Obama and Energy

In this posting we explore Barack Obama’s positions on energy as of mid July 2008.

“Well, I don't believe that climate change is just an issue that's convenient to bring up during a campaign. I believe it's one of the greatest moral challenges of our generation. ... And I didn't just give a speech about it in front of some environmental audience in California. I went to Detroit, I stood in front of a group of automakers, and I told them that when I am president, there will be no more excuses — we will help them retool their factories, but they will have to make cars that use less oil.”

— Barack Obama, Speech in Des Moines, IA, October 14, 2007

Key Climate Change Positions

1) Cap and trade system

- By 2050 target carbon levels 80% below 1990 levels.

- Pollution credits to be auctioned off, revenue generated is to be used for funding energy R&D and transition costs (including helping retrain workers)

2) $150 billion over 10 years to promote clean energy development

- Development of next generation of biofuels and infrastructure

- Accelerate commercialization of plug-in hybrids

- Investment in clean coal plants

- Commercialization US technologies around the world

3) $10 billion a year to create VC fund to commercialize technologies from the lab

4) Require 25% Federal RPS

5) Support development of next generation biofuels targeting 2 billion gallons of cellulosic ethanol by 2013 and requiring 60 billions gallons of renewable fuel by 2030

6) Double fuel economy standards in 18 years

7) Maintain gasoline tax

Analysis of positions

Business

Obama’s cap and trade proposal is similar to McCain’s and has similar pros and cons. It will require large up front investment by companies to reduce their emissions and promote the development of industries to meet the new needs for reduce carbon. The principal difference with McCain is that Obama’s plan involves the auctioning off of carbon credits. Companies that emit large amounts of carbon will have to buy more credits, immediately internalizing the costs of emissions. There will certainly be economic disruptions as a good which was previously free (air into which emissions could be released) will suddenly be a cost to the company. The transition has to be smoothed out for most companies to avoid unnecessary shocks - here the European experience may be instructive.

Auctioning off the credits will create one-time windfall revenue for the government. Depending on the price of the credits, this revenue could be (and likely will be) very significant. The process to allocate this money fairly and efficiently has to be set up prior to the auction itself.

Technology

Allocating most of the windfall revenue from the sale of credits to funding R&D in universities, labs and pilot scale plants is definitely the best use of the money. There are a large number of technologies which are technically feasible but which aren’t economically viable yet. Getting these technologies down the cost curve should be a priority use of these funds.

Creating a government run VC fund is a novel idea but one which is not necessarily going to work. VC funds, even those that invest in renewable energies, base their investing and management decisions on maximizing return to their investors. A government run fund has to be set up with enough separation that it doesn’t feel pressure to invest in projects that are favored by certain Governors or Senators. There is a similar model existing today - OPIC overseas private investment corp. is a government "VC" fund that help fund US start ups. They have been fairly successful and evaluate investments like a VC.

Policy

Obama clearly believes that the federal government has to raise the bar on renewable standards, hence proposing 25% Federal RPS and a doubling of mileage standards (albeit in 18 years). Biofuel requirements will also be much higher.

The auto makers will squeal but given enough time, mileage standards can double. Small cars today now have very high fuel efficiency, the average is pulled down by large cars and SUVs. The auto makers will have to make decisions about how to improve large vehicle performance and decide how many of these they will sell.

RPS will be a harder target. 25% will only be feasible if the other two dimensions, technology and economics, make dramatic progress. We will need a huge build out of wind and solar farms across the Plains states and the transmission capacity to get that energy to the coastal cities. (also we need to figure out energy storage, as wind and solar -which are intermittent- make a larger percentage of the total we will need to figure out how to make the grid adapt) This has to be done in a way that does not increase the cost of electricity for the average household. The same is true for a very high proportion of gasoline coming from renewables.

What is likely to happen is that the government will set the bar very high (similar to getting to the moon in a decade) and then scientists and entrepreneurs will try to meet this demand. If there is significant progress within 5 years, then it is likely that the target can be easily reached and surpassed. If not, then we will fall short but still have significantly changed our energy patterns.