Technology and the Environment DD's Eco Notes

[Note: I jointly authored this with Dan Sarewitz of ASU]

The House of Representatives has passed a massive climate change bill aimed at legislating a new, climate-friendly energy supply into existence through emissions caps, technology standards, and incentives. The bill’s champions assume that, in response to an array of mandated carrots and sticks, nimble startup firms will be motivated to develop new clean-energy technologies that will ultimately revolutionize our use of energy, while investors smelling early profits will line up to fund these activities.

Unfortunately, a crucial question remains embarrassingly unasked: Who is going to buy enough of these new technologies to establish a market that's large enough to meet our carbon reduction goals? This question is particularly vexing because, in the energy sector, existing business models are deeply entrenched, huge capital investments are at stake, and new technologies often require changes in consumer behavior that inhibit adoption.

Large, reliable, early-adopter customers are essential to new markets—to bring in revenue that helps scale up operations, and to foster confidence that attracts more customers and new investments. Real-world customer feedback also promotes rapid innovation and improves the chances that new products will succeed in the market.

What would the ideal clean-energy customer look like? Imagine an organization big enough to have energy systems that mirror the real world’s, rich enough that its purchasing power could command the attention of innovators, sophisticated enough to assess and deploy the latest technologies, and disciplined enough to push those new technologies relentlessly in the direction of greater efficiency and lower cost, year after year.

Something akin to this ideal customer exists: The Department of Defense, funded annually at about $500 billion (roughly the GDP of Sweden). DoD owns a huge infrastructure, including 570,000 buildings at more than 5,000 facilities and bases (many of which are the equivalent of small cities), hundreds of thousands of vehicles and tens of thousands of aircraft, and annual energy costs of about $20 billion.

For more than 60 years, DoD has been by far the world’s most important customer for driving high-tech innovation. In aviation, telecommunications, advanced materials, semiconductors, and many other fields, the dual role of DoD as investor and major customer has stimulated rapid technological improvements, allowed scale-up of high-tech systems so they became both practical and affordable, and catalyzed the growth of the private sector so technologies could flourish in the broader marketplace. The Internet may be the DoD's crowning achievement. First conceived at DoD’s Advanced Projects Agency, this early computer network eventually created a market for equipment and service providers that soon spilled over into the private sector as the Internet, an unparalleled platform for innovation and wealth creation.

Yet policymakers have, amazingly, ignored the critical role of government as a strategic customer for energy technology. DoD, with its hunger for energy, huge size, and sophisticated technical capabilities and needs, could quickly become the world’s most important consumer and catalyst for clean energy innovation—even as it vastly improves its operational efficiency and flexibility in providing for the nation’s defense. We can see the latent capacity for this role in the early adoption of solar energy cells by the military for use on satellites (in the 1950s!); in the ever-increasing demand for better batteries to support troops in remote locations; in the nation’s largest solar energy farm on Nellis Air Force Base in Nevada.

Congress or the President should ask the Department of Defense develop a plan for committing to a path of progressively increasing efficiency and clean energy across all aspects of its operations, from tanks in the desert to the supermarkets on its bases. This plan should include a DoD commitment to purchase prescribed amounts of increasingly efficient clean energy capability in 2015-2030 time period. Such a commitment would send an immediate, strong economic signal to innovators and investors, and would decisively put the nation, and the world, on a path to a clean energy future.

Like many, I'm divided by the passage of Waxman-Markey (aka ACES) in the US House of Representatives. While its passage is a historic event, the bill has so many issues that I find myself as worried as I am excited by it. As Tom Friedman recently wrote (sorry, free registration required to see the whole article):

It is too weak in key areas and way too complicated in others. A simple, straightforward carbon tax would have made much more sense than this Rube Goldberg contraption. It is pathetic that we couldn’t do better. It is appalling that so much had to be given away to polluters. It stinks. It’s a mess. I detest it.

But he immediately turns the tables, saying "Now let’s get it passed in the Senate and make it law.". His main point is that a getting a price on carbon will result in fundamental changes in decision making, which will put us on the right path:

Henceforth, every investment decision made in America — about how homes are built, products manufactured or electricity generated — will look for the least-cost low-carbon option. And weaving carbon emissions into every business decision will drive innovation and deployment of clean technologies to a whole new level and make energy efficiency much more affordable.

At Sun, we've been a strong advocate for establishing a price for carbon, because Tom is correct that it is a basic requirement for "weaving carbon emissions into every business decision". For example, we'd like to be able to use the current cost of carbon along with scenarios of future costs to make the business case for switching our datacenter backup systems to something less carbon intensive than diesel generators. Unfortunately, Waxman-Markey doesn't provide a clear price of carbon for America's energy consumers - business or individual.

Here's why.

Most homes and businesses, including large ones like Sun, don't emit GHG in ways that require them to directly participate in the cap and trade system. When we purchase electricity the corresponding emissions will have been covered by our electric utility, and when we buy fuel and burn it in vehicles, generators, furnaces, etc, the emissions will have been covered by a party somewhere in the refining and distribution process (ACES smartly avoids forcing each of us individually to participate in the cap and trade system every time we drive somewhere or turn on a lightbulb). In both cases the emissions costs will have been passed along and will show up as increases in our electricity or fuel bill.

The challenge is to figure out what part of our bill went to paying for GHG emissions, since that's the number we need to do a standard return on investment (ROI) analysis like the one described above. Assuming we know the amount of emissions (which you can usually get today), then the number we need is the price per ton that was paid for those emissions.

The obvious answer is to use the current price of carbon in the market where utilities and oil companies trade emissions allowances. But in Waxman-Markey that "market price" may be very different from what your utility or oil company paid. In fact they will have gotten emissions allowances from many different sources, including free allowances from the government, auctioned allowances from the government, domestic offsets, cheaper foreign offsets, "banked" allowances from previous years. Note that these will all usually be cheaper (or much cheaper) than the current "market price", and are not publicly visible. I've verified with folks at utilities and who've worked directly on the bill that there is no provision to make the actual "cost of carbon" available to the consumer, and no utility I've talked to plans to voluntarily provide it.

Since the actual carbon price is lower than the publicly visible price, it makes ROI calculations especially problematic. Using the market price will overestimate the savings of going to a lower-carbon solution, but using any number lower than the market price is pretty much of a guess. This isn't exactly reassuring when you're the one who has to justify a major clean energy investment to your CEO and CFO.

Others have argued that the actual price of carbon will be reflected in the consumer prices of the respective energy options, so that decisions can be based off of that. For example, the ACES-adjusted price of coal-based electricity will go up relative to cleaner options, so people will make different decisions. There's two problems with this approach, especially in a business scenario. First, commercial clean energy commitments are almost always multi-year, and extremely so in the case of deploying solar or wind where a 20-year commitment is not uncommon. But it is obviously difficult to do a multi-year ROI analysis without even knowing what the recent carbon costs are as a baseline to project future carbon costs.

The second problem is that the financial advantages of many clean energy options won't show up until the later years of a multi-year analysis. Initial carbon prices will not be high enough to spur a move to cleaner energy, but future carbon prices might. However, to do the financial analysis we again need a combination of recent prices plus a projection of future ones. So while using today's energy prices may work perfectly well for decisions at home, it is inadequate for the type of financial decisions that businesses need to make.

Fortunately this is easy to fix: the cap and trade participants need to make the data available. Here's three possible mechanisms:

1. Print the included price of carbon on everyone's bill (or at the pump, in the case of gas, diesel, propane, etc)
2. Same as above, but assume that this is mostly useful to businesses, so print this data for them only
3. Each utility or major emitter will publish a monthly or quarterly report of their average price of carbon for the preceding period

I believe that any of these would work for us at Sun. The last leaves more to the reader, but makes the data widely available and seems like low effort for the reporting companies. The first and third options make the information available to all US citizens and organizations that will be paying into this system. Personally this form of basic transparency seems like an important ingredient for people to build trust in this complex systems.

If the final version of ACES can establish a visible price for carbon in the US, its value to companies like Sun will rise. But as it exists right now, it does not provide a price for carbon that Sun, or any other company, can use to justify serious efforts to decarbonize our businesses. Addressing this has got to be a top priority as the bill evolves through the Senate and conference.

I've always thought that one of the most interesting and powerful aspects of the US system of government is that individual states can act as test beds for emerging areas of legislation. This is especially important to high tech, where rapid change creates new legal opportunities and issues on a regular basis. As the understanding of the new area occurs, states can enact legislation which explores the space of possible responses. At some appropriate point the federal government can then pick from the 'winners' and enact a consistent federal approach.

The problem is that this system can break down, and when it does it can be a big mess for businesses. That's the case with eWaste (i.e. the trash from end-of-life electronics), where there is a wide range of state and even local legislation springing up. Last week the WSJ documented the situation, with a good summary by Environmental Leader.

The article highlights two problems: 1) the cost of mandatory takeback and recycling, and 2) the cost of the disparate and inconsistent laws. In my case I actually think that mandatory takeback and recycling is the right answer (with appropriate details), but as I've regularly argued in DC, at some point the cost of inconsistent state and local laws far outweighs the benefits of having a mixture. And in the case of eWaste, where a reasonable and consistent regulation already exists in the EU, there's no excuse for not addressing this at a federal level today in the US.

Why is this important? The big reason is that it is a drain on innovation in this country, especially innovation driven by startups and small companies. Imagine being a small electronics company and having to deal with 50+ takeback and recycling laws and processes. We're feeling the pinch of the administrative overhead here at Sun - I can only imagine what it feels like at a smaller company.

I know that eWaste legislation isn't as appealing as GHG reductions right now, but the states aren't slowing down. So next week when I'm in DC I'm going to keep up my pitch: please pass reasonable federal eWaste legislation!