Change the Rules, Change the Future
New energy rules could unleash an economic boom
and help quash climate change
By Timothy E. Wirth, Vinod Khosla and John D. Podesta
22 May 2007
In 1997, as the Kyoto Protocol on Climate Change was
being negotiated, the U.S. Senate voted, 95-0, to
reject any agreement that "would result in serious
harm to the economy of the United States." The senators
were acting on the widespread fear that the transition
from fossil fuels to clean energy would hurt American
businesses and cost millions of jobs. Those were the
beliefs and the politics of the times.
But times change. Ten years later, it's increasingly
clear that it will be more costly not to act on global
warming than to act. Clean, renewable, efficient energy
will not be a burden but a boon -- the next in a series
of revolutions, beginning with telecom and digital
that have invigorated our economy with new ideas,
new industries, and new jobs.
Voters, investors, activists, business leaders, and
policy experts are pushing for clean energy to create
jobs, limit climate change, and reduce America's dependence
on foreign oil. And yet, progress is slow: oil imports
and carbon emissions continue to rise. Why?
Because the rules of the game -- the laws, regulations,
subsidies, and tax credits that shape the energy market
and the way it acts -- continue to make fossil fuels
a less expensive, more convenient choice for consumers.
These rules are both the heart of the problem,
and the key to a solution.
In 1931, Thomas Edison met with Henry Ford, whose
popular cars were driving up demand for gasoline,
and told him: "I'd put my money on the sun and solar
energy. What a source of power! I hope we don't have
to wait until oil and coal run out before we tackle
that."
Seventy-four years later, the three largest technology
IPOs of 2005 were solar-energy companies. We're finally
catching up with Edison.
Bill Joy, the founder of Sun Microsystems, says that
clean energy is where we'll find "the Googles, the
Microsofts of the new era." Venture capitalist John
Doerr -- whose firm, Kleiner Perkins, got rich investing
early in companies like Google, Amazon, and Sun Microsystems,
has called clean energy "the largest economic opportunity
of the 21st century."
They base these predictions, in part, on advances
in technology. Wind power now costs about 5 percent
of what it did 25 years ago. Solar energy costs are
down more than 90 percent since 1970. The National
Renewable Energy Laboratory says that the price of
renewable energy will drop another 45 percent over
the next 20 years. Indeed, this estimate may be low,
given that scientists like Craig Venter, who cracked
the human genome, and Steven Chu, who won the 1997
Nobel Prize for Physics, have turned their attention
to clean energy.
Support for a new energy future is coming from everyone
from evangelicals like Pat Robertson, who believe
we have to preserve God's creation; to union leaders,
who see the opportunity for new jobs; to farmers,
who know wind and biofuels will boost their income;
to policymakers like Republican Sen. Richard Lugar
(R-Ind.), who says we must reduce our dependence on
oil "in the interest of American national security
and our economic future."
It even includes business leaders like the CEOs from
DuPont, GE, and Duke Energy, who earlier this year
called for tough federal limits on global-warming
emissions -- a call that was echoed in March by institutional
investors managing $4 trillion in assets.
Ten Northeastern states are implementing a regional
cap-and-trade system to reduce CO2 emissions. And
the California legislature has required the state
to cut its greenhouse-gas emissions 80 percent by
2050.
But in spite of this momentum for change, our energy
habits are still stuck in the past. Carbon dioxide
emissions are up 19 percent since 1990 and still rising.
Oil imports are up 70 percent since 1990 and still
rising. Renewable sources like solar power and biofuels
provide just 6 percent of America's energy -- and
that share is not rising.
What's wrong? Big majorities of Americans want clean
energy for its national security and environmental
benefits. Why aren't we moving faster toward a clean
energy future?
Huge society-wide change comes only when millions
of consumers change their habits, and consumers will
not change their energy habits until we reach the
"crossover point" at which clean energy beats coal
and oil on the basis of price, convenience, and availability.
Right now, most drivers cannot pull into a gas station
and fill up with domestically produced biofuels. Most
homeowners cannot choose wind- or solar-generated
electricity to power their appliances. Going green
too often costs more -- in time or money.
Change won't come until the price is right. That price
is set by the market, the market is shaped by rules,
and the rules favor fossil fuels.
If we want to change the future, we have to change
the rules.
Rules Matter
Rules matter. Rules define the character -- and shape
the future -- of the society that makes them. Democracy's
distinguishing excellence lies in its ability to write
the rules in a way that serves the common interest.
Good rules align the interests of individuals and
corporations with the public interest, so that business
can profit in ways that also make society richer and
safer. This is the foundation of sound public policy.
When high purpose is combined with the profit motive,
the results can be astonishing. Time and again market
capitalism, bounded by smart rules designed to serve
the public interest, has delivered the desired result
more cheaply, quickly, and easily than anyone thought
possible.
Unfortunately, rules that are passed to advance the
public interest can come, over time, to harm the public
interest.
The rules we have now encourage the use of energy
-- especially oil and electricity. For most of the
20th century, this was smart policy. Electrification
of the U.S. economy produced huge gains in productivity
and quality of life. The increased mobility of people,
goods, and services had similar benefits. Using more
energy did not make us dependent on foreign oil. As
late as 1940, the U.S. produced 63 percent of the
world's oil, compared to the 5 percent that came from
the Middle East.
But the world is very different today. Geologists
estimate that the Middle East has over 60 percent
of the world's oil reserves, the U.S. just three.
And carbon dioxide emissions from our power plants
and vehicles are wrecking the world's climate. The
rules need to change.
The rules today give oil and gas companies -- the
most profitable industry in the history of the world
-- billions of dollars in tax breaks and research
subsidies. The rules do not factor in the indirect
costs of oil -- the cost of protecting oil supply
lines to the Middle East, the cost of oil price shocks
that lead to recessions, and the cost of intensified
storms that make coastal property uninsurable. Insurers
have priced insurance in Florida so high that the
state has stepped in and pledged tens of billions
of dollars in public money if a major hurricane strikes
-- despite the fact that neither the state's catastrophe
fund nor the state-chartered insurance company has
anywhere near enough money to pay the claims.
The rules perpetuate our energy habits. Auto companies
sell cars that get as little as 13 miles per gallon
-- something they could never do in Europe, Japan,
or even China. Utility companies make more money when
their customers waste energy and less when they save
it. Developers build with energy-inefficient materials
because they don't have to pay the utility bills.
And power plants use the atmosphere as a free garbage
dump for their global-warming emissions.
We need new rules that will make the best choice for
the country also the best choice for consumers.
We don't have to undo investments we have already
made. We don't need to take old cars off the road
or shut down coal-fired power plants prematurely.
But the next investments we make -- the next cars
and buildings we design, the next power plants we
build -- should follow new rules that reflect our
need for clean, renewable, efficient energy.
Changing the rules to unleash the power of the market
is not a new idea. Until 1984, telecommunications
in the United States were monopolized by a single
company: AT&T. For a time, that was sound policy.
It ensured dependability during the early years of
the industry. Customers bought their phone service
and rented their phones from Ma Bell. But when rivals
emerged, the government and the courts changed the
rules. The market took over, and the telecom revolution
began.
Phone sales jumped from 19.7 million in 1983 to 30.3
million in 1984. New features like call waiting and
call forwarding proliferated. From 1984 to 2001, AT&T's
share of the long-distance market declined from 90
percent to 38 percent as competition drove down prices.
New producers of telecommunications technologies like
switches, microwave antennas, cables, and modems began
to thrive.
Today, we are on the cusp of a similar revolution
in energy, but the old rules are still in place. There
is a lot of money ready to invest, but too few good
investment opportunities. To enable those emerging
products and technologies to succeed, the most important
thing we can do is change the rules.
Consider the recent case of Xcel Energy, a Minnesota
utility that wanted to build a new coal plant. When
the state utility commission asked Xcel to recalculate
the cost of running the plant with an $8-per-ton cost
for carbon emissions, the company did so -- and then
abandoned its plan for the coal plant. Instead, it
will rely on wind generation and hydropower. A spokesperson
said that the prospect of a carbon fee helped prompt
the decision, and the company now advocates mandatory
standards for reducing greenhouse gases.
In this case, just the anticipation of a rule change
created a market incentive for Xcel to make its next
investment in a way that favored new technology.
Because the challenges of climate change and oil dependence
are so urgent, when we make this transition matters
just as much as whether we make it. Sooner is better
-- much better -- particularly if we want to be one
of the countries that sells these new technologies.
The New Energy Competition
Many of our economic competitors are moving more quickly
than the United States to capitalize on the new jobs
and new industries that will come with clean energy
-- Japan and Germany in particular.
Japan, which has very limited fossil-fuel resources,
has supported solar energy with government research-and-development
funds and a decade-long subsidy for consumers who
install solar panels. Germany, since the late 1980s,
has supported wind and solar energy with tax breaks
and a tariff that guarantees renewable-energy producers
a competitive price. Cornelia Viertl, a senior adviser
at the German Federal Environment Ministry, explains:
"We feel there's a chance for Germany to be innovative,
to create an industry and possibly be the leader."
Because of their rules, our competitors are farther
along than the United States in the transition from
old energy to new energy, and they have captured most
of the growth and jobs along the way. Just 10 years
ago, the United States produced 44 percent of the
world's solar cells; today its market share is less
than 10 percent. Japan is now the world leader, producing
43 percent of the world's solar-energy products. Europe,
meanwhile, produces 90 percent of the world's wind
turbines. Brazil, where the government requires all
gasoline to contain ethanol, has led the way on biofuels.
Even Abu Dhabi is getting into the game. The oil-rich
emirate recently pledged hundreds of millions of dollars
toward developing alternatives to fossil fuels. In
the past year, it has announced plans to build a 500-megawatt
solar power plant -- the first in the Middle East
-- and has also announced a partnership with MIT to
develop a research center for the study of clean energy
technology. They're not just out to get the industries
and jobs that we want here, they're using our oil
payments and our intellectual power to help them do
it.
We still have a chance to reassert our leadership.
Our educated workforce, top-level universities, and
culture of innovation still position us to capitalize
as the world moves to clean energy. We have to decide
whether we're going to lead the world -- and claim
the economic benefits -- or follow, and send money
to other countries for clean energy technology, in
the same way that we now send money to the Middle
East for oil.
The Rule Changes
The future of energy is not terribly complicated to
envision:
Clean energy: We'll use new, renewable sources of
energy: more biofuels and less oil, more wind and
solar, and less coal and natural gas.
Energy efficiency: Our homes, office buildings, cars,
and appliances will require less energy, and we'll
have better ways to manage that use.
Carbon capture: Emissions from coal-fired power plants
will be captured and pumped underground.
A "smarter" grid: Digital technology will finally
come to the electric power grid, making it more efficient,
more reliable, and better able to draw on renewable
resources. It should become a national grid, like
our highway system, so any renewable or non-renewable
electricity generated in any part of the country can
be transmitted to market.
President Bush addressed the first two goals in his
State of the Union address in January. His "20 in
10" initiative called for U.S. vehicles to use 35
billion gallons of alternative fuels by 2017, and
he also suggested that fuel economy standards could
be increased by 4 percent a year over the next decade.
On May 14, he directed four federal agencies to take
action toward this goal. These are steps in the right
direction, but we have a long way to go.
Here are five more rule changes that would reduce
emissions, give consumers new choices, launch new
businesses, and accelerate the profitable transition
to new energy technologies:
Put a price on carbon.
Putting a price on carbon dioxide -- through a cap-and-trade
system similar to the one that reduced acid-rain pollution
at low cost -- would end the use of the atmosphere
as a free garbage dump and create a market for any
technology that reduced global-warming emissions.
Just as important, a cap-and-trade system would give
businesses the basis for making capital investments
in cleaner energy research, technology, and capital
stock. As Elizabeth Moler, an executive at Exelon,
one of the nation's largest utility companies, said
last year: "We need the economic and regulatory certainty
to invest in a low-carbon energy future."
Carbon limits should be broad-based, predictable,
and achievable. A simple reduction of 1 percent of
our carbon emissions each year would capture the public
imagination and unify individuals, families, corporations,
and government behind this crucial national goal.
The goal might need to be strengthened over time,
but it would be a strong start.
Set "carbon efficiency" standards for vehicles.
The debate over fuel efficiency standards has bogged
down in finger-pointing between Washington and Detroit.
To break the impasse, Congress should pass tough standards
for "carbon efficiency." If companies had to reduce
the average carbon emissions of their fleet, it would
encourage them not only to build lighter, more efficient
vehicles, but also to build cars that can run on biofuels
and on electricity -- rather than simply updating
the internal combustion engine. California has recently
taken the first step in this direction. This is the
technology of the future, and it is where Detroit
should be making its investments.
At the same time, Congress or the U.S. EPA should
require oil companies to phase out the harmful additives
in their gasoline. In the 1970s, when Congress required
the elimination of lead in gasoline, oil companies
turned to additives called "aromatics" -- benzene,
toluene, and xylene -- to give engines the added octane
they used to get from lead. Today, these toxic additives
make up more than a quarter of every gallon of gasoline.
Their use creates airborne particulates, which cause
thousands of premature deaths every year and may be
related to the unexplained urban epidemic of asthma
among children.
Removing these additives would take some of the "kick"
out of gasoline. But that would just be another incentive
for motorists to turn to biofuels -- which have the
power to replace the octane now supplied by aromatics.
With this one rule change, we would not only make
the air cleaner and improve public health, we would
also create additional demand for the next generation
of biofuels, made from non-food crops like prairie
grasses -- so-called cellulosic ethanol -- which contribute
almost nothing to global warming.
Make energy efficiency the business of utilities.
Today, in almost every state, utilities make more
money as their customers use more energy. We should
flip those incentives. Utility companies in California
are compensated for helping their customers reduce
their energy use. They make money by helping customers
install better insulation and use more energy-efficient
products. When a utility can make more money helping
people save energy rather than use energy, that's
a smart set of rules.
We should go one step further and allow utilities
to profit by investing in energy efficiency directly.
Today, new windows have three times the insulation
value as old ones, and new air conditioners use 30
percent to 40 percent less energy than models that
are just 10 years old -- but they are rarely installed
in new homes, because home builders don't have to
pay the utility bills. Even the new homebuyer may
only plan to live there for a few years and may not
want to invest in energy efficiency.
For utilities, however, a new building is a 50-year
energy obligation, and permanently reducing its energy
use should be treated as a 50-year asset. Utilities
should be able to earn a return on structural investments
in energy efficiency just as they do in a new power
plant. Indeed, because home-based renewable-energy
systems have the effect of reducing demand, utilities
should be compensated for buying solar panels and
geothermal heat pumps, which will cut a building's
energy consumption for decades.
Modernize the electric power grid to be more efficient
and better deliver clean energy.
Nearly every sector of the economy has been made more
efficient with the introduction of information technology
-- but not the electric power grid, which still operates
on 50-year-old technology. A modernized, digitally
connected national electricity grid will be more secure,
reliable, and resilient, allowing quicker restoration
of power after outages and the ability to avert large-scale
blackouts. Renewable electric power should be given
priority access to such a grid.
A modern grid will also be able to manage intermittent
power flows from renewable-energy sources and give
producers -- from farmers with wind turbines in their
fields or homeowners with solar panels on their roofs
to large solar farms in the desert -- a better opportunity
to sell electricity back to the grid. Instead of relying
only on a few, traditional power plants, utilities
will be able to get electricity from a network of
clean power providers, which would not only make clean
energy more widely available to consumers, but also
make the energy supply more stable and secure.
By allowing remote control of energy demand, a modernized
grid will also reduce the need for new generation
and cut costs to consumers. It will also create new
economic opportunities that are unpredictable today,
just as other networks -- the interstate highway system
and the internet -- did before.
Increase government support for clean energy.
No industry of any consequence to the country has
grown and thrived without government support. According
to the Government Accountability Office, the oil industry
alone received more than $140 billion in subsidies
and tax breaks between 1968 and 2000. In the 21st
century, the U.S. government has just as much interest,
if not more, in the success of clean energy.
That's why the government should boost incentives
and dramatically increase R&D spending for clean
energy -- in line with its importance to the national
interest. Last year, the federal government spent
less than $2 billion on energy R&D -- just one-third
what it spent 25 years ago, adjusted for inflation.
During the same 25-year period, government medical
research is up nearly 300 percent to $28 billion,
and government military research is up 250 percent
to $75 billion.
A major chunk of new money, ironically, should go
to a fossil-fuel technology -- coal -- to enable power
plants to capture their carbon emissions and bury
them underground. Coal can continue its large role
in meeting the nation's power needs only if its global-warming
emissions can be sequestered. A greatly intensified
program of research and development is needed in this
area. Another chunk of new money should go to utility-grade
renewable technologies like solar thermal power plants
to create a clean energy horse race.
It's also crucial that the government invest not only
in research and development, or R&D, but also
in the other Ds -- demonstration and early deployment.
The engineering challenge of applying new technologies
is just as important as the scientific challenge of
discovering them -- and government needs to fund both
aggressively.
To pay for this work, we can cut back our handouts
to the oil companies. It is certainly arguable that
all subsidies to oil companies should be eliminated
-- but at the very least, we should cut off taxpayer
support when the price of oil rises above $50 a barrel.
President Bush himself has said, "With oil at more
than $50 a barrel, by the way, energy companies do
not need taxpayers'-funded incentives to explore for
oil and gas."
Tying subsidies to price is only common sense. Just
as tax breaks for oil should be phased out as the
price rises, subsidies for clean energy should be
increased as the price of oil falls, and reduced or
eliminated if oil stays near current levels. Last
year at the World Economic Forum in Davos, Switzerland,
a Saudi official warned: "If biofuels start to take
off, the price of oil could drop." Linking alternative
energy subsidies to the price of oil would signal
to oil suppliers -- and OPEC in particular -- that
predatory pricing would be futile. Within a decade,
clean alternatives to oil will not need subsidies
if the scale of markets is large enough.
Changing the rules on subsidies responds to the threats
of oil dependence and climate change. Today the rules
favor fossil fuels. For the sake of the country, it's
time to switch. If clean energy doesn't win, we all
lose.
These five rule changes will help build a market-based
system in which companies and consumers can advance
the national interest by acting in their own self-interest.
All the arguments against action -- from "global warming
is not proven" to "India and China have to go first"
-- share the same assumption: that accelerating the
move to clean energy will impose huge economic costs
on the country. That's a false premise. As soon as
we get the rules right, we will create a multibillion-dollar
market for new products and technologies here in this
country. The sooner we create that market, the sooner
companies will emerge to profit from it. Any delay
simply forfeits an economic advantage to countries
that are more far-sighted in setting their rules.
Nearly 30 years ago, President Carter went on national
television and told Americans to turn down their thermostats
and put on their sweaters. The message Americans received
was one of sacrifice: reduce your energy use and your
quality of life.
We saw how well that worked.
People are willing to embrace sacrifice in the midst
of an urgent and obvious crisis -- but only if they
see their sacrifice as a solution, and only if there
is an end in sight. That is not the situation we face.
To meet today's energy challenge, hundreds of millions
of people must change their habits -- not just for
a few months or a few years, but forever. That makes
our options clearer.
We can try to scold people into embracing sacrifice
-- and change nothing -- or we can offer the kind
of choice that can change the world, which is choice
that is cheaper, cleaner, better. Choice is what markets
do best, but not if government is standing in the
way with old rules that favor the industries of the
past.
Climate change and oil dependence are pushing us toward
a clean, renewable, efficient energy future. The profits
to be made in making and selling these technologies
are pulling us in the same direction. With one strategic
leap, we can wipe out two of the biggest threats to
our children's well-being while creating the high-tech
industries that will employ them in the future.
If we just change the rules.
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