May 2, 2008 - There is now a new crisis and a new opportunity: economic development based on low-carbon technologies and infrastructure. Climate change ...
Opportunities for Economic and Community Development in Energy and Climate Change
Economic Development Quarterly Volume 22 Number 2 May 2008 107-111 © 2008 Sage Publications 10.1177/0891242408315579 http://edq.sagepub.com hosted at http://online.sagepub.com
DeWitt John Bowdoin College, Brunswick, ME Climate change is an economic development issue, not just an environmental issue. Private businesses have begun to invest heavily in low-carbon technologies, but market imperfections, including uncertainties about new technologies, mean that public dollars will also be required. Billions of public dollars will be available from auctions of emissions allowances for research and development, deploying low-carbon energy technologies, changes in public infrastructure, and adaptation. A distributed approach, with state, local, and federal economic and community development agencies playing important roles, could ensure wiser investments of public resources. Keywords: climate change; energy; low-carbon technology; cap-and-trade; sustainability
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ederal economic and community development efforts have been “much redesigned” to address past crises like the Great Depression of the 1930s and lagging urban and rural regions in the 1960s and 1970s (Markusen and Glasmeier, this issue). There is now a new crisis and a new opportunity: economic development based on low-carbon technologies and infrastructure. Climate change has finally moved to center stage in the United States. Since January 2007, 50 investment firms that manage over $4 trillion and 22 corporations with 2 million employees and revenues of $1.7 trillion have endorsed federal legislation requiring 60%-to-90% reductions in greenhouse gas emissions by 2050.1 Over half the states and hundreds of local governments have joined in, with the state of California; King County, Washington; and many others setting similar goals. Climate change is not just about the environment, and it is not just a national and global issue. It is also about local economies and community development. Public efforts to build low-carbon communities will need the discipline of a free marketplace of information to avoid unwise investments. A federal–state–local partnership could provide that discipline.
Conventional Wisdom: Federal Leadership There is no shortage of promising technologies that might help us achieve 60%-to-80% reductions— photovoltaics, carbon sequestration and storage, plug-in
hybrid cars, cellulosic ethanol, and others. But very few are commercially available now, we don’t know which would be cheapest, and we are just beginning to understand how these new technologies might drive changes in the values, institutions, and physical infrastructure that organize our lives. Can we develop low-carbon transportation, or do we need to slow down suburban sprawl and rely more on locally produced food and products? Will we rely on centralized production of electricity, or will distributed generation be cheaper and cleaner? Furthermore, some new technologies will work well, but other may not. For example, the wave of new cornbased ethanol plants may revitalize rural communities in the Midwest, but many experts claim that these plants consume more energy than the ethanol they produce, so they do not reduce net emissions. The consensus today is that federal policy should not attempt to pick winners among technologies. Conventional wisdom favors economy-wide incentives—either a federal energy tax or a national cap-and-trade system that would set a price on carbon dioxide (and possibly for other greenhouse gases) in the form of allowances for emissions.2 These macroeconomic tools are essential but will not be sufficient. One reason is that the price of carbon is not likely to be high enough to stimulate technological development fast enough to meet goals such as 20% by 2020 or 60% to 90% by 2050. Venture capitalists and private investors are investing heavily in low-carbon technologies—as much as $7.1 billion in the Americas in 107
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2007, up 83% from 2005 (New Energy Finance, 2007). But venture capitalists, private investors, and corporations want returns of 15% at the very least, so they are investing heavily in the few new technologies—like wind— that are ready for commercialization, not in technologies that are 10 to 20 years off or in low-carbon public infrastructure. Public investments in research, development, and demonstration will be necessary to meet climate goals. Investments in energy efficiency may also lag behind the rising price of carbon. It is well established that many consumers, businesses, and communities do not invest in energy efficiency even when the pay-back period is as short as a few months. There are a variety of reasons— for example, lack of information, insufficient expertise in energy management, misaligned incentives, and the lack of ready financing.3 Many communities that have not profited from national economic growth may lag behind in adjusting to a low-carbon economy. If they miss opportunities to become more energy efficient and to generate decentralized renewable energy production, they will fall further behind.
What Should the Federal Government Do to Encourage Low-Carbon Technologies? Federal cap-and-trade legislation seems likely after the next presidential election and will put billions of dollars on the table for low-carbon technology and infrastructure. The Congressional Budget Office (2007) projects that auctioning emission allowances could raise $50 billion to $300 billion annually in 2020.4 Maneuvering has begun in the United States about how our allowances should be allocated among the companies that emit greenhouse gases. Will Congress give allowances to deserving companies and industries so that they and their host communities do not lose out? Will allowances be auctioned off to finance technology development and other energy-related programs? Some industries and corporations are already positioning themselves as responsible, far-sighted citizens to persuade the public that their technologies are the best route to a low-carbon economy, so they deserve an advantageous position in the multibillion dollar emissions allowance market. In the United States as around the world, national government investment in energy research and development has been stagnant since the late 1980s. When energy taxes are imposed or auctions of emission allowances begin, federal investments in energy technology could rise.
A Federal-State-Local Partnership for Low-Carbon Technologies A single national derby would be the worst way to go about investing in low-carbon technology and energy efficiency. Inevitably, economically and politically powerful interests will get a big share of public funds. We need a system that will spread the money around because we don’t know which technologies are best. And we need a system with checks and balances to assure that there is impartial expert scrutiny of investment decisions so that money is not wasted. We have the capacity for that kind of decision-making process; it is called our federal system, and federal– state–local economic and community development programs are an important part of the system. Congress could authorize a national partnership to develop and demonstrate promising low-carbon technologies, funded by a national auction of emission allowances and through the normal appropriations process to the extent that funds are available. Several agencies could be involved. The U.S. Department of Energy (DOE) (2007) has long-standing energy research, development, and demonstration programs. About $1.8 billion of these funds go to the nuclear power, coal, and other fossil fuels industries. Their technologies involve massive, centralized facilities such as billion-dollar electricity-generating stations. The DOE also invests about $1.2 billion in technologies like combined-heat-and-power, wind and photovoltaic energy, microturbines, and energy efficiency, which can be deployed at a much smaller scale in individual communities, multicounty regions, and states.5 The DOE works closely with universities but has very limited federal–state and federal–local activities. The Environmental Protection Agency (2007a-g) has many creative programs to work with industry and with state and local governments on energy efficiency and renewable energy, but these are voluntary programs that have very limited funds and rely primarily on technical assistance rather than financing of promising technologies.6 In contrast, the Departments of Agriculture, Commerce, Treasury, and Housing and Urban Development have many agencies with substantial federal–state and federal– state–local economic and community development programs. These agencies have established working partnerships with state, local, and regional leaders who make significant decisions about economic development, technology, and small business development, and
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investments in water and sewer infrastructure, housing, and other public infrastructure. An effective federal climate policy would have to address all of these topics. Meanwhile, several governments are moving aggressively to build research institutions and to finance enterprises that develop and provide new energy technologies and services. California is the leader, not only in regulating carbon emissions but also in funding a million solar rooftops, deploying the first pieces of the infrastructure for fueling hydrogen-fueled cars and earmarking funds for aggressive (and acclaimed) energy efficiency programs.7 Its venture capital community saw the economic potential for these state efforts and has worked closely with the state to put these and other economic development initiatives in place. The challenge for the federal government is to build on the strengths of its many agencies to develop an effective partnership with states, research institutions, and the private sector.
Disciplining Federal and State Investments in Low-Carbon Technology When federal cap-and-trade gets going, a significant portion of the funds from the auction of allowances may be funneled to state governments. As of this writing, the Senate is considering a Lieberman-Warner bill (S. 2191) that would give states 5% to 9% of emission allowances; Bingaman-Specter (S. 1766) would give states 9%.8 Powerful interests would quickly mobilize to persuade federal, state, and local decision makers to give their industries and companies access to this new money. Scientists, university presidents, corporate executives, venture capitalists, labor unions, and environmentalists with an entrepreneurial bent would all jump into a virtuous contest, each arguing with conviction that its technologies are the most promising path to a safe global climate. Federal economic and community development programs have experience with similar “virtuous contests,” with different communities and states competing to attract businesses. Markusen and Glasmeier suggest several ways of disciplining the “bidding wars,” including a much more active federal effort to evaluate development efforts, disclosure of the provisions of bidding packages, performance requirements, and regulation. These same principles could work for local climate efforts. There is one big difference. From the federal perspective, the competition for economic development is often zero-sum or worse, with states and communities subsidizing companies to relocate. The competition for
lowering greenhouse gas emissions would be virtuous. Every community benefits when others reduce their emissions. However, local efforts to cut emissions can be narrowly defined and wasteful. The federal role in energy technology development programs would be as a check on this waste. Federal legislation could establish review boards to evaluate technology development and energy efficiency efforts in terms of their potential to reduce greenhouse gas emissions to meet a national goal such as a 60% to 80% reduction in emissions by 2050. The boards could approve state and local investment strategies or perhaps authorize a larger federal cost share on specific investments that have a greater chance to pay off for everyone in lower emissions. The review boards might consist of engineers, entrepreneurs, and disinterested experts who would be forbidden to make personal investments in the energy-related technologies that they evaluate. The boards would work something like a peer review system—with dispassionate, expert review—except that the boards would be charged to explain their decisions to the public, thus educating local and state officials and the public about the technologies and the choices. Such boards should rule out—or at least penalize— projects such as state investments in corn-based ethanol plants that use more carbon-based energy than they save.9 This system would establish a disciplined, free intellectual marketplace to guide public and private investments in developing low-carbon technologies. Federal economic and community development agencies would fill an important niche in a federal– state–local partnership about climate change. These agencies work with networks of local development districts, community development corporations, financial intermediaries, and local leaders—all important participants in climate change policy. Also, most federal development programs operate at a regional, multicounty level, which is often a closer match to local economic regions and thus could be an effective level for organizing energy efficiency and small-scale technology development efforts. The agencies and their local partners have expertise in putting together complex development projects that mobilize unconventional private sector financing along with mainline public spending and bank loans. And if federal economic and community development programs adopt the recommendation offered by Markusen and Glasmeier to work more closely with local universities, community colleges, and technical institutes, they could bring the expertise from those institutions about
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energy technologies and practices more directly into local development strategies.
Next Steps for Economic and Community Development Programs Climate change is a 50-year agenda (at least), but action can start with small, well-chosen steps. Indeed, many federal agencies have already taken initial steps and are learning to work together on climate and energy issues. Housing and Urban Development has been working for several years with the Department of Energy and Environmental Protection Agency to reduce energy costs in housing, which amount to 10% of the agency’s budget. The U.S. Department of Agriculture has done important work on biofuels. As of May 2007, there were no significant references to energy or climate on the Web site of the Economic Development Administration (EDA), but within the EDA world there are, no doubt, many local and federal officials who are familiar with the high energy costs of water and sewer systems, the costs of providing electricity to industrial parks, and the concept of sustainable development. At other levels, community development corporations, liberal foundations, politically progressive communities, and the United Nations have been working on a very broad range of efforts that link environmental quality with economic development and social equity under the label of “sustainable development” for at least 20 years. What is new is that climate change has arrived at the center of federal policy debates. It will stay there for some time. Federal economic and community development agencies could ignore climate change but risk becoming less relevant to their partners at the state and local levels. States and local governments are already looking for economic opportunities in wind, solar, and biofuels; regulating emissions; mandating and investing in programs to energy efficiency; and thinking about how climate change and the rising cost of energy might affect their water supply, transportation systems, and local economy. It’s time for the federal government to engage.
Notes 1. More precisely, Ceres, which describes itself as “the largest coalition of investors, environmental, and public interest groups,” issued a report titled “Capital to the Capitol: Investors and Business for US Climate Action” in March 2007 that called for a 60% to 90% cut, and the corporations called for 80% by 2050, with intermediate levels of reduction. The Ceres report was available at http://www .ceres.org/pub/docs/Call_to_action.pdf as recently as December 10, 2007, but now is not available at the Ceres Web site. The corporate
report is still available (Retrieved January 8, 2008) in U.S. Climate Action Partnership (2007) “Call for Action,” at http://www.us-cap. org/about/report.asp. 2. Cap-and-trade works like this: Congress would set a national cap on emissions from certain businesses—perhaps all electrical utilities and large industrial facilities. Government would allocate the cap among these sources, requiring each either to reduce its emissions or to purchase an allowance from another company that would promise to reduce its own emissions and could do so more cheaply than the price of the allowance and thus would profit by selling the allowance. 3. For example, often building owners have no incentive to invest in better insulation and more efficient major appliances because renters, not the owners, would benefit from lower heating and electricity bills. For an authoritative discussion, see Smil (2003). 4. The Congressional Budget Office (2007) estimates that 15% of the revenues would be sufficient to compensate energy firms for reduced profitability. Retrieved December 10, 2007, from http://www.cbo.gov/ ftpdocs/80xx/doc8027/04-25-Cap_Trade.pdf. 5. The U.S. Department of Energy (2007) proposed budget for 2008 includes $1.236 billion for energy efficiency and renewable energy programs and $1.852 billion for electricity delivery and energy reliability, fossil energy, and nuclear energy. Other programs include $9.4 billion for national security (primarily nuclear weapons), $6.3 billion for environmental management (mostly nuclear cleanup), and $4.4 billion for science (mostly the national labs, which work on many issues but put most of their resources into nuclear, security, and large-scale energy technologies). 6. These programs include, for example, the SmartWay Transport Partnership (2007g), Clean School Bus USA (2007e), Best Workplaces for Commuters (2007d), High Global Warming Potential Gases (2007b), WasteWise (2007c), Diesel Technology Retrofit Verification (2007a), and others that are described as Partnership Programs. Energy Star (U.S. Environmental Protection Agency & U.S. Department of Energy, 2007) is an Environmental Protection Agency–Department of Energy program that certifies and labels energy-efficient products. 7. Many documents describing California’s climate change policies and programs are available at http://www.climatechange.ca.gov/policies/ index.html. See, for example, State of California Agencies’ Roles in Climate Change Activities at http://www.climatechange.ca.gov/ policies/state_roles.html. Also see Taylor, Rubin, and Nemet (2006). 8. S.2191, America’s Climate Security Act of 2007, sponsored by Senator Joseph Lieberman, with 10 cosponsors. Available from http:// thomas.loc.gov/cgi-bin/query/z?c110:S.2191: and S. 1779, Low Carbon Economy Act of 2007, sponsored by Senator Jeff Bingaman, with six cosponsors. Available from http://www.govtractk.us/congress/billtext .xpd?bill=s110-1766 9. The federal Energy Policy Act of 2005 provided a substantial boost for corn-based ethanol by setting a national goal for ethanol production for use in place of gasoline.
References Congressional Budget Office. (2007, April 25). Trade-offs in allocating allowances for CO2 emissions. Retrieved December 10, 2007, from http://www.cbo.gov/ftpdocs/80xx/doc8027/04-25-Cap_Trade.pdf New Energy Finance. (2007, August). Cleaning up 2007: Growth in private equity & venture capital investment in clean energy technologies, companies, and projects. Retrieved December 10, 2007, from http://www.newenergyfinance.com/?n=19
John / Energy and Climate Change 111 Smil, V. (2003). Energy at the crossroads: Global perspectives and uncertainties. Cambridge, MA: MIT Press. Taylor, M., Rubin, E. S., & Nemet, G. F. (2006, January). Technological innovation and public policy. In W. M. Hanemann & A. Farrell (Eds.), Managing Greenhouse Gas Emissions in California (pp. 1-35). Berkeley: University of California–Berkeley, The California Climate Change Center. Retrieved December 10, 2007, from http://calclimate.berkeley.edu/3_Innovation_and_Policy.pdf. U. S. Climate Action Partnership. (2007, January). Call for action. Retrieved December 10, 2007, from http://www.us-cap.org/about/ report.asp. U.S. Department of Energy. (2007, February). FY 2008 Congressional budget request: Budget highlights. Washington, DC: Author. U.S. Environmental Protection Agency. (2007a, September). Diesel retrofit technology verification. Transportation and Air Quality. Retrieved December 10, 2007, from http://www.epa.gov/otaq/ retrofit/. U.S. Environmental Protection Agency. (2007b, September). Partnerships. High global warming potential gases. Retrieved December 10, 2007, from http://www.epa.gov/otaq/voluntary.htm. U.S. Environmental Protection Agency. (2007c, September). Preserving resources, preventing waste. WasteWise. Retrieved December 10, 2007, from http://www.epa.gov/wastewise/.
U.S. Environmental Protection Agency. (2007d, October). Best workplaces for commuters. Transportation and Air Quality. Retrieved December 10, 2007, from http://www.epa.gov/otaq/bwc.htm. U.S. Environmental Protection Agency. (2007e, October). Clean school bus USA. Transportation and Air Quality. Retrieved December 10, 2007, from http://www.epa.gov/cleanschoolbus/. U.S. Environmental Protection Agency. (2007f, October). SmartWay Transport Partnership. Transportation and Air Quality. Retrieved December 10, 2007, from http://www.epa.gov/smartway/. U.S. Environmental Protection Agency. (2007g, November). Energy efficiency and global climate change. Partnership Programs. Retrieved December 10, 2007, from http://www.epa.gov/partners/ programs/#global. U.S. Environmental Protection Agency and U.S. Department of Energy. (2007). Energy Star. Retrieved December 10, 2007, from http://www.energystar.gov/. DeWitt John is the Director of the Environmental Studies Program at Bowdoin College in Maine. He led the National Academy of Public Administration’s 1996 evaluation of the Economic Development Administration, has written two books about economic development, and managed a national grant-making program for community economic development.
