Is Obama's Energy Plan Enough?

I fear it may be too much--of the last thing we need more of.

From Time:

With the possible exception of Barack Obama's puppy-anticipating daughters, no one is more eagerly awaiting the incoming Administration than the leaders of the renewable-energy industries. President-elect Obama campaigned on the promise to spend $150 billion over the next 10 years to support alternative energy, like wind and solar, as well as the green jobs that the sector has the potential to create. At California Gov. Arnold Schwarzenegger's climate summit on Nov. 18, Obama, in taped remarks, reaffirmed that he would hold fast to those campaign promises, starting with mandatory caps on greenhouse gas emissions. "This is a crucial step forward," says Linda Church Ciocci, the executive director of the National Hydropower Association.

The problem is, it won't be enough. As ambitious as Obama's campaign promises were — at least compared to his predecessor's — the future state of global energy will demand government policies with a much longer reach, according to alternative-energy leaders.

And what precisely is it that these "leaders" want? Turns out, it's our tax dollars.

In a press conference last week the leaders of the solar, wind, geothermal and hydropower industries called on Obama and the incoming Congress to look ahead. First, energy leaders asked Obama to immediately adjust the alternative-energy production credit to provide green investors with a cash rebate, rather than a tax reduction. With the economy tanking, simple tax credits — which Congress renewed in October and without which the renewable-energy industry would not survive — aren't the lure they once were for companies looking to invest in new energy projects.

Other items on the renewables industry's wish list: a national renewable-energy portfolio standard, which would require a certain percentage of U.S. electricity to come from alternative sources. (More than 20 states already have similar standards, but a national one would be tricky, given that utility regulation in the U.S. is localized.) Green energy leaders would also like to see an executive order that would greatly expand the federal government's procurement of renewable energy — a smart idea, easily doable — plus a major initiative to update and smarten the nation's aging, overworked electrical grid.

Huh, I'm kind of curious as to why an industry that is supposedly so much more economic than nuclear power needs the PTC "just to survive." This is rent seeking, plain and simple, as are all the other desires of the renewable energy industry. The last thing America needs is another corporatist energy boondoggle--remember this one? How about this one?

In all fairness, it's not like this list is Obama's actual energy platform, which remains obscure. Recent indications, however, suggest that many of the desires of the renewable energy industry will be realized. Most worrisome is the prospect of a national renewable portfolio standard, which is just bad policy any way you look at it. Most forms of renewable energy are already a costly means of reducing CO2 output, but a national RPS would encourage building renewable generation facilities in marginal areas--making them increasingly uneconomic. Furthermore, certain parts of the country are far better endowed with renewable energy potential than others. For instance, my home state of Tennessee is deficient in solar, wind, and geothermal resources, and TVA has already tapped out most of the hydro potential. While an RPS would presumably allow trading so that utilities in such underendowed locales could buy offsets, this doesn't end up going anywhere near far enough. This is because it would require that the areas with better renewable potential (such as, say, California) develop an overdependence on renewable energy, creating all kinds of attendant problems and costs.

Furthermore, such a scheme actually encourages making compliance maximally expensive. Let's think through the incentives facing the "haves" in a system with an RPS that requires that every utility either produce a particular percentage of electricity from renewables or buy credits from another utility with excess renewable capacity. Say it's 2030, and you're a utility in Southern California. There's a 25% RPS, but thanks to some very expensive solar thermal plants built during the Obama administration, you actually generate 30% of your output using renewables. This gives you tradeable credits worth 5% of your output that you can now auction off to the highest bidder. These are worth a lot, since no utility east of the Mississippi has actually managed to meet the RPS by generating its own power. This, of course, means that whatever ratepayers ultimately pick up the tab for these credits end up paying the most any utility would bid on them. This is one disincentive to building more renewable capacity--the tighter the market for RPS credits, the more the utilities that sell these credits can get for them. If the utilities are rational maximizers, they will only build out their capacity to a point that is far less than adequate for supplying cheap credits to the rest of the country. The second disincentive is that the utilities' need to deal with the intermittency of the renewable resources on their grid. Even with the construction of "smart grids" and "green energy superhighways" (whatever the hell those are), this will be first and foremost a local problem, since renewable generation facilities have to be integrated into the utilities' own grid resources. Research from Europe indicates that once you start trying to integrate much more than 30% intermittent generators, things start getting really unmanageable (and it's pretty hard even below that). These two disincentives would work together to encourage the utilities with renewable resources to maximize the cost of compliance for the have-nots, rendering the RPS an extremely inefficient and expensive way of reducing CO2 emissions.

A better plan would be some kind of cap-and-trade scheme for CO2 emissions themselves. Indeed, I like the sort of "cap-and-auction" idea that Obama is pushing, but I'm extremely wary of the apparent plan to use the proceeds to subsidize certain energy technologies. Personally, I think that the ideal policy would be as follows:

1. Set stringent CO2 output limits that go down each year.
2. Auction off emissions permits for the legal CO2 emissions--no grandfather clauses for industry or other measures that would render the scheme impotent.
3. Enforce compliance, but let individuals and corporations find their own preferred measures for doing so.
4. Divide the auction proceeds among all American taxpayers as a dividend. This will both act as a way of helping American families deal with the costs of compliance, but also serve as an economic stimulus. And as the costs of permits go up, so does the dividend.

I believe that this scheme probably has the best achievable mix of economic efficiency and fairness. In practice, I believe that it would encourage investments in efficiency in the short run, and modular, mass-produced nuclear reactors in the long run. But even if I'm wrong about that, these measures should find the most cost-effective means of reducing CO2 emissions. Compared to the RPS, which even on paper appears to be a highly inefficient way of fighting climate change, this is a vastly superior policy prescription. But somehow I imagine we'll end up with an RPS anyway. Let's just hope the government realizes the folly of this before they've done any more damage to our already faltering economy than necessary.