Accurately Estimating the Social Cost of Carbon

Apologies for getting into a more academic mode today, but I feel that this issue is one that needs a good deal of research to fully address it, especially considering the recent changes that the Obama Administration made to the U.S.'s "official" social cost of carbon.

Carbon dioxide (CO2) is a greenhouse gas (GHG) that is emitted as a side effect of burning various fossil fuels. It is the primary cause of global climate change, and yet its impacts on mankind differ because of the different locations humans inhabit, and the discrepancies in wealth and socioeconomic status that various countries possess. These conditions make estimating the social cost of carbon quite difficult, but an accurate assessment of carbon’s costs to mankind is essential to raise awareness of and spur action on climate change.

The social cost of carbon (SCC) is defined, broadly speaking, as the damage each ton of carbon emitted into the atmosphere causes to mankind. The SCC is what agencies such as the Environmental Protection Agency (EPA) and Department of Energy (DOE) use when crafting regulations: as the SCC rises, the regulations promulgated by these agencies become stricter, and vice versa. This makes estimating the SCC of vital importance to the preservation of the environment and the economy. If the SCC is underestimated, countries will not take sufficient steps to reduce their emissions, and further damage to the environment, and eventually countries’ economies, will result. However, if the SCC is overestimated, the regulations put into place will be onerous and a drag on current and future economic growth. Therefore, getting the price of the SCC right is essential for harmonizing the relationship between economic growth and the environment.

Because of its importance to both environmental and economic conditions, several governments, academics, and advocacy organizations have studied the social costs of carbon and come up with what they believe to be accurate estimates for that number. In 2010, the United States had a SCC of $22/ton, assuming a discount rate of 3%. However, in May 2013, the Obama Administration updated the SCC to a price of approximately $35/ton, citing changes in sea level rise projections, as well as agricultural impacts, among other things. Other studies looking at the social costs of carbon have an average of $43/ton, but also reveal a large spread in the data, with a standard deviation of $83/ton. This spread occurs in reality as well: while Norway plans to double its carbon tax (which is a reflection of the SCC) to $70/ton this year, the EU’s cap-and-trade system currently only prices carbon at $6.50/ton.

Difficulties When Accurately Pricing the SCC

 Uncertainty of future climate impacts causes spreads in CCS price estimates.

The aforementioned large spread in SCC prices primarily reflects the uncertainty in what impacts climate change will have on the globe, and for specific countries and regions. One of the hardest things for climate change scientists to predict is the specific impacts increasing CO2 levels will have on the environment. While scientists can make generalizations about what impacts are more likely to occur in a GHG-intensive world, translating those impacts into specific monetary figures is a daunting task.  For example, agriculture in many regions around the Mediterranean Sea may suffer in a warmer world because of shifts in precipitation patterns and timing, but farmers at higher latitudes may enjoy longer growing seasons, increasing their productivity. This uncertainty means that, consequently, SCC prices vary greatly.

 SCC calculations do not take all variables into account.

While many SCC studies do their best to include as many variables in their calculations as is feasible, certain environmental aspects are left out of the equation because of their incalculable nature. For example, biodiversity is a valuable part of our environment; understanding the makeup and interaction of different species has resulted in many notable medical advances such as the development of gene mapping and cell division, among other things. However, biodiversity by itself carries no explicit monetary value in equations. As a result, it is not included in SCC equations. This means that the SCC price may end up being undervalued.  Many other environmental assets are also not included in SCC equations for the same reasons, so the full costs to the environment are not captured by current SCC prices.

 Model biases and incompleteness may skew results.

One more factor that leads to inconsistent SCC prices is the use of the models themselves. Three main models are used to calculate SCC prices: the FUND, PAGE,and DICE models. These models are almost always used to calculate the SCC, while other models that are available are discarded in the process. The data sets used by these models are developed by the same authors, and are not usually questioned. Additionally, the models do not account for variation in local effects, choosing instead to make uniform assumptions, and also ignore potential high-impact climate effects, like the melting of the Greenland ice cap. These conditions limit the potential for really understanding the full scope of carbon impacts, as well as SCC price ranges. Some of these changes may result in an order-of-magnitude difference in a carbon cost, which means ignoring them could have serious ramifications for both the environment and the economy in the future.

Recommendations

 Provide an open comment period when SCC models are updated.

One of the major issues with models exploring SCC prices is that the models themselves are subject to the inherent biases of the researchers developing and modifying them. Including an open comment period when the models are updated can ensure that outside concerns about model assumptions or specific operating parameters are taken into account. This will help to make sure that different ideas about SCC factors are heard and understood by the researchers updating the models, and help the models more accurately identify the correct SCC price.

 Use a declining discount rate for projections of SCC prices over 25 years into the future.

One of the main issues with SCC price projections is that discount rates (which are used to help determine whether it is preferable to fund a project with public money, or to let the private sector handle it) can substantially reduce the damage estimates from climate change in the future. Including a declining discount rate can help to offset the impacts of discounting across generational timespans. While France and the United Kingdom already use a declining discount rate, the U.S. Office of Management and Budget instead recommends using a flat discount rate. Having a flat rate means that even discount rates of 3% create damages in the future that are quite minimal compared to climate change projections. Reducing the discount rate to 1% over time will account for future damages due to climate change more accurately and paint a more realistic picture of climate change’s intergenerational impacts. Because one generation is approximately 25 years, declining the discount rate to 1% after that time in the future can help to measure intergenerational impacts of carbon with more clarity.

Include climate change “tipping points” in model calculations.

One of the major concerns of climate change scientists today is the possibility of a climate “tipping point,” where changing temperatures cause rapid and unexpected shifts in the climate that could be catastrophic for the global economy. These events have a relatively small chance of happening, but their costs are extremely high, so much so that including them in SCC models will change the output prices. Including these events will help models to capture the full scope of potential effects from future climate change and produce a more accurate cost of carbon in the process.

While the social cost of carbon is difficult to estimate and project because of the complexity of climate change, it is nonetheless a very necessary and important part of climate economics. Getting the price of carbon right will help policymakers to assess and develop policies to mitigate climate change’s effects while providing for economic growth. Because many of the problems with calculating the SCC lie with the models used to calculate the value, modifying those models to more fully include the effects of climate change will be instrumental in getting the “correct” SCC price. Changing the discount rate will also better account for the intergenerational effects. Hopefully, if the SCC price is closer to the “actual” price observed in reality, it will provide policymakers with better information so that they will be able to make the necessary changes to mitigate climate change and adapt the global economy to its effects.

Smart Growth and Sustainability

Today, I figured I'd take a break from technology and touch on the basics of Smart Growth policies, as well as their strengths and limitations. Planning communities wisely can have as much impact on carbon emissions as switching to clean energy sources, and its important that we all have education of how community planning can be beneficial to both the environment and the economy of a city or region.

A relatively recent design concept in community planning has had the potential to transform urban and suburban life from its current state into one that is more amenable to sustainable forms of living.  “Smart Growth” policies are those that encourage infill of existing developments, reuse and re-integration of urban brownfields, and increased emphasis on public transportation systems, with the goal of creating more tight-knit communities that are less of a burden on their surrounding environs.  While Smart Growth policies do mesh nicely with many facets of sustainability, certain issues preclude their full adoption in all communities, especially larger areas with more sprawl. 

 Smart Growth policies can help to advance the environmental goals of the sustainability movement.  The promotion of higher density development within urban areas reduces dependence on automobile usage, deceasing greenhouse gas (GHG) emissions and reducing their impact on global warming.  Higher density communities also mean that more land can be set aside to remain in its natural state and provide buffers for any pollutants or chemicals that might otherwise make it into the local waterways.  Additionally, trees and grasses act as carbon sinks, furthering GHG mitigation.  One of the more underrated facets of Smart Growth policies is their facilitation of communities suitable for mass transit usage: higher development levels mean that mass transit is more efficient at shuttling people to and from their preferred destinations.  This further reduces air pollution in the area, which clearly benefits the community. 

 Smart Growth policies also improve economic living in their targeted communities.  Smart Growth’s encouragement of higher development concentrates more businesses and shops in a smaller area.  These higher density developments increase the property values of neighborhoods adjacent to them:  the presence of shops near residential neighborhoods increases residents’ convenience, which can make properties closer to them more desirable.  The presence of more shops and businesses also means more jobs for local inhabitants, increasing their purchasing power and their ability to contribute to the local economy.  This can result in a positive feedback loop, as increased activity in the local economy can result in an increased migration of new businesses to the area, creating more jobs and further stimulating growth in the locality.  

 Smart Growth enhances the social well-being of the community as well.  More tightly-clustered communities means more walkable neighborhoods, improving people’s health as alternatives to automobile usage become more accessible.  Green spaces and nearby parks enhance the aesthetic appeal of the community and freshen the air in its vicinity.  Buildings that are more energy-efficient also lower the community’s energy bills, leaving them more money to spend on hobbies or other leisure pursuits.  Higher density communities also have the potential for more interaction opportunities among residents, leading to stronger bonds between community members, and potentially stronger civic organizations as well.

 The greatest obstacle to the implementation of Smart Growth policies in municipalities is arguably the size of the existing city in which lawmakers want to develop these policies.  Cities that are more compactly developed, like the cities within the U.S. Megalopolis, for example, present more opportunities for concentrating development than larger-sized, spread-out cities in the Midwest or West.  For example, many Eastern cities have older buildings that can be redeveloped or refurbished to comply with Smart Growth policies, and these buildings also come with the utilities already established.  It may be more difficult to concentrate building in areas that are already spread out, like the suburbs of Houston, for example, then to focus it on areas that already are developed, like inner city Philadelphia. Densely-packed urban areas have their own problems as well, like depressed tax bases or blighted communities with bad reputations, but what they do already possess is compactness.  This is worth noting:  the size and density of a city can improve the potential usage of mass transit, one of Smart Growth’s main pillars.  For example, the city of Los Angeles has a good subway system, but that system is hardly used by its inhabitants.  The reason for this is because of the city’s enormous size: there are so many places that are not reachable by using the system that the only way it benefits residents is if the place they want to go to (as well as the place they are departing from) is within one or two blocks of a subway stop.  Because the system is one-dimensional in this regard, it is used far more infrequently than systems in New York, Boston, or Washington, DC.

 In the end, Smart Growth offers a lot of promise to incorporating the theme of sustainability in urban settings, but policymakers need to recognize that there are limits to its effectiveness.  It is hard to break the pattern of suburban sprawl once that path has been in place for decades, and just as difficult to change urbanites’ habits after they have become accustomed to a particular lifestyle.  The problem is especially pronounced in cities that have developed around sprawl, as opposed to those that started out more compactly.  That does not mean that sustainability itself cannot work in those cities; on the contrary, cities like Los Angeles have taken the lead in LEED-certified buildings and alternative energy production (in fact, Los Angeles plans to install solar panels on every school in the city over the next few years).  But, Smart Growth policies will end up being most effective on cities with smaller, more compact structures, as its main pillars synchronize best when cities are denser and potentially less auto-centric.  

Tech Talk, Round 4: More Useful Salt Applications

For those of you who read Tuesday’s article on molten salt thermal polar plants, you know that salt can be an effective way to store and release energy over defined periods of time.  Well, today we’re going to look at how molten salt can apply to other sources of energy generation too.

I am a fan of an “all-of-the-above” energy policy, which roughly translated means an energy economy where sources like natural gas and nuclear power play a role alongside renewables to power the nation.  Therefore, I am particularly keen on nuclear power as a possible alternative to coal and oil as a source for base load (that is to say, 24-hr steady) power.  While its upfront costs are expensive, and recent events like the Fukushima Daiichi meltdown in Japan have caused governments to question its safety, nuclear is still the only power that can currently provide baseload power free of carbon emissions, making it a critical component of a low-carbon future for the United States.

One technology is getting a second look at providing nuclear power: salt.  A molten salt reactor (MSR) is a type of nuclear reactor that uses molten salt as a coolant, or even uses the salt itself as a fuel.  While experiments using molten salts in reactor generation have been around since the 1940s, they were derided as too cost-prohibitive to be applied for wide-scale use; however, these days researchers are looking into much more experimentative salt combinations and vastly cheaper alternatives.  Depending on the type of model, the salt either absorbs the heat generated by fuel rods, or creates heat to power turbines which produce electricity. 

This type of reactor has many advantages to the traditional method of nuclear generation:

•         The salt, being denser than water, is able to function as a coolant without the high pressures that water requires in a traditional reactor design.  This results in two distinct advantages:
•            The lower pressures allow the salt to expand naturally, which spaces out the fuel atoms and slows down and stops chain reactions

•       The lower pressure also reduces the risks associated with high-pressure liquids (pipe ruptures, etc.)
•      The salt itself can use nuclear waste from spent fuel rods.  This can provide a use for the barrels of nuclear waste that accumulate from traditional reactor designs.  The generation process in molten salt reactors also reduces the time the waste is radioactive from hundreds of thousands to years to just several hundred years.
•      According to Transatomic (the company working on one version of a molten reactor design), the price per kWh is halved from that of traditional reactor designs.  This could potentially make MSRs twice as cost-efficient as “normal” reactors, assuming the math checks out.
•      The size of the reactors is far smaller than traditional designs can manage:

Source: The Weinberg Foundation

So, let’s recap:  MSRs are smaller, potentially more cost-efficient, can use the waste products of other reactors, and are far, far safer than traditional reactors.  What’s not to like?  Unfortunately, financing for the systems is virtually nonexistent at this time, and the new reactor designs themselves are still just leaving the experimental stage and won’t be ready for deployment for the next few years at least.  But it is encouraging to see that there is enough support for scientists to continue to pursue advancements in this technology.  Hopefully, this technology can revive nuclear power as another viable solution to our energy needs, like it was in the 50s and 60s.

Tech Talk, Round 3: Salty Solar Storage

In what amounts to a huge win for solar power, two of the largest planned solar projects in the United States have officially been given the green light for construction by the Department of the Interior.  They include a solar power tower with molten salt storage in Arizona, and a huge photovoltaic (PV) plant in Nevada.  Together, the two installations have the potential to produce close to 450 megawatts (MWs) of power, which is enough to power almost 135,000 homes!  For this round of tech talk, I'd like to talk about one of the most innovative parts of the solar power tower in Arizona, its molten salt energy storage system, and why this technology is innovative and inventive (and useful, too!).

One of the biggest issues that detractors can use to argue against the increased use of solar power is its intermittency.  By its very nature, solar power is diurnally-based.  When the sun isn't shining, the system isn't generating power.  Additionally, the system's power capacity fluctuates according to changing weather conditions: passing clouds or cloudy days can substantially reduce the available power output from PV panels, causing spikes or lulls in energy production.  This means that a solar PV system by itself requires a backup power source to ensure a smooth energy distribution curve, increasing the cost of electricity to homes and businesses alike.  Let's take a look at this graphically to understand this a bit better:

Source:  SolarQuotes Australia

As you can see, solar power's production potential is typically highest during a time of the day when energy use is rather low, and vice versa. However, this fact presents opportunities as well.  If the excess energy generated by PV panels during the middle of the day could be stored, then that energy could be spread over a longer time period and provide even more benefit to consumers while simultaneously reducing the use of expensive backup power sources.

It is this concept that has led to advancements in solar thermal plant design. Instead of using photovoltaics to generate electricity, a solar thermal plant instead uses the sun's rays to generate heat. The Arizona solar plant utilizes a relatively new application of an older technology, molten salt, to help store the excess energy produced by the sun.  Molten salt is a combination of potassium and sodium nitrate heated to very high temperatures.  The reflected energy from the sun is used to heat this salt to approximately 1,000 degrees Fahrenheit, and that heat is used to create steam to turn turbines and generate power.  If left by itself the salt loses less than 1% of its heat overnight, which means that the system can remain hot for 2 months even if all of the solar panels suddenly went offline!  However, the designers of the system anticipate using the heat from the salt to generate enough energy so that all the heat will be used up overnight.

Source:  treehugger.com

The use of molten salt in the solar tower means that there is enough energy for an additional 10 hrs worth of energy production from the solar facility even after the mirrors have stopped reflecting sunlight for the day.  This allows the solar system to be more flexible in its energy generation, depending on the needs of the utility.  Since Las Vegas (the city that the plant will service) is by its very nature more active at night, this plant can help to alleviate some of the greater energy usage by its denizens at any hour of the day.  

Energy storage is an important technology for making sure solar power can provide an efficient, steady flow of energy.  As new advances in storage, like molten salt, become economically feasible, they can provide a way for solar power producers to match their distribution curves to typical energy use patterns.  I imagine that PV panels could be used to heat mini salt storage systems as well:  the excess electricity generated by panels during the daytime hours can be used to heat the salt, and then the heat from the salt generates electricity at night.  It's an exciting technology development, and hopefully it ends up being one that can become widely used and accepted as well.

Solar in our Schools: The National Solar Schools Census

Sorry for the delay in getting my blog posts out regularly:  grad school and internships have eaten up a lot of my time over the past 9 months!  However, since I have a few days before my next internship kicks in, I wanted to write a post about a really cool new effort currently being undertaken in the solar community.

Solar power will be an important source of energy for future generations to harness to meet their energy needs.  However, because solar power is a relatively nascent energy subsector, it doesn't have as much credibility with the public, largely because many people don't quite understand how solar panels work, or the benefits they can provide to their wallets.  To their credit, a number of schools around the country are working to install solar panels on their campuses, so that students can learn about solar power at a young age and become more familiar with the process of energy generation from the sun.  Solar panels have ancillary benefits for the schools themselves as well:  solar power lowers energy bills for school districts, which means that schools can then allocate the money saved on energy to repairs for dilapidated buildings, or even to programs that may have been canceled or cut from stressed budgets in prior years.

One of the biggest methods of spreading the benefits of solar power is through word of mouth.  If individuals, businesses, or schools hear about the savings other entities have reaped through investing in solar power, they are more likely to invest in the same technologies as well.  But how will we know which schools have taken steps to become greener?  One new effort by The Solar Foundation will help to shine light on this trend.  The National Solar Schools Census  is an attempt to collect data on all of the K-12 schools that have installed solar panels throughout the nation.  The map is really cool; it uses Google Maps so you can zoom in and see the solar panels on the schools that have installed them already.  It also breaks down the schools by the size of the installation that currently exists.  While the data is understandably patchy at this time (since it can be difficult to get accurate data for all schools in a state, and because the pace of solar adoption is currently quite rapid among schools), its certainly inspiring to see all the work that K-12 schools have taken already to save money and educate their students about solar.

If your school isn't on the map, the web page has an email address so you can send the Foundation your information and be included!

A Conservative's Take on Environmental Regulation

When one thinks of environmental policy, one usually assumes that environmental policies primarily fall within the realm of the Democratic Party and left-leaning thinkers.  To an extent, this has been true recently, with Democrats sponsoring legislation to increase regulation of our air and water, including a relatively recent proposal to move to a carbon cap-and-trade system.  However, the Republican Party, usually known as the party favoring business interests, has been sensitive to environmental issues in the past (Richard Nixon created the EPA, after all), and there are parties concerned with the environment within the party that believe that some regulations are actually harmful to the environment.  Thus, by eliminating unnecessary regulations, the state of the natural world can be improved, while the republican philosophy of smaller government can be realized.  One conservative group, R Street, has published a website detailing these cuts, and the head of the firm, Eli Lehrer, shows us how eliminating regulations can be good for the environment as a whole.

Lehrer’s group’s proposal “outlines almost $700 billion in cuts that would improve the environment.”  His group takes the shears to all subsidies for oil companies, as well as for green energy companies, arguing that in times of large deficits, subsidies that go to companies that are already profitable doesn’t help taxpayers with the bills.  He also states that the litany of tax credits and subsidies also ends up distorting the clean energy market, and eliminating those will help the market function more smoothly.  He looks at subsidies for specific insurance programs, like those for agribusinesses and beach houses, and says that the private market can handle those duties as efficiently as the government.  Additionally, Mr. Lehrer recommends that the budget be gone over and eliminated of wasteful programs like the Essential Air Service Program.  The program enacts subsidies that “encourage the use of small, inefficient planes and don’t save significant time for travelers.”  In the end, the report proposes cuts that “include $269.78 billion from energy programs…$167.09 billion of agricultural subsidies…$212.02 billion of transportation subsidies…$101.8 billion of federal flood, crop, and nuclear insurance subsidies…[and] $24.99 billion from wasteful or environmentally damaging public lands and water projects.”

            While it may seem surprising to see these cuts proposed by a member of a party not usually associated with environmental protection as of late, Lehrer proclaims that these cuts came with the support of Taxpayers for Common Sense, and the progressive group Friends of the Earth.  While I believe that pricing pollution effects into the free market can help green tech with its competitiveness, smart regulation changes can be a good thing if properly vetted and administered.  It reminds me of a scene from Pixar’s Ratatouille, where several characters, particularly critic Anton Ego, take offense to chef Gusteau’s slogan “Anyone Can Cook.”  In the end, the point of Gusteau’s slogan was not that anyone can make good food, but rather, that good food can come from anywhere.  It seems that this can hold true with the policy arena as well:  not everyone can create good policy, but smart, pragmatic, well thought-out policy measures can come from anywhere.  

Industrial Policy: Is It All It's Cracked Up To Be?

When it comes to discussing market incentives for green energy promotion, policymakers are blessed with a variety of different options for helping nascent industries compete with the established market.  In order to provide monetary scaffolding for companies to grow, the government has provided a combination of tax credits and subsidies for alternative energy companies, and direct stimulus to governmental departments focusing on green energy research.  The approach is known as “industrial policy,” and the idea behind this strategy is that it represents a “one-two punch” to help specific sectors compete more effectively with outside competition.  But is such an approach really beneficial for the energy sector in the long run?  One new study by the centrist Brookings Institute questions the viability of the current approach, and compares it to former methods practiced with other institutions in the past.  While agreeing that some federal funding may be appropriate, the authors instead make a case for a continued push for a carbon “cap-and-trade” system, in order to more properly capture the hidden costs of fossil fuel consumption.

            Industrial policy measures have been a staple of green energy promotion in the past.  In the 1970’s, during a time period of stagnation in America’s industrial sector, policymakers looked for solutions that would help revive manufacturing and increase its competitiveness in the face of new industrial powers in Japan and Germany.  One such school of thought postulated that the federal government could be used to push industry in specific, preordained directions through “indirect measures,” like tax credits and subsidies, and direct stimulus as well.  The idea was that these measures would shift industry into the “proper” cutting-edge technologies, and create increased American competitiveness in those sectors.  While this school of thought died out in the early 1980s as American productivity rebounded and Japan’s economy slowed down, the ideas behind industrial policy still appeal to various interest groups, particularly those with left-leaning ideologies.  Although these policy ideas are primarily associated with the industrial sector of the US economy, they have also been applied to the green energy sector as well.  Over the past 40 years or so, the industry has been the recipient of a combination of subsidies and grants, beginning with a massive effort by the Carter administration to produce synthetic fuels, and continuing off-and-on throughout subsequent decades. 

With the advent of the financial crisis of 2008, policymakers espousing industrial policy found an opportunity to promote green energy technologies within the context of a stimulus for the economy as a whole.  Advocates of this policy touted that “[the investments] will help address global warming and…promise greater ‘energy security,’ but also deliver thousands of ‘green jobs.’”  Like the Carter administration in the 1970’s, the Obama administration made a push for alternative energy development a centerpiece of its policy initiative, and authorized $32 billion in stimulus funds to go to the Department of Energy (DOE) for green energy research.  History has shown us that this approach is iffy at best in its effectiveness:  while a 2001 study by the National Academy of Sciences showed that DOE projects yielded returns of about $40 billion at a cost of $17 billion, “just three of the energy efficiency programs produced 75% of the benefits.”  Additionally, most of those developments occurred in the building efficiency sector, while most of the other initiatives in other sectors merely broke even, or suffered from cost overruns.  Given these facts, it’s easy to see that direct investment on an industrial scale can be a dicey proposition.

Many advocates of green energy industrial policy proclaim that we are in competition with other nations, like China, Germany, and Brazil, to produce effective alternative energy solutions, and that taking control of this industry’s development, and “winning” the competition, will result in increased jobs and a stronger economy.  Using this logic, initial investments to support industry growth will result in a quicker rate of technological progress and a leg up on the competition.  However, the logic isn’t as sound as one might think; the authors turn to the liberal-leaning economist Paul Krugman to debunk these claims.  According to them, “Krugman notes that, while the term ‘competitiveness’ is meaningful when applied to individual firms, it makes little sense when applied to the economic relationships among countries.”  What he means by this is that one can’t lump countries and corporations in the same boat when talking about competitive principles.  A corporation is a singular entity, and while corporations benefit from obtaining greater market share, international trade actually ends up helping countries more than it hurts them.  It’s tempting to believe that countries can gain a boost in GDP from aggrandizing the competitiveness of their industries in order to gain market share, but Krugman found that even if a strategic American trade policy could be crafted to gain a majority share in markets to maximize any monopolies enjoyed by US firms, the process would net less than a percent to U.S national income.  In contrast to industrial policy, empirical data support the idea of international trade to lower energy costs.  The authors of the study note that when other countries develop cheaper green tech, more of it will be used in the US as well, which will then minimize costs for conversion, and help the environment too.  Indeed, they cite recent anti-dumping cases levied by solar firms against firms in China as an example that dumping cheap solar panels in the US may actually help US consumers “by artificially lowering the costs of solar power,” and making it more competitive with nonrenewable energy sources.

            The final question concerning industrial policy is whether the claim that policy measures of this type can produce “thousands of green jobs” hold up in practice.  The first thing we need to take into account is the nature of this policy.  Industrial policy composed of direct stimulus tends to be “timely, targeted, and temporary.”  And in the 2009 stimulus proposed by President Obama, the money allocated to the Department of Energy and other green entities was just that:  a short-term burst of direct funds and tax cuts designed to provide demand for services when the private markets are unwilling or unable to do so.  Unfortunately, the Institute notes, this form of stimulus is at odds with the goals of most energy research.  This research is a time-consuming process, and beginning a project “require[s] detailed proposals, competitive contract selection, and negotiations over the scope of work,” unlike, say, a transportation or construction project.  Green energy research also tends to draw from a highly educated pool of labor that is less likely to be affected by downturns in the market, and therefore, causes less of a dent in unemployment than projects requiring less-skilled workers.  Thus, the authors conclude that “programs designed to promote the sustained commercialization of new technologies are seldom effectively counter-cyclical.”  Unfortunately, while green energy can provide many benefits to the environment, it is not the most efficient vehicle for promoting job creation.

Since industrial policy seems to falter on several of its selling points, what then would be a more efficient solution?  The authors come to the conclusion that “getting prices right” is the most logical first step in making green energy more attractive to commercial enterprise.  Properly factoring in the “hidden costs” of carbon production, like the harm carbon emissions pose to the environment and society, can help to level the playing field between green energy producers and more traditional energy companies.  The authors propose that a carbon cap-and-trade system be the main focus for creating a price scheme reflecting all costs of production, but also note that targeted governmental investments can provide a nice complement to private research and development.  To this effect, they note that the DOE would do well to shift its policy portfolio to focus on investments that “would have been taken by firms in the presence of an effective carbon price” until cap-and-trade can be implemented in Congress.  Therefore, the DOE should focus on “technologies with the lowest expected cost of abatement and the highest probability of market penetration,” instead of its current priorities.  In short, they recommend a focus on technologies that would provide a firm the maximum amount of profit if carbon were properly priced.  This combination of solutions, they argue, would be a more market-friendly solution and more properly set the carbon market at a level where green tech could compete.

            It’s interesting to note that the Brookings Institute is recommending a shift in government policy, rather than having the more often-heard debate on whether government should be helping the industry at all these days.  It says something about the importance of having government provide support to certain industries, even though there can still be plenty of debate about how that support should manifest itself, whether it be cap-and-trade, direct investment, or other methods.  Although throwing money willy-nilly at every possible energy solution seems inefficient, a more sensible solution for proponents of direct investment is to keep closer tabs on research projects, and instead move to support those projects that show the most return, like the three projects that accounted for 75% of the DOE’s profits.  That way, targeted direct investment can produce the maximum “bang for the buck,” and provide a nice complement to a future cap-and-trade program or a carbon tax.    Investing this way will help to pick up any slack in research that exists in the private sector, and help to ensure that green energy development won’t be consigned to the wastebasket in case of a future downturn in fossil fuel prices.

Note:  All quotes taken from: http://www.brookings.edu/~/media/research/files/papers/2012/6/04%20clean%20energy%20morris%20nivola%20schultze/04_clean_energy_morris_nivola_schultze.pdf