next year’s summer temperature -- let alone long-term global climate conditions -- things fall apart quickly.  Long-term climate models are anything but accurate.

We know with certainty that past natural occurrences have caused significant changes to the atmosphere, resulting in climate changes.  So, there is little question about whether changes in the atmosphere can cause climate changes.  Rather, the question is whether man-made emissions are significant enough to cause a change on their own and to overcome the large natural forces on our climate that include sun spots, variations in the earth’s orbit, and volcanoes all of which have not been taken into account in forecasts of global warming.

Often there is a focus in the media on recent variations in climate as a source of evidence for anthropogenic climate change.  Variations in climate over short periods of time are highly suspect as evidence. While most scientists seem to agree that there have been increased temperatures and other climate changes over the past century or so, what cannot be said with certainty is that the increased CO2 levels caused this as opposed natural climate change events that have and continue to happen regularly to our planet.  Even the UN Intergovernmental Panel on Climate Change report, which is the backbone of support for anthropogenic climate change, found that its confidence in human contribution to such measured weather events (e.g., temperature, severe storms, sea level, etc.) could be as low as 50% for most of the events and 66% for the others (pages 23 and 52 of the Technical Summary).  

Climate change is measured over extremely long periods of time – not a few years or tens of years.  Some of the best long-term data on historic CO2 concentrations and temperatures is derived from glacial ice core data that spans back 400,000 years.  This data shows that the concentration levels of CO2 in the atmosphere today are strikingly more than 20% higher than any level measured in the past 400,000 years (See Figure 1).  The recent rapid increase corresponds well with the industrial age and temperature variations are in high correlation with CO2 concentrations. This is hard data to ignore or simply write-off.

Figure 1 – Data from Vostok Ice Core (400,000 years)


Figure 2 –Estimated CO2 and Temperature Changes over 500+ Million Years

But interestingly over longer periods, the level of CO2 today is far below the estimated levels during many times in history (Figure 2) raising the possibility that the current spike may have other natural contributors.  And the correlation between temperature and CO2 that seems so apparent in the 400,000-year ice core data becomes much less clear when looking over many millions of years.

While most scientists seem to believe that, in isolation, increased CO2 concentrations create an increased “greenhouse” effect whereby the CO2 acts like a blanket, preventing more of the heat radiated by the earth from going back into space, at what concentration level and over what time period remains a point of uncertainty and debate. In addition, how other factors that may occur with warming such as increased moisture and clouds as well as changes in absorption of CO2 into the ocean at varying temperatures will affect the warming dynamic and other climate change is much more uncertain.

The bottom line is that we won’t truly know if man has caused climate change until after it has already occurred for a very long period of time.

And that’s the rub.  The theoretical costs to the human race of global warming are high: rising ocean levels, decreased polar ice, increased severe weather and significant changes in precipitation patterns.  If they occurred to a significant degree, all could have sizeable economic and health implications.  But there is no certainty that we will ever pay such a price. More compelling is what we know with near-certainty:

• Fossil fuels are a finite resource and they do pollute.   Reduction of pollution is always a good thing.  And with booming energy demand in China and India, fossil fuels are a resource that will become scarcer and more expensive.  You can argue about the pace, but few argue that it will happen.    Even oil rich countries such as Saudi Arabia have begun to accept this fact.
• Increased sources of cost-effective energy and more energy-efficient consumption have and will continue to lead to increased standards of living.
• Nations with greater diversity of energy sources have greater economic and national security.
• The U.S. Defense Department believes that climate change will impact our national security.
• If anthropogenic global warming is real, by the time we start paying the price for the damage we have done it will be too late to turn things back quickly.

To claim with certainty that man is causing climate change or to claim there is no risk of anthropogenic climate change are equally incorrect and equally polarizing.

While it is not certain, there is evidence that suggests that human emissions of greenhouse gases may be changing our climate in ways that could have dramatic impacts.  We can do nothing and roll the dice that everything can be OK.  Or we can take steps to diversify our energy sources away from fossil fuels and increase our energy efficiency, thereby not only reducing the risk of anthropogenic climate change but also increasing the robustness of our economy and our national defense.

Although there should be debate about the specifics of how to best advance the availability and utilization of cleaner technologies, support for cleantech innovation should be the ultimate bipartisan issue without the divisiveness created by talking about anthropogenic climate change as if it is a fact or as if it is fiction. 

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

Posted by David Gold at 11:18 PM | Permalink | Comments (3)

by David L. Levy

In the absence of a global framework for regulating emissions, the future of the planet largely rests on choices by private firms and investors regarding which technologies to pursue and commercialize.

Despite the mounting evidence of severe climate change, there is a funding crisis for potential solutions. The Department of Energy released data at the beginning of November showing that global emissions of CO² rose 6% in 2010, despite the ongoing economic recession. This trajectory is higher than the worst case projections from the Intergovernmental Panel on Climate Change (IPCC) in it’s 2007 Fourth Assessement Report. The impacts are already being felt. A new IPCC report concludes that climate change is causing more extreme weather, especially heat waves, heavy precipitation, and coastal flooding (though the super-cautious IPCC hedged on hurricanes).

Yet November also witnessed setbacks for two key clean energy technologies. Beacon Power (BCONQ.PK), a Boston-area developer of flywheel energy storage and power management systems for the grid, filed for bankruptcy the same week that the DoE released the grim emissions data. Just a few days later, the FutureGen 2.0 project, the leading US effort to develop commercial scale Carbon Capture and Storage (CCS) technology, suffered a major setback when the Midwestern power company Ameren announced that it could not provide an old power plant for the project due to financial difficulties.

One important lesson is that public policy must be based on a clear understanding of the challenges facing the clean energy sector and the impact of regulation and programs on investment decisions and corporate business models. In the absence of a global framework for regulating emissions, the future of the planet largely rests on choices by private firms and investors regarding which technologies to pursue and commercialize. The clean energy sector, however, faces a host of risks that make investors wary. The risk is not that climate change is going away as a long-term driver; the problem is that there are large market uncertainties regarding the future of regulation and subsidies, which technologies will emerge as large-scale, low-cost, low-carbon alternatives, how consumers will respond, and how competitors will react.

Despite the woeful underfunding of clean energy research in the US, there is still a plethora of exciting technologies being developed in the laboratories of universities, government centers, and the private sector. For more mature technologies, large subsidies are flowing to commercial installations of solar and wind, perhaps too large, according to a critical New York Times article last week. While these subsidies are reducing costs by accelerating the technologies down the learning and scale curves, they tend to reinforce the dominance of early, low-cost “winners” in the marketplace, and provide little help for less mature but promising emerging technologies, such as Solyndra’s CIGS thin film glass tubes. As a result, these subsidies also tend to suck in a lot of low-cost Chinese imports rather than stimulate US production or research.

A structural problem, as Daniel Goldman wrote in an earlier Climate Inc. post, is the proverbial “valley of death” between lab research and commercial production, where “neither government, venture capital firms nor capital markets have tended to bear the risks associated with providing equity capital, which can amount to hundreds of millions of dollars, for initial deployment of capital intensive new clean energy technologies at commercial scale – described here as “first project commercialization.”  The US venture capital model evolved primarily to support the emergence of the software industry, which has relatively low capital intensity, but there is not currently an adequate private (or public) sector solution for clean energy. It’s far too early to know whether, for example, flywheel technology is better than batteries or compressed gas for power storage – and maybe there is a role for each of them, to meet different needs in different locations. But a market-based system that relies on private sector funding is failing us if it cuts off development of promising technologies before they even reach commercial scale testing.

Beacon Power has not yet closed its doors, and is trying to continue operating under bankruptcy. Since the summer, it has been testing a 20-megawatt flywheel plant in Stephentown, N.Y., which can absorb and supply power from the grid very rapidly, and is therefore valuable in frequency regulation. Another installation is planned for Pennsylvania. The more intermittent wind and solar that is connected to the grid, the greater the need for short-term storage solutions. Flywheels are able to deal with rapid fluctuations and match supply and demand more effectively and reliably than batteries, such as those from A123, or gas-fired plants (while reducing emissions from rapid cycling of gas plants). A few of the the 200 flywheels in Stephentown have experienced problems, but the system has performed well overall.

Until recently, Beacon Power has not been able to monetize the full advantages of flywheel storage. It was only on October 20^th that the Federal Regulatory Energy Commission (FERC) approved a change in regulations that makes grid operators pay, not just for the amount of power in reserve, but also for its effectiveness in grid stabilization. According to Bloomberg, this could double Beacon Power’s revenue and make it easier to find financing. But the ruling, which has been in the works since February, was too late to keep Beacon solvent. If we are to rely on price and market mechanisms, we need to build them to serve the planet.

The lack of a clear regulatory framework has also hurt offshore wind power in the US. Even now that the 450 MW Cape Wind project is most likely moving ahead, the damage from more than a decade of delays and uncertainty, resulting in millions of dollars in costs and legal fees, have probably dampened investors’ enthusiasm. The latest delay stems from a court ruling that the FAA needs to take another look at aviation hazards. With further financing still required for the $2.6 billion project and the company still negotiating to sell half the power output, the future is not yet secure. Meanwhile, the European Wind Energy Association expects annual investments in the European offshore wind industry to triple to reach 10 billion Euros by 2020.

Given the urgency of the situation, public policy needs to shape the market context in order to steer private investment decisions. We are not heading in the right direction, however. In the short term, the ongoing recession appears to be diverting attention from the climate issue and draining government, business, and consumers of resources. A new Ernst and Young report estimates that the recession could lead governments to cut spending on climate change by tens of billions of dollars. It’s more important than ever to focus government resources, and commercialization of carbon-reducing technologies is a critical area. But in addition to financial support, the problems facing Beacon Power, FutureGen and Cape Wind highlight the importance of reducing regulatory uncertainty.

David L. Levy is Chair of the Department of Management and Marketing at the University of Massachusetts, Boston. He founded and is currently Director of the Center for Sustainable Enterprise and Regional Competitiveness, which engages in research, education and outreach to promote a transition to a clean, sustainable, and prosperous economy. David’s research examines corporate strategic responses to climate change and the growth of the clean energy business sector. He has published widely on these topics, and co-edited a book with Peter Newell titled “The Business of Global Environmental Governance”, MIT Press, (2005).

Posted by Guest Contributor at 07:32 PM | Permalink | Comments (0)

Jim Lane

The Obama Administration got tricked, and handed out some bad energy loan candy.

Turns out that the Washington press corps, and House Republicans, were asleep on the job, too. Until the money ran out, that is.


We’re not sure if there’s been any more perfect timing for an Obama Administration announcement, than the news that it will start up an investigation of the DOE loan guarantee program just as Hallowe’en weekend got underway.

Hallowe’en, is of course, the time of disguise, the celebration of the macabre, and the ghostly return of the dead to haunt you.

Not a bad description, overall, for the Solyndra loan. But there was substantial evidence that the loan guarantee process was fundamentally broken, over two years ago.

“Today,” announced White House chief of staff Bill Daley, “we are directing that an independent analysis be conducted of the current state of the Department of Energy loan portfolio, focusing on future loan monitoring and management,”  “While we continue to take steps to make sure the United States remains competitive in the 21st century energy economy, we must also ensure that we are strong stewards of taxpayer dollars.”

Today. As in the end of October 2011. But, let’s rewind the tape two years.

The signs in 2009

On Friday, Politico reported that Rep. Cliff Stearns (R-Fla.), chairman of the House Energy and Commerce oversight subcommittee, said, “In August 2009, the staff on the Department of Energy indicated that Solyndra would go prophetically bankrupt in September 2011.”

Well, it is high Washington fashion this fall, even more popular than the latest from Lagerfeld, Chanel or Dior, to trash the Solyndra loan. It looks like “Obamacare meets Watergate Junior”, to a lot of Republicans on the Hill.

The fact that the US government doubled-down, by allegedly subordinating the loan to investments by a pair of hedge funds, during a Solyndra financial reorganization, is going to cost Energy Secretary a headache when he heads to a November 17th hearing on Capitol Hioll, and possibly more.

But House Republicans and the general media missed a lot of signals themselves, that something was awry in clean energy financing and funding, way back in 2009.

In 2009, we reported:

“$32.9 billion in total funding announced, including grants and loan guarantees. Impressive! But just $17.44 billion for the private sector, the street – nearly half of that in loan guarantees rather than outright funding. The rest of it went to government (although, some went in state block grants that may, in turn, have some portion that finds its way to the street; and some of that went to the utility sector, in which there are private companies). Seems to me that government announcing a grant to government is double-counting. Call me stupid – isn’t that just an allocation?”

Why did so much energy funding get funneled to electric and clean vehicles, not energy?

We warned that an awfully high percentage of the funding was being shifted into specific industries, for reasons we could not fathom:

“Electric and “clean” vehicle technology received $2.9 billion — that’s $500 million more than the entire support for the solar, biofuels, wind, hydro, and geothermal investments which are supposed to provide the renewable molecules and electrons to power said vehicles.”

Why did coal receive more clean energy treats than biomass and biofuels?

We noted that, somehow, the coal industry had received more funding than biofuels and biomass put together – this, in a clean energy financing round:

“Of the $32 billion, $792 million has gone directly to biofuels or biomass — 2.4 percent. That’s 29 percent less than went to coal – which I thought was the energy we were supposed to be transitioning away from, rather than investing in.”

How did researchers in DOE labs end up costing the taxpayer $500,000 per year, each?

In fall 2009, we noted that a program “to support at least 50 early career researchers for five years at US academic institutions and DOE national laboratories,” received more than nuclear energy R&D, so far this year, or hydroelectric power development, or fuel cell research.”

That program received $85 million for salaries and the expenses of the organizations that do the hiring. In all, it was $1,700,000 per researcher, or $340,000 per person per year. Interestingly, the university positions were for “summer salary and expenses” only. Only some of these positions — for DOE National Labs — were full time. Full-timers received $500,000 in funding, per person per year.

At the time, we pointed out that, according to salary.com, the average salary for an assistant professor in the United States is $62,654. Leaving $438,346 for DOE national lab “expenses”. Per person. Per year. That’s a lot of beakers.

And, we pointed out that it wasn’t exactly like a honeymoon for more exotic, fashionable projects like solar. Even as Solyndra was getting the come-on, a lot of projects were getting the shut out.

How macabre did energy financing get, and when did it get that way?

In 2009, Mike Carpenter, managing director of Energy Recovery Group in Oregon advised us, “My USDA Oregon rep sent me the contact information of 30 banks, all apparently designated USDA 90% guaranty, $10M – 3 of thirty responded.   One of the three followed up – we had a deal – all I have to do is:  Show 30% cash, 27 different documents, private and personal, and the killer, a separate, exclusive method or vehicle to pay for the project, not related to the project.  As a solar project, I need to show a 5-year payoff. I called the other 27 banks just to check – the FDIC answered twice, we aren’t lending any money, we don’t have anyone smart enough to analyze a solar deal, on and on.”

We decline to fall in with the general expressions of “shock and horror” on Capitol Hill that Solyndra failed. Even if it is Hallowe’en, and “trick or treat” is in the air. Or, is that “trick, and you’ll get a treat too”?

For us, there was enough evidence on the table in 2009 that any self-respecting auditor might have issued a “substantial doubt, going concern” notice on the Administration’s financing programs way back in 2009. That the broader media didn’t pick up on what was broadly distributed in trade media two years ago, tells you just about what you need to know about the state of the Washington press corps.

When the treats run out, it’s time to soap the windows

The fact that Congress didn’t pick up on any of this, until the loan guarantee program was just about over, the funding wells were dry, and there was no more lipstick left for pigs, tells you just about what you need to know about Washington itself.

Now and through November, the Washington press corps and the House of Representatives will shine its jack-o’-lanterns on the macabre world of the DOE and the Obama Administration’s energy financing goals and achievements. They may well find a landscape of activity that reminds one more of out-takes from Thriller than a well-run financing program. There’s bound to be dirty laundry mixed in with some genuinely good loans, and well-meaning goals.

But the afore-mentioned watchdogs might do well to drop the we-are-the-champions costumery this year, and tramp the streets of Washington wearing hair shirts — or at least the latest sleepwear, to reflect what they have been up to most of the past two years.

The Bottom Line: No Great Pumpkin, and rocks again

Treats for a lot of companies and individuals.

For the long-suffering public, saddled with bad loans, and still not end in sight to the dependence on foreign loans – as it is each year in It’s the Great Pumpkin, Charlie Brown: no great pumpkin in sight, and rocks in the Hallowe’en sack, all over again.

To all of the above, we offer the traditional Hallowe’en (and theater) greeting: Boo!

Jim Lane is editor and publisher of Biofuels Digest.

Posted by Guest Contributor at 12:54 PM | Permalink | Comments (0)

David Gold

The Solyndra debacle is no surprise to this cleantech venture capitalist. The inherent conflict between trying to get money out of the U.S. Treasury as quickly as possible to stimulate the economy and, at the same time, have government agencies that are ill-suited at making business decisions do just that was nothing other than a recipe for disaster.

Anytime a government program is giving money to the private sector with the intent of getting the money back, the program is doomed to failure.  Bureaucracies, politics and the lack of a profit motive simply don’t allow government to succeed in business.   Anyone who was surprised that politics played a role in the loan decision for Solyndra (and almost certainly other awardees) is very naïve.

Even if, by some miracle, the government could make good business decisions void of political influence, such programs are still doomed to failure because the public and media won’t allow for even one loan or investment to fail. In venture capital we make investments that don’t succeed and we fail often.  Yet, we are still successful on the whole.  Our successes more than compensate for our failures.  The government has no ability to operate this way.  Even if a program like the DOE loan guarantee could operate with an overall effective return (which I find unlikely anyway), its first failure would sink it.  The government can give away money, but it cannot effectively invest money in individual companies.

Solyndra won’t be the last default from the DOE loan guarantee program.  The huge amounts of money that will ultimately have been wasted in the cleantech stimulus – both in terms of loans that won’t be repaid and the stimulus’ failure to create any meaningful job growth when growth was most needed - is bad for tax payers. The negative PR and the future demise of cleantech policies that otherwise may have had broader bipartisan support is bad for cleantech.

In 2009, amid the euphoria of the Obama Administration’s cleantech programs, I wrote that the Administration’s cleantech stimulus was bad policy but good politics.  I was wrong… not only was the cleantech stimulus bad policy, it was bad politics too.  While the politics by which the Administration pushed through these ill-thought programs may have been deft, the ultimate political impact is clearly bad for both the Administration and cleantech itself.

Ultimately, we may look back at Solyndra as the dagger that burst the cleantech bubble.  The hype and euphoria are officially gone.  The long, hard work that will be required to diversify our energy base and increase energy efficiency wasn’t reduced when the government sent floods of money out the door to cleantech companies, and it won’t change now that the hype of those programs is gone.  The good news is that, like the Web and every other technology bubble, the real value creation comes after the bubble has burst.

So, let’s get back to work. 


David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

Posted by David Gold at 05:01 PM | Permalink | Comments (0)

Garvin Jabusch

The Occupy Wall Street movement (OWS), now in its fourth week, is getting a lot of media attention. Opinions are divided. By and large, conservatives represent the protesters as 'a mob' (a notable exception is former governor of Louisiana and current GOP presidential candidate Buddy Roemer, who said on MSNBC that "politicians need to listen to these young people, it could change America"). Meanwhile, progressives view them as a justifiable, if not inevitable, reaction to the social inequity that results from a system rigged in favor of the ultra-wealthy.

In their foundation document, the Declaration of the Occupation of New York City, OWS protesters say (among other things) that they object to the monetization of the American political process, where money talks and everyone else -- the 99 percent -- walks, even if that results in policies with horrific consequences for everyone but the wealthiest 1 percent.

And, of course, that is the true state of affairs in America. These "kids" are absolutely right. The U.S. has always been to some degree subject to the overreach of its richest citizens and, from time to time, the resulting inequity has become so egregious that the less-moneyed have taken to various acts of protest to register their indignation and to work for change. And in case you weren't aware, inequity is presently at an all-time high in this country. Nobel Prize-winning economist Joseph E. Stiglitz summed it up last May, in his seminal Vanity Fair piece "Of the 1%, by the 1%, for the 1%":

The upper 1 percent of Americans are now taking in nearly a quarter of the nation's income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

In their Declaration, the Occupy Wall Street protestors have rightly placed the blame for all of this on "corporations" (I would amend this to "some corporations with the aid of their bought congresspersons," and I bet most of the OWSers wouldn't disagree) and included a long list of grievances against them. For me, three of the charges are especially relevant.

1. "They determine economic policy, despite the catastrophic failures their policies have produced and continue to produce,"

Corporations do determine economic policy, mostly via their nearly complete control of policymakers. Leading economists believe that "skyrocketing inequality… is the result of public policies that have concentrated and amplified the effects of the economic transformation and directed its gains exclusively toward the wealthy. Since the late 1970s, a number of important policy changes have tilted the economic playing field toward the rich." The catastrophic failures, as in 1929, speak for themselves.

2. "They have donated large sums of money to politicians, who are responsible for regulating them."

This one, of course, was immeasurably exacerbated by the Supreme Court's 5-4 ruling, in Citizens United v. Federal Election Commission, that money is speech and therefore may be used as freely, and also that corporations are people, and therefore may exercise their right of free speech (cash) without limit. Further, via super-PACs and 501(c)(4)s, donations of any size can be made and spent anonymously. (I've been thinking that Green Alpha should run for governor of Colorado to see whether our company would, in fact, be definable as a "person.")

It's not-quite-amusing to note that former House majority leader Tom DeLay was this year sentenced to three years in a Texas prison for making large corporate donations that would today be legal. Citizens United gave corporations whatever remaining leash they needed to make sure Congress stays bought. An amount like $10 million, for example, is relatively small in the world of business (on a good day that buys maybe a small condo complex?) but in Congress it's enough to ensure the votes of every policymaker you need to make sure that, say, Big Oil gets billion-dollar subsidies or that coal companies can continue to remove whole mountaintops and poison West Virginia. Which brings me to my next point.

Using the levers derived from these actions and policies,

3. "They continue to block alternate forms of energy to keep us dependent on oil."

Here again, of course the OWS Declaration is right. How else to explain that a majority of the comfortably profitable public solar companies that we follow are presently trading at valuations less than the free cash they have in the bank?

How else can we explain that the main story around energy corruption in America is focused on the relatively small amount of money loaned to solar firm Solyndra? Pure political donation-driven kabuki. Or as Jeff Goodell put it in Rolling Stone:

…we're in the middle of a concerted campaign to demonize clean-tech entrepreneurs, one that fits into the grand narrative that fossil fuel apologists and shills have been pushing for several decades now: that America as we know it and love it runs on oil, gas, and coal, and that anyone who says otherwise is a liar, a communist, or a criminal. House Republicans are already using Solyndra's failure as an excuse to slash federal loans to clean energy start-ups, as well as plotting a carnival of hearings and investigations that will keep this story in the news for months.

It comes down to what FDR said, as he battled the inequalities of the Gilded Age that brought about the Great Depression: "We had to struggle with the old enemies of peace: business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob." We're up against greed, self-interest, and a tax code that's not fair -- where you and I pay more than the largest corporations. No, not just a higher percentage, more dollars. General Electric famously paid $0.00 in taxes for 2010 after earning net income for the year of $11.6 billion. The system is so rigged, that even if GE wanted to pay its fair share, say even 5 percent, to do so (or even to lobby to close the loopholes that allow it not to pay) would put it in an actionable position for acting against the financial interests of its shareholders.

It's pretty clear that we have to both change the tax code and get private money out of politics. Only then can true and free capitalism emerge. Only then will dollars chase companies with the best ideas and products, rather than those with the best connections and the largest political donations.

OWS, in short, is right. And we agree. That's why Green Alpha Advisors practices investment management wth a transparent process. We make our reasons for our portfolio positions clear, and we don't play games with synthetic assets such as credit default swaps or with computer tricks like high-frequency trading. We only buy companies whose business models both disrupt business-as-usual and represent the next, green economy. With the exception of a small percentage of speculative positions, we focus on companies with proven, profitable businesses (as opposed to nascent green tech that we wish would do well). We still believe in buy and hold, and reject the notion that the true value of good companies changes ten percent or more each day. That is, we're doing the job that investment managers are "supposed to be doing, i.e., making sober investments in job-creating businesses and watching them grow." (Quote from Matt Taibbi's advice to OWS.)

We believe investment management can be fair, clear, and work to promote rather than stifle a global economy that works in tandem with the world's ecology. Further, we believe that next-economy finance is the only path forward that won't result in both economic and ecological collapse (to the extent that those are even different), and that as such it is also the best long-term economic bet for investors, offering the best chance for competitive returns in an increasingly resource-scarce, warming, populous, and unequal world.

At Occupy Wall Street and around the country, people are clamoring for solutions. The rise of the solutions must surely follow.

Garvin Jabusch is co-founder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

Posted by Garvin at 10:21 AM | Permalink

Tom Konrad Ph.D. CFA

Much fuss has been made about green jobs. Do they exist, and are more “brown” jobs displaced for every green one? Given all the political rhetoric, it’s not surprising that there is also considerable confusion about green jobs.

There should not be. While pinpointing the actual number of jobs created or destroyed by any particular policy will always be fraught, the underlying microeconomics are rather simple, and understanding those microeconomics can make it clear if a given policy will be a net creator or destroyer of jobs.

While there are many considerations that should be taken into account when forming policy, such as encouraging new technology which may allow future growth, and improving the health and well-being of citizens, I am going to restrict myself to the goal of promoting job creation and economic activity in this article in order to keep the discussion relatively simple. 

My conclusions should not be considered in a vacuum.  Many considerations, not just jobs, should be considered when forming policy.

 
(Picture reprinted with permission from UCS / John Klossner)

Re-framing the Question

In order to avoid the rather pointless debate about the definition of a “green job” I will re-frame the question to one that I believe both sides would agree is more important (at least if they were able to put aside partisan bickering):

Does a particular green policy create more jobs than it destroys?

If a policy is both green (which I define as lowering our use of resources and/or environmental impact) and is a net creator of jobs, all parties should agree that it is a good policy. Green policies which destroy jobs, on the other hand will require further analysis as to whether the environmental and health benefits outweigh the economic losses, a question which requires putting relative value on various benefits, and cannot be resolved purely by economic reasoning.

Which Policies are Net Job Creators?

I’m aware of two mechanisms by which a policy can increase or decrease economic activity and hence number of jobs.

1. Jobs can be created or destroyed by substituting labor for capital, energy, and/or other resources in production.
2. If a policy increases economic efficiency, it will increase economic activity and create jobs. If it decreases economic efficiency, it will reduce economic activity and destroy jobs.

Substituting Labor for Energy or Capital

Image Source: Wikipedia

A basic tenet of microeconomics says that there is a tradeoff between capital, labor and natural resources such as energy in the production function. In particular, you can substitute capital for labor (by mechanization) or labor for capital (by using shovels and picks instead of bulldozers.) Now add energy into the mix, and you can substitute fossil energy for either capital or labor to attain the same production.

For example, a hybrid vehicle substitutes capital and resources (in the form of an electric motor and batteries) for energy (less fuel consumed to do the same work.) A bus substitutes labor (the bus driver) for capital, resources and energy (lots of cars and fuel consumed.) A green building substitutes labor (better architecture/construction) and some resources (extra insulation) for energy.

From this perspective, any policy that promotes the substitution of labor for energy will create green jobs, since you get more work and less energy consumed. Shifting people out of their cars and onto mass transit will create jobs because there will have to be drivers and people managing the transit system, where before no one was paid to drive. To the extent that the transit system can be paid for out of the reduced fuel costs and car ownership costs of the former drivers turned riders, the number of jobs created will be a pure economic gain.

Multiplier Effects

That brings us to the other major potential source of jobs from green policies: economic multiplier effects.

To the extent that green policies improve economic efficiency by overcoming economic barriers to cost effective green solutions, these policies will result in greater economic activity, and hence more jobs. The strongest critique of “green jobs” initiatives is that they simply shift economic activity from out-of-favor “brown” sectors to more politically correct green ones. Yet when a policy improves economic efficiency, it does not just shift jobs and capital around in the economy: it creates economic activity and jobs.

Not all green policies improve economic efficiency. For example, subsidies for not-yet-economic types of renewable energy such as wave power and solar installations may be justifiable on the grounds that they are helping to promote needed future technologies, but they probably come at a net cost to near-term jobs (even if they may create more jobs in the long term by allowing the creation of new types of businesses.)

On the other hand, policies to promote energy efficiency will be strong net creators of jobs, because the cost of energy efficiency is typically only a fraction of the cost of the energy saved. The very existence of opportunities to save significantly on energy bills at modest cost is proof that the energy market is inefficient. In an efficient market, all such opportunities would have already been taken.

After the energy efficiency measure has been installed, the cost savings can be used for useful economic activity, rather than wasted on unneeded fuel. This money will then spur additional activity and stimulate jobs.

Using Fossil Resources to Stimulate Growth is Like Stimulating Growth With Debt

Short term jobs (green or otherwise) should not be the only consideration when forming policy. A short term focus on jobs today can end up doing long term economic harm. For instance, if we spend too much borrowed money to create jobs today, the long term drag on the economy caused by paying back the debt will leave everyone worse off.

Economic growth fueled by the extraction of non-renewable resources is very similar to economic growth fueled by debt. When we extract these resources and use them, we increase economic activity today, but their non-renewable nature means that we lose the opportunity to extract and use them tomorrow. Hence, the economic stimulus today comes at the cost of an economic drag tomorrow, and the future economic drag will generally be larger than today’s stimulus, since improving technology should allow us to get more benefit from each unit of resource in the future.

Using renewable resources to stimulate growth does not have this problem: Tapping the wind or the sun for energy today does nothing to diminish the wind or sun tomorrow. Hence, to the extent a green job relies on renewable resources and a brown job relies on fossil resources, the green job should be preferred, even before taking the environmental benefits into account.

Policy Implications

If we only consider job creation, the focus on policy should be on creating jobs and economic activity, with a preference for green jobs, since those impose less of a cost on future economic activity than jobs based on extractive industries.

Green jobs can be created either by substituting labor for energy and capital, or by reducing energy waste so that the money previously wasted on energy can be put to more productive uses. For policy makers who wish to create green jobs, the implications are clear.

Green job programs should focus on two types of opportunities:

1. Industries where labor can usefully be substituted for energy or capital, such as mass transit.
2. Breaking down the barriers to energy efficiency which can stimulate economic activity by allowing money that would otherwise have been wasted.

The converse is also true: if the goal is to create jobs and stimulate economic activity, subsidies and other policies which encourage the substitution of capital and energy for labor should be ended, especially those subsidies which encourage the extraction of non-renewable resources which only create jobs today at the cost of future jobs.

The most cost effective policies for creating jobs will be those that break down the barriers to the adoption of cost-effective green technologies, especially energy efficiency. Ironically, most energy subsidies have gone into capital intensive sectors such as nuclear and extractive sectors such as oil and gas.

A very cost effective way to produce jobs would then simply be to remove subsidies from fossil fuels and nuclear energy and redirect them towards the most cost effective clean technologies.

Increased support for and promotion of public transit could do much more to reduce our dependence on imported oil than support for domestic drilling (which will only make us more dependent on imported oil in the future by using up domestic resources sooner) while also creating jobs.

Meanwhile, energy efficiency programs such as cash for caulkers can cost-effectively reduce energy bills and free up money for other sorts of consumption while also creating jobs in the depressed housing sector.

Posted by Tom Konrad at 12:51 AM | Permalink | Comments (2)

John Petersen

Last week I stumbled across a link that led to a 2010 report from the National Research Council titled "Hidden Costs of Energy, Unpriced Consequences of Energy Production and Use." This free 506-page book takes a life-cycle approach – from fuel extraction to energy production, distribution, and use to disposal of waste products – and attempts to quantify the health, climate and other unpriced damages that arise from the use of various energy sources for electricity, transportation and heat. After studying the NRC's discussion of the unpriced health effects, other nonclimate damages and greenhouse gas emissions of various transportation alternatives, and thinking about what the numbers really mean, I've come to the conclusion that the electric vehicle advocates are playing liars poker with their cost and benefit numbers – emphasizing a couple areas where electric drive is superior and de-emphasizing or completely ignoring a far larger number of areas where electric drive is clearly inferior. The result, of course, is unfounded and wildly optimistic claims of superiority based on four sevens in a ten digit serial number that don't mean a thing if your goal is to evaluate the entire serial number.

The first graph from the introduction summarizes the unpriced health and other nonclimate damages arising from the use of thirteen different vehicle fueling technologies over the entire cycle life of an automobile and quantifies the unpriced mine to junkyard cost per vehicle mile traveled, including well or mine to wheels costs of manufacturing the vehicle and fueling it over its operational life.



The thing I found most surprising was the relative consistency of the numbers across all thirteen classes, both for today and for the future, and the fact that many advanced drive train technologies score lower than their conventional cousins because the unpriced costs of manufacturing the vehicle or processing the fuel exceed the claimed operating benefits. When you look at the realities from a cradle to grave perspective there are no clearly superior choices and the values are all clustered within ±15% of a $1.25 average. While I derive some personal satisfaction from the idea that the low cost winners are a Prius-class HEV or an internal combustion engine with a CNG fuel system, and that electric drive is just a smidgen cleaner than a diesel engine burning fuel produced from Fischer Tropsch coal liquifaction, the reality is that none of the advanced technologies are inherently better. They're just more expensive.

The game is simply not worth the candle. It’s certainly not worth the enormous expenditures of public funds that governments worldwide don't have. There’s nothing electric drive can accomplish that CNG and fuel efficiency can’t accomplish cleaner, faster and cheaper.

The second graph from the introduction summarizes the unpriced greenhouse gas damages arising from the use of the thirteen different vehicle fueling technologies over the cycle life of an automobile. While the range of variation around a current average of about 450 grams of CO2 per vehicle mile traveled is a little wider at ±25%, once again it's just not worth getting worked up over inconsequential differences that entail substantial incremental costs.



One of the most intriguing take aways from these two graphs is the inescapable conclusion that the differences today are modest and as technologies mature and improve the differences will become less important, not more. By 2030, plug-ins will have no advantage over internal combustion when it comes to greenhouse gasses and be significantly worse than internal combustion when it comes to health and other nonclimate costs.

Over the years I've suffered endless abuse from commenters who decry my appalling lack of vision when it comes to lithium-ion superstars like Ener1 (HEV), A123 Systems (AONE), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) that are certain to drive battery performance to new highs while driving manufacturing costs to new lows and enabling a paradigm shift to electric cars from Tesla Motors (TSLA), Nissan (NSANY.PK), General Motors (GM) and a veritable host of newcomers that are positioning for future IPOs and certain to change the world. While the following graph is a little dated, it shows why the electric pipe dream can’t happen unless some genius in a garage comes up with an entirely new way to store electricity.



Liars poker can be a fun way to fritter away the hours in Wall Street watering holes like Fraunces Tavern, but it creates enormous risk for investors who hear about four sevens but never hear about the other six characters in the serial number. I've seen this melodrama before. For the period from 2000 through 2003 fuel cell developers like Ballard Power (BLPD) and FuelCell Energy (FCEL) carried nosebleed market capitalizations based solely on dreams. From 2005 through 2007, it was the age of corn ethanol kings like Pacific Ethanol (PEIX). Lithium-ion battery developers have already taken it on the chin and there's no question in my mind that Tesla will be the next domino to fall. Its demise is every bit as predictable and certain as Ener1's was.

It's frequently said that those who do not learn from history are condemned to repeat it. There isn't much I can add.

Disclosure: None.
Posted by John Petersen at 04:49 PM | Permalink | Comments (12)

John Petersen

Last Friday President Obama and executives from thirteen leading automakers gathered in Washington DC to announce an historic agreement to increase fleet-wide fuel economy standards for new cars and light trucks from 27.5 mpg for the 2011 model year to 54.5 mpg for the 2025 model year. While politicians frequently spin superlatives to describe mediocre results, I believe the President's claim that the accord "represents the single most important step we've ever taken as a nation to reduce our dependence on foreign oil" is a refreshing example of political understatement. After three decades of demagoguery, debate, dithering and delay, meaningful policy change has finally arrived, and not a moment too soon.

The economic impact will be immense – a staggering $1.7 trillion in fuel cost savings that will flow directly to consumers. As those savings begin to work their way through the economy and kick-start secondary fiscal multiplier effects, the boost to GDP will be closer to $7 trillion. I believe Friday's agreement will ultimately be seen as the biggest economic stimulus event in human history.

The following graph from a new White House report titled, "Driving Efficiency: Cutting Costs for Families at the Pump and Slashing Dependence on Oil" says it all.



The most surprising aspect of this agreement isn't the aggressive goals; it's the fact that the auto industry has helped forge the goals and plans to achieve them by implementing "affordable technologies that are on the road today." The new goals are not based on the electric dreams of a Tesla Motors (TSLA). They're based on the automaker's hard-nosed evaluation of the cumulative gains that can realistically be achieved with existing ICE technologies like engine downsizing, stop-start idle elimination, turbocharging, optimized cooling, low friction, direct fuel injection and variable valve timing.

Individually the fuel economy gains from advanced ICE technologies will only be baby steps toward energy independence. Collectively they'll give American consumers passenger cars with lower well-to-wheels CO2 emissions than a 2012 Nissan (NSANY.PK) Leaf plugged into the typical wall socket. They'll change the world without a budget busting paradigm shift.

In early July The Boston Consulting Group released a new report titled "Powering Autos to 2020; The Era of the Electric Car?" that evaluated the combined potential of baby-step fuel efficiency technologies and considered their likely impact on wildly expensive and impractical proposals to convert the world's transportation infrastructure from liquid fuels to electricity. In the report BCG concluded that:

• Conventional technologies have significant emissions-reduction potential, but OEMs will need to pull multiple levers simultaneously to meet emissions targets.
• Advanced ICE technologies can reduce gasoline consumption by 40% at a cost to the consumer of $50 to $60 per percentage point of reduction – roughly half what BCG predicted three years ago.
• Advanced ICE technologies are likely to become standard equipment worldwide during the next decade.
  
• Electric cars will face stiff competition from ICE and will not be the preferred option for most consumers.
• Battery costs will probably fall to about $9,600 per vehicle, but become increasingly uneconomic as the potential fuel savings per kWh of battery capacity plummets.
• In addition to dismal economics, plug-ins will face substantial go-to-market challenges including battery durability concerns and the absence of adequate charging infrastructure.

In my view the BCG report is a must read for investors who want to profit from this fuel efficiency mega-trend and avoid heavy losses in vehicle electrification schemes that will become increasingly uneconomic over time. The fundamental flaw is simple. Today an EV with a fully charged 24 kWh battery pack can save a consumer the equivalent of 3 gallons of gas. By 2025, the savings will be closer to 1.5 gallons of gas. Even with falling battery prices the value proposition can only get more challenging with each passing year.

For the last couple years I've been cautioning investors that gee-whiz vehicle electrification technologies are transitory, a flash in the pan, and the biggest business opportunities in energy storage involve cheap, simple and effective baby-step technologies like stop-start idle elimination that will slash fuel consumption by 5% to 15% for a few hundred dollars. The BCG report and the newly announced fuel economy goals are yet another proof of that principle.

The future is all about getting more from less and has absolutely nothing to do with increasing consumption of one class of scarce natural resources in the name of conserving another.

While I can't identify the component manufacturers that will thrive from the widespread implementation of advanced ICE technologies like turbocharging, direct fuel injection and variable valve timing, picking the winners in energy storage is easy. Johnson Controls (JCI) and Exide Technologies (XIDE) will be the first beneficiaries as automakers upgrade their electrical systems to withstand the strains of stop-start idle elimination. As stop-start systems become standard equipment worldwide and the inherent limits of current AGM battery technology become obvious, more powerful energy storage solutions from emerging technology developers like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) will ascend to prominence if not dominance.

The new fuel efficiency standards are not an omen of doom for lithium-ion battery solutions from A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) which will no doubt gain a toehold among the 6% to 13% of consumers who say they'd purchase an environment-friendly car even if they had to pay a premium over the life of the vehicle. I'm just not certain how significant that toehold will be in light of the incontrovertible reality that less than 2% of consumers actually buy environment-friendly cars.

On balance I believe that survey-based uptake forecasts will be just another example of a painful lesson I learned in the biodiesel business – that individual buying decisions speak louder than surveys and the green in a consumer's wallet always takes priority over the green in his cocktail party conversation.

For several years the mainstream media, financial press and sell-side analysts have been publishing irrationally optimistic stories and reports about the end of the ICE age and the dawn of a golden electric era. On Friday the Obama Administration and the automakers put the world on notice that IC Empire is striking back and plans to bury the now generation of electric wannabes like it has all of their predecessors.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

Posted by John Petersen at 05:31 AM | Permalink | Comments (5)

by Stephen Viederman
 
Philanthropic foundations are like old-fashioned slot machines. They have one arm and are known for their occasional payout.

Although the term “mission-related investing” found its way into the lexicon of philanthropy decades ago, the finance committees of most foundations continue to manage their endowments like investment bankers. Their portfolios give no hint that they are institutions whose purpose is the public benefit. There is a chasm between mission – grantmaking – and investment. The logic of a synergy between the two has yet to take hold.

For example, number of reports circulated in the US and the UK in the last few years laid out ways that foundations can “win the war on climate.” The focus was entirely on grantmaking. None made any reference to the various ways that assets could be used to add value to their grantmaking.

My op-ed in the Chronicle of Philanthropy, pointing out the ways that assets could help “win the war” went unanswered by the authors of the reports and by foundations. Among the 25 biggest climate funders, very few have climate investments, and only one –the Jessie Smith Noyes Foundation — is an active shareowner on climate issues.

US philanthropy is a big enterprise with over $500 billion in assets. Unfortunately share ownership is not taken seriously. Investing to avoid predictable and preventable surprises is smart investing. Voting proxies and filing resolutions is an ownership obligation rarely exercised.

What I’m calling the Bermuda Triangle of foundation investing seems to swallow up discussions of assets as an instrument of change. On one side of the triangle is the board and investment committee; the second is the investment office; and the third is the consultant. Their views on finance, formed in the same business schools, see reality – the world as it is – as an externality, and intangible. Water availability and utilization, climate change, human rights, working conditions, diversity on boards are issues not factored into their investment decisions, which are made for the short-term, as if the future did not matter. In the foundation setting, as in their day jobs, their awareness is bounded by what they have learned with few incentives to change.

Little time is spent exploring new ideas, leading to what has been called “willful blindness.” And yet these same people after work and on weekends are often very eleemosynary, devoting their time and money to organizations seeking to remedy these issues. Vocation and avocation are split, as demonstrated by the philanthropy of Bill Gates and Warren Buffet. [Note from Marc: The LA Times highlighted the issue with respect to Gates in 2007. See Dark cloud over good works of Gates Foundation.)

Within the triangle outdated views of fiduciary duty prevail. The myth that mission-related investments will underperform remains pervasive. Maximizing alpha, the old-fashioned way, takes precedence over benefit to meet the public good, and to harmonizing investments and grantmaking.  In fact, these are complementary not conflicting activities. Michael Jensen and his colleagues at the Harvard Business School are studying organizational integrity, “that group’s or organization’s word being whole and complete.” The concept incorporates morality, ethics, and legality. Their model “reveals a causal link between integrity and increased performance, in whatever way one chooses to define performance (for example, quality of life, or value-creation for all entities).”

As president of the Jessie Smith Noyes Foundation in the early 90s I worked with my board to “reduce the dissonance” between our grantmaking and our asset management. We screened our portfolio, which was state-of-the-art at the time; filed a shareowner resolution with Intel in support of our grantee, the South West Organizing Project, as well as with other companies on environmental issues; voted all our proxies; and had our own social venture capital partnership seeking to invest in companies that were providing commercial solutions to the issues we were dealing with in our grantmaking. Our performance matched or exceeded the standard benchmarks we used to measure how were doing. And during the decade our payout averaged 7 percent each year, well above the IRS requirement.

Harmonizing mission and asset management, becoming whole, is an organizing concept to improve the practice of philanthropy. Though claiming integrity, foundations often fail the wholeness test. The pessimist sees the glass mostly empty, while the optimist sees it filling. The hopeful say change must occur, and it cannot come too soon.

Stephen Viederman is the former president of the Jessie Smith Noyes Foundation and an expert on sustainable investing. Since "retiring" Mr. Viederman's vocation continues to be Grandparenting. In addition to loving and caring for his own grandchildren, Grandparenting involves his active commitment to insure that they, and all children, have options to live a full and satisfying life in an equitable, just, peaceful and environmentally sound world.

This essay was originally published by Inflection Point Capital Management, and is reprinted with permission from the author. It came to our attention through a post on Marc Gunther's blog.

Stephen welcomes comments both here and directly at s.viederman@gmail.com.

Posted by Guest Contributor at 01:56 PM | Permalink | Comments (1)

Tom Konrad CFA

Our energy policy looks like a bubble.  

Bubbles are a social phenomenon at least as much as they are a financial phenomenon. 

• At the top of bubbles, participants ignore glaringly obvious risks.  In October 2007, Meredith Whitney pointed out the almost glaringly obvious fact that Citigroup was paying out more in dividends than it was earning in profits (i.e. it was being run like the US government, but without a friendly Federal Reserve to bail it out by printing money.)  She said that Citigroup would need either to raise capital, sell assets or slash its dividend -- possibly all three. That's what happens when you spend more than you earn, yet other Wall Street analysts were dismissive of "the easiest call [she] ever made" (as she called it.)
  
• Critics are ostracized.  Remember how Warren Buffett was ridiculed because he did not "get" the Internet? This allows the "in" crowd to ignore warnings from those not caught up in the mania.  During the housing bubble, if you told someone you were a renter, not a homeowner, you were greeted with looks of puzzlement and/or pity.  If you went on to explain that you thought the rental yield on homes was much too low to justify valuations, people would start to look around for the men in white suits to take you away.  (I know this from personal experience.)
• Participants enjoy financial success far beyond what their skills or efforts should reasonably justify.  That financial success imbues bubble participants with an aura of infallibility.  We tend to think "He made a lot of money in real estate/internet stocks/tulip bulbs, so he must be a smart person, and I should be doing what he is doing."   Think of all the people who grew rich (and full of themselves) flipping houses during the mid-2000's.  And then think of the even greater number of people who emulated them, only to get into the housing market in 2007, right before it started heading down.
• "This time it's different."  The internal logic of the bubble creates its own reality.  People don't question when a single tulip bulb costs as much as a middle-class home, or when a strawberry picker earning $15,000 a year can get a loan to buy a $750,000 home.

Alan Greenspan was wrong.  It's not impossible to spot bubbles before they burst.  What's hard is going against the consensus, when everyone around you is ignoring the risk that should be obvious, causing you to question your own reasoning; when they are making money hand over fist for seemingly no effort, telling you they've found a "new truth" and ridiculing you if you don't agree, that's when you've spotted a bubble.

Energy

I introduced this article by saying bubbles are a social phenomenon.  As a social phenomenon, they don't have to be financial: The same dynamics of group behavior can also lead to bubbles that don't necessarily manifest themselves in asset prices, but they're still real, and they still bear the very real risks of financial bubbles.

I believe we're in just such a bubble now.  To me, it's glaringly obvious.  Like Meredith Whitney said about her Citigroup call, it's the easiest call I ever made:


In other words, our society and economy are built on an energy bubble.  Oil powers our transportation system, and coal, natural gas, and nuclear power our electrical infrastructure.  All of the signs outlined above are there.

Ignoring risks. 

How many nuclear disasters like the ongoing one in Japan, and the earlier ones at Chernobyl and Three Mile Island will it take us to realize that nuclear generated electricity is picking up quarters in front of a steam roller?  Yes, the risks of nuclear failures are absurdly low, but the consequences of such failures are absurdly high, and the pools of spent fuel that we still have not agreed on a permanent home for are tempting targets for any ambitious terrorist.

Why do the people who are trying to convince us that shale gas extraction is safe spend so much time talking about the economic benefits?  Isn't that a lot like someone trying to sell you a tranche of a highly rated MBS in 2007 saying "sure, it's safe, the yield is 100 bps higher than any other security with a triple-A rating from S&P?"  Shale gas fracking has only been going on commercially for five years.  Perhaps it is safe, when done properly, but why, exactly, do we expect it to always be done properly?  Before putting our faith in environmental regulators to ensure that shale gas extraction is done properly, we should consider the plight of the financial regulators overseeing mortgage backed securities in the last financial crisis.

And then there is Climate Change.  We know that burning fossil fuels emits CO2.  We know that CO2 levels are rising rapidly.  We know that we're burning a lot of fossil fuels.  We have known since the 19th century that CO2 traps heat in the atmosphere.  We know that so much Arctic sea ice is melting that countries are squabbling over newly accessible Arctic oil and natural gas reserves.  Yet the number of Americans worried about Climate Change is falling, and not a single Republican on the House Energy Committee will say that Climate Change is real. 

Critics are Ostracized

I don't believe that each of the 31 Republicans on the House Energy committee necessarily thinks that Climate Change isn't happening.  They are not stupid, they simply are all politicians, and if being ostracized and forced out of the "in" group is dangerous in any profession, it's dangerous in politics.  Politicians know which way the wind blows, and this level of consensus in the face of basic science is one of the surest signs of the bubble mentality.

Participants enjoy financial success beyond what their skills and effort merit. 

The US consumes about 22 percent of world oil production, so we're certainly participants in the bubble.  We have the highest living standards in history, higher than any other country.  Yet are we smarter than our grandparents, or our immigrant ancestors who came from all over the world?  Do we work harder than an Asian laborer in a factory doing 12 hour shifts seven days a week in order to send a little money back to his family?  If you resent the implications of those questions, you now have a visceral understanding of how hard it is to escape the bubble mentality when you are already caught up in it.  When you're making money or enjoying cheap energy today, it's very hard to look at the long term costs of your actions.  This is the same reason that the United States has so much trouble getting our deficit under control.  We all want the US to live within its means, but support vanishes when it comes to cutting Social Security, Medicare, or Defense Spending.

"This time it's different"

Whether you believe the oil and other fossil fuels in the ground got there over millions of years of heat and pressure on organic matter, or were put there by God during creation, there is only so much of it in the ground to extract. 

We started extracting the easiest, most accessible reserves, and now the only easy oil that's left is in the unstable Middle East.  In the rest of the world, we're left with drilling in increasingly difficult and risky situations, such as deep water (as the Deepwater Horizon oil spill and the consequences for BP's stock price demonstrated, .)  The rising price also reflects the lack of oil prospects that are cheap and easy to extract.  Yet the discussion about what to do about rising oil prices revolves around "how can we drill for more oil?" not "how can we use less oil?"  Richard Nixon promised in 1977 that "gasoline will never exceed $1.00 a gallon" and the United States has been striving for Energy Independence ever since.  It has not worked: in 2005 we imported twice as much oil as we produced.



The progress towards energy independence we've made since 2005 is almost entirely due to reduced consumption (see chart.)  Despite over three decades of effort to increase domestic oil production, production has declined.  Nevertheless, if you listen to the popular debate, the implication is still that the secret to energy independence is trying harder.  Trying harder is not going to more than double our oil output when we've been trying harder for over three decades and we're now producing less than we did in 1970.

What to Do About It

During the 2007 Housing Bubble, the smart investors were buying credit default swaps (CDS) on mortgage backed securities.  During the Internet bubble, they were scooping up REITs yielding 15% or more. 

I'm a stock guy, and I didn't (to my regret) buy any CDS's in the last bubble, but I was one of those buying REITs in 1999 and 2000.  This time around, I'm buying Green Stocks: Renewable Energy, Energy Efficiency, Efficient and Alternative Transport companies that will be selling the services that help us shift away from traditional energy sources like oil, coal, natural gas, and nuclear.  But like most bubbles, it's a lot easier to see the Energy Bubble happening than it is to predict when it will burst.  Hence, it's important to buy the stocks of companies that can survive (or even thrive) in the current environment, yet still benefit from the end of the current Energy paradigm. 

Just buying green stocks is not going to allow our Energy Bubble to deflate safely, but it should cushion the fall for those of us who do, and we'll also have the comfort of knowing that the companies we invest in are doing just a little to build the beginnings of a post-bubble energy infrastructure.

This article was first published on Forbes.com Green Stocks blog.

DISCLOSURE: No Positions.

Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Posted by Tom Konrad at 07:20 PM | Permalink | Comments (1)

David Gold

State renewable energy standards have gained momentum over the past decade with 29 states having put in place various types of standard mandates and five more having implemented voluntary standards (34 total).  Now the federal government is looking to get into the game with a bi-partisan bill (S. 3813) aiming to set a minimum national standard. Renewable energy standards certainly feel good, but do they really provide the best path for achieving their goals?  The existing renewable energy standards are savvy in finding a way to reduce fossil fuel consumption and carbon emissions while simultaneously being politically palatable to a broad array of people.  But they are a bit silly in their formulation. 

            The popular momentum behind renewable energy standards, I suspect, is driven by the fact that for most consumers, there is no obvious downside.  There is no explicit tax or fee paid to the government as a result of such standards, and the actual cost to the consumer of such standards is far from black and white.   It’s easy for a person to feel good about asking the utility company to generate more electricity from renewable energy sources, and most people don’t immediately correlate that with a cost to themselves. 

But what goals are we trying to achieve with renewable energy standards?  Many would quickly respond, “Reducing global warming.”  Others would say, “Reducing our dependence on fossil fuels.”  And those who deal with risk might say, “Diversifying our energy base.”  In addition, politicians sometimes imply that such standards increase our national security.  However, given that our nation sits on huge supplies of coal and natural gas that provide about 70% of our electricity production (vs. only 5.5% from petroleum, which we mostly import), connecting renewable production of electricity to national security is a bit silly.  Case in point, the recent spike in oil prices will have little impact on the cost of electricity in most of the U.S.  

The way that virtually all the state renewable energy standards are structured is that they establish a minimum percentage of electricity generation that must come from specified renewable energy sources by certain timeframes.  An energy source that is not on the list won’t count towards the standard.  And this is where, while well-intended, current renewable energy standards fall short.  The standards almost look like a popularity contest for the technologies with the most hype or longest track records.  As you can see in the bar chart below, there are a large number of potential sources of renewable energy that would be acceptable under the standards of only a relatively small number of states.   And this would be true irrespective of whether that technology might be a more cost-effective alternative.

Summary of State Renewable Energy Standards

(From U.S. DOE)

State	Amount	Year	Organization Administering RPS
Arizona	15%	2025	Arizona Corporation Commission
California	33%	2030	California Energy Commission
Colorado	20%	2020	Colorado Public Utilities Commission
Connecticut	23%	2020	Department of Public Utility Control
D.C.	20%	2020	DC Public Service Commission
Delaware	20%	2019	Delaware Energy Office
Hawaii	20%	2020	Hawaii Strategic Industries Division
Iowa	105 MW		Iowa Utilities Board
Illinois	25%	2025	Illinois Department of Commerce
Massachusetts	15%	2020	Massachusetts Division of Energy Resources
Maryland	20%	2022	Maryland Public Service Commission
Maine	40%	2017	Maine Public Utilities Commission
Michigan	10%	2015	Michigan Public Service Commission
Minnesota	25%	2025	Minnesota Department of Commerce
Missouri	15%	2021	Missouri Public Service Commission
Montana	15%	2015	Montana Public Service Commission
New Hampshire	23.8%	2025	New Hampshire Office of Energy and Planning
New Jersey	22.5%	2021	New Jersey Board of Public Utilities
New Mexico	20%	2020	New Mexico Public Regulation Commission
Nevada	20%	2015	Public Utilities Commission of Nevada
New York	24%	2013	New York Public Service Commission
North Carolina	12.5%	2021	North Carolina Utilities Commission
North Dakota*	10%	2015	North Dakota Public Service Commission
Oregon	25%	2025	Oregon Energy Office
Pennsylvania	8%	2020	Pennsylvania Public Utility Commission
Rhode Island	16%	2019	Rhode Island Public Utilities Commission
South Dakota*	10%	2015	South Dakota Public Utility Commission
Texas	5,880 MW	2015	Public Utility Commission of Texas
Utah*	20%	2025	Utah Department of Environmental Quality
Vermont*	10%	2013	Vermont Department of Public Service
Virginia*	12%	2022	Virginia Department of Mines, Minterals, and Energy
Washington	15%	2020	Washington Secretary of State
Wisconsin	10%	2015	Public Service Commission of Wisconsin

*Five states, North Dakota, South Dakota, Utah, Virginia, and Vermont, have set voluntary goals for adopting renewable energy instead of portfolio standards with binding targets.

           

Opponents of renewable energy standards argue that the standards will inevitably increase the cost of electricity, thereby hurting our economy and lowering our standard of living.  There is merit to this thesis in the near-term, given that most of what the various standards define as renewable energy sources cost more to produce electricity  than the fossil fuel alternatives.  In addition, most renewable sources are intermittent and may not be available during peak load times, thereby requiring investment in energy storage, increased demand load management capabilities or dispatchable generation to effectively manage high percentages of renewable energy on the grid – all of which cost additional money. 

Number of States Accepting Various Types of Energy as “Renewable”

*Hydro:  Highly limited in most states to exclude new large-scale hydro
**Waste Heat Regeneration: Two states allow Combined Heat and Power systems only

***Nuclear is somewhat addressed in S.3813 where it is eliminated from the denominator in calculating the percentage of renewable energy generated.

Data compiled from various sources on state renewable energy standards

Opponents also argue that the free market should be allowed to pick the most cost-effective energy sources.  If one does not believe that any of the three aforementioned goals are critically needed, then such a pure free market approach would make sense.  But the free market can fall short when there are externalities that have significant negative impacts on individuals or on the nation as a whole.  If such externalities are not reflected in the economic incentives that drive company decisions, the free market will generally ignore the negative consequences. (For a related discussion, see my post “Cleantech Economics 101”.)  Numerous historic examples exist such as acid rain, asbestos and lead paint.  And our electrical infrastructure is more than just another industry; it is infrastructure as critical to our economic commerce as roads, airports and railroads – infrastructure that is used by every business and every consumer every single minute of every day.  Thus, for those of us who do believe that the goals are very important, the basis for renewable energy standards is sound. 

However, the restrictive and prescriptive nature of the established renewable energy standards serve to bolster opponents because they eliminate the ability of the utility company to utilize the most cost-effective alternatives.  Going back to the goals of these standards, it must be asked why any specific technology should be named.  If the goal is to reduce carbon emissions, reduce fossil fuel consumption and/or diversify our sources of electricity production, then shouldn’t any technology that achieves this goal be acceptable?  Why should waste heat regeneration into electricity, gasification, and many other technologies that may ultimately be better solutions be excluded in so many states?  Why would demand management (energy efficiency) not be an acceptable means in most states for achieving at least the first two goals? 

And even in the light of the earthquake disaster in Japan, why shouldn’t nuclear as an option? It clearly achieves those three goals and, unlike most of the other options, can be used as base load. It would be easy to run from nuclear in light of the Japanese nuclear crisis that was caused by a record setting earthquake.  But we should not forget that there is rarely a free lunch.  Nuclear still has proven to be much less deadly than our most common form of electrical generation (i.e., coal plants), which releases more radiation than nuclear plants.  In the end, I suspect that far fewer people will die as a result of radiation exposure in Japan than from the direct effect of the earthquake and tsunami themselves.

Beyond outright cost, one of the biggest challenges with most renewable energy is that it is intermittent and cannot provide base load.  The world needs options for base load to bridge from where we are today to the (hopefully) disruptive break through in energy technologies of the future.   Part of the reason we don’t have even safer nuclear power is the lack of significant demand for new nuclear power.  This is as much an inhibitor of innovation of newer and potentially much safer designs (such as Thorium reactors and liquid metal cooled reactors which have the potential of fail safe designs, much lower half life of waste materials and low proliferation risks) as would be the lack of demand for solar or wind on those industries.  All current renewable energy sources have negative environmental impacts and risk – none is perfect (more on this in a future post).  Given that a perfect solution is likely out of our reach for the foreseeable future, our goal should be to strive for overall improvement in our energy base.  To that end, utilities should have the flexibility to implement various energy production methods that achieve the goals as well as technologies that reduce energy consumption.

Allowing greater flexibility would decrease the near-term costs to businesses and consumers by allowing utility companies to choose the most cost effective solutions that meet the goals.  In addition, it would further broaden the net of political support for such standards.  One way this flexibility could be achieved would be by allowing utilities and businesses a clear path to obtain approval from their public utilities commission for new technologies under renewable energy standards.  Any technology that achieves the goals of carbon emissions reduction, fossil fuel consumption reduction, and energy source diversification should be allowed.  Renewable energy standards shouldn’t be about supporting a specific technology or industry.  They should be about reducing the risk of global warming and increasing the robustness of our electric infrastructure in the most economical way possible.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

Posted by David Gold at 05:58 PM | Permalink | Comments (0)

With the recent “shellacking” (as President Obama referred to the election results) of the Democratically controlled Congress, much of the buzz in the cleantech space has been doom and gloom.  Is cleantech doomed to a new dark age?  I do not believe so.

Energy policy is one area where there is an overlap of goals between the parties.  Members of both parties largely agree that energy is critical to our economic and national security.  And most Republicans do not dismiss out of hand the risks of global warming.

I suspect that energy policy will be a topic where this Congress will get something done especially with the President’s to work across party lines.  It won’t be exactly what the president wants and it won’t be exactly what the Republicans want.  It will be an old-fashion compromise that may actually result in some policies and that will have greater long-term impact on cleantech than most of the short-term handout programs that were put in place under the largelyineffective cleantech stimulus bill.

So, where can the Democrats and Republicans potentially agree when it comes to cleantech?

1)   Energy efficiency.  Republicans and Democrats have demonstrated their ability to find common ground here.  George Bush signed the law from a Democratic Congress that will end the life of the incandescent bulb and that increases the fuel efficiency standards for vehicles by 40% by 2020.  Democrats like tax credits for installing energy efficiency improvements, and Republicans like reducing taxes.  Reads like a match made in heaven.

2)   Renewable energy standards.  Many states have put in place such standards with support of both parties.  Some Republicans in Congress havepreviously voiced their support.  If the definition of “renewable” were expanded to include nuclear as an acceptable alternative, I suspect there would be broad support in Congress.  A renewable energy standard is exactly the kind of long-term macro-economic policy needed to drive change and create more sustainable demand for renewable energy and energy efficiency.  Utilities putting big dollars into development of renewable energy power sources and energy efficiency will drive much more industry growth and relieve issues around debt financing to a much greater degree than the government’s ineffectual efforts to play banker.  And if the definition of “renewable” were expanded to include nuclear, then I suspect the base of support would broaden even more.  Given that most renewable energy sources can’t serve as base load, it would be the right environmental and national security move to include nuclear in the energy mix.


3)   R&D.  Republicans have long been supporters of government R&D.  Although there will be an issue around funding offsets for the R&D, I believe there will be broad consensus on the need to invest in our energy future. What will happen, I suspect, is that the focus of this R&D will shift more to early stage disruptive technologies rather than the late-stage grants and government loans which are already proving to be failures. Even the Administration has internally begun to question the effectiveness of these programs.    If the scope of cleantech R&D is expanded to include clean coal technologies and next-generation nuclear, I believe the support base will broaden even more.  The most effective way to ramp up disruptive R&D funding is likely through the new ARPA-E and possibly to the few federal labs that do not have their roots in our nuclear weapons programs (e.g. the National Renewable Energy Laboratory).  By funding ARPA-E, most of the research would take place in our universities and private companies where the potential for real product development and technology transfer is much greater than in our defense oriented federal labs.  The biggest challenge will be finding the funds given the need to reduce the deficit.  One possible solution would be to take the funds already appropriated to later stage projects/loans that have yet to be awarded and redirect them to disruptive R&D.  Another would be a…

4)   Gas Tax.  Cap and trade is likely dead.  And given that such a program would have been a largely ineffectual mess (see my previous post, Cap and Trade: Right Debate, Wrong Solution) that is not necessarily bad.  As I pointed out, the area where there is the greatest overlap between environmental, national security and economic objectives is with gas/diesel, which most cap and trade proposals largely wouldn’t have touched.  The co-chairs of President Obama’s bi-partisan tax commission recently included a gas tax as a piece of its budget solution and two key Senators (one Republican, one Democrat) recently recently wrote the commission encouraging them to consider even bigger increases.  A heftier tax phased in over time may be possible by using the concept of a “tax and dividend”, whereby a tax is levied to increase its price and much or all of the revenue is distributed back to consumers. If the money raised from this tax is largely given right back to the consumers in the form a rebate, then it’s not a tax increase but rather a tax incentive to reduce consumption of gasoline/diesel.  Increasing the cost of gasoline/diesel to drive market demand for alternative fuels and energy efficient vehicles can help Republicans and Democrats achieve their desire of enhancing our national and economic security while reducing carbon emissions.

5)   Government Procurement.  The government is a large consumer of many items.  One of the best ways to accelerate market adoption is by creating a market for the product/service.  For example, the Federal government’s decision to require all new buildings to be LEED certified is accelerating a shift in the building industry to green buildings.  The government purchases a large amount of energy for buildings, vehicles, airplanes and ships.  Policies that drive increased purchases of domestic energy sources based on non-fossil fuels can provide a significant lift to multiple cleantech industries.  The Department of Defense understands the critical nature of this issue, especially around liquid fuels.  The Pentagon’s concern provides the nexus of an opportunity for collaboration between Democrats and Republicans on government procurement policies.

Even if you believe we will see a stalemate in Washington on cleantech, the global macro-economic trends will not change.  Consumption of fossil fuels is accelerating as the world, especially heavily populated China and India, dramatically increase the number of automobiles, power plants and factories.  It is a certainty that the price of these commodities will, on average, increase over time.  The next spike in oil prices, I suspect, won’t be too many years away and, worst case, whatever lull in cleantech enthusiasm that may occur will be quickly washed away.

The essence of any government policy with the goal of accelerating cleantech is simply an effort to narrow the time between today and the inevitable day when fossil fuels become expensive enough that various renewable energy and energy efficiency solutions become compelling without any government involvement.  If you’ve read my previous posts, you know that I do not believe that we will achieve our cleantech goals through massive grant or loan programs to the private sector.  Policies that target the underlying macroeconomic environment will ultimately have a much greater impact than handout programs.  Many of the policies that lie in the zone of potential cooperation between Democrats and Republicans such as gas tax, national renewable energy standards, and federal procurement policies can help drive steady long-term demand for renewable energy and energy efficiency. I am optimistic that these are areas where real progress can be made.  

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

Posted by David Gold at 01:26 PM | Permalink | Comments (0)

John Petersen

On September 17th, the White House released a report titled, 100 Recovery Act Projects That Are Changing America. Since the report included eight companies that were awarded a total of $1.1 billion in ARRA battery manufacturing and vehicle electrification grants in August 2009, I created the following table to summarize the first tier job creation impact.



As I pondered over the relatively high cost per first tier manufacturing job, I decided it might be better to look at the overall value chain including second tier job creation impacts (new jobs in companies that make equipment for the ARRA funded factories) and the third tier job creation impacts (new jobs in companies that will sell raw materials and components to the ARRA funded factories). That process brought me back to the following table from a June 2010 report on the advanced battery sector from Goldman Sachs.



While the Goldman table is by no means definitive, it clearly shows that a substantial share of the initial funding will be used to buy imported equipment and a substantial share of the future material and component inputs will likewise be bought from foreign manufacturers. It's enough to make you wonder whether ARRA wasn't more effective at creating offshore jobs than domestic jobs.

While bloggers like me frequently note that current energy policies are merely substituting one dependence on imports for another dependence on imports, we usually focus on the reliability and stability of global supply chains rather than a fundamental economic issue that strikes me as far more important – stimulating domestic production as opposed to stimulating foreign production.

Most of us understand the concept of fiscal multipliers where $1 million in spending on a new factory turns into several million dollars of GDP as one company's capital investment becomes revenue to a contractor who then pays his employees who then buy goods from businesses that then pay their suppliers etc, etc. Most of us also understand that fiscal multipliers are stronger contributors to GDP when the second and third tier impacts create domestic jobs instead of overseas jobs. Frankly I have a hard time getting excited about energy policies that don't focus first and foremost on converting spending on imports into spending on domestic products.

The following chart comes from an Energy Perspectives Overview that the Energy Information Administration published as part of its Annual Energy Outlook 2009. It shows that the US was self-sufficient in energy until the 1950s when consumption began to outpace production. By 2009, net imported energy accounted for 24 percent of all energy consumed. The bulk of those imports, or roughly $200 billion per year, are imported crude oil.



When I consider the massive annual outlay for imported oil, the first question that comes to mind is "Why aren't we doing more to shift consumption from imported oil that impoverishes the nation to domestic natural gas that would enrich the nation several times over through the fiscal multiplier effect?" While my calculus skills aren't strong enough to nail the analysis down to hard numbers, it doesn't take a lot of math to recognize that every dollar of energy consumption that we can shift from imported oil to domestic natural gas will reduce the import drain by a dollar and increase domestic economic activity by several dollars. While advocates argue that cost of shifting transportation from oil to natural gas is a compelling value proposition in its own right, by the time we account for fiscal multiplier differentials between imported oil and domestic natural gas there's simply no contest.

America's strengths are legion and it became a prominent global power by playing from its strengths instead of its weaknesses. The two strongest players on America's energy team are domestic natural gas production and the minimization of waste through energy efficiency. Truly smart energy policy must merge with the broader issue of truly smart economic policy by keeping energy spending at home instead of sending it overseas.

Disclosure: None

Posted by John Petersen at 04:45 PM | Permalink | Comments (4)

David Gold

         As we have seen in just the past few years, fossil fuel prices can vary dramatically over very short periods of time.  Creating greater certainty regarding steady increases in fossil fuel prices over the coming decade would have an enormous impact on private sector investments in both alternative energy and energy efficiency.  Cap and trade is the right debate to be having because it focuses the discussion on how to change the fundamental economics of fossil-based energy.  But ultimately cap and trade is the wrong solution; superior means exist to achieve the results we need not only for the environment but also for national security and our economy.  A better solution is a strategically targeted “ceiling” tax on carbon combined with a tax dividend.          Cap and trade sounds good on the surface. Seemingly it would allow the market the freedom to choose among implementing technologies that reduce greenhouse gas emissions, paying to use existing technologies that emit greenhouse gases, or paying for offsets from another entity.  But cap and trade is inherently flawed in its complexity and the slow rate at which it can propel change.  The potential for loopholes  and corruption, both through the specifics of how the law is implemented and the trading markets that will be created, are enormous.  If you have read my blog previously, you may be surprised to hear me come out against a seemingly market-based solution like cap and trade.  Many assume that because cap and trade worked for acid rain, it will work for greenhouse gases.  But for markets to work well there needs to be transparency around both price and what actually is being purchased.  As the graphics shown help illustrate, the complexity of greenhouse gases are enormous compared to the simplicity of sulfur emissions from coal plants. The challenges around accurate and transparent accounting of how much carbon is emitted or “re-sequestered” through an offset is fairly daunting.  There have already been significant challenges around carbon offsets with the European cap and trade efforts.  So far in Europe, the impact on greenhouse gas emissions has been much less than desired (for additional reading see the upcoming book by Roger Pielke).   Because of these factors, not only does cap and trade create risk of corruption because of the challenges around defining exactly what has been emitted or how much an offset has recaptured, but its ability to actually achieve the desired reduction in greenhouse gases also falls into question.

         Efforts to implement a cap and trade system that would be truly comprehensive would treat all long-lived greenhouse gases as equal. To make any meaningful difference, the price of carbon must be set high enough to move the meter significantly on the cost of fossil fuels.  Many experts estimate that price to be as much as ten times the current price in Europe.  As a result, if a cap and trade system is actually going to result in a meaningful reduction in greenhouse gas it will have an enormous impact on the economy given the scope of activities that generate greenhouse gases.  In addition, the sheer process of requiring businesses to account for their emissions would lead to significant wasteful administrative costs beyond the cost of the carbon emissions themselves.  Such a requirement would, however, create a great jobs program for accountants, attorneys and even investment bankers who would get paid to navigate the complicated mess that would result.  This reality is why many cap and trade proposals end up being limited to areas of highly concentrated emissions that are easy to track.  This effectively means focusing on power plants, which represent about 39% of the impact-weighted greenhouse gas emissions (of which 85% is from coal-fired plants).  And most proposals generally leave transportation -- which produces about 33% of the impact-weighted U.S. greenhouse gases – largely unaffected.

         “So what?” you say.  Let’s focus on reducing the 39% that is largely from coal-fired plants, right?  From an environmental perspective it does not matter where we reduce emissions – just that they are reduced.  But from an economic and national security standpoint it matters significantly.  The U.S. is home to roughly 25% of the world’s coal and supplies virtually all the coal Americans consume.  Meanwhile, the U.S. imports the majority of petroleum that we consume.  Reducing consumption of coal will not strengthen our national security, and the most immediate effect on our economy will be negative.  Even if one doesn’t believe those are important factors (hard for me to fathom but I know some feel that way), I suspect that everyone would agree that the political ability to implement something that moves the meter is critical.  A policy that appeals to the left and right of the political spectrum holds the best promise.

       Tax and dividend, whereby a tax is placed on carbon and some, if not all, of the proceeds are distributed back to those who paid the tax, is a concept that has begun to receive discussion as a potential alternate solution.  Such a system taxes based on consumption but the dividends are paid out without respect to specific consumption.  So, the motivation to move to alternative fuels or implement energy efficiency remains because the dividend will still be received even if tax payment is reduced.  Yet, the sting of the tax is reduced by receipt of the dividend.  Tax and dividend eliminates many of the problems associated with the complexity and lack of transparency with cap and trade and it largely leverages systems already in place to tax things like gasoline, coal, etc.  However, it still is flawed in that it treats all carbon as being equal.  Again, while all emitted CO2 is equal from an environmental standpoint, it is not from an economic or national security standpoint.  In addition, the greater the scope of the tax, the more interest groups it will upset and the less likely it is that it can ever pass Congress to become law. 

         The better solution, both from an efficacy and political standpoint, than cap and trade or tax and divided is a strategically placed “ceiling” tax on carbon combined with a tax dividend.  Our greatest opportunity lies at the nexus where greenhouse gases are reduced, national security is strengthened and our economy is at least not harmed.  As a result, the first element of the solution should focus on petroleum consumption, which is predominantly consumed in vehicles and the first strategic place for a “ceiling” tax is on CO2 emissions from fossil-based transportation fuels used in automobiles and trucks.  This is effectively a gas tax, except it would apply to gasoline, diesel and any future form of fossil-based fuel sold for ground transportation and would be based on the amount of non-renewable CO2 emitted upon combustion.  In addition, the tax rate would be determined by the difference between the price the retailer/vendor pays for the fuel and a pre-determined fixed maximum charge to the consumer (individuals and businesses alike).  If the ambient price of the fuel commodity increases, the tax that is charged would decrease.  Thus, it creates a “ceiling” on the tax where there is an ambient price at which the tax would no longer be charged.  Implementing the tax in this manner accomplishes several objectives:

• It creates clarity, certainty and stability around the price that alternatives will need to compete with.
• It sends a clear political message that this tax is not forever; it has a built-in mechanism to end when the ambient market price catches up with the artificial price created by the tax.
• It puts a limit on the pain inflicted at the pump.  If fuel prices spike, the tax will diminish and even go to zero if the maximum charge to consumers is exceeded.

Now, what to do with the revenue?  We must ensure that the negative impact on our economy is minimized as much possible.  In addition, we have to be realistic and create something that can fly politically.  As a result, the tax revenue should be sent right back to the consumers who paid it.  For individuals, the amount received could be based on the size of the family to reflect the likely increased transportation needs.  Economically speaking, the dollars received by each family will be much more meaningful to a low-income family.  Yet, the payment is not based on income – something for Democrats and Republicans to celebrate.  For businesses, we must endeavor to avoid making specific businesses non-competitive. If a business has a transportation intensive business, the cost increase could be substantial.  So, distribution to companies could be based on their fuel consumption for transportation over a multi-year period prior to enactment of the tax.  That way, transportation-intensive companies will receive a much larger share than those that use little transportation directly in their business. What about the impact on the oil industry?  No doubt that such a tax would have an impact on oil consumption and therefore production.  It may even be politically required to dividend some of the tax proceeds back to the oil industry.   After all, democracy is the art of the possible.  This would likely mean a smaller oil industry to the extent that the industry doesn’t redirect its efforts to other profitable business efforts (e.g., geothermal, solar, etc.).  However, with a tax on transportation fuels, there would be a clear economic upside to the change.  The clarity provided with respect to future prices of gasoline and diesel would provide significant impetus and support for private sector investments in renewables as well as vehicle energy efficiency.  In addition, such clarity would spur significant economic growth in the automotive industry as consumers become eager to find energy efficient or alternative energy vehicles. One need only look at what happened with the sales of hybrid vehicles when gas prices spiked a few years ago. The auto industry would see a boom as consumers looked to switch to vehicles that consume less fossil fuels. President Obama’s desired goal is a 17% reduction by 2020 from 2005 emission levels.  If the tax is set at a high enough level, studies indicate it would drive significant change in buying decisions and driving behavior of consumers.  A key to the success of the tax is that it creates long-term certainty with consumers regarding the likely price of gasoline and diesel.  A Congressional Budget Office Study found that a 10% long-term increase in fuel prices would result in roughly a 4% reduction in fuel consumption (through a combination of reduced driving as well as purchase of different vehicles).
If the ceiling tax were set based on a target price of $5 per gallon retail price for gasoline, this would create long term visibility into a price increase and would imply we could see a reduction in fuel consumption (and corresponding emissions) of 40%-50% representing a 13%-17% reduction in overall greenhouse gas emissions.  The U.S. consumes more than 6x the gasoline per capital than Europe and one reason is that gasoline costs 2-3x as much at the pump than the U.S.  What the CBO study did not take into account (given the challenge of doing so) is what happens to petroleum consumption when alternative fuel vehicles then become cost-competitive.  I would suggest that the accelerated innovation that would occur in such vehicles once businesses knew they would be competing with a $5/gallon price would drive even greater reductions in greenhouse gas emissions and petroleum consumption well beyond 17% in 10 years. Clearly, such reductions are much less meaningful from an environmental perspective if carbon emissions elsewhere were to increase.  Given that electric vehicles are a probable future for some vehicles, we must address the emissions created by electricity production.  Otherwise, we will simply push CO2 creation from the tailpipe to the smokestack.  But rather than a complex loophole- and scandal-fraught cap and trade system, a strategically placed ceiling tax on CO2 emissions and corresponding dividend should also be used in the utility industry.  The challenge here is that just like cap and trade, in order to have a meaningful impact regarding the business decisions made on utility plants, the price of carbon must be set fairly high.  Because electricity costs impact every person and business in the nation, a carbon tax applied to power plants significant enough to be meaningful would have a broad-based negative impact on the economy.  Everything would become more expensive. Instead of a blanket tax, the ceiling tax on CO2 from electricity production should be much more strategic.  First, the tax placed on existing plants should be fairly modest and intended primarily to generate tax revenue that would be utilized specifically to provide funding to the coal industry for clean coal and sequestration technologies.  That is not only the politically correct move; it is economically smart given our vast coal resources.  A tax of just $2 per million metric tons of carbon would generate roughly $5 billion a year in tax revenue (U.S. utilities generate roughly 2,400 million metric tons per year).  Yet, it would add an average of about one tenth of a cent to the cost of every kilowatt-hour (U.S. total electricity production is roughly 4,100 billion kilowatt hours per year) or roughly a .01% increase in retail price.   Second, the tax on new plants built after a couple-year grace period for those already being constructed, should be set at a much higher level that ramps up over time to a capped amount. An initial tax rate of roughly $30 per metric ton would equate into a cost increase of about 3 cents per kilowatt-hour for the worst offending coal-powered electricity generation.  However, the specific amount of the tax should also vary based on the price of the underlying commodity (e.g., coal or natural gas).  That way, if there were a spike in a commodity price (like with natural gas a few years ago), the tax is automatically reduced or eliminated, thereby eliminating excessive spikes in electricity prices.
To make a carbon tax on utilities achieve the desired goal of driving a change in decisions regarding which type of plants to build, it is critical that utilities are not allowed to work the tax into their rate base - they must eat the tax cost or implement new plants that emit less or no CO2.  In addition, when plants reach a set timeframe after the end of their depreciation period, they would begin to be subject to the higher tax on new plants.  The incentive must be squarely placed on utilities to implement low carbon or no carbon means – all of which they can work into their rate base.  That means implementing renewable, nuclear, sequestration and likely some additional natural gas.  Given that the incremental plants will, by and large, create more expensive electricity than the base coal plants, utilities will have increased incentives to promote energy efficiency and implement the smart grid.   Until technology innovation allows otherwise, most incremental electricity load above the current base will likely cost more to deliver.  Such a tax, if set high enough on new plants, would likely create something akin to a cap on any increases in carbon emissions by utilities. As aging plants are replaced or retrofitted, reductions in emissions would begin.   In 10 years, if the vast majority of new electricity production beyond what was currently being built has been low- or no carbon and if just 15% of aging coal plants are replaced with low or no-carbon emitting alternatives, we would see a reduction from 2005 utility emissions of 3%-6% on top of the at least 13%-17% reductions from action on transportation fuels but without a severe negative impact on the economy.  And the clean coal and sequestration technologies developed from the R&D generated through the taxes would hopefully enable an acceleration in reductions as they are able to be implemented in the following years.


 In making decisions about how to reduce green house gas emissions, as a nation we cannot and should not focus solely on the issue of global warming while ignoring the equally important goals of maintaining our national security and economic strength.  We must implement a system that changes the economics of energy in a way that supports all of these goals.  Not only will cap and trade be unable to achieve these three goals, but without an extremely high price on carbon that likely cripples our economy it won’t even have a significant impact on the single goal of reducing green house gas emissions.  A system that does not focus first on our consumption of petroleum has little chance of strengthening our economy or national security.  In addition, to be successful, we must create greater clarity over long-term fuel price that the alternatives must compete with in order to provide the impetus for private sector investment in energy efficiency and alternative energy.  Cap and trade cannot give this clarity and the government cannot simply buy our way out of this problem.  We must have the innovation, creativity and financial power of the private sector motivated to making the scale of change that is required.  A strategically targeted ceiling tax on carbon with focused use of the dividends could create the log term clarity needed in the market and will motivate the private sector to dramatically increase investment in the type of innovation and change that is the source of ours (and the world’s) prosperity.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com).  This article was first published on his blog, www.greengoldblog.com.

Posted by David Gold at 12:00 AM | Permalink | Comments (1)

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Tom Konrad, Ph.D., CFA

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it's generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.

Data

The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO₂ reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors' defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)

Results

Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO₂ emissions (CO₂e) reduced annually, and the horizontal axis is the annual investment needed to achieve this level of reduction.

 

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO₂e per year, and no practical increase in abatement beyond 20 15 Gt CO₂e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO₂ at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO₂e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO₂e (for a total of 18 Gt CO₂e, or portfolio 4) by 2060.  Since the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.

Forestry

The most striking thing about these portfolios is that Forestry dominates CO₂ abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report's authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.

Hydropower

Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.

Biofuels

Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don't believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.

Wind

We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It's also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.

Geothermal

Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It's also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I'll save that for later.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 12:52 PM | Permalink | Comments (6) | TrackBacks (0)

Charles Morand

On Monday morning, I received an e-copy of a new research note by BofA Merrill Lynch arguing that disclosure by publicly-listed companies on the issue of climate change was becoming increasingly "important". The note claimed: "[w]e believe smart investors and companies [...] will recognize the edge they can gain by understanding low carbon trends." I couldn't agree more with that statement.

It was no coincidence that on that same day the Carbon Disclosure Project (CDP), a non-profit UK-based organization that surveys public companies each year on the state of their climate change awareness, was releasing its latest report at event organized by BofA/ML in NYC.

I am fairly familiar with the CDP, having worked on one of the reports in 2006. In a nutshell, the CDP sends companies a questionnaire covering various topics such as greenhouse gas (GHG) emissions, programs to manage the identified risks of climate change, etc. (you can view a copy of the latest questionnaire here). The responses are then aggregated and made into a publicly-available report.

The CDP purportedly sends the questionnaire on behalf of institutional investors who are asked to sign on to the initiative but have no other obligation. The CDP currently claims to represent 475 institutional investors worth a collective $55 trillion. Not bad!

Putting Your Money Where Your Signature Is?

Despite their best efforts, initiatives like the CDP or the US-based CERES are mostly inconsequential when it comes to where investment dollars ultimately flow. Investors are asked to sign on but are not required to take any further action, such as committing a percentage of assets under management to low-carbon technologies or avoiding investments in companies with poor disclosure or that deny the existence of climate change altogether.

Case in point, the latest Global Trends in Sustainable Energy Investment report found that, in 2008, worldwide investments in "sustainable energy" totaled $155 billion. That's about 0.28% of the $55 trillion in assets under management represented by CDP signatories. A mere 1% commitment annually, or $550 billion for 2008, would substantially accelerate the de-carbonization of our energy supply, probably shrinking the time lines;we're currently looking at in several industries to years rather than decades.  

And that's ok. By-and-large, investors are investors and activists are activists. In certain cases, investors can be activists, either from the left side of the political spectrum with socially-responsible funds or from the right side with products like the Congressional Effect Fund. But overall, most sensible people want investors to be investors.

That's because the function that investors serve by being investors rather than activists is a critical one in a capitalist system - they force discipline and performance on firms and their management teams. By having to compete for capital with other firms in other sectors, clean energy companies have an incentive to crank out better technologies at a lower cost, and that process will have positive implications for all of society in the long run.

The problem with the CDP is that it's really an activist organization parading as an investor group. If the Sierra Club were to go around and ask Fortune 500 companies if they wanted to be hailed as environmental leaders in a glossy new report with absolutely no strings attached, I bet you anything they would get 475 signatures in a matter of days. And so it goes for CDP signatories - institutional investors the world over get to claim that climate change keeps them up at night while not having to deploy a single dime or alter their asset allocation strategies.

Approaching Climate Change Like An Investor

Someone approaching climate change like an investor - that is, as a potential source of investment outperformance (long) or underperformance (short or avoided) - isn't likely to care for activist campaigns aimed at forcing large corporates to disclose information on the matter; in fact, they may prefer less public disclosure to more.

That is because one of the greatest asset an investor can have is an informational advantage. In the case of climate change, those of us who believe that it's real and who think they can put money to work on that basis have a pretty good idea where to look and what to look for - we don't need the SEC to mandate disclosure. Those who think it's one giant hoax couldn't care less - they don't need the SEC to get involved, either. Yet this is where such campaigns are going, according to the BofA/ML report.

I like to think of climate change as an investment theme in terms of three main areas: (1) Physical, (2) Business, and (3) Regulatory. All three areas present investment risks and opportunities.

	Opportunity	Risk
Physical	DESCRIPTION: Companies that stand to gain  from strengthening or repairing the physical infrastructure because of an increased incidence of extreme weather events or a changing climate. Examples include electric grid service companies such as CVTech Group (CVTPF.PK), Quanta Services Inc (PWR) and MasTec Inc. (MTZ).  TIMELINE: Medium-term	DESCRIPTION: Companies that stand to be negatively impacted by more frequent and more powerful extreme weather events, or by a changing climate. Examples include ski resort operators, sea-side resort operators and property & casualty insurers.   TIMELINE: Long-term
Business	DESCRIPTION: Companies that provide technologies and solutions to help reduce the carbon footprint of various industries, be it power generation, transportation or the real estate industry. Renewable energy and energy efficiency are two obvious examples. TIMELINE: Immediate	DESCRIPTION: Companies that make products that increase humanity's carbon footprint and that could fall out of favor with consumers on that basis. Examples include car makers with a large strategic and product focus on SUVs and other needlessly large vehicles. TIMELINE: Medium-term
Regulatory	DESCRIPTION: Firms that have direct positive exposure to the regulatory the responses to climate change enacted by governments. Examples include firms that operate exchanges or auction/trading platforms for carbon emission credits such as Climate Exchange PLC (CXCHY.PK)  and World Energy (XWES). TIMELINE: Near-term	DESCRIPTION: Companies that are in the  regulatory line of fire for carbon emissions. Coal-intensive power utilities are a good example, as are other energy-intensive industries that might have a limited ability to pass costs on to consumers because of high demand elasticity or fierce competition. TIMELINE: Near-term

This categorization provides a high-level framework for thinking about what may be in store for investors as far as climate change goes. However, with the exception of Business/Opportunity and Regulatory/Opportunity, the investment case is not necessarily clear-cut and requires some thinking.

For instance, oil would seem like a perfect candidate for the Business/Risk category were it not for another major and more powerful price driver: peak oil. As for Regulatory/Risk, the European experience thus far has shown how open a cap-and-trade system is to political manipulation, and firms there have been able to withstand the regulatory shock more because of achievements on the lobbying side than on the operational side. That is why I have stressed in the past that understanding emissions trading was more about understanding the rules and the politics than about understanding the commodity.

Nevertheless, these trends are worth following for people who: 1) like investing and 2) think that climate change is not the greatest hoax ever perpetrated on the American people. For instance, CVTech Group (CVTPF.PK), a small Canadian electrical network services company, reported that in fiscal 2008 around 58% of its annual revenue increase (C$23.0 MM) was due unscheduled electricity infrastructure repairs as a result of hurricanes in Texas, Louisiana, North Carolina and South Carolina. In the annual report, management noted: "Since 2005, an increase in the occurrence of hurricanes has resulted in growing demand for our services in these states."

Conclusion

I have nothing against the concept of activist organizations going after corporations with various demands, be they influenced by left- or right-wing thinking; after all, we live in a free, open society and it's everyone's right to do so within the confines of the law.

What I don't like quite as much is hypocrisy and greenwashing. As far as I go, if an institutional investor truly believes that climate change can be a worthwhile investment theme, they should put a couple of analysts on it and figure out how to put money to work. If they don't believe that it is, then they should just go on doing what they do best: manage money.

What they shouldn't do is pretend to see an investment risk or opportunity where they really don't just to appease a handful of vocal stakeholders. Lobbying to get the SEC to force disclosure on climate change is nothing more than window dressing; investors who think this is real already know where to look and what to look for and - surprise, surprise - it's not rocket science!

DISCLOSURE: None

Posted by Charles Morand at 10:23 AM | Permalink | Comments (3)

Michael Giberson

Market-oriented policy analysts have not been shy about cataloguing the problems surrounding windpower development. But in the enthusiasm to oppose the government interventions accompanying wind generation, market-based analysts sometimes have strayed beyond principled defense of markets and unwittingly offered support to anti-market NIMBYism and other meddlesome sentiments. Policy analysts examining wind power issues should consider more carefully which issues ought to be pursued through the policy process.

Two Images

Wind power has two images. In one view, wind power is glamorous, hi-tech, future oriented and almost sexy. Advertisements for products from automobiles to watches to banking services casually feature tall, slowly spinning wind turbines in the background, hoping to suggest that the advertised product, too, is glamorous, hi-tech, and future oriented, and maybe a bit sexy.

A second view shows wind power in a much less favorable light: the product of misguided environmentalism twisted into government-funded corporate welfare. No hi-tech glamour in this view. Instead, destruction and waste becomes emblematic of a windpower industry, which has blighted farm and ranch lands with industrial towers and power lines, killed bats and birds, raised the cost of electricity, and squandered tax dollars.

The second view dominates among policy analysts with a libertarian or conservative policy bent. Market-oriented policy shops have produced several critiques of wind power: the Cato Institute, Heritage Foundation, Competitive Enterprise Institute, Reason magazine, the Heartland Institute. Each has issued policy papers or published editorials or articles about wind power. The details vary, but the overwhelming verdict is negative: wind is more costly than conventional power even with subsidies, it wastes land, the turbines are ugly, the power output is unreliable and requires fossil-fuel backup generation, it produces the most power when it is least needed, the spinning blades are dangerous to both wildlife and human health, and construction damages the local environment.

In addition, wind power development often requires substantial investment in electric transmission lines, which consumes more land and adds to the expense. The Texas Public Policy Foundation has produced a fairly comprehensive critique of wind power development that touches on all of these points and a few more (see links below).

Business versus Policy Issues

The first view contributes to a few policy problems — the hi-tech glamour of wind power gains it unearned public support and therefore special political favor. As one wind energy association analyst has said, windpower “polls extremely well” and has support of both Republicans and Democrats.

But the second, negative view also contributes to policy problems when the analysis goes beyond issues of appropriate public policy and gets involved in a seemingly indiscriminate piling on of negatives. Renewable power policy in the United States has involved the government in heavy-handed subsidies, which is wasting taxpayer monies, distorting investment into electric generation and raising consumer costs. But these points represent about the limit of the market-based objections to windpower development. Most of the technology and resource-use concerns listed above are, for the most part, nobody’s business but the business owners. When analysts encourage negative attention to decisions that naturally fall within a business’s scope of actions, they end up encouraging further unconstrained expansion of public policy.

Let’s sort through that catalogue of complaints about windpower one at a time:

Wind power is more costly than conventional power generation. This claim is not always true, but probably true in many cases and for most of the time. But so what? It may cost more to make a Ferrari than it costs to make a Subaru, but so long as the consumer is free to choose which price it wishes to pay, no real policy issue emerges. Sure, many states mandate that consumers purchase a certain amount of renewable power, but the objection here is to the government picking winners in the marketplace. The mandate would be just as objectionable in principle if renewables were cheaper than conventional generation, so let’s leave cost out of it.

Wind power development often requires substantial investment in electric transmission lines. Wind power development can require investment in electric transmission lines to get the power from the wind farm to the frequently-distant major power consuming regions. (Of course this is not too different for other forms of power generation, only in those cases the fuel frequently moves by pipeline or railroad before being converted to power.) Transmission remains a government-regulated business, even in regions and states with restructured markets, which makes it a public policy concern.

For years the rules governing transmission investment were intimately tied to the needs of the monopoly electric utility. As independent power generation became important to the industry, the rules governing transmission investment had to change too. Accommodations for renewable power are of a similar nature. If policies in fact unduly favor renewable generators, then market-based policy analysts may have a complaint. But development of the transmission grid can be useful in reducing the generator market power that is a legacy of years of government-protected monopolies. It is at least possible that most of the value of transmission investment to support renewable power will come from the encouragement of competition and the resulting more efficient operation of the grid. Consumers should favor such transmission development.

Windpower development is land-intensive. This claim is true in some respects, but greatly exaggerated. It is certainly the case that windpower projects blanket thousands and thousands of acres, but such production is consistent with many other uses of the land – excepting a rather small footprint for the turbine itself and associated facilities. And, again, so what? Agriculture also uses a lot of land, but that is no reason to oppose farming. Landowners are generally considered capable of deciding how much, if any, land they wish to devote to various opportunities. Public policy involvement in these private decisions should be limited, not encouraged.

Wind power output is unreliable. Three parties should be concerned with the variability of windpower output: the company selling the wind power, the company buying the wind power, and the transmission network operator providing responsible for reliable operation of the power grid.

Other power market participants using the grid have a secondary interest, but this interest should be limited to ensuring each power transaction pays an appropriate share of the costs of operating a reliable transmission grid. There are important and difficult issues here, but for the most part they are technical grid operation and market design issues only passingly related to public policy. The various regional power markets are working out the issues, and progress will probably be faster if Congress doesn’t get too interested. Market-oriented policy analysts ought not to encourage politicians to think wind power variability is a public policy issue that politicians need to address.

Wind power requires fossil-fuel backup generation.  In a point related to the variability of wind, it is sometimes claimed that each new megawatt of wind power capacity requires the support of a new megawatt of fossil-fuel generation.  There is, maybe, a grain of truth here, but as stated the point is greatly exaggerated.  First, to an extent every generation unit supplying the grid has to be supported by backup generation in the case that the unit under produces or fails altogether.  Reliable grid operation requires the presence of units kept in reserve.  But not every single unit supplying the market is matched by a unit kept in reserve – since independently operated generators are unlikely to fail at the same time, the system just needs a few units in reserve at any one time.  For this reason, most regional transmission grids have already had sufficient reserve capacity available to accommodate the level of wind power that has been added. 

Wind power presents some new challenges – unexpected output variations across wind farms in the same area will be correlated rather than independent.  But this is a technical issue to be handled by the parties involved, and the main technical issue is assigning wind power developers an appropriate share of the costs of the necessary reserves.

Wind power produces the most power when the power is least needed. On average this claim is true for most existing installed wind power capacity. For example, in West Texas, where the boom in windpower investment is most pronounced, wind speed and wind power output is higher during Spring and Fall than it is in Summer, but the demand for electricity is highest during the Summer. In addition, windpower output tends to be higher overnight, while demand tends to be highest on late summer afternoons. (On the other hand, coastal and off-shore wind power developments tend to produce more power during the day and less power at night.)

An issue related to these last two items concerns references to wind power’s capacity factor. A generator’s capacity factor is calculated by dividing the unit’s power output over a period of time by the amount of power that would have been generated by the unit operating at maximum output. It is frequently noted that wind power generators will have capacity factors that range between 20 and 40 percent, while coal, natural gas, and nuclear power plants tend to have capacity factors that range from 70 up to 95 percent. But capacity factors have substantially different meanings for wind power and the other forms of generation. And once again, the policy significance is limited. If the “capacity factor” of a Subaru plant is higher (or lower) than that of a Ferrari plant, then … so what?

Wind turbines are dangerous to both wildlife and human health. Obviously coming into contact with fast-spinning blades can be dangerous – to humans as well as to birds and bats. Turbines sometimes fail in dramatic and hazardous fashion, as easily findable YouTube videos will show. But producing and burning coal is probably more hazardous to humans, birds and bats as well, and even natural gas is not without risks to animals. Any balanced analysis would at least seek to put the risks of wind power in appropriate context.

It also seems somewhat disingenuous when a think tank usually given to complaining that the endangered species act or similar policies interfere with private property rights starts holding up injured birds in the attempt to discourage private rights to develop property, simply because government subsidies are involved.

Windpower construction damages the local environment. If wind power development is damaging your property, first try negotiation with the developer and if that doesn’t work, then existing property law provides various opportunities for you to pursue a remedy. To the extent that wind power development is damaging other people’s property, they should pursue their rights. It usually is not a public policy concern.

Wind power turbines are ugly. Of course, no policy analysis calls turbines ugly as a serious policy argument; the name-calling just tries to detract a bit from wind power’s glamorous image. But making the claim in the context of a policy argument tends to align the analyst with a NIMBY crowd. If the development of someone’s property is going to spoil a historic view or other community value, the market-based approach would be for members of the community to negotiate purchase of an easement.

My main point is that much of the litany of negative factors surrounding wind power is of limited relevance to a policy analysis grounded in a political philosophy of limited government. Yes, the government intervention into the economy in support of favored kinds of power production is objectionable. But it is just the intervention that is the problem, not the way that the businesses and property of other persons are being developed.

Of course it isn’t just wind power that benefits from intervention, other resources and technologies also see various government supports. It turns out that tallying up subsidies for different resources gets surprisingly complicated, but it is clear that renewable power is the recipient of substantial government support at the moment, particularly on a per-MWh generated basis. Defenders of wind power would also point out that it produces no direct air emissions when producing power, and therefore should be encouraged relative to fossil-fueled generators that do emit pollution. The claim has some validity, but as I have suggested elsewhere, the current set of subsidies for wind is a very inefficient way of pursing those policy goals.

A Suggestion to the Free-Market Community

Now that I have made my main point, let me suggest a principled way to violate it and bring some of these factors back into policy analysis. As any market-oriented person who engages in policy debates has realized, not everyone shares their viewpoint on the role of markets and the value of limited government. In such cases an appeal to principles will not be persuasive. Winning policy arguments appeal to more pragmatic considerations. Cost-benefit analysis is the standard approach.

A serious cost-benefit analysis of public policies supporting wind power would have reason to examine the costs of windpower and the value of its output. For such an analysis, some, but not all, of the negative factors surrounding wind become relevant. Even here a market-based analysts should exercise care to keep issues that should be primarily matters of private choice out of the policy discussion, lest politicians and other less-discriminating analysts become encouraged to further intervene in the market.

For the most part, these market-oriented policy papers and essays are not pursuing a balanced assessment of costs and benefits, just trying to make a case against windpower interventions. I support making a principled case against intervention; I urge policy analysts to refrain from arguments which miss the mark and thus may inadvertently give support to interventionists.

Michael Giberson is an instructor and research associate at the Center for Energy Commerce at Texas Tech University's Rawls College of Business, blogs on energy economics (including wind power) and other topics at Knowledge Problem.  This article was first published on Master Resource.

Appendix: Market Think Tank Critiques of Windpower

Most of these are fairly short commentaries; Drew Thornley’s study for the Texas Public Policy Foundation is probably the most thorough).

Cato Institute: Jerry Taylor, “Picken’s Plan to Rig the Market,” 2008; Robert L. Bradley, Jr., “Eco-dilemmas of Renewable Energy,” 1997.

Competitive Enterprise Institute: Steven J. Milloy, “The Wind Cries ‘Bailout’,” 2008; Neil Hrab, Baptists, Bootleggers and Wind Power, 2004.

Heartland Institute: Cheryl K. Chumley, “Questions Plague Efforts to Grow Wind Power Use,” 2008.

Heritage Foundation: Ernest Istook, “Hot air about wind power,” 2008.

Reason magazine: Ron Bailey, “Wind Breaks,” 2002.

Texas Public Policy Foundation: Drew Thornley, “Texas Wind Energy: Past, Present, and Future,” 2008.

Posted by Guest Contributor at 03:34 PM | Permalink | Comments (1)

Tom Konrad, Ph.D., CFA

Energy markets are neither free nor efficient, so traditional economic arguments against regulation and other government interventions do not apply. 

In response to my recent article digging into green jobs, a reader sent me a copy of a March paper by Andrew Morriss et al at University of Illinois that attempts to debunk green jobs myths.  While I see major flaws in most green jobs papers I read, many of the myths cited by this paper are irrelevant to what I consider the most important questions:

1. Can government intervention to clean up the energy sector create jobs and boost the economy?
2. What interventions are likely to be the most effective or harmful?

Other "myths" are simply not myths; the flaw arises because the debunkers are economists, and approach the subject from the perspective of economics.  The problem is that the energy market is neither free nor efficient, so the traditional economic assumptions about how supply and demand regulate price simply do not apply.  I'll deal with the myths in the order they are presented by Morriss et al.

Define "Green Job"

From the paper:

Myth 1: Everyone understands what a “green job” is.

Fact 1: No standard definition of a “green job” exists.

My Thoughts:  The hundreds of billions of dollars to be committed are designed to promote cleaner energy.  Who cares how green jobs are defined?  The important question is Question #1 above: Regardless if the jobs are defined as "green" or not, will more jobs be created by promotion of cleaner energy, or by some alternative sort of spending.  My last article answered this question in favor of clean energy.

Productivity of Green Jobs

From the paper:

Myth 2: Creating green jobs will boost productive employment.

Fact 2: Green jobs estimates in these oft-quoted studies include huge numbers of clerical, bureaucratic, and administrative positions that do not produce goods and services for consumption.

My Thoughts:  If cleaning up the energy economy simply creates a shift to the less efficient use of labor, then it is not worthwhile.  

However, labor efficiency is the wrong metric.  Higher labor efficiency can nearly always be achieved with greater use of capital or energy.  For instance, driving to work is statistically more labor-efficient than taking light rail.  If I take light rail, then the pro-rated labor needed to run the rail system goes into the cost of getting me to work.  If I were to drive, my labor in guiding the vehicle would not be counted in work statistics, because I am not paid for my efforts (even though I'm probably not enjoying myself much.)  Nor is the capital investment in my car included in the calculation, (although the road I drive on probably is) because it is a private, not business or government expenditure.

Green spending is likely to be more energy-efficient than other spending: reducing energy use one of the main goals.  Capital spending may go up or down, and labor usage may increase, as labor is substituted for fossil energy.  The goal should be to find those sectors which most effectively substitute spending on labor (a renewable resource of which we currently have more than we are using) for spending on fossil energy (a nonrenewable resource which causes harm to the environment.)

As I previously discussed, spending on energy efficiency programs such as weatherization  are ideally suited to substitute labor for energy.  Weatherization gets the largest share of the energy spending from the stimulus bill.

Modeling 

Myth 3: Green jobs forecasts are reliable.

Fact 3: The green jobs studies made estimates using poor economic models based on dubious assumptions.

The forecasts for green employment in these studies optimistically predict an employment boom that will take us to prosperity in a new green world. The forecasts, which are sometimes amazingly detailed, are unreliable because they are based on: a) Questionable estimates by interest groups of tiny base numbers in employment, b) Extrapolation of growth rates from those small base numbers, that does not take into consideration that growth rates eventually slow, plateau and even decline, and c) A biased and highly selective optimism about which technologies will improve. Moreover, the estimates use a technique (input-output analysis) that is inappropriate to the conditions of technological change presumed by the green jobs literature itself. This yields seemingly precise estimates that give the illusion of scientific reliability to numbers that are actually based on faulty assumptions.

My Thoughts: As often with the arguments against greenery, the critics equate greenery with exciting new (and expensive) technologies such as solar PV.  Some of the proponents fall into this trap as well.  And everyone should be uncomfortable with relying on attributing any level of accuracy to a study even though it claims to be precise.  Precision is impossible in economic forcasting.

In fact, the majority of the spending will be going to old, proven technology with a long track record.  Building weatherization and mass transit have been around and evolving for over a century, and these two alone get well over half of the spending.  Cofiring of biomass is also a proven and very cost effective technology.  All of these will reduce, not increase the overall cost of energy, without waiting for technology improvements.

No, we won't get the number of jobs we expect, but for the purpose of decision-making, we only need to be confident that we'll get more jobs than if we had not acted.

"Free" Markets

Myth 4: Green jobs promote employment growth.

Fact 4: By promoting more jobs instead of more productivity, the green jobs described in the literature actually encourage low-paying jobs in less desirable conditions. Economic growth cannot be ordered by Congress or by the United Nations (UN). Government interference in the economy – such as restricting successful technologies in favor of speculative technologies favored by special interests – will generate stagnation.

Myth 6: Government mandates are a substitute for free markets.

Fact 6: Companies react more swiftly and efficiently to the demands of their customers/markets, than to cumbersome government mandates.

My Thoughts: The government already interferes on a massive scale in energy, to support the fossil fuel industries.  Electric and gas utilities are either government regulated (IOUs), government-run (munis), or government-sponsored non-profit cooperatives (REAs.)  Unless you live in Lubbock, your electric utility is a monopoly. Our transportation infrastructure is government-built and maintained (or government-sponsored, in the case of toll roads.)  Rules, taxes , and incentives specifically targeted at fossil fuels are legion.  

Deriding "government interference" in an industry with so much government involvement already is ludicrous.  Nothing can happen in the energy industry without "government interference."   The trick is to make sure that any change is change for the better.  "Hands off" is not an option.

Yes, green spending produces a higher proportion of low skilled jobs than would spending on capital intensive fossil fuels.  But green spending creates more jobs at every skill level than spending on fossil fuels, making workers at every level of skill better off.

A typical instance of the authors' blind faith in markets appears in the section titled "Markets vs. Mandates." "The implication of the necessity of a mandate is that profit-seeking building owners are too foolish to make investments in energy saving despite the alleged short-term paybacks."   Yet this is precisely what happens, if not because building owners are foolish.  It happens because renters, not building owners derive the benefits from the efficiency investments, and because many building owners lack the skills and information necessary to make informed decisions.  

Instances of profit-seeking building owners not making efficiency improvements abound.  When the building owner does not pay the utility bill (as with most rentals), there is no incentive to make such improvements at all.  Even in owner-occupied buildings, how many building owners know what improvements will be cost effective, or make it a priority to find out?  Without adequate information, no improvements will be made.

Anti-Trade

Myth 5: The world economy can be remade by reducing trade and relying on local production and reduced consumption without dramatically decreasing our standard of living.

Fact 5: History shows that individual nations cannot produce everything its citizens need or desire. People and countries have talents that allow specialization in products and services that make them ever more efficient, lower-cost producers, thereby enriching all people .

To the extent that we're not just exporting the manufacture of energy-intensive goods to other counties, I agree with this caveat.  However, to the extent that transport requires large amounts of energy, some of the arguments for re-localization make sense, or where the production of the good (such as oil) is controlled by non-market forces (Russia, Venezuela, OPEC, etc.) free trade (which is rooted in the assumption that markets operate efficiently) does not make sense.

If we could actually create an increase in domestic oil, the conservative proponents of domestic drilling (whom I think of as the "Local Oil" movement) would have a point, despite the fact that they use the same anti-trade rhetoric.  Unfortunately, since total production of domestic oil is capped by our already-diminished reserves, the Local Oil movement is simply asking for more domestic oil today, at the cost of less domestic oil for our children.  In contrast, today's local farmers can avoid taking food from their children by using sustainable farming practices.

Free trade makes sense in free (or at least reasonably efficient) markets where total supply is not limited.  Inefficient markets may rob us of the benefits of free trade.  When the total supply of a commodity is finite, as with fossil fuels, we can never have true "free trade," because one set of participants has no voice in the transaction.  Future generations have no say about what they give up in future consumption when we consume a finite resource today.

Pie-in-the-Sky

Myth 7: Wishing for technological progress is sufficient.

Fact 7: Some technologies preferred by the green jobs studies are not capable of efficiently reaching the scale necessary to meet today’s demands.

Absolutely true. We can't decarbonize the economy this decade.  We need to start now with the established, cost-effective technologies we have today, such as energy efficiency, electricity transmission, wind power, geothermal, and mass transit which are capable of scaling and bring both jobs and economic benefits today.  As new technologies such as solar become cost effective, we will have the infrastructure in place to allow them to scale.

The gigantic scale of the job is a reason to start as soon as possible, not to delay.

Posted by Tom Konrad at 12:00 PM | Permalink | Comments (4) | TrackBacks (0)

The stimulus package and the climate bill recently passed by the US House and now being considered in the Senate will create jobs while delivering a boost to our economy.  A "green" stimulus swill create  approximately three times as many jobs as the same amount of spending in traditional energy industries.  But clean energy is too diverse to consider a single industry.  What are the differential jobs creation effects of different types of clean energy and are the most effective sectors getting the most money?

Tom Konrad, Ph.D., CFA

In my next Greener Money column for Smart Energy Living Magazine, I look into the economic behind Presidential and green claims that the stimulus package and the Climate bill just passed by the House can both create economic growth while cleaning up the economy.  I found most of the rhetoric coming from the greens to be disappointing. For the most part, it touts the numbers of "Green Jobs" which will be created, without looking at the cost.  For instance, while the report from the American Solar Energy Society does a good job defining "green job" and counting them, it does not look at what would have happened if we put our resources elsewhere.

Probably the most incredible claim I heard from on the green side came from Jigar Shah, who told me via email that spending on solar photovoltaics produces "more jobs per federal dollar invested" than other green technologies.  He did not respond to two requests for his source.  I found this claim hard to believe, because solar manufacturing is very capital intensive, and manufacturing jobs are likely to be high-skill and highly paid.  The labor-intensive installation is unlikely to completely make up for capital intensive (and often overseas) manufacturing.  Clean energy investments which are not capital intensive, such as weatherizing homes, are likely to produce more jobs because 1) less money is spent on equipment and more on labor, and 2) the workers are typically paid less.

The Cost of Creating a Job

The best national report I read was Green Prosperity, which was sponsored by Green for All and NRDC, and written by the economists Robert Pollin, Jeanette Wicks-Lim, and Heidi Garrett-Peltier at the Political Economy Research Institute at the University of Massachusetts, Amherst (PERI).  This report used data from the US Commerce Department Input-Output tables and IMPLAN to look at the potential for job creation from each $1M of spending in various industries, some of which is presented below in table 3 from the report:

TABLE 3. BREAKDOWN OF JOB CREATION BY FORMAL EDUCATIONAL CREDENTIAL LEVELS

	1) Clean Energy Investments	2) Fossil Fuel Investments	3)Difference (col 1-2)
Jobs per $1M	16.7	5.3	11.4
% of category	100%	100%
College degree jobs  $24.50 avg wage	3.9	1.5	2.4
	23.3%	28.3%
Some college jobs $14.60 avg wage	4.8	1.6	3.2
	28.7%	30.2%
High School or less jobs $12.00 avg wage	8.0	2.2	5.8
	47.9%	41.5%
High school or less jobs with decent earning potential $15.00 avg wage	4.8	0.7	4.1
	28.7%	13.2%

Note that while clean energy spending creates more high paying jobs than fossil fuels, clean energy is even better at creating jobs for low skilled workers: Everyone stands to gain, but those who have the most trouble finding jobs have the most to gain.

Comparing Clean Energy Industries

Un fortunately, even this report does not detail the differences Jigar Shah was alluding to: the difference in job creation between clean energy investments.  Where can we best deploy our stimulus dollars for the greatest effect?  I contacted the authors of the study, and Heidi Garrett-Peltier was able to provide the following job creation numbers for industry sectors they considered in their research:

Sector	Percent of spending in Green Program	Jobs per $1M spending
Weatherization	40%	17.1
Transit/Rail	20%	20.8
Smart Grid	10%	13.3
Wind	10%	13.8
Solar	10%	14.1
Biomass	10%	15.5
"Green Program"	100%	16.7
Fossil Fuel	-	5.3

Here, "Green Program" is a weighted average of the six energy industries, with the weights approximating the anticipated spending contained in the stimulus package and the climate bill.  They did not look at the credential level job creation benefits of the clean energy sectors individually.

I find it very encouraging that the two best job-creation sectors (Transit/Rail and Weatherization) are also the sectors which get the lion's share of investment; this is why the Green Program as a whole produces more jobs per million dollars spent than any of the sectors besides these two.

Will the Jobs Last?

All this discussion is about a stimulus to the economy, in order to jump start it and get it going again.  The Green Prosperity Report considered only jobs created by the direct effects of the spending, and the indirect effects of increased spending by people whose earnings increased due to higher earnings.  These new jobs are only likely to last as long as the spending continues, after that, the hope is that the economy will have begun producing jobs again without federal stimulus.

Nevertheless, there will be ongoing effects that will help the economy long after stimulus spending has ended, and the impressive job creation numbers above do not consider these effects, which "dominate the job creation figures" according to Howard Geller, the Executive Director of the Southwest Energy Efficiency Project (SWEEP), and co-author of a study on job creation from energy efficiency measures in Colorado.  Weatherization was just one type of energy efficiency measure the SWEEP study looked at, although the other sectors above were not considered because of SWEEP's focus on energy efficiency.

He says, "I don’t think renewables are going to have nearly as much impact [as efficiency].  Using the same input/output model, you won’t get nearly the job creation from the energy bill savings.  It’s the cost effectiveness of EE that leads to the savings and long term job creation."  So, to the extent that measures are cost effective, they will produce ongoing savings and job creation.  Of the spending sectors listed above, Biomass is likely to be the most cost effective of the energy generation technologies (Wind, Solar, and Biomass), if the money is used for biomass co-firing in existing coal plants, and both Wind and stand-alone Biomass will be more cost effective than Solar (see my article What Does Clean Energy Cost?.)  Only Biomass co-firing is likely to be able to compete with weatherization for long term job creation effects among these three.

The ongoing job creation effects of smart grid are unknown, since no one has done it before.  However, giving people better information about their energy usage has been shown to reduce their consumption as much as 15%, so there should be some long term effects.  

For transit spending, the benefits depend on if the transit improvements will be effective enough to allow people to reduce their car ownership:  According to the Green Prosperity study, the marginal cost per mile of travel on transit is about the same as the marginal cost of auto travel, but large gains are available from any reductions in car ownership.

Conclusion

Green investments will be good for both the economy and the environment.  Nevertheless, any additional federal spending will use borrowed fund that have to be repaid.  Hence, we should focus on spending in sectors with both large job creation potential, and long term impacts.  Clean energy as a whole has excellent job creation potential and long term impacts, but some sectors are better than others.  Although the climate bill which passed the house is not everything we might want, it's nice to know that most of the spending is going to the right places.

Posted by Tom Konrad at 12:19 PM | Permalink | Comments (4) | TrackBacks (0)

Last month, I wrote about how Ontario, North America's 6th largest jurisdiction by population, had tabled a Green Energy Act to boost the alternative energy industry's growth in the province. In that post, I mentioned that officials would soon release the rules for a feed-in tariff (FIT) system. FITs, which pay fixed rates for renewable power, are all but absent in North America, although they are popular incentive in Europe. Germany's FIT is largely responsible for that country's dominance in solar PV today despite mediocre sun conditions. 

Ontario released the draft rules and proposed prices for its FIT a few hours ago. Proposed prices are as follows:

Fuel Type	Size Tranches	C$/kWh	US$/kWh (x0.79)
Biomass*	Any size	12.2	9.6
Biogas*	≤ 5 MW	14.7	11.6
	> 5 MW	10.4	8.2
Waterpower*	≤ 50 MW	12.9	10.2
	≤ 2 MW (community-based or aboriginal)	13.4	10.6
Landfill gas*	≤ 5 MW	11.1	8.8
	> 5 MW	10.3	8.1
Solar PV	≤ 10 kW (rooftop)	80.2	63.4
	10 - 100 kW (rooftop)	71.3	56.3
	100 - 150 kW (rooftop)	63.5	50.2
	> 500 kW (rooftop)	53.9	42.6
	≤ 10 MW (ground mounted)	44.3	35.0
Wind	Any size onshore	13.5	10.7
	Any size offshore	19.0	15.0
	Community-based or aboriginal (≤ 10 MW)	14.4	11.4
* 35% premium during weekday on-peak hours (11am to 7pm) and 10% discount during off-speak hours

The suggested pricing levels are relatively high and, as discussed in my original article on this topic, should benefit the clean energy independent power producers active in the province. Of special interest is the fact that Ontario is proposing to implement a tariff for offshore wind, and could thus be the first Great Lakes jurisdiction to see significant offshore installations go up (that is, if they get the tariff right!). The solar PV tariffs are based on the tiered German approach and should trigger significant installations if credit doesn't prove to be a problem for households and businesses.      

To be continued...

Posted by Charles Morand at 10:58 PM | Permalink | Comments (4)

Last week, several branches of the Colorado state government organized a symposium on "How Colorado Electric/Gas Utilities and Their Customers Can Benefit from the American Recovery and Reinvestment Act (ARRA)."  I attended, with an ear to how the likely implementation would affect Clean Energy Stocks.

Overall, Colorado seems to be taking a very organized approach to a monumental task.  According to Colorado Public Utilities Commission (PUC) Chairman Ron Binz, who officiated at the conference, they intend to organize proposals into an overall thematic plan for spending stimulus money.  In addition, they are working to eliminate barriers to regulated utilities participating.  In particular, the PUC "will allow expedited review of applications filed to request financial incentives including ratemaking treatment."

The symposium was four hours long with no breaks.  For readers seeking some specific information, here is a link to my notes.  What follows are my thoughts on what it may mean for different clean energy sectors.

Solar Stocks and Wind Stocks 

Solar seems unlikely to be a big winner from the ARRA.  This makes sense because the point of the bill was to stimulate jobs.  Solar, especially Solar Photovoltaic (PV) panels, are very capital intensive investments, meaning that few jobs would be created per dollar spent.  Solar PV has long been the poster-boy for green energy, yet its high-tech capital-intensive nature means PV installations create fewer jobs per dollar invested than most other clean energy technologies, and many fewer than the most effective, energy efficiency.

Sitting next to me was a representative of a major solar project developer whom I've known for a couple years.  After the panel on electric generation, he commented to me "that was a total waste of time."

The prospects for wind seem slightly more hopeful, according to Brian Greenman, principal at Greenman Financial Advisors.  Brian is another member of the Denver the renewable energy community whom I've known for several years.  His firm has established a niche been providing a wide variety of financial services to wind project developers across the Great Plains.  He says that there is a real chance that the Department of Energy loan guarantee program may begin guaranteeing loans; something which has not occurred for clean energy deals since it was established in the 2005 EPAct.  The major hold-up has been uncertainty about the potentially enormous size of the subsidy cost.  Now, new money has been appropriated, and once new rules are established, this subsidy cost is likely to either be regularized, or eliminated entirely.  The main roadblock stopping wind projects right now is the inability to obtain financing, a problem which should resolve more quickly with a functional federal loan guarantee program allowing wind projects to borrow up to 80% of the capital needed at rates of less than 0.5% above US treasury bills.  Large solar projects may also be able to qualify for such guarantees, but this is a bigger deal for wind because of the much larger program size.

The bad news is that these loan guarantees are unlikely to be available until the last quarter of the year, even with expedited rule-making. 

Smart Grid 

Of the utilities with existing Smart Grid efforts, all seemed interested in accelerating roll-out.  Black Hills Corporation (BKH) has an AMI-roll out using meters from Elster, currently going on in Pueblo, which they hope to use ARRA money to accelerate, and to expand to more rural areas where it might not otherwise be economic for them.  The Poudre Valley Rural Electric Association has a program focused on commercial customers using a Landis + Gyr solution. Xcel Energy (XEL) has an extensive Smart Grid pilot program in Boulder Colorado, with seven partners.  The City of Fort Collins has an ongoing Fort ZED project with a wide variety of partners.

These expansions should be good news for the equipment providers, but a look at the partners brings up one of the perennial headaches of investors interested in the smart grid: nearly all the companies listed above or in the partnerships are privately held.  While there are publicly traded smart grid companies, the wide variety of solutions and companies offering them make it difficult for a public investor be confident that the companies he owns will be the ones which do well long term.  The best solution I have come up with is to own a little bit of all the smart grid companies I find, with a focus on the lower-tech solutions such as Demand Response, and established metering companies which I consider likely to acquire smaller private players.  Charles provided a list of four smart grid stocks in December, while I took a look at three more (Itron (ITRI), Echelon (ELON), and EnerNOC(ENOC)) in November.  To these, I'd add General Electric(GE) and Telvent (TLVT). I don't know of any projects by these companies in Colorado, but if the trends here are any guide, companies which already have existing projects with utilities can reasonably expect those projects to accelerate.

One other trend of note was that the utilities were generally much more interested in the potential of the smart grid to make their distribution systems more efficient.  For example Xcel's representative said that their goals, in order of priority, were improved utility efficiencies, improved asset operations, asset life extension, recapacitating existing infrastructure, and (lastly) new assets and services.  All of these except the last are upstream improvements which are unlikely to be seen by the customer.  While smart grid applications which allow residential users to understand our own power consumption may be more exciting to us, these are unlikely to be the first applications which the utilities choose to roll out in a big way.

Energy Efficiency

Energy Efficiency stocks are likely to be big winners, simply because of the amount of money in the stimulus directed towards building retrofits, both for low income and federal buildings.  If anything, however, energy efficiency can be more difficult to invest in than Smart Grid, because good efficiency measures tend to have more to do with system integration than with products.  That said, there are a few products which seem likely to get a boost.  First and foremost is insulation, which will be used extensively in weatherizing homes and businesses.  Owens Corning (OC) gives the best exposure to this sector, since major competitors Johns-Manville is owned by Berkshire Hathaway (BRKA), and CertainTeed is owned by Paris-traded Saint-Gobain, a more broadly diversified building products group.

Other energy efficiency products which are likely to see a boost from ARRA funds are ground source heat pumps, which will be likely to feature in multifamily residential and commercial building retrofits.  I profiled heat pump companies Waterfurnace Renewable Energy (WFIFF.PK) and  LSB Industries (LXU) in December, in anticipation of the stimulus package.  LED lighting company Cree, Inc is also well placed to take advantage of energy efficient building retrofits.  Other companies which may benefit are small innovators which have efficiency improvements targeted towards specific applications.  One such is AltEnergyStocks.com sponsor Power Efficiency Corp (PEFF.OB), which sells controllers which improve motor efficiency in variable-load applications such as escalators and rock crushers.  

Geothermal Stocks

Despite Geothermal Power's small contribution to overall electricity generation, both Xcel Energy and Tri-State Generation and Transmission mentioned geothermal power as something they were looking to pursue with ARRA funds.  If these plans come to fruition, likely beneficiaries are the industry leader Ormat (ORA), a vertically integrated geothermal company, which I consider attractively priced around $25, and Raser Technologies (RZ).  Raser could be particularly well positioned to benefit from the stimulus because they focus on building and commissioning geothermal plants much faster than industry incumbents such as Ormat by using off-the shelf turbines from United Technologies Corp. (UTX), allowing them to get projects up and running much faster than their competitors.  This should be a particular advantage when competing for stimulus dollars because of the emphasis on speed in the ARRA, which requires projects to be completed by 2012.

Electric Transmission

The Western Area Power Administration (WAPA), a federal agency, was given both new funding and authority to plan and build new electric transmission in its territory to deliver power from renewable sources.  They have already begun the planning process, and their representative was enthusiastic about the process.  These projects will likely be in partnership with private companies, and so several of the transmission companies we listed in anticipation of the stimulus package are likely to benefit.

Batteries and Energy Storage

Although batteries were not mentioned directly in this utility-oriented symposium, two speakers mentioned that they would be interested in using plug-in hybrid electric vehicles as part of a smart grid pilot project.  Both Xcel and Tri-State mentioned that they had specific Compressed Air Energy Storage (CAES) projects they would look to fund through the stimulus package.  CAES is the second most cost effective way to store electricity on a large scale (the first being Thermal Energy Storage in conjunction with Concentrating Solar Power), but I do not know of any public companies focused on this technology.

Finally, the symposium did not focus on transportation infrastructure, and so I have not mentioned rail and transit companies which may also benefit.  See our Clean Transportation archives for some of our ideas in these sectors.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad is long ITRI, ELON, ENOC, GE, TLVT, WFIFF, LXU, ORA, RZ and PEFF.  PEFF is also an advertiser on AltEnergyStocks.com.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 08:34 PM | Permalink | Comments (0) | TrackBacks (1)

Most people have probably seen and/or listened to Barack Obama's inaugural speech by now. In the second presidential debate, Obama ranked energy as his top priority (the choices offered by the moderator were: healthcare, entitlement reform and energy). As I pointed out earlier this week, the President picked an inner energy and environment circle that is heavily tilted in one direction: combating climate change and promoting alternative energy.

We were thus very interested to see if Obama would place a strong focus on energy issues in his inaugural speech given the precarious economic environment. After all, that is probably not where he stood to score the most points.  

We were not disappointed. Here are all energy-related quotes in the speech:

"each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet."

"We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together." (Emphasis ours)

"We will harness the sun and the winds and the soil to fuel our cars and run our factories."

"With old friends and former foes, we'll work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet." (Emphasis ours)

"And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to the suffering outside our borders, nor can we consume the world's resources without regard to effect. For the world has changed, and we must change with it."

We've already discussed this topic at length so I won't be delving into the meaning of every quote. Suffices to say that the President made all the right noises as far as alt energy investors are concerned, and he managed to do it five times in the space of 20 minutes.

You can find a full transcript of the inaugural address here.

Posted by Charles Morand at 09:33 PM | Permalink | Comments (1)

As the Obama inauguration nears and his cabinet picks are made public, the impact of his presidency on the alternative energy sector is becoming more tangible. During the campaign, we heard plenty on Barack Obama's views on environmental regulation, climate change and alternative energy. But what about the people who will be advising him day-to-day on these matters, and who will be ambassadors both inside and out of the country for the administration's policies?

One thing is for certain: Obama's picks so far for positions with influence on energy and environmental matters mark a clear break from the Bush administration. I was doing some reading on the matter and put together the table below, along with certain stock categories that could see some upside as a result of these individuals' influence on the incoming administration's policy agenda.

Name	Position	Responsibilities	On The Record	Stocks
Rahm Emanuel	Chief of Staff	Top administrator in the White House. Controls the flow of people and information in and out of the President's inner circle.	Strong proponent of natural gas-powered cars; History of voting for clean energy initiatives and against measures favorable to the oil & gas industry	Clean Energy Fuels (CLNE); Alternative energy ETFs and MFs
Hillary Clinton	Secretary of State	Strong foreign policy responsibilities. As far as the environment and energy goes, will be largely responsible for communicating and defending the administration's policies abroad.	Get tough with OPEC; Wants "gas price manipulation" investigated; Favors cap-and-trade	Emissions trading stocks
Ken Salazar	Secretary of the Interior	Responsible for policies related to land management in the US.	Tighten controls over oil royalties; Expand the use of renewable energy on public lands; Modernize the interstate electric grid; Cautious on oil shales and off-shore drilling	Electric grid stocks; Wind power ETFs
Lisa Jackson	Head of the EPA	Responsibility for enforcing various pollution laws and regulations, and for setting pollution standards.	Commitment to making decisions based on science rather than politics; Unveiled New Jersey's carbon emissions reduction strategy; Commitment to fighting pollution and climate change	Emissions trading stocks
Nancy Sutley	Chair of the White House Council on Environmental Quality	Main advisor to the White House on environmental policy.	Oversaw a program to retrofit buildings in L.A. to increase energy efficiency; Views the roles of cities as important in fighting climate change	Building retrofit stocks
Carol Browner	Energy Coordinator	This is a position that does not yet exist. Its main function will be to advise the President on climate policy.	Record of enacting pollution standards	Emissions trading stocks
Stephen Chu	Secretary of Energy	Broadly responsible for the domestic energy file.	Strong belief in the urgency of fighting climate change; Proponent of energy efficiency; Very cautious on coal	Emissions trading stocks; Energy efficiency stocks

To be sure, not all of these individuals will have the same degree of influence on the President, and past opinions or actions may not be an indication of future ones. Nevertheless, two main things emerge from this table, in my view.

First, few if any of these individuals have a history of cozying up to the fossil fuel industry, whether oil & gas or coal. This is markedly different from what people got used to under the Bush administration and while I wouldn't say this is grounds for shorting O&G or coal stocks, these industries should not expect energy policy to be as favorable as it has been over the past eight years.

Second, in most cases, these individuals have openly stated that they view climate change as a significant problem that should be addressed. It is therefore nearly certain that greenhouse gases will be regulated at the federal level.

Obama made his views on alternative energy and climate policy known a long time ago. His appointments confirm that he intends on carrying through with his promises. While I continue to believe that the White House won't seek to have tight climate regulations enacted as long as the economy remains soft, such regulations, likely in the form of a cap-and-trade system, will almost certainly be brought forward before this presidential term is over. 

Posted by Charles Morand at 10:37 PM | Permalink | Comments (1)

I was interviewed for a story on NPR's Morning Edition which aired Thursday.  Tamara Keith asked me what Obama's election meant for Alternative Energy, and I felt many of my points were downed out by the others she interviewed.  Here's what she didn't put in the story:

• Obama mentioned three challenges ahead in his acceptance speech.  He said, "We know the challenges that tomorrow will bring are the greatest of our lifetime: two wars, a planet in peril, the worst financial crisis in a century."  Of these three challenges, two were thrust upon him, but he chose to tackle climate change.
• When choosing which Alternatives Energy to support, Obama is likely to consider if they 1) will be cost effective, 2) will create jobs, 3) are necessary for transformation, and 4) promote citizen involvement.
• The sectors which best fit the above criteria are Energy Efficiency (Cost effective, Jobs, Citizen involvement) and Transmission and Smart Grid (Cost effective, necessary for transformation.)
• Obama has the skills needed to get people thinking about energy, and overcome the behavioral and attitude barriers which cripple efforts to promote energy efficiency.

At the same time, AltEnergyStocks.com Editor Charles Morand was doing a live interview on the CBC Radio Noon show at practically the same time.  Here is his article about EarthFirst Canada (EF.TO, ERFTF.PK), which was the subject of the interview.

Tom Konrad

Posted by Tom Konrad at 12:18 PM | Permalink | Comments (2) | TrackBacks (0)

Politicians will always have an influence on the stock market, through regulation, tax policy, incentives and more.  This truism is only more certain in energy policy, where electricity markets and transport are highly regulated, and the next administration is widely expected to enact some sort of carbon regulation, if not a tax.  

Last night, I heard the head of the Colorado Governor's Energy Office speak on what the state administration is doing on energy policy.  Our current governor, Bill Ritter, ran on a three part platform: working to fix Colorado's healthcare, transportation, and energy policies.  Last year, the administration mostly focused on energy, and although healthcare and transportation will get more attention this year, there are already several energy bills on the legislative slate.  This is because "Nobody is certain what to do about transportation or health care, but we do know what to do about Energy."   This scenario may also be familiar to residents of California.

Since we do know what to do about energy, do the remaining US presidential candidates?  From the news coverage, I have to admit I'm far from certain.  My impression has been that most of the Democrats and John McCain among the Republicans have been talking a good game, but repeated mentions of potentially problematic technologies and policies such as "Clean Coal," Biofuels, Carbon Cap'N Trade, Nuclear power, and even Coal to Liquids, leave me wondering if even the best of intentions might lead to bungled energy policy.

If I Were President...

There is no doubt that energy policy is complex.  Nevertheless, energy policy much more tractable than solving our nation's healthcare crisis, the looming unfunded costs of entitlements such as Medicare and Social Security, or even what to do about the mess in Iraq.  In short, I feel I know why Al Gore isn't running for President again.  

It is true that many of the candidates have health care plans as well as energy plans. but until some other unsuccessful presidential candidate reinvents himself (or herself) by trudging around the nation with a slideshow about healthcare, I doubt our next President will be able to do more than apply a band-aid to any of these problems.  (I sincerely hope to be wrong on this.)

In contrast, Energy policy, while complex, provides clear opportunities for improvement.  

1. Improved energy efficiency provides winners all around. 
2. Strengthening our national grid is essential to large-scale renewable energy development.  
3. If a Carbon cap is chosen over a carbon tax, it needs to be carefully designed to avoid rewarding polluters without significantly reducing pollution.  
4. The entire life-cycle of transport fuels needs to be considered to ensure they don't do more harm than good.  
5. All externalities of transport solutions need to be considered to avoid unintended consequences, such as higher fuel economy encouraging driving and hence contributing to congestion and accidents.  We need better transportation systems and smart growth more than we need better cars.  
6. "Clean Coal" and ...
7. Nuclear are likely to be much more expensive when true costs are taken into account than cleaner options with less active lobbyists. 

Admittedly, several of my above points are controversial, but they're less controversial than turning off life support on a brain-dead Florida woman.  And they're orders of magnitude more important. 

Grading the Candidates

I'm doing this exercise partly for my own benefit; I don't know how the candidates are stack up against each other, and I still have a caucus to participate in.  What follows are my grades of the remaining candidates on each of the seven above criteria.  Keep in mind that I give candidates low grades on "Clean Coal" and Nuclear if they support subsidies for these technologies.   I assume that the candidates who are not currently talking about energy policy will not attempt to do anything about energy policy.  

Democrats:

All of the democrats have put real effort into their proposed energy policies, but only Obama considers it one of his highest priorities.  Links are to sources other than the candidates policy statements.

	Hillary Clinton	John Edwards	Barak Obama
Energy Efficiency	B	A	B
Transmission/Grid	C	C	B
Carbon Regulation	B	B	B
Transport fuels	C	F	B
Smart Growth	C	D	B
"Clean Coal"	D	F	C
Nuclear	C	B	C

Republicans

Rudy Giuliani and Mike Huckabee seem to consider energy independence (a chimera) more important than reducing carbon emissions.  Ron Paul shifts the subject to property rights, while Mitt Romney waffles about whether climate change is caused by human action.  Given this backdrop, I cannot take any of their energy policies seriously.

While John McCain also emphasizes energy security, he puts priority on combating climate change.  If you are a Republican who cares about this issue, he is the only one likely to take any meaningful action.

Energy Efficiency	C	Smart Growth	F
Transmission and Smart Grid	B	"Clean Coal"	D
Carbon Regulation	C	Nuclear	D
Transport Fuels	C

Conclusions

I'm surprised to find that Barak Obama is the best candidate for the Clean Energy voter.  I started this project remembering the furor he aroused with his support of Coal-to-Liquids technology, but his subsequent "clarification" that he was only interested in low-carbon coal to liquids seems to have taught him a lesson about transport fuels, and that early misstep may have led to a more comprehensive look at the tricky issues of transport fuels.  This may be why he now takes the lifecycle costs of transport fuels seriously, while they aren't really on other candidates' radar.

Obama is also the only candidate who explicitly calls energy one of his highest priorities.  I can't say I'm in love with any of the candidates (note the almost total lack of "A" grades.)   John Edwards earned the sole "A" because he panders towards interest groups.  On energy efficiency, he managed to hit one of my hot-button issues squarely, but then he went and blew it by pandering to the ethanol and "Clean Coal" lobbies.  

A major part of Clinton's platform involves forcing oil companies to invest in renewable energy, an idea that does not fit into my rating schema.  I think this is a bad idea, because reluctant investors are unlikely to make intelligent investments.  Even without Clinton's paln, oil companies that understand peak oil will invest in alternatives, and oil companies that do not will decline along with their reserves.  

With my discomfort with Obama's initial endorsement of Coal-to-Liquids, and Edwards' habit of pandering to every interest group at the expense of his own coherence, I used to lean towards Hillary.  I'm now convinced that Barak has the best grasp of the issues involved. 

Republican Clean Energy voters have a much easier choice: only John McCain is willing to confront Climate Change.

Posted by Tom Konrad at 08:37 PM | Permalink | Comments (6) | TrackBacks (0)