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.
Timothy E. Wirth is president of the United
Nations Foundation and a former U.S. senator
and undersecretary of state for global affairs.
Vinod Khosla is the founding partner of Khosla
Ventures and remains an affiliated partner
of Kleiner, Perkins, Caufield, & Byers;
he was the founding CEO of Sun Microsystems.
John D. Podesta is president and CEO of the
Center for American Progress and served as
White House chief of staff under President
Bill Clinton. All three are members of the
steering committee of the Energy Future Coalition.
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