This is part of an occasional series looking for signposts of our energy future. It is not a forecast or a prediction, but a search for clues about the path we seem to be following to meet our energy needs. I also included a few bumps in the road.
Feel free to add your own signposts to this non-exhaustive list.
Signposts of our Energy Future
- Unconventional Gas is a 100 Year Winner! The steady growth of natural gas supply from unconventional sources like shale plays across North America is real and sustainable. That was the clear message from speakers at the IHS CERAweek conference in Houston. Jim Mulva, CEO of ConocoPhillips told the crowd on oil day that the proved reserves of natural gas from shales has grown from 30 years to more than 100 years supply with more to come. While this is not new news it does represent a significant recognition that unconventional gas is both substantial and sustainable. Even Energy Secretary Steve Chu acknowledged that natural gas was the key to America’s energy security and a major factor in achieving any reduction in greenhouse gas emissions from coal. He told the CERA crowd that he had asked the National Petroleum Council to begin a study in Spring 2010 of the Prudent Development of North American Natural Gas and Oil Resources. So What? Expanding development of America’s domestic oil and gas resources is essential to our energy security and a key factor in restoring America’s global economic competitiveness. The potential for oil & gas from unconventional sources depends upon American technology and America’s oil and gas expertise being demonstrated in play after play across North America. Will this open the door to offshore drilling? Too soon to say. Will this be good for the environment? Yes, since natural gas has one-half the emissions impact as coal. Will gas expansion hurt wind and solar development? No, since renewables require backup to offset their intermittency. Is domestic oil and gas development good for America’s economy? DUH!!!
- Economic Recovery is Slow but seems Durable. OK, the glass is half full, but after all we’ve been through we’ll take it. Key signs of green sprouts include the sharp growth in the ISM index with industrial production up 5.3% since it bottomed out in June according to Wells Fargo Economics which also said that manufacturing jobs grew in both January and February suggesting that we have now eaten up excess inventory and suppliers are beginning to restock the shelves to meet the strengthening of consumer spending which has also been stronger than expected. Well Fargo Economics predicts real GDP growth of 3.4% in Q1:2010 but still sees slower growth by midyear. So what? So the rough spots remain stubbornly high unemployment which is always a lagging indicator and the continued problems in the housing sector. Other than that, Mrs. Lincoln how did you like the play.
- Is the Stimulus working? And do we Need it? The Administration and Democrat majority in Congress claim the $862 billion in stimulus spending approved is saving jobs and doing its job of turning the economy around. But others who are tracking the progress and problems with stimulus spending tell a different story. ProPublica reports that only $195 billion of the stimulus money has been spent with another $151 billion somewhere in process. You can read their report here. But if the Government cannot spend this stimulus money when we need it, do we really need it? And if the economy is turning around on its own BEFORE we get all this stimulus money handed out could we just save the billions not yet spent and reduce the deficit?
- Renewable Energy Market Share is Growing but So are Rates. We continue to see major expansion of the market share of wind and solar power generation across America driven by the state renewable portfolio standards. But this massive growth has only raised the total installed capacity of renewables to something like 9% but not even this fast growth is sufficient to materially affect the market share of coal and certainly will not do so cost effectively. So what? Utility rates are programmed to rise dramatically as the above market cost of renewable energy is factored into rates on top of the costs for emissions reduction and smart meters. And guess what, it won’t be sufficient to meet our growth in energy demand in a recovering market. OUCH!
- Electric Demand is Returning to Historic Levels—will that mean shortages ahead? The US EIA short term forecast for U.S. Electricity Consumption assumes 5.5% growth in manufacturing output during 2010 which means an expected growth in electricity sales to the industrial sector of about 1%. EIA forecasts electricity sales to the residential sector to grow by 3.5% during 2010 assuming normal weather. Total consumption of electricity across all sectors is expected to grow by 2.0% during 2010 and by 1.5% in 2011.  So what? These are signs that we are in the build up stage of the next electric boom and bust cycle and one signpost of that stage is perceived and real constraints on power generation. States have favored renewable energy for most new power generation additions and many, many coal plants have been cancelled or deferred in the face of uncertain cap and trade regulation. The Obama team has supported one new nuclear power plant project. We have reduced our lead time for power plant construction and a return to historic demand levels for power means that the only practical choice to quickly catch up to demand will be to build natural gas combined cycle plants. Got gas?
- US is not Serious About Electric Transmission. The failure of US DOE to release the 2009 Electric Transmission Congestion Study due to Congress last September is a clear signpost that the US is not ready to face up to the need to take substantial actions to upgrade and expand the interstate transmission system essential to bring new renewable energy projects to market and enable smart grid investment to be practicable. Problems are likely political given the historic conflict between the States and Federal Government over control of transmission siting. So what? NIMBY wins! Smart grid requires broad market access to make the networks and efficiency and demand response programs scalable. Without transmission access new renewable solar in the Southwest and wind in Texas, Iowa and elsewhere cannot reach the load centers. Federal preemption of the states in building natural gas pipelines has created a common market across North America for gas that is serving us well. The fragmented state by state approach to electric transmission is holding us back and undermining our investment in smart grid and renewables.
- Ratepayer Tea Parties Ahead. There is a looming problem of rising utility rates brought on by the pancaking costs of state renewable portfolio standards, feed-in-tariffs and other procurement subsidies, the cost of emissions reduction especially AB 32 in California, and the rolled in costs of smart meter installation. So what? So expect ratepayers to start coming to the street with signs when their rates double or triple over the next five years as a consequence of the political aspirations of politicians and regulators who have approved all these programs. Polls show that ratepayers do not see this coming and it is likely to hit the fan BIG TIME before the economic recovery fully takes hold.
May You Live in Interesting Times
Peering into our energy future always reflects the volatility and surprises that characterize the energy business. Add that to the natural boom and bust cycles of the business and you find a frothy stew simmering and ready to boil over.
The good news is we have more choices today given the growth in unconventional natural gas that reduces our dependence on imported LNG and turns upside down the once forecast transformation of our domestic gas market into a global gas dependence on the same countries that send us oil.
The other good news is the growth in clean and renewable energy from wind and solar and the exploding global demand that is bringing China and its low cost manufacturing prowess to bear driving down the equipment costs for wind turbines and solar panels. If some of the stimulus money allocated to energy ends up in China because we bought their renewable equipment it is a good sign that the Chinese are our friends because they are committed to driving down the cost of renewable energy to grid parity prices in order to capture market share for exports.
When they do that we can end the subsidies of wind and solar and force them to compete on a level playing field with natural gas and clean coal—and let the competitive markets work!
Now that’s an energy future worth working to achieve!
The Western Climate Initiative partners meeting is being held March 3rd in Vancouver BC, but there won’t be much cheering in the stands after Arizona Governor Jan Brewer issued an executive order officially pulling Arizona’s commitment to reduce greenhouse gas emissions to reduce emissions to 15 percent below 2005 levels by 2020 as part of the cap-and-trade approach the Western States and Provinces agreed to in 2008. 
Back then the Federal Government under President Bush resisted action on cap and trade and WCI was seen as a politically correct strategy for encouraging collaborative action along the lines the Northeastern States had taken earlier in forming RGGI—the Regional Greenhouse Gas Initiative. Fast forward to the November 2008 election of Barack Obama and the Feds shifted their strategy and Waxman-Markey Cap and Trade legislation began rolling as a prelude to the main event which was to be a new global treaty at Copenhagen’s COP15-fest.
We’re Behind You California—Way Behind You!
That is the headline to the story of the WCI today, but despite having ten remaining WCI members only the Golden State—now out of gold—is the only one of the WGI partners actually moving forward. In November 2009, the California Air Resources Board issued a preliminary draft regulation for its AB32 Global Warming Solutions Act implementation. 
The recession has had a sobering effect on all these partners and was the official reason for Governor Brewer’s executive order in Arizona. She said the cap and trade program would “devastate Arizona’s economy” and instead the state would use nuclear, solar and other renewable energy sources. But that was true before the recession except Janet Napolitano was Governor then moved on to be Homeland Security Secretary to President Obama.
Indeed, there was an embarrassing dust up recently when one Arizona legislator filed a bill to reclassify energy from the Palo Verde nuclear plant toward meeting the State’s renewable portfolio standard goals thus effectively ending the program by achieving its goal. While the bill was later withdrawn after howls of protest by the solar lobby the point had been made.
The problem for California is that it is now committed to implement AB32 by law. But the cold reality of achieving the policy objectives of AB32 will require natural gas prices of $13.87 per mmbtu and a carbon tax of $100 per tonne in order for the cap and trade program envisioned to be effective in changing behaviors enough to actually achieve the goals according to the CPUC and the CEC—the state agencies responsible for implementing it. And we’ll need to invest billions in new transmission lines to bring all that clean and renewable energy from Arizona to the Golden State—only one problem, we don’t have any gold to pay for it.
There is a growing body of anecdotal evidence to suggest we may be at the crest of the smart grid wave and key players are beginning to map out an exit strategy. They are not yet running toward the exits but there is a sense that time may not necessarily be their ally so the pace is quickening.
Smart grid hype was born out of the global warming movement in the belief that improved efficiency in the use of electric power would result in easier access for clean and renewable energy from wind and solar, fewer line losses or wasted power, and better grid management. And there is some truth to these beliefs since the transmission segment of the electric power value chain has been the most neglected. It has always been tough to build transmission lines because of NIMBY problems so smart grid became a way of wrapping transmission expansion in a political correctness that might make it more acceptable. After all, getting that wind energy from West Texas, Wyoming and Iowa to the load centers that need it most requires transmission. Likewise, unleashing the solar potential of Arizona and the Mohave Desert to bring that clean energy to Los Angeles meant investing in wires as well as solar panels.
The excitement over smart grid was fed by the seduction of billions of Government, venture capital and utility investment in smart grid technology. And it has now produced deal flow sufficient to accelerate installation of smart meters, sensors, boxes and the networks needed to live into the cleantech potential it promises.
So why—-when smart grid potential is reaching its peak is this first wave of investors in smart grid looking for ways to cash in or cash out?
Signposts of the Smart Grid End Game Taking Shape?
- Cleantech Investors were in it for the flip. Many of these early Silicon Valley cleantech investors are not “true believers”. They saw cleantech as a profitable way of aligning the market and politicians to cash in on the global warming concerns. Just like Al Gore, these players looked for ways to make money on our fears and pain points. Seed money produced a wide range of start-ups all across the cleantech value chain leveraging the networks, software, gadgets and chips that made Silicon Valley famous. More importantly, it created a global market for the innovative technology America does best and united it with the low cost manufacturing efficiency of China and the social welfare tendencies of Europe “juiced” by the EU fear being dependent upon Russian gas. Obama became the darling of Silicon Valley because he proved willing to spend our money pursuing a policy regime that enlarged the Government’s industrial policy and social engineering—and paid off for Silicon Valley. But now it’s time to put lipstick on this pig and flip it. So Silver Spring Networks is talking about IPO? Consolidations from M&A is speeding up as smaller weaker players are acquired by stronger ones. This is happening sooner than expected but the return on investment is sufficient to do well by having “done good” before the risk erodes the value peak.
- Risks for Smart Grid Investor are Rising. The dirty little secret of smart grid is that all that investment in smart meters, networks, sensors and gadgets is meaningless unless state regulators and politicians do two things they are loathe to do—raise rates and build transmission lines. Since ratepayers are charged based upon average cost based rates they have little incentive and even less ability to influence demand on the system. Smart grid technology works by using real-time pricing so that customers, being exposed to the volatility and high costs of on-peak power change their behaviors and reduce demand. Smart grid technology taken together is well suited for this, but customers are not ready for it and politicians see it as something to consider—in the future. As a result we get all the embedding costs of adding smart meters and none of the benefits. Add to that the need to build new transmission to bring that clean wind and solar power to load centers and costs are going up—and so are rates. Not a good set of facts for investors seeking to monetize their start-up investments so it might just speed up the exit for many.
- Ratepayers are angry over rising utility rates. The cumulative cost of all this “do-gooding” is beginning to hit the utility bills just when ratepayers can least afford it. The result is pushback by ratepayers, complaints to politicians and pressure on utility regulators. But it is too late. The costs of years of procurement of cleaner, but more expensive renewable energy is coming due. The rate impacts of program after program of energy efficiency, demand response, subsidies and feed-in-tariffs paying above market costs to get cleaner energy resources built is going into rates. In California, PG&E gets pushback in Bakersfield over high utility bills and politicians run for cover. In Colorado, Xcel Energy does “good” by sponsoring Smart Grid City but when the cost go up—way up, the Colorado regulators slap it with a prudency review and threat of disallowance. In Florida, the Public Service Commission denies most of FPL and Progress Energy’s rate increases and both utilities respond by slashing capital investment and thousands of jobs. It’s getting ugly out there in ratepayer city—and the worse is still to come.
- We Told You It Would be Expensive! The age old process of CYA is setting in big time across the smart grid landscape. In Spain and Germany, the use of feed-in-tariffs to pay above market costs for solar energy imploded in the recession and the governments decided they could no longer afford the subsidies. The action in Spain pulling back on the FiT caused worldwide chaos in the solar PV panel supply chain as Spanish vendors dumped panels at less than cost to avoid being stuck with them sending PV prices around the world plummeting. The lesson: what lives on unsustainable subsidies cannot be sustained when they dry up. Now in the US there are growing concerns that utility investment in smart grid especially smart meters may turn out to be a poor one since the prospect of real-time pricing diminishing at the same pace as the rise of ratepayer squealing about rate increases. The same is true of other global warming “solutions” where in California the implementation of AB32 remedies to reduce emissions are likely not cost effective unless the market price of natural gas rises to $13.87 per mmbtu and a carbon tax of $100 per tonne is imposed according to the state agencies responsible for implementing this law. Even in California we have limits.
- Settled Science is, perhaps, Not So Settled after all. The meltdown of the Copenhagen COP15 climate change treaty process is only one of the problems plaguing the proponents of global warming solutions. The IPCC panel scandals over research manipulation has destroyed the credibility of the foundation for smart grid, AB32 like draconian measures to reduce emissions, real-time pricing and perhaps even renewable portfolio standards for clean energy by the time it runs its course. I am not cheering this on, just stating the reality that the implosion of the scientific basis underpinning all this hype on global warming and smart grid or clean energy solutions tarnishes these strategies in the face of their staggering cost. Perhaps, we do have time to find more balanced, affordable, cost-effective solutions that do not require the remaking of our global economy. And besides that, unless China, India and a few other fast growing economies agree to play by the same rules there is little reason to commit economic suicide to pursue a policy prescription that will not work to reduce emissions.
So the pendulum is swinging back and a sense of balance, proportionate response, and re-examination of the facts and science is likely to save us from our own political folly—this time. Cleantech investments will produce a rush of new products that the natural process of consolidation and flip will combine into better solutions. Subsidies and stimulus will give way to economic rationalism once again. The aftermath of the recession will have purged our economy of its unrealistic leverage and our next few rounds of elections in the US and EU body politic will purge incumbents and relieve the pressure of excessive spending—we hope.
Investors in cleantech and otherwise will do what they do best—harvest profits and move on to the next big thing. And their investment in smart grid may yet be realized—not thru stimulus or subsidies but by leveraging the convergence of information technology, communications, entertainment, security and, yes—energy management to create the next generation of ‘must have’ and oh so cool products we will gladly spend money to acquire and use. Look around you, it is already at work.
Check out the latest AT&T ad for its iPhone which touts—almost in passing—the iPhone App for “did we turn off the light at home before we left?” It’s here today. Or consider the new Comcast ad for Xfinity, the next generation of bundled services with 100 mbps bandwidth for streaming TV combined with VOIP, cable TV and a menu of thousands of movies and soon apps to meet your every need.
Smart grid investment will pay off in the long run but not because we bankrupted ourselves to install them—-but because —in the nick of time—we didn’t!
It appears that climate science is not as settled as Al Gore professed even as late as Copenhagen. Reports of “errors” keep piling up as researchers take a fresh look at key findings and reports emanating from the international bodies and research universities most responsible for the body of literature being used to shape the world’s environmental and economic future.
“Skeptics Up, Obama Down, Cap and Trade Dead”
That was the conclusion of an ongoing series of investigative news reports in the UK on the IPCC and other research institutions linked to the UN’s Climate Change policy analysis.  Just a month ago, the panel was forced to retract is report on the rapid melting of glaciers after it was found that it could not be supported by the evidence. 
Correction Course on Political Correctness in Progress
That scientific research has been tilted toward a favored policy outcome is neither shocking nor new. That the rest of the science community tolerated this “junk science” so long is the real tragedy. This kind of passionate inquisition has been going on for centuries, but rarely has so much money been spent pursuing political correctness nor the risk of economic harm from such policy prescriptions so profound. From faster melting glaciers, to rain forest collapse to agricultural production declines in Africa, the list of dire conclusions now being shown as based upon inadequate research, suddenly unavailable data, or just unsubstantiated opinion keeps coming like a slow trickle turned into a major flow.
Exposing these “research errors” is useful and timely to be sure. We can only hope that this tilting of science for the sake of continued research funding, professional advancement and tenure, or just vanity will be exposed and the erring parties discredited. But where was “peer review” when we needed it?
As humans, we understand human failing, and can forgive it even as we discipline those who engage in it. But we expect more from our governments and our rising cynicism and trust in government has a far more lasting and corrosive effect when we discover we are being mislead on the science and then mislead by politicians about the policies proposed as a result of reading that ‘political’ science.
It is NOT about the Environment, Stupid!
It would be a mistake of equal or greater proportion for those who cheer this collapse of climate change research to take it as repudiation by the public of our collective interest in being good stewards of the planet. The environmental movement has succeeded in persuading us that we must all act responsibly, avoid unnecessary pollution, and decry actions that needlessly despoil the planet or cause harm. We still expect to leave the earth a cleaner place for our children than we found—as the cliché goes.
But something is changing in our sense of environmental responsibility.
This exposure of bad behavior by climate scientists will result in more skepticism to be sure from this experience, and a better sense of the need for balance as a consequence of the economic recession we have experienced. We still expect environmental responsibility. But our definition of environmental economics is changing to include more balance of the cost and consequences of proposed policies against the benefits of enacting them.
Is there a Good Outcome from this Bad Science?
This could mean some profound changes yet ahead in the US and around the world after the effects of this climate change “crisis” plays out through the next election cycle:
- Reality Therapy in Mexico City. Hopes for a COP15 “do-over” in Mexico City should be diminishing considerably. If anything, the next UN conference in Mexico City should be a place full of confession, repentance, remedial education and soul searching about the important of academic rigor, peer review and transparency as a foundation for re-starting the debate about the real science of climate change.
- US EPA Endangerment. US EPA must quickly back off its threatened endangerment finding before it risks having its authority in the matter gutted by an outraged Congress looking for someone to hang for this climate change embarrassment. More than Waxman-Markey has been left bleeding on the sausage making floor of Congress, the Administration now lacks the political authority to pursue the same agenda by regulatory fiat.
- The Environmental Responsibility Act. Congress should require all Federal agencies and State governments using Federal money to include in any environmental impact statement or environmental review and/or Federal rule making an analysis of the economic impact of any such proposed action and a finding, subject to judicial review, that balances such costs and benefits in the public interest. The law should also include a “loser pays” provision in environmental litigation to assure that environmental lawsuits are not used as tactics to extract settlements or pursue political agendas.
- AB32. This California law to regulate greenhouse gas emissions is actually an income redistribution tax act designed to evade the two-thirds rule on budgets and taxes in the California Legislature. It gives the California Air Resources Board the authority to set carbon taxes administratively on an annual basis. The likely consequence is that such fees will be pegged to the size of the California budget deficit and, conveniently, requires no elected official to actually vote to raise taxes. The California Energy Commission and California Public Utilities Commission have reported to the Legislature that they believe a carbon tax of $100 per tonne would be required to implement the policy goals of AB32 and the companion 33% RPS standard. The collapse of the climate science foundation for AB32 will expose it for what it is. Besides, with RGGI and EU carbon credit prices falling like a rock to about $2 per tonne, AB32 will not likely produce the revenue California politicians’ dream of anyway after the climate science is “settled”.
Maybe unsettled science is a good thing if it forces a balancing of the costs and benefits of major policy changes in environmental laws and other public policies. Voters are in a surly mood over the state of the economy and their anxiety about their own financial future. This is the kind of political climate crisis that brought us Proposition 13 in an earlier California era. Today there is no similar ‘quick fix’ for California unless we hit “reset” by authorizing one of the ballot measures being circulated today calling for a state constitutional convention. For Congress, the path to hope we can believe in is actually swifter the old fashioned way Americans love—“throw the bums out” in the November 2010 election.
The press is full of ‘blood in the water’ analysis of the meaning of the Massachusetts election of Scott Brown. As a former Bay Stater I appreciate how stunning that victory was in both bad and good ways. For Democrats, accustomed to dominance it is a humbling experience. But the GOP will make the same mistakes the Democrats have made if they see Scott Brown’s election as a triumph for their version of Washington truth.
Let’s face it, at the end of the day the general public see little difference between the behavior in Washington of the Democrats and the GOP. Both parties over-reach when their power is felt to be dominant. Both parties are controlled by their fringes on the left and right. Both parties are hyper partisan. And both parties have been equal opportunity offenders of the public conscious.
“We’re mad as hell, and we’re not going to take this anymore!”
The real message of Massachusetts is that the voters are saying ‘a pox on both your houses’. The tea party movement is a genuine demonstration of disaffection for the direction the country is going and should be seen by the Democrats as ‘in your face’ evidence of over-reaching. Why don’t they see it?
The dirty little secret is they DO SEE IT, but they realize that they are likely to lose their dominance in the 2010 election (the party in power almost always loses seats in mid-term election historically). So the base of the Democrat party came to believe that Obama’s election gave them ONE SHOT at getting their agenda passed in the 2009-2010 term of Congress—and they decided to go for it. But by so fiercely focusing on the end game for their left driven political base they have ignored the public majority in the center and shut-out the GOP on the right undermining the perception of a fair process in their overreach and risking an even worse political outcome. Is this narcissism? Is it desperation?
Don’t rejoice for the Republicans
The election of Scott Brown is not necessarily good news for them either. The truth is the GOP did a terrible job in the majority when they last held it and the behaviors of the Congressional GOP leadership and right-leaning base were just as obnoxious in their time in power as the Democrats are today. Scott Brown’s election is as much a wake-up call for the GOP right as it is for the Democrat left. And reading more support for the GOP into his election is a foolish fantasy for the right wingers. The candidates who are winning in New Jersey, Virginia and now Massachusetts are NOT traditional GOP right wingers, but capable, reasonable, center of the road Main Street folks.
Change We Can Believe In
Scott Brown’s election is a savvy and, so far, successful attempt to take the Obama message of 2008 of ‘change we can believe in’ that the public signed up for and apply it to a center of the road style of governance that the public thought they would get in a President Obama. Instead, Obama campaigned as one kind of president and has governed as a very different kind. The public is feeling like he bait and switched them from a centrist agenda of positive, inspiring change to a left-wing agenda of government control over every aspect of our lives with debt that is never ending to fund it. And they are reacting negatively to it. The president remains personally popular among a general public that truly wants him to succeed, but he is at very serious risk of losing that benefit of the doubt. And there is no way to blame the mess Obama is now in on his predecessor. He did not inherit this political mess—he caused it.
Get back on the Green Line!
Like that Fidelity investments commercial that seems to run constantly these days, you know the one with the green line of “guidance” for the scared investor, Obama can still save his presidency by returning to the “guidance” of his 2008 campaign message and living it as the centrist president the people voted to elect. The election of Scott Brown gives him an opportunity to tell the left leaning base in the Democrat party they failed to deliver a product the people want and now must move to the center. It is a tough love message of ‘follow-me or get run over’ that only he can deliver. But unless he does he will have squandered his historic opportunity and ruined his legacy.
What should Scott Brown do?
Be the centrist independent the People of Massachusetts elected. He may indeed be the 41st vote against ObamaCare, cap and trade, and the political bribery of the Louisiana Purchase, Cornhusker exemption and other desperation deals which should now die a visible death. But Scott Brown must be a demonstrable change of political behavior in Washington to invest and grow the political capital he just received.
If he succumbs to being just the 41st vote for the GOP he looks like every other sleazy politician in Washington instead of living into the legend he inherited with the seat of Ted Kennedy. By being the new “lion of the Senate’ for the center of the road majority of the American people Scott Brown can give President Obama an opportunity to reclaim the captaincy of his listing ship of state and he disciplines both extremes on the left and the right with the true message from the Massachusetts election.
Now that would be change we can believe in.
The sting was revealed but the hook is not yet set by the January 11th exposure of a “dispute” among the 16 member California Economic Allocation Advisory Committee (EAAC) whose purpose is to figure out how to spend the money from carbon taxes envisioned by AB32, the California Global Warming Solutions Act.
The Set Up
On January 11th the EAAC presented final allocation recommendations to the State. So this is a trial balloon to see how much angst this approach stirs among the politicians, special interest groups, and seeks to avoid enraging voters before the next election. By framing this “dispute” among members, the EAAC is setting up the potential for a sting of California consumers depending upon how the rest of the process plays out.
The timeline for the rest of this process is that a final public conference call will be held in February 2010 to adopt its economic impacts report. EAAC Chair Goulder will present both reports to the California Air Resources Board February 25th. In Fall of 2010 along with the final proposed cap and trade rules, the CARB staff is expected to recommend a final allocation approach which will purport to balance EAAC recommendations and public input. This is when the hook will be set if the political will exists to do so. There is the minor problem of the November 2010 election looming and voters in California as elsewhere are growing surly.
The committee imported a Harvard environmental economics professor, Robert Stavins, director of Harvard’s Environmental Economics program, to testify that the California approach complies with the AB 32 intent and that the proposed carbon taxes should not fall heaviest on poorer people. He opined that a cap-and-dividend approach produced fewer benefits than cutting taxes on labor and capital.
The much maligned Waxman-Markey Bill passed by the US House uses most of the proceeds from sales of emissions allowances to reduce power company costs of compliance by essentially awarding them free permits to reduce the expected spike in utility rates. This approach sidelined a number of major utilities who fatalistically decided to get the best deal they could rather than be painted as obstructionists. There is a Senate bill by Senators Boxer and Kerry which is closer to the approach being used in California, but it has gone nowhere as yet on Capitol Hill.
Placing the Hook
At its January 11th meeting, the CEAAC members endorsed a “cap-and-dividend” approach which would set prices for CO2 emission allowances as a tax on producers and then use the money raised as a “dividend” to consumers to help reduce their burden of paying all those higher prices for everything that uses energy. The discussion by staff presenting ideas to the committee suggested an annual energy “dividend” for a family of four might be about $1,000.
Sounds good, right?
Not so fast, the committee was divided on whether the best way to use this pot of gold at the end of the global warming rainbow was to give it back directly to consumers or instead use it to create “tax cuts” in state income taxes or sales taxes that will have to be raised to balance the state budget!
The timing was subtle but perfect. Waxman-Markey has stalled in Congress and COP15 turned into a food fight between developed and developing countries and resulted in egg on all their faces. So California with AB32 safely adopted has the opportunity to recapture the leadership flag and show the world how things are done in the Golden State.
Meanwhile, the State is facing another $22 billion deficit because of the recession thus the convenient convergence of the need to develop an implementation plan for AB32 and address the growing California budget deficit sets up the “the sting” that should earn the State an Oscar for best supporting actor in a political drama. Nothing tops the Federal Governments hubris for spending, taxation and income redistribution for Best Actor nominees this year.
Perfect Sting or Fatal Error?
So will California use Carbon Taxes to fill the hole in its state budget? The perfect cure it seems to state politicians. Will they save the world and save their behinds at the same time all while calling these new carbon allowance revenues “dividends” or using them to “reduce taxes” that they must raise rather than reduce spending to close the budget gap? Or will this fatal attraction and sleight of hand turn into a fatal error in the November 2010 elections. High stakes!
But I saved the best part for last, his vast income redistribution scheme would not require the Legislature to actually vote for any nasty tax increases since the California Air Resources Board would administratively each year set “carbon allowance fees” sufficient to raise the revenue needed to meet the Legislature’s spending desires and balance the budget and then the Legislature would declare a “dividend” to give a modest portion of the revenue back to consumers while taking credit for being fiscally responsible balancing the budget by keeping the lion’s share for budget spending. This has the added political benefit of reducing the hostage taking behavior over the need for a 2/3 vote to raise revenue or reduce expenditures each year in passing the state budget. The debate among the 16 members of the California Economic Allocation Advisory Committee is not really what to do but how little of the revenue must be given back to consumers.