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!
The ARRA stimulus bill targeted $36.7 billion in spending for energy investments, with solar, wind, and the smart grid as the major focus for spending while biofuels, energy storage and carbon capture and sequestration projects saw targeted financing. This Federal money certainly stimulated the venture capital sector that saw it as a once in a lifetime cleantech binge.
Analysts said there were 356 deals in 2009 including 110 Series A and seed round start up deals, compared to 350 deals in 2008 and 222 deals in 2007 with a 2009 total capital invested of $4.85 billion down from $7.6 billion in 2008—the record year. Venture capitalists continue to bet heavily on cleantech and renewable energy with solar power investment of $1.4 billion in 84 deals according to GTM Research continuing its four year lead in the category. Biofuels saw $976 million in investment perhaps responding to the big bet made in the sector by XOM. 
The sleeper in the race was water with 33 deals totaling $130 million. Water and energy have always been integrally linked but the best way to profit in the water business is to provide the technology, advanced process services and equipment to increase supply, reduce waste and improve the efficient and cost effective treatment of water.
The Great Cleantech Flip Ahead?
The market also saw an uptick in capital investment from outside the United States and that combined with the stimulus and VC spending binge suggests rising demand for cleantech opportunities might mean a rush of IPOs in 2010 to cash in big time before the inevitable consolidation process eats some of the best opportunities. Timing seems right for increased deal activity in 2010 because Federal stimulus money is drying up and prospects for more gravy out of Washington are greatly diminished over worries about the deficit.
The VC trade press says investors are looking for opportunities in smart grid infrastructure perhaps hoping to pick up products and capabilities that can “tuck under” to make more complete and thus valuable solutions. The bigger fish are also looking opportunistically to eat the smaller fish in the consolidation process. Any anyone who did NOT get ‘stimulated’ or got VC capital infusion and now is threatened by those that did turning them into ‘fish food’ in the consolidation process now underway.
Global Competition is Good
The other factor at work is that as the markets improve we need for more deal flow to put capital to work, consolidate market share, and position for the next boom. This is a global competition with the US, EU and China as healthy rivals for this investment.
Fish Stew with Sour Wine in EU
The EU today is the weakest of the three global rivals with problems in Euro zone in Greece, Spain and others. Germany and France are working to address the economic problem but it is a distraction, adds uncertainty, and will require bailouts to prevent more damage. UK investors seem more attracted to the US markets than Europe leaving the problem to Germany with France along for the ride. Renewable energy in EU took big hits with the failure of feed-in-tariffs in Spain and then Germany two of the largest markets causing equipment prices to tumble worldwide as vendors dumped excess solar panels and China slurped up FiT subsidies from existing contracts.
China Demand for Growth is High but Sustainable Growth Means Coming to America.
Strange as it seems from the political sparring between the Obama Administration and China over issues like arms sales to Taiwan and chicken parts, Iran nukes and North Korea sanctions issues, these two rivals seem linked at the hip even if the lips are bantering. Rivalry results in tiffs like this but the core relationship between the US and China is too interdependent for either to do something stupid.
China needs American markets to export its goods and sustain its growth. It buys US dollars and increasingly invests capital in US assets and businesses to further diversify its portfolio and reap the benefits from the most stable world economy returning to growth. Besides, China needs something only America can provide—technology and brainpower to deploy it.
The US needs China to finance our deficit and recovery by continuing to buy dollars and increasingly invest in American business to allow the US Government to dig out of its deficit hole. The US also needs China to drive down the cost of goods sold and especially to drive down the cost of renewable energy equipment such as solar panels and wind turbines to grid parity prices with natural gas. Unless this happens, renewable energy is not sustainable or affordable long term.
If the global rivalry is managed and healthy both China and the US can win big time. If they permit other issues to distract them from their strategic relationship both lose potentially big time.
The US is the World’s Best Hope for Recovery
Like it or not, the US is still the world’s most influential superpower even when its economy is weak. We likely will survive the Obama Administration stumbles with a big debt but that can be fixed over time with a robust recovery. That must be our single minded focus—putting Americans back to work and leveraging their ingenuity to drive markets, technology, innovation and growth around the world.
Grid lock in Washington DC is a wonderful thing.
It constrains the worst aspirations of both political parties. Recent elections in the US have humbled the Democrats, but the Republicans make a huge mistake if they see the Democrats stumble as their gain. Voters are surly and have a ‘pox on both your houses’ attitude that will require human political sacrifice to purge. And November 2010 is shaping up to be a time of wholesale political sacrifices threatening all incumbents. This sends our beltway bandits running for cover, but voters smell blood and will not be denied. There are risks in electing a new Congressional majority of people with little elected office experience, but the genius of America has always been our ability to reinvent ourselves when we needed it most. America is in the early stages of that process of renewal which will play out in 2012 in the next presidential election.
The Return of Prudence in Energy Costs Looms
Meanwhile we have market and economics work to do. On the energy front we have seen explosive growth of clean and renewable energy from wind and solar. We have been over stimulated in smart grid investment—ahead of its full potential—so we are likely to see a consolidation of players, firming of interoperability standards, and then a pause while the political issues that will determine the next wave are decided. The issues are mixed for the energy markets.
Renewable portfolio standards have created incentives for wind and solar growth but rising utility rates to pay higher than market costs for renewables are starting to hit the fan and ratepayers do not like it. In addition, we lack the electric transmission capacity to bring all this new renewable energy to market and we lack the political will to speed up the environmental review and transmission construction to make it work. NIMBY could crater the renewable energy market in the US over transmission line siting and construction.
COP15 meltdown and the collapse of credibility for climate science research have stalled emissions reductions advances. We do not know if this is temporary or fatal. The market for carbon credits is sinking like a rock in both EU and US with emissions allowances now selling for as little as $2 per tonne. At those prices there is no incentive to invest in more expensive solutions—just pay the penalty and let the government worry about it.
Smart meters are being installed as an accelerated pace but largely sit unused and un-useful without the changes in policy like real-time pricing or dynamic pricing as it is now being called to give customers the incentives to make smart energy decisions. Utilities face a tsunami of meter data heading their way with limited capability to do anything with it. Customers really don’t want all that information and as long as we continue to have rates based upon average prices and regulatory lag in rate cases—we just keep on living our lives.
So all of this geopolitics, venture capital investment, and policy hassle is going to converge in a giant pause as we await the next election and torment our politicians. Ratepayers will increasingly complain more loudly about rising utility bills and regulators will rediscover “prudence” looking for a way to slow down rate increases and save their skin.
Meanwhile, investors who want to cash out have two choices: sell out to now to strategic buyers looking for good deals and get your money out of cleantech, renewable energy and smart grid while the getting is good. Or, if you feel lucky, wait for a good window in an improving economy and try the IPO route to cash in big time.
The problem with the latter strategy is that window of opportunity may not arrive in time and the global competition is going to keep moving. Sit and wait to cash out and you may miss the next big wave after cleantech or the hassles over rates and policy may hurt your flip.
My prediction: Prepare for the big fish food feast ahead where flip, consolidation, and a new focus on riding the next wave will be on the menu. What is that next wave? Well, think about it, you really don’t need any of this cleantech, smart grid or renewable hassle if you control the communications networks to make all of that as well as streaming TV, home area networks and the more fun side of life work faster, better, cheaper do you. Now we’ll pay big money for entertainment and faster, wireless communications on new iPad toys. Energy—its a big hassle.
Can I get the sports package with that? To go, please.
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 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.
After the collapse of the COP15 treaty prospects, proponents of curbs on emissions are scrambling to find Plan B. It is not an easy thing to do. In the US the best prospect to breathe life back in the emission reduction campaign, the Waxman-Markey cap and trade bill, is dying a slow death in Congress where fears about another hit on the economy in the face of persistent 10% unemployment has sent members running to the exits.
Carbon Allowance Prices Fall
Meanwhile, in carbon markets in Europe and the US carbon credit prices are plummeting and with them hope that cap and trade will provide the incentive for significant reductions. EUA (European carbon allowance) futures ended 2009 at 12.53 euros/tonne, down 21 percent from 2008 closing prices as reported by Reuters. The Regional Greenhouse Gas Initiative covering the Northeastern states held an auction for CO2 allowances and the price came in at a little over $2.00 per tonne.
On voluntary carbon markets, where allowances are traded based upon bets about demand for them in the future prospects for passage of Waxman-Markey were not good and futures prices for allowances fell. 2010 vintage carbon futures on the Chicago Climate Exchange fell from $1.65/tonne to only $0.15/tonne in 2009. Reuters reported that 2009 volumes for voluntary carbon offsets were 40-50 percent below 2008 volumes, and demand fell substantially in December, which is usually a busy month is that market.
Going into 2010 the futures markets in allowances was horrible. European industrial firms were busy estimating their emissions output for 2010 in order to sell excess EUAs early while prices were higher than forecast for later in 2010. Not a good sign for the allowance market or policy makers who expect dumping EUA early will lead to even lower prices later in 2010.
The Ticking Time Bomb in Cap n’ Trade Models
That allowance price problem was the context for the questions put to Dr Severin Borenstein, Director of the UC-Berkeley Energy Institute. Severin is a very smart, very savvy guy who has been at the front lines of energy research long enough to know a few things about policy analysis. Speaking recently at a meeting of private equity players focused on the clean tech and energy space he commented on allowance prices and whether cap and trade legislation could revive prospects for effective green house gas emissions reduction policies.
“There is a ticking time bomb under these cap and trade models. Most studies ignore the supply elasticity of fossil fuels. Analysis to date hasn’t focused on resource price change in response to cap and trade – resource scarcity and price changes are likely to be central,” he said. 
He went on to say that he felt that it would require a carbon allowance price of between $80 and $100 per tonne to displace coal. Achieving significant reductions in greenhouse gas emissions needed to focus on that coal displacement goal or market participants would simply pay a lower carbon tax and make only modest changes in their behaviors.
Coincidentally, this is almost exactly what the California Energy Commission and California Public Utilities Commission said in their implementation report on AB32 the California Global Warming Solutions Act to the California Legislature. In short, these state agencies charged with implementing GHG emissions reduction concluded that natural gas prices would need to be $13.87 or higher per MMBtu and the applicable carbon tax would have to be $100 per tonne or higher for the program to be effective in achieving its goals for emissions reduction.
The BIG PROBLEM Waxman-Markey supporters and environmental advocates face is to get their policy goal implemented they must raise gas prices and carbon taxes so high it will crater the economy and keep them there long enough to drive a stake through the heart of the coal industry once and for all so it cannot be resurrected.
If you think the greenmail price was high for a vote for ObamaCare in Nebraska and Louisiana wait until you see what it will cost to buy off enough politicians to get 60 votes for this cap and trade program in an election year.
And if Waxman-Markey cannot find 60 votes, then Plan B logically would be to unleash US EPA with its endangerment finding to wreak havoc on the coal and utility industries. The problem with such blunt instruments of torture as regulations is that a lot of unintended consequences can happen along the way.
If the world’s leaders who assembled in Copenhagen knew in advance, as everyone else did, that reaching an agreement to create a binding, enforceable treaty obligation to reduce greenhouse gas emissions by defined targets by specific dates, the final outcome of this week’s grand event to save the planet was all the more a sham. But a litany of sober speeches and prospects of doom were not enough to bring the parties to agreement—except to keep talking.
Let’s face it, this is a wonderful outcome to what could have been a total train wreck. An enforceable treaty would, almost certainly, enacted sweeping wealth redistribution, onerous carbon taxes to pay for it, the mass migration of energy intensive business from countries on the hook to those on the lam. This was a climate crisis of epic proportions in the making.
In drama it was only upstaged by the circus going on in the US Congress surrounding health care reform, cap and trade, the need for more stimulus since the first two plans did not work, and the Omnibus Defense Spending Bill that looks more like the Omnibus Christmas Tree with all its promised earmarks seeking to buy votes for other lost causes.
But wait, maybe they are related. Did President Obama go to Copenhagen because he thought he had a better chance of getting something there than on Capitol Hill? The odds now look like he will fail in Congress like he failed in Copenhagen.
New Year’s Resolutions
It is good that we will have a few days break to ponder the significance of all this hot air and lost momentum while the spin-masters work their magic to explain down expectations. This will force many camps to revise their New Year’s Resolutions:
Al Gore: Step up sales of emissions credits as fast as you can while this gravy train still has legs. I need to make another $100 million before this thing collapses of its own weight.
True Believers: We’ve been screwed. These lying, cheating, back stabbing politicians will say anything but even when we had them in our grasp we could not close the deal. Damn! This was our best shot and we blew it.
True Deniers: We’ve been saved. Those liberal do-gooders would have sold us down the river. Thank goodness for China and a few other countries that still believe in capitalism.
Carbon Marketers: Holy Methane! Our business model just fizzled out. How will we sell these same rain forest preservation deals now when everyone agreed to cheat.
Coal Producers: Burn Baby Burn! We are back in business.
CEOs: WTF! Why did I just agree to invest billions to make my company look clean and green when these politicians can’t even agree to count what I’m doing. Now the Chinese are going to go like hell to take my market share and Obama is still going to raise my taxes!
Harry Reid: We’re roadkill!
Nancy Pelosi: We scored a great victory in getting all these nations to work together and the long term results will show President Obama’s leadership made a huge difference. He deserves all the credit for this.
U.S. Chamber of Commerce: How Sweet It Is!
The combination of events that is casting a foul mood over the COP15 party reads like the plot line of a soap opera. But the the actors are actual politicians working overtime to get themselves out of their sticky situation by reducing expectations for COP15 outcomes they can no longer deliver. All except for President Obama whose decision to go to Copenhagen has not wavered—much. He now plans to arrive near the end of the event since Congress failed to give him a cap and trade legislative victory to wave to the crowds as he motorcades past The Mermaid on the way to the adoring world chattering classes.
The CRU email-gate scandal is certainly a juicy plot twist in this soap opera even if it does have inconvenient timing but it seems to have scared off Al Gore (the perfect villain) from attending the event.
The ‘You’ve Got to be Kidding Me’ Effect
But let’s face it, what is really happening is that the combination of forces having the most impact is that the BRIC countries have hung together saying NO! We will not shoot ourselves in the foot for your Euro-American political correctness.
China and India have now offered up goals they are prepared to work toward—and if they do so it would not only be good for the planet and good for their own economy and populations. Americans are also looking at economic reality and have come to the conclusion they we do not want to shoot ourselves in the foot either by imposing huge costs on our economy just as we seek to recover from this Great Recession. These are the realities driving the reduced expectations for Copenhagen.
The CRU-email scandal can have a positive outcome if it takes some of the hot air out of the climate crisis advocates and forces a realistic and balanced look at the true climate science (whatever it is) and the economic impacts of cures that may actually be worse than the disease.
Too bad they canceled the soap opera The Guiding Light after 50 years on TV. This climate crisis stuff offers an entirely new set of plot lines and intrigue. Al Gore could even play himself!
There are plenty of good and sufficient reasons we should be good stewards of our planet and take actions to reduce greenhouse gas emissions. Following our politicians off the cliff for the sake of political correctness or their own political aspirations is not one of them.
We believe in science and technology and have found the inconvenient truth is that real science is trial and error and not all the theories work out. Real science never tells us there is incontrovertible proof of anything because real scientists know better seeing science as a journey of continuous discovery not a mission to a predefined political objective. True science tells all, confesses all, seeks validation in peer review and competing research, admits error and shares the lessons from failure so others learn from its mistakes.
Now if we could only teach the scientific method to our politicians!