Smart Obamanomics for the President-Elect's Top Priority: Energy and Climate Change

This is a joint post with Kevin Ummel, Robin Kraft, Joel Meister and Dan Hammer During the second presidential debate on October 7, an exchange took place that tells us a lot about what to expect from an Obama administration:

Tom Brokaw: Senator Obama, if you would give us your list of priorities, there are some real questions about whether everything can be done at once.Barack Obama: We're going to have to prioritize, just like a family has to prioritize … Energy we have to deal with today … So that would be priority number one.

Nine days later, Jason Grumet, energy advisor to Obama, offered further explanation for this sense of urgency:

The U.S. has to move quickly domestically so we can get back in the game internationally. We cannot have a meaningful impact in the international discussion until we develop a meaningful domestic consensus. So he'll move quickly.

Congratulations to President-elect Barack Obama and Vice President-elect Joe Biden. We take them at their word: They will move quickly on energy, which will be their number-one priority. And, as they have repeatedly promised, (see here and here) the focus will be clean energy, because we face a climate catastrophe unless greenhouse gas emissions are rapidly reduced. But the new administration will also face a credit crunch, a ballooning deficit, a looming recession, and an electorate fearful of losing jobs, income, retirement savings, health insurance coverage and even homes. The United Nations Climate Change Conference in Copenhagen is coming up fast: the successor to the Kyoto Protocol will be negotiated there in December, 2009. But it may suddenly seem far away when President Obama confronts the immediate pressures of office on January 20.The President's budgetary resources will be finite, along with his political capital, even though he will enjoy a tide of good will and an expanded Democratic majority in Congress. To move effectively, he will need a smart Obamanomics of energy and climate change. This will require a laser-like focus on objectives that are absolutely critical, and the most cost-effective measures for reaching them.Here are the facts of the case:

• The onset of global recession will reduce carbon emissions growth and buy time. At the same time, it will reduce near-term willingness to pay for greenhouse gas reduction.
• The climate crisis will be resolved in the developing world -- or not at all. Even if developed countries stop emitting carbon tomorrow, rapidly growing emissions from developing countries will create a climate crisis within a generation.
• Market-based regulation of carbon emissions, while necessary, is no panacea. Cap-and-trade systems are feasible now in all OECD countries, but highly unlikely in developing countries for at least a decade. So reducing emissions in developing countries will depend on rapid expansion of affordable clean energy systems.
• "Clean coal" (coal-fired power with large-scale carbon capture and storage -- CCS) is at least a decade away, and it will always be more expensive than "dirty coal." Clean coal power is, after all, dirty coal power plus costly CCS. Private investors will choose clean coal in the OECD countries if market-based regulation raises the cost of dirty coal sufficiently. But profit-seeking investors in unregulated developing countries will never choose clean coal without subsidies. And, given the gigantic scale of the power investments needed to overcome poverty, there will never be enough public resources to provide these subsidies.
• It will take a decade to bring new nuclear power plants online; nuclear construction costs have been exploding; we still don't have any facility for long-term waste storage; and, as The Economist has recently noted, rapid global expansion of nuclear power would make nuclear weapons proliferation much more likely.
• In contrast to clean coal and nuclear power, rapid expansion of solar and wind power systems is feasible now, at a cost that promises to be competitive with “dirty coal” within a decade once currently available technologies achieve scale and learning economies (see, for example, Crossroads at Mmamabula)

With these facts in mind, here's the six-step program that will get us out of the climate mess most quickly, and at the least cost:

1. In the United States, follow the Obama Plan by enacting cap-and-trade immediately, including the auction of 100 percent of emissions permits and the long-run reduction goals that are in the plan. Follow the plan by allocating most of the revenues to energy cost relief for working families, while retaining some revenues for promotion of clean technology and energy efficiency (see Why Warner-Lieberman Failed and How to Get America's Working Families behind the Next Cap-and-Trade Bill). Set the initial limit at emissions last year and start percentage reductions from that point. This will get all major carbon polluters into the system, but the "slack" in the emissions limit with the onset of recession will ensure that auctioned permits are extremely cheap in the immediate future. They will become more expensive as the economy recovers and emissions expand toward the mandated limit. A recession is the perfect moment for smart regulation.
2. Begin negotiations with the EU, Canada, Australia and Japan to ensure similarly stringent arrangements for market-based carbon regulation. This will produce a credible posture for the rich countries at the upcoming Copenhagen conference.
3. Move to break the potentially fatal stalemate with China on carbon emissions. The U.S. and China -- the world's two giant carbon emitters -- have each invoked their counterpart's refusal to limit emissions as the reason for doing nothing themselves. China's leaders have obviously been following the U.S. presidential campaign. And last week, they publicly acknowledged China's co-equal status with the U.S. as a carbon emitter, the huge risks posed by global warming, and their willingness to sit down and talk seriously about limiting carbon emissions. Now is the time to sit down with the Chinese.
4. Focus clean technology investment policies on cost-parity with dirty coal when global economic recovery begins. Once cost parity is achieved, the private sector will finance clean energy growth. To achieve this, focus clean technology subsidies on the most promising solar and wind technologies, to push them down their learning curves. While the U.S. program will be important, a counterpart program in the developing world is absolutely critical because emissions growth there must be curbed now, not a generation from now. The Obama administration can implement this program through its proposed Global Energy and Environment Initiative and the Emerging Market Energy Fund. The World Bank's new Clean Technology Fund (CTF) can provide the needed forum for cooperative investment with other donor countries, but only if the bank adopts needed reforms to the CTF that have been incorporated in recent legislation filed in the House (see here and here) and Senate
5. Begin development of the national smart energy grid that has been proposed by the Obama/Biden campaign. This will connect major metro electric grids to the new sources of renewable power in the Central and Western U.S.
6. Promote a rapid shift to vehicles powered by renewable energy -- clean electricity on a new grid, hydrogen fuel cells or cellulosic biofuel.

That's it -- a six-point plan that is focused, affordable and -- most importantly -- critical for our common survival. The new president has the mandate and the opportunity for greatness. We don't have a moment to lose.