There are three types of policy responses to the climate change problem, it seems to me. The first involves public education and what we might call moral suasion ("Here's what each of us can do to be responsible citizens and voluntarily reduce our own carbon footprint"). The second involves government spending on research and development into less carbon-intensive ways to move ourselves around and to generate electricity. The third, and by far the most important, is to affect the prices that people pay for carbon-based fuels (gasoline, natural gas and coal). This latter approach, which will require the government to adopt either a carbon tax or a cap-and-trade program, will at once give people strong incentives to reduce their consumption of fossil fuels and also motivate the search for alternatives.

Viewed from this perspective, the recession we are now in cannot help but impede our efforts to slow and eventually reverse the growth of greenhouse gas emissions. First, the large and growing budget deficit will make it difficult to expand R&D spending on renewables. More importantly, a carbon tax or cap-and-trade program will increase energy prices at a time when the economy is already struggling. This will not be fatal for carbon mitigation efforts, because it has always made sense to ramp up such a program gradually. But energy price-increasing programs no doubt become a harder sell during tough times and we shouldn't pretend otherwise.

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Climate change efforts should not take a back seat due to a global economic downturn. But the slow economy reinforces the need to ensure U.S. climate change policies maintain the international competitiveness of our domestic chemistry industry. For example, climate policy should reflect that many of the most effective solutions for improving energy efficiency (and reducing greenhouse gas emissions) come from the manufacturing sector, which relies heavily on affordable, accessible energy for production.

In the business of chemistry, we use natural gas as a raw material for chemistry that goes into energy-saving materials relied on throughout the U.S. economy. Building insulation, lightweight vehicles, solar panels, wind turbines, compact fluorescent light bulbs, energy-efficient appliances, “low rolling resistance” tires, thermal roof coatings, automotive and industrial lubricants, and many more -- all contain chemistry. When we use natural gas as a raw material, it’s not burned, but rather converted into chemistry for these energy-saving products. This raw material, or “feedstock,” use of natural gas does not emit GHGs, and the United States benefits from net energy efficiency improvement and emission reduction. Innovations in other manufacturing sectors have likewise contributed to boosting energy efficiency and reducing emissions.

To the extent that climate policy makes it possible for manufacturers to continue to supply the nation with energy-saving materials, we are much closer to being able to meaningfully reduce GHG emissions. This will mean crafting climate policies that make natural gas available and affordable. There are economic implications, too: Chemistry is used in 96% of U.S. manufactured goods, and our industry is developing the innovations and technology that are empowering our families to live more sustainable lifestyles. Congress would do well to recognize that policies that make energy more expensive can ripple through the economy.

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The US cannot afford to set aside climate change legislation simply because our economy is in a recession. Instead, global warming legislation will incentivize clean, domestic and pollution-free energy sources, like solar, that produce jobs and create new investment in America. In the same way that World War 2 became the catalyst that pulled the US economy out of the great depression, climate change can also create new industries that help get our economy back on track.

Plain and simply, greenhouse gas emissions are an externality that must monetized and become part of our economy. Not only can we not afford to continue to produce these emissions without check, but our businesses can no longer absorb the uncertainty of future regulations that clouds investment decisions that they are making today.

But perhaps most importantly, strong global warming legislation will create an army of entrepreneurs that will invent new technologies, new business models for deploying renewable energy and energy efficiency, and create millions of new jobs for Americans in the states where we need them most. Every American knows that Ohio and Michigan have lost tens of thousands of manufacturing jobs in the last eight years, but few realize that solar energy is now a major employer in both states. In fact Ohio and Michigan are the top two manufacturing states for solar energy and as we expand the use of these technologies we will see jobs in these states continue to grow.

I have faith in the American entrepreneur, that with strong global warming legislation we will not only address the largest environmental issue to face the planet, but we will put millions of Americans back to work in jobs that cannot be outsourced or sent overseas.

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Climate change legislation will take a back seat to rising unemployment, a declining economy and the credit crunch. Also, climate change is not the issue for "Main Street" America between the coasts that it is here in Washington, especially when people understand that addressing it will COST MONEY. However, as Margie pointed out, EPA has a great deal of authority to regulate carbon without further legislation. Whether it will do so will be an interesting issue for the new Administration.

Efforts to curb greenhouse gases need not be significantly impacted by current economic woes if we follow the right policies. The convenient truth, supported yet again by the latest market news, is that wind power and other renewable energy technologies provide a stimulus for our economy as well as a solution to our climate change and energy security challenges.

Amid the current economic turmoil, the wind energy industry alone last week reported 1,400 MW installed in the third quarter (about a $3 billion investment); an additional 8,000 megawatts of wind power projects under construction nationwide (an investment of over $15 billion); and a raft of wind turbine and turbine component manufacturing investment announcements, from Iowa and Colorado to Ohio and Arkansas.

Also important from an economic point of view is the fact that wind power protects against fuel price volatility (who can predict what natural gas, oil, and even coal prices will be in a few months?) and applies downward pressure on electricity prices compared to business as usual. And for rural communities that are often hard hit by extreme weather and swings in commodity prices, wind power provides valuable revenue.

There is more that we can do to ensure that the transition to clean, renewable energy continues, even in these challenging economic conditions.
In addition to designing effective climate change legislation, the new Administration and Congress need to put in place, at long last, a long-term renewable energy policy. It should include stable tax incentives for renewable energy; a national renewable electricity standard; and policies that spur investment in the transmission infrastructure needed to bring that renewable energy to market.

Such a renewable energy policy will ensure that these technologies continue to grow and shine as a bright spot in our troubled economy, while serving as a down payment and early action on climate change.

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It makes sense to frame this issue around risk. The current economic downturn occurred because we misunderstood the risk and regulatory needs of the financial sector. Similarly, we are willfully ignoring risk of climate, and refusing to regulate performance. If we do not do something to regulate greenhouse gas emissions more effectively, in 20 years we will see the negative effects of climate change on a grand scale. Now is the time to take these risks into account.

It's also important not to view this situation as an either/or proposition between a healthy economy and a healthy environment. If done right, climate legislation can help spur a recovery and reduce greenhouse gas emissions. We can do so by incentivizing a transition towards a new green energy system with massive investments in energy efficiency and cleaner technologies.

New research is emerging that calls for climate-friendly green investments to spur economic recovery. A recent Deutsche Bank study found that governments have a “historic opportunity” to stimulate growth through investments in green energy. And as Professor Robert Pollin of the University of Massachusetts-Amherst recently told Congress: “There is no reason at all to delay taking action now to fight global warming. A green investment agenda--focused primarily on measures to dramatically improve energy efficiency but on advancing renewable energy commercialization as well--can itself serve as a powerful engine of job creation in the short run.”

In addition, we can structure policy in a way that has minimal impact on consumers. Lawmakers have discussed several ways to do this, such as a carbon tax and direct rebate to consumers, or efficiency allowance allocations meant to encourage the electric sector to reduce ratepayer costs.

Regardless of the path we choose, we shouldn’t be afraid that climate policy will stymie the economy’s recovery. Rather, we can use climate policy to help to assist our recovery and put us on the path toward a more climate-friendly energy system.

Ultimately, it is not a question of whether we pay to limit the climate risk, but how. We either pay today with increases in electric costs offset by gains in efficiency and long term energy security. Or we pay later with reduced competitiveness of US industry in the global clean tech market; we pay later with huge adaptation costs; and we pay later with a less stable world.

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Margaret Kriz of the National Journal interposed a question that could be summarized as “…is all global warming legislation bad for the economy?” I would suggest the answer depends on how you define “global warming legislation”. If you define such legislation to be traditional “cap and trade”, or even a carbon tax or EPA CO2 regulation these certainly could put pressure on the economy depending on how they are implemented.

But there are other legislative and regulatory initiatives that could be undertaken that will directly reduce carbon production while having positive impacts on our country’s economy. These include renewable and energy efficiency portfolio standards, initiatives to remove barriers and foster economic incentives to implementing widespread deployment of energy efficiency and demand response technologies, legislation to promote energy production from waste heat recovery, and advance the use of highly efficient combined heat and power systems. In addition, federal legislation to support the construction of a national backbone high voltage transmission line using smart grid technologies to deliver wind and other renewable resources to load centers would also lower carbon while providing positive economic benefits.

All these initiatives could be considered “global warming legislation”, and given the relatively low delivered marginal cost of efficiency and renewable resources such as wind these are initiatives that will help our economy both in producing jobs and stabilizing consumer costs.

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Two questions are floating around Washington’s polite circles these days. The first and most often asked, stated in various ways, is “Now that gasoline prices are declining, does Congress still have the collective courage to change transportation and energy policies to move away from imported fuels and toward domestic, (carbon-free) transportation choices? The second question being asked in various ways is, “With the economic crisis, should we postpone addressing the climate crisis?”

Let me give two reasons why we cannot wait for better economic times to face the climate crisis or to solve the energy crisis.

First, global warming is amplifying as the so-called “feedbacks” that scientists have long warned about are occurring much sooner than they predicted. These feedbacks are accelerating carbon dioxide and methane releases which further accelerate the warming process. Like a rolling snowball, every turn gets bigger and bigger.

The defrosting of the permafrost is now releasing its own carbon, including methane, at five times the rate predicted. Wildfires and climate-driven forest destruction by bark beetles and other pests are making boreal forests carbon “sources” not “sinks,” The alarming acidification of the oceans with carbonic acid combined with the saturation of the ocean carbon sinks are endangering the oxygen-producing phytoplankton and the entire ocean food chain while diminishing the amount of carbon that the oceans can absorb. Climate forcings are increasing prolonged heat waves; desertification; sustained droughts, especially on important agricultural lands; increasing storm intensities (including heavy rainfall, more lightning and increases in hurricane intensity and duration); drying out of loss of tropical forests; and drying of wetlands (e.g., potholes, swamps, bogs, peatlands moors, and mires). All of these things are happening at unprecedented rates and have been worse than predicted. In short, we are running out of time to avoid a climate catastrophe.

The second reason why we cannot wait relates to something I learned in high school. My coach had a sign on his locker room wall that says a lot about times like these. “When the going gets tough, the tough get going.”

Throwing money at voters doesn’t work to restart the economy. Remember the $500 rebate? Instead of pandering, let’s get real. It is time to solve the dangerous climate threat facing the world while we also address long-standing energy issues.

I think its time to get going on bold climate solutions with a rapid, World War II-like mobilization of talent and resources to build a new energy economy and to create millions of green-collar jobs. We must build a new, efficient national grid and a network of base-loaded solar, geothermal and wind facilities to provide for our electric use and to recharge battery-powered cars. We must better insulate every home, school, store, church and business and make everything we do more energy efficient. We can recover from the pending recession by investing in a green economy. America can still be a great nation, we just need leadership.

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Raising the price of energy via taxes or regulation will not spur the economy. So far, all of the studies I've seen purporting to show a "green" jobs dividend fail the no-free-lunch test. They assume an injection of funds from nowhere and then trace the multiplier effects.

In reality, the injections are expropriated from some other part of the economy. There will be an offsetting multiplier at least as large and there will be the deadweight loss of the transfer.

The question is and has always been: What is the value of the environmental benefits from cutting CO2 compared to the costs of cutting CO2?

Studies that look at the comprehensive economic impacts, from groups across the spectrum, show significant economic costs to forcing cuts in CO2 emissions. There is debate on the magnitude, but not the sign.

Are some ways of forcing the cuts worse than others? Sure.

Having the EPA regulate CO2 by way of the Clean Air Act is regarded as so disastrous that many who are in favor of significant CO2 cuts only want to use the CAA as the mean cop in a mean-cop-nice-cop routine where cap-and-trade is the nice cop.

In any event, a weak economy is less able to bear the burden of CO2 cuts. Though, as has been noted, a weak economy puts out less CO2 to begin with.

How the legislation is crafted absolutely matters, particularly with respect to the allocation and use of emissions allowances. It is NARUC’s view that in the context of the electric utility industry’s legal obligation to reduce emissions, this valuable currency should be used to mitigate the impact of the price of carbon emissions on utility customers. To that end, we support a system of allowance distribution that allocates allowances to local distributors of electricity so that retail regulators can take their value into account in regulating the economic impact of the emissions reduction program.

Secondly, in NARUC’s view, Congress should create an emissions reduction program tailored to the unique characteristics of carbon dioxide and other GHG emissions. While NARUC has considered approaches other than cap-and-trade, including a carbon tax policy, few economic regulators believe that EPA regulation under existing law would be well suited to GHG emission control.

Overall, NARUC believes climate-change legislation is essential no matter what the economic situation if for no other reason than to allow energy utilities and their wholesale and retail regulators to plan the kinds of new investments that will be needed to ensure cleaner, reliable and affordable utility service. The longer the electricity industry is forced to wait for congressional action, the more difficult it will be to build the needed infrastructure to meet growing demand.

While current economic conditions are cause for very serious concern, the economy will surely recover. In the long term, however, energy demand is not cyclical; consumers use more electricity today than they did 10 years ago, growth that will continue. The more we become reliant on the expanded use of electric energy to meet the needs of a high-tech economy, the more we will need to satisfy growing demand while also aggressively pursuing energy efficiency programs. NARUC supports congressional action on climate change because it will remove many of the uncertainties that are preventing State regulators, utilities, and others from planning and financing new electricity investments.

As I stated above, climate-change legislation can be crafted in such a way to protect consumers. We are in an era of rising utility rates now, and any attempt to limit carbon will add to that upward pressure. Still, assuming Congress moves forward with a cap-and-trade program, we can protect consumers as much as possible by allocating emission allowances in the electricity sector solely to the Local Distribution Company, not to generators. This ensures that the people who paid for the power plants being capped—i.e. the ratepayers—can receive any benefits their LDC might recoup from the cap-and-trade market because LDCs are regulated at the State level.

Additionally, Congress should consider safeguards to any cap-and-trade system that would help LDCs meet the cap without being too costly. While we would expect cap-and-trade to increase rates, Congress can mitigate that somewhat by implementing off-ramps, offsets, and/or safety valves in any cap-and-trade system. While NARUC is reviewing the design for specific safeguard options, they do need to be considered before moving too quickly.

One more thing—we cannot forget the critical role energy efficiency can play in this situation. Certainly during an era of economic uncertainty and higher utility rates, the more consumers can reduce their demand, the more emissions and money can be saved. Energy efficiency is not the silver bullet, but it is the cheapest, cleanest, and quickest resource that we can implement now.

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We believe the rollercoaster ride on Wall Street and fears of a recession will make more difficult any legislative efforts to curb greenhouse gases (GHG) because regardless of what shape GHG legislation eventually takes, it will increase the cost of energy to consumers. Whether the new Congress wants to add higher energy costs to the economic difficulties Americans currently face is an open question, but we believe the current economic situation will probably move the implementation of significant GHG legislation further down the road.

The silver lining is that, in great part because of the current economic crisis and the prospects of greenhouse gas legislation, more and more Americans will begin to conserve energy and use it more efficiently. Actually, we are already seeing this, but it will become more pervasive.

One place we have seen energy conservation and increased efficiency for many years is in the natural gas utility’s residential and commercial sector. In fact, natural gas households have reduced their gas consumption at a rate of about one percent per year for the last 25 years, meaning that today homes using natural gas produce fewer CO2 emissions than they did in 1970, despite a dramatic increase in the number of homes heated by natural gas.

As it is, natural gas is the most environmentally friendly of the fossil fuels—it emits approximately 40 percent less CO2 than coal and almost 30 percent less CO2 than oil—so any effective GHG legislation should take into account natural gas’ clean-burning attributes. AGA believes the best use of clean-burning natural gas is to use it directly to heat homes and businesses—and for water heating, cooking and other end-use applications—rather than use natural gas to generate electricity for the same end-use applications. The direct use of natural gas is its most efficient use, so it saves consumers money and reduces greenhouse gas emissions. Those are two important national goals, especially as Congress attempts to curb GHG emissions in a volatile economic climate.

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Our experts are split along two lines. One group believes that climate change legislation shouldn’t pass anytime soon because it would raise the cost of energy and exacerbate the nation’s economic problems. The other group argues that controlling greenhouse gases could spur development of a green economy and help pull the nation out of a recession.

Does it depend on how the legislation is crafted? Or is all global warming legislation bad for the economy? What's worse--having EPA regulate carbon dioxide or having Congress create a new climate program?

The Alliance supports Federal legislation for an economy-wide greenhouse gas (GHG) emission reduction program, with supporting roles for state and local governments. An effective national program will require equitable CO2 reductions across all sectors of the economy; will be technologically and economically feasible; will utilize market-based measures to the greatest extent possible; will incentivize rapid development and deployment of advanced technologies; and will delineate appropriate roles for federal, state and local governments.

Automakers are committed to improving fuel economy and reducing CO2, but meeting this commitment is a big challenge, especially under foreseeable market conditions. Now more than ever, in this difficult economic environment, we need the certainty of a single national standard set by the federal government and not competing regulations.

America can’t have a healthy economy without a healthy auto industry, because autos represent the country’s largest manufacturing base. Almost 4% of U.S. gross domestic product is auto-related. One out of every 10 U.S. jobs, or about 13 million, is auto-related, and auto workers receive $335 billion annually in compensation.

Despite the market turmoil, the auto industry is still investing in the future. Automakers supported passage of the 2007 Energy Bill, which requires at least 40% increase in fuel economy and at least 30% reduction in carbon dioxide emissions by 2020. In 2009 there will be more than 137 models available with highway fuel economy ratings of more than 30 mpg (EPA). That’s an increase of 25%+ over 2008 in the number fuel-efficient models on sale. In 2009, automakers are planning to sell 25 models of hybrids, 8 models of clean diesel, and 38 models of FFVs. More models are planned for introduction in 2010. The economic reality is that building autos is a capital-intensive industry. A new powertrain can easily cost $1 billion to build. A single test car costs $300 million or more.

The federal government estimates that new fuel economy standards required in the 2007 Energy Bill will cost automakers about $47 billion by 2015, and required investments will rise to $115 billion by 2020. It is more important than ever that there is a single fuel economy standard set by the federal government, and this standard needs to make both environmental and economic sense. The success or failure of the industry will have national economic consequences. Adherence to one federal regulatory standard (reformed CAFE) enhances the likelihood that those national economic consequences will be positive.

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Another reason to move quickly is the "other" financial crisis taking place even as we blog - the green capital squeeze. U.S. cleantech indexes have lost over 2/3 of their value since last December. Earlier this year, large institutional investment portfolios began to shift allocations from carbon-intensive stocks into low-carbon stocks. They did this, in part, because they believed that U.S. climate legislation would end the era of free carbon emissions. Now this flow of funds has reversed - just when venture and corporate innovators need capital to "scale-up" their most promising ideas. Falling oil prices without climate policy will put clean energy on hold - just like we did in the early 1980's.

Actions to deal with greenhouse as emissions, as others have noted, should be part of a strategy for economic growth and as a means to spur new economic activity to move us out of the continuing economic downturn. New and emerging technologies that are being developed in the U.S. and strategies to reduce greenhouse gas emissions can create new employment and growth. In this discussion we need to not lose sight of the main issue – that climate change is happening, and that reductions in greenhouse gas emissions can’t wait for the economic turmoil to subside.

We need to also remember that changes in the climate will have real costs to our economy, and that those costs are beginning to emerge today. Long standing droughts in the Southeast and the West are costing our economy today. While the existence of the drought may not be directly related to the changing climate, recently scientists are concluding that the length and severity of the droughts is a sign that the climate has been changing due to human intervention. It may be that the drought was inevitable, but that the changing climate can delay by years the end of the drought. This means our economy will incur real costs, in higher costs to supply water and perhaps decreased agricultural productivity. This is one reason why California has not slowed progress toward the implementation of AB32 – the Global Warming Solutions Act even though the state has a budget crisis and a slowing economy. CA can’t slow down because the state will be impacted by the changing climate. But the state does see an opportunity to develop new technologies and businesses.

The current economic slowdown will also slow emissions of greenhouse gases. We should look at this as an opportunity to create the incentives for companies to become more efficient so that the emissions can stay down, and for consumers to be more efficient in their use of energy. Well structured policies that encourage the efficient use of energy can help grow the economy. Policies to encourage the use of alternative energy can spur development of emerging companies to feed that market. And yes, even a carbon cap and trade program can spur innovation and economic activity in unexpected ways.

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One of the top three priorities of the new Administration and Congress should be developing a new energy economy built on sound climate and energy policies that will drive cleaner energy technologies and economic growth.

Clearly, the economic crisis is first among the full slate of issues Washington’s newly-elected leaders will address, but I do not believe climate change policy will fall off the agenda. The fact is that unlike Wall Street, there’s no bailout for the climate system.

There are four main reasons why I think climate policy remains a top issue in 2009. First, one priority for the next President will be to rebuild our alliances abroad and establish constructive relationships with other world leaders. One way to assist in this effort would be to craft and pass reasonable national climate policy, and to engage constructively on a global framework for action. Delivering a set of detailed legislative principles to Congress in the first 100 days would be a strong step in this direction.

Second, there is continued activity in the states and in industry. Twenty-three states are participating in regional greenhouse gas (GHG) reduction efforts. And many in corporate America are ready for the certainty that a well-designed national policy will afford them.

Third, the Supreme Court decision in Massachusetts v. EPA paves the way for more traditional command-and-control regulations, and the CAIR decision suggests that innovative approaches without the benefit of legislation will not survive. This increases the pressure on the Congress to take legislative action to deal with climate change.

Fourth, the top issue for corporate America is restoring our competitive economy, and this won’t be achieved without both a comprehensive energy policy and a sound climate policy. A shift to newer, cleaner energy sources; increased energy efficiency, particularly in buildings and in our transportation system; a rebuilt energy infrastructure with a smart grid; and limits on greenhouse gas emissions are all part of what will keep our economy competitive and play to our strengths as a leader in technology development.

I expect some will try to use the current economic situation to delay action, but we can’t afford to wait. By not acting, we’re faced with more emissions to reduce and greater damages from a changed climate. As a result, the argument that waiting only increases costs has been gaining traction.

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At a time when Congress is grappling for the best ways to spark short-term economic stimulus and lay the foundation for long-term economic growth, the need for a sharp focus on America’s energy policy has never been greater.

Our aging electrical grid needs repair and modernization, as does our transportation infrastructure. We need clean and secure energy sources to free our economy from foreign oil dependence – and to protect our climate. All will require substantial investment, billions of dollars in investment.

Where will those billions come from? They are not all going to come from the government, there simply isn’t enough there. But with a cap on greenhouse gas pollution, we can bring the capital and the ingenuity of the private sector to bear. We need the next administration and the new Congress to challenge U.S. companies to innovate and invest in new energy technologies and all of the jobs that come with them.

The benefits will be felt up and down the supply chains of traditional American manufacturing. Just think of the 8,000 parts in a single wind turbine: from cement and steel to ball bearings and copper wiring. American manufacturers who make those parts will see an instant economic benefit in the form of new markets and new customers. We will be selling this new energy technology to Asia and Europe, not the other way around.

What’s more, an emissions cap that includes an auction of pollution credits – a feature of many of the bills on Capitol Hill – could generate a substantial new source of revenue for easing the burden on taxpayers and putting more investment into transportation and electric infrastructure improvement as well as other important economic priorities.

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There are two scenarios for climate legislation next year: (1) the climate debate is melded with the debate over economic recovery and energy policy and moves apace; and (2) the debate flounders and reignites only after the midterm elections. The difference between the two scenarios probably is Presidential leadership, and whether the next President embraces climate change legislation as part of his program in response to the current economic times. While it may be popular to accept the conventional wisdom that economic conditions will delay the debate, there are some reasons to believe that the President will be motivated to lead on climate.

If the next President steps forward quickly on climate change, he would have a challenge of communicating his program and its logic over the attacks already foreshadowed in this blog. The bully pulpit helps. That’s good, because there would be short-term economic costs with any program, even if the downturn reduces the growth in energy consumption for a time. Many people, representing both political parties and all sectors of the economy believe that not only are a low-carbon economy and prosperity compatible, the low-carbon transformation can be an engine of growth for the United States. A transition to such an economy, however, will not happen without a reorientation of the market to attract private capital to clean technologies. In the minds of most investors, this reorientation will not happen without a price on carbon. The President can argue that a carbon market, properly paced to account for current economic times, is one of the keys to the long-term revitalization of our economy.

Why would the President spend his political capital on the issue so early in his first term? Let me offer eight thoughts:

1. The threat of global warming demands timely, decisive action. As already noted in the post of Chairman Dingell, the science is making a compelling case that further delay in addressing climate change will greatly exacerbate the problem and make it much tougher and more expensive to fix.

2. If climate change policy is pushed back, the President may be forced to act through EPA regulation or litigation, on others’ terms, rather than acting on his own terms in legislation. As already noted in the post of Bill Kovacs, this is not the most effective way to address the climate change problem.

3. The President must act quickly to regain U.S. stature in the international negotiations, as early as the Poznan talks in December. As both campaigns have noted, the next President will want to step back into a world leadership role with focus and confidence. The international community is pushing for a new global deal in the Copenhagen negotiations in December 2009. While it is highly unlikely that the next President will be able to seal a deal in Copenhagen, both candidates have pledged to re-engage our country in serious global negotiations to address the climate issue, and it will be critical to the incoming President’s credibility that he move swiftly to do so.

4. Energy security is a substantive and political need, and pressure will remain high for early action to expand energy supply and reduce energy demand, building on last year’s energy law. Such legislative action could run counter to an effective climate strategy or be synergistic with it. It should be the latter to avoid having two of our most significant policy priorities work cross-purposes.

5. The economic opportunity of a low-carbon economy is bottled up behind this legislation. In the past year alone the number of private equity firms investing in clean technology has more than doubled. According to Thomson Financial, venture capitalists invested over $2.2 billion into more than 200 clean technology deals in 2007, a 340% increase from 2005. Much of this capital has come into the market anticipating a price on carbon. If a supportive policy framework is not put in place, there is little doubt that a rapid reversal is possible.

6. The next President will need to act to live up to his campaign promise. The urgency for action was clearly recognized by both Presidential candidates, and bold action on climate change through a cap-and-trade program has been promised by each campaign.

7. The inertia in our energy system requires fairly swift action before the climate challenge becomes even more difficult to address. In our energy system, infrastructure is long-lived, with utility plants planned for 40 years and lasting 100, and transportation infrastructure intended to last in perpetuity. The longer we go without a price signal to those building this infrastructure, the more stranded investments in high carbon infrastructure will materialize and the greater will be the cost of moving to a low carbon infrastructure in the future.

8. Passage is less likely the longer the President delays. As we saw in the 2008 debate, election year politics can make it difficult to pass a proposal of this scope. The earlier this debate can happen, the less likely such politics are to defeat it. History has shown that the first two years of a new Administration are optimal for moving major reforms or new programs.

None of this should suggest that the economic crisis should not be relevant to what we do in response to climate change. We must consider many arising issues, including what reductions are possible in the economic situation, how the market should be structured so as to prevent the failures that have recently plagued Wall Street and Main Street, and how revenue from any climate program might be most effectively used to create economic revitalization. Many of the posts already contained possible solutions to these new questions.

To embrace our energy transformation as part of the nation’s economic revitalization would truly be a bold leadership move, but it is not without support across the economic and political spectrum. By way of one example, I noted the recent quarterly newsletter of famously bearish investor Jeremy Grantham, sounding quite bullish on government-led energy investments. Grantham’s posting, which can be found at http://www.gmo.com/websitecontent/JGLetter_ALL_3Q08.pdf, concluded as follows:

“Finally, a Single Piece of Advice for the Government

I have never been a fan of the hysteria that has surfaced on all sides in recent years at a hint of recession, and the panic to throw public money at the economy. Mild recessions have several long-term advantages discussed in earlier Letters, but in recent years we seem to have lost interest in the long term.

However, this time it’s different. This is the Real McCoy crisis, and we must welcome all the stimulus we can get. It is easy, though, to end up employing people to build mildly useful parks or, in the Japanese style, nearly useless bridges to nowhere. Government stimulus can have a decent (even high) return in the long run. It absolutely doesn’t have to be a series of boondoggles. Let me suggest that the magic word this time is not “plastics” but “alternatives.” Massive spending on energy and, better yet, energy savings will create jobs, stimulate the economy, produce a good longterm economic return, reduce dependence on depleting Middle Eastern oil, curtail carbon dioxide emissions, and set, for once, a real example for other countries. From the simplest – better insulation and more efficient machines – through the new alternatives – solar, wind power, and second generation biomass – to the potentially massive investments in new nuclear plants and efficient energy transmission, this could be in total a long range bonanza for the U.S. in economic and broader respects. Such a program could offset the risks of a Japanese-style drawnout recession. It would be potentially an epoch-defining change, and one of which, like the Marshall Plan, future generations might be proud.”

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Continuing Wall Street jitters and potential recession will certainly impact climate policy. Here are 5 ideas for adapting policy to the financial crisis:

1. Cap Electric & Industrial Only: Too much has changed in the past year - with both our near-bankrupt auto companies and their oil-producing counterparts – to fairly include transportation in the distribution of obligations under a cap. A cap is best executed among large electric power and industrial sources from which most abatement over the next 20 years will likely come in any case. This smaller market, at the same point-of-regulation, is a much less risky solution for a new market post the financial crisis.

2. A CLOB for Carbon: A central limit order book (a CLOB) with central clearing should be the mandated trading venue for all allowances and allowance derivatives. Such a transparent and electronic marketplace could be used to minimize counterparty risk, limit position sizes and leverage, and allow for effective real-time monitoring. A RFP process could pick the initial vendor to run the market, with perhaps a more competitive marketplace in future years.

3. Abatement Trading: Our recent experience in credit derivatives and other new markets should make the creation of a massive permit market sobering. But given the large aggregate value of abatement we don’t necessarily need permits to have efficient trading. Instead, emitters could be given abatement obligations – which they can then debit or credit by trading with other emitters. This would create a smaller industrial market (also a CLOB) rather than the much larger financial market in permits. The obligations would ideally be allocated pro-rata to a baseline year - algorithmically rather than politically. Yes, this is economically the same as free allocation – but distribution, accounting, trading, and perhaps even windfall profit challenges, would be reduced.

4. Coal Emission Rights: Helping the transition to clean coal is critical given a likely recession. One means to accomplish this might be a pro-rata allocation to coal-fired sources of tradable rights to reduce their abatement obligations at a fixed price. For example, exercising the rights and paying the Government, say, $20 per ton could reduce a meaningful percentage of the required abatement from coal for the first 5 to 7 years of policy. The exercise price of these “coal emission rights” should be set low enough to avoid destabilization (for both producers and consumers) – yet not so low as to delay investment in clean coal technology.

5. Petroleum Taxes: Collect revenue from petroleum taxes. Petroleum taxes can be structured to be beneficial for the environment, national security, and the current account deficit – with the revenue being used for low-carbon fuel subsidies, aid for low-income energy consumers, and cleantech research and development. Can we do this in a recession? What better time to tax oil than when the price is falling? And do we want to repeat our mistake of not aggressively taxing oil when prices fell in the mid 1980’s? Tougher standards on cars, accompanying contemplated auto industry bailouts, could further reduce vehicle emissions.

The policymaker, environmental, and business communities have all invested heavily in cap and trade as a solution to managing the risks of climate change. But economy wide cap and trade as currently contemplated should not be sacrosanct. Smaller, simpler, and less risky - seems a good direction for adapting cap and trade to a changed financial and economic environment.

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Respectfully, this is the wrong question. It presumes that it is likely that dealing with climate will, on balance, be a negative for the economy --- in particular, it assumes that Phase 1 of a climate solution will be a net economic drag. But the micro-economic analysis suggests that with better market design, roughly half (McKinsey's numbers) of the carbon reductions needed for climate protection are actually good economic investments and would increase total output -- but governmental barriers get in their way -- surely we can and should make markets clear more easily as part of economic recovery.

Millions of Americans are facing loss of their houses -- the conventional wisdom is this is due to increases in mortgage payments. But increases in utility bills are, in many cases, as big or greater -- and these homeowners have no easy access to energy retrofit programs linked to long term financing that could cut their utility bills by 25-50%.

What better way to jumpstart the economy than by solving this market design problem. Give banks a very low risk and high return investment option, contractors a huge new order book, workers and aspiring workers new careers, homeowners dramatically lower housing costs -- and at the same time slash the 42% of our total carbon emissions that come from, largely leaky and inefficient, buildings.

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Yes. We will continue to see the policy discussion on climate change advance but this economic crisis will definitely limit options for Congress & the new Administration in the short to mid term. While climate change legislation will undoubtedly be a top priority for Congress, the economy will be THE top priority for the foreseeable future. It will prove difficult to move any major policy initiatives that could negatively impact the economy, consumers and jobs until signs of a turnaround are clear. The next Congress will be seeking ways to stimulate the economy & not retard it. A crisis like this exposes the central problem policymakers face on climate change: the only way to meaningfully reduce greenhouse gas emissions is to make it much more expensive to use carbon-based fuels. This will ultimately place large costs on individual consumers who cannot afford it or on businesses that still must compete in a global market with competitors not subject to the same restrictions. Ultimately, for any climate strategy to be effective, it must require those who compete in the U.S. market to operate under the same constraints.

Greenhouse gas control is likely to happen, and the coming era of fiscal responsibility will impose some much-needed discipline in the economics of meeting greenhouse gas reduction requirements.

The five carbon dioxide reduction bills introduced in the 110th Congress require that CO2 emissions in 2050 be no more than 20-40% of the 2007 emissions. Reductions in the electric power sector are likely to be larger than those of the remainder of the economy. That is for two reasons. First, it is less expensive to remove the gas from a centralized industry than from (for example) gasoline or diesel vehicles. Second, electric power's share of our CO2 emissions has been growing, from 12% in 1950 to 35% in 1983 and to 40% in 2006.

It is possible that some of the air emissions associated with cars and light trucks may be shifted from their gasoline or diesel engines to electric power plants, if plug-in hybrid gasoline-electric vehicles become popular. That would underscore the importance of lowering air emissions at low cost, since it would cause a substantial increase in demand for electricity.

Generation of electric power in the USA produced 2.34 billion metric tons of CO2 in 2006 (the most recent year for which we have data). A number of studies at our center (www.cmu.edu/electricity) and other universities peg the cost of avoided or captured carbon dioxide at $35-$50 per metric ton of CO2.

If we avoid or capture 80% of our electric power emissions, at a cost of $35 to $50 per metric ton, that will cost $65 to $90 billion per year. That works out to 0.5% to 0.7% of gross domestic product.

For comparison, the estimated cost of compliance with the 1970 Clean Air Act peaked in the mid-1970's at $40 billion (in 2007 dollars), 0.65% of that era's GDP (U.S. Environmental Protection Agency, The Benefits and Costs of the Clean Air Act, 1970 to 1990, 1997, Table 1, http://www.epa.gov/oar/sect812/retro.html) . The costs of cleaning up our water was likely about the same.

It is very important to achieve low CO2 emissions at low cost. If we mandate technologies that achieve CO2 reduction at, say, $100 per ton, the increase in our electric bill would be 75%, or nearly 2% of GDP.

Mandates that achieve goals at an unreasonable cost are likely to lead to a public backlash. For example, Pennsylvania has enacted a requirement that 0.5% of electricity be generated by solar photovoltaic (PV) by 2020. Using the fairly modest growth in demand for power projected by the system operator, that works out to 800 MW of solar PV. The innocuous-sounding half percent requirement will add 6% to the average electric bill. If that requirement had been assigned to wind, the bill would go up only 0.6%.

So, if CO2 control is to be affordable, we must mandate that it be done at the lowest possible cost. That means refraining from layering on other laudable goals such as encouraging particular technologies. This is going to be expensive, and at the scale at which me need to do it, we cannot afford to indulge in nice-to-have but expensive technologies. The fiscal discipline of the lowest cost technologies must be allowed to select our methods of CO2 control.

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Confronted with the Wall Street crisis even the most ardent Congressional supporters of greenhouse gas regulation seem to recognize that it is not the appropriate time for a $7 trillion cap (tax) and trade bill with over 300 new regulatory mandates, the creation of dozens of new agencies and the largest redistribution of wealth in the history of the United States. In simple terms the concept of imposing a $7 trillion financial scheme upon the public sounds too close to the sub-prime fiasco which has gotten us into our present financial mess. Imagine $7 trillion dollars of carbon credits being sold, resold, sliced and diced and resold again throughout the world.

On top of a U.S. cap and trade system there are the carbon credits issued by the European Union and proposals to form Carbon Commissions to block the import of products not subject to similar regulatory schemes. Such a system would be another federal policy that would form the basis of a future financial disaster. The world would truly be sacrificed on a cross of carbon. The public is just not ready for this scheme at this time so its supporters in Congress will have to wait.

But if this were all there was to say about the topic I could end my Blog now. Unfortunately, Congressional reluctance to pass climate change legislation in the middle of a financial crisis is not the end of the discussion, it is merely the beginning. Those in Congress who truly believe that no matter what is happening in the world, the control of greenhouse gases must be controlled now or the world will face even greater disaster, will have their most certain weapon for regulating greenhouse gases within the next year. The weapon is already loaded; the Environmental Protection Agency (EPA) is excited about pulling the trigger. And the weapon can be used without any congressional fingerprints. The perfect murder of the U.S. economy!

This weapon is EPA’s ability to use the Clean Air Act (CAA) to regulate greenhouse gases. EPA was given this authority last year by the U.S. Supreme Court in Massachusetts v. EPA. The court held that greenhouse gases from motor vehicles are a pollutant under the CAA. The court ordered EPA to make a decision on how it will use its authority. The court gave EPA three options:

1. find that greenhouse gases from motor vehicles endanger public health or welfare and regulate the gases under the CAA;

2. find that greenhouse gases from motor vehicles do not endanger public health or welfare; therefore, no regulation would be necessary; or

3. provide “some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether” greenhouse gases from motor vehicles endanger public health or welfare.

Without getting into procedural nuances suffice it to say that EPA on July 30, 2008 published an Advance Notice of Proposed Rulemaking, (ANPR) which is the first step in an agency rulemaking to determine how to regulate greenhouse gases. The actual ANPR was over 500 pages and the supporting documents referenced in the text were over 16,000 pages. It is literally a six and one-half foot stack of paper; an amount so large that it makes participation in the regulatory process all but impossible by both the regulated and the regulators. It is likely the only people on earth who really know what is in the documents are those EPA staffers who put the policies in the document. But this is not a blog on transparency in government so this issue can rest for now.

The procedural problems are what they are but the problems that arise from a review of only a few thousand pages are so monumental and involve numerous policy options never dreamed of by Congress, yet alone considered. If Congress abstains from addressing this issue it will be allowing EPA to drive the regulated community to its knees and beg for oppressive legislation because no matter what is in it; it will not be as oppressive as EPA’s proposals. That would not be governing!

In the ANPR, EPA only focuses on the policies needed to implement an endangerment finding. EPA does not even consider the huge negative impacts of using the CAA to regulate greenhouse gases; therefore it does not even consider addressing the Supreme Court’s third option of a reasonable explanation as to why it cannot or will not exercise its discretion to determine whether greenhouse gases endanger public health or welfare.

Some of the options EPA proposes for regulating greenhouse gases include:

1. A recognition that an “endangerment finding”, even one limited to motor vehicles is an “endangerment finding” for all titles of the CAA which means there is a regulatory cascade and literally every aspect of society will be regulated under the CAA from cows to corn fields to office buildings and churches. Every entity that emits more than 100 tons of greenhouse gases (a very small amount) will be subject to greenhouse gas regulation. Some examples of the newly regulated entities: 260,000 office buildings, 150,000 warehouses, 92,000 health centers, 71,000 hotels and motels, 37,000 churches, 17,000 farms and anyone who owns 50 head of cattle or plants 500 acres of corn.

2. The regulated community will expand from 15,000 entities today to more than 1.2 million.

3. Those who generate over 250 tons of greenhouse gases will immediately need to obtain a pre-construction Air permit (technically called PSD permit) before building a new structure or modifying an existing structure. This permit is mandated the first second greenhouse gases are regulated. Therefore, all new construction that will result in the emission of 250 tons of greenhouse gases will come to a halt until the permit can be obtained. These pre-construction permits take between 1-2 years to obtain, cost hundreds of thousands of dollars and involve, on a case – by - case basis, the analysis of the best available technology. Presently there are only about 300 projects annually that generate 250 tons of non-greenhouse gas pollutants in need of the pre-construction permit. This number will rise to 30,000 to 50,000 if EPA regulates greenhouse gases. This is literally a moratorium on construction.

4. Greenhouse gases will become what are called a criteria pollutant and states will have to undertake implementation plans that would reduce the concentrations of greenhouse gases. Since greenhouse gases travel throughout the world the fact that we reduce greenhouse levels in Kansas, for example, is irrelevant since greenhouse gases generated in China will travel into Kansas. Kansas will be permanently unable to reduce the level of greenhouse gases below the level needed to the meet the standards set by EPA to eliminate its endangerment finding. Unfortunately, however, once an endangerment finding is made any state that cannot comply is found to be in non-attainment. Once in this non-attainment status the state cannot use federal highway funds in any manner that would result in an increase of greenhouse gases. So a state in non-attainment could build bike paths but not highways. Also areas in non-attainment are red-lined; business cannot come into the area or expand in the area unless it eliminates more greenhouse gases than it will generate. But with the vicious cycle of greenhouse gases traveling world-wide, non-attainment areas will not ever be able to reduce greenhouse gas emissions below levels needed to eliminate endangerment. In short, the entire U.S. will be in a continuous state of non-attainment. This will force all new business to expand operations in other parts of the world.

5. Every business that generates over 100 tons of greenhouse gases will have to get an EPA Title V operating permit. This will be an increase from 15,000 to more than 1.2 million entities. The paperwork is not the problem; the problem is that every one of the permit applications can be challenged in court by any citizen. This will result in a direct attack on any economic development that any citizen does not like.

6. Finally, the most insidious aspect of EPA’s proposal is that Title V of the CAA imposes a tax of $25 per ton on all applicants for an operating permit up to 4000 tons generated. This tax will generate tens of billions of dollars when applied to the more than 1.2 million generators of greenhouse gases. Right now the U.S. generates 300 million tons of non-greenhouse gas criteria pollutants so the revenues collected from the tax merely pay for program implementation. By extending the CAA to greenhouse gases the agency will be regulating 7 billion tons of pollutants; a greatly expanded tax base and a huge new tax with massive revenues.

In its proposal EPA also describes how it will regulate the design and operation of planes, trains and even lawnmowers. Only the smallest of operations will escape the long arm of EPA. For those in Congress who desperately want to immediately regulate greenhouse gases, they have their vehicle and it is driving to a conclusion. The record closes November 28, 2008 and EPA could make an endangerment finding anytime after that date. The next President and Congress can either let EPA decide on its own; which will likely be an endangerment finding since that is what the staff has been advocating for or Congress can put a brake on the vehicle by legislating that the CAA is not the appropriate vehicle for regulating greenhouse gases.

So while the next Congress and the next President can easily let EPA follow its own instincts and make an endangerment finding; such a finding will wreck havoc on our economy by creating a regulatory weapon of mass economic destruction and it will be used as the nation struggles to regain its once great economy. So yes, the Wall Street crisis is restricting Congress’ legislative efforts to control greenhouse gases but if Congress truly wants greenhouse gases regulated immediately all it need do is nothing and the EPA regulators will pull the trigger and there will be no congressional fingerprints.

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The cost of addressing climate change has always been a concern and would surely be easier to bear in good economic times. Unfortunately, the economic crisis does not erase the fact that climate change is a serious problem that is not going away and needs to be dealt with as soon as possible. The current state of the economy increases the need for Congress to act carefully and deliberately when legislating to control greenhouse gases. The next Congress will be charged with tackling the issue of climate change in a way that protects the health of our environment without further damaging our economy or sacrificing American jobs. Achieving the proper balance is critical. Our success will be based directly on our ability to craft policy that addresses both economic and environmental concerns and it is my intention to do just that.

It's important to recognize that the looming economic recession will have profound effects on U.S. and global emissions of carbon dioxide, largely because less economic activity means less energy generation and use, and hence lower emissions. This means that any particular global target of future concentration levels becomes easier to achieve, because the future trajectory of business-as-usual (BAU) emissions will be shifted downward.

On the other hand, the possibility of a deep and prolonged recession will also render less likely the success of any efforts by the Congress to institute a meaningful policy of greenhouse gas emission reductions in the short term. This will happen in two ways.

First, a depressed economic climate will focus attention in Washington on rejuvenating the economy, and will thereby distract attention from most other issues. This means less rapid and less intense attention by policy makers to global climate change. Predictions of the enactment of a meaningful, upstream, economy-wide cap-and-trade system, previously pointing to 2009, will point instead to 2010 or even 2011, depending on the economic outlook.

Second, in addition to this distracted-attention phenomenon, an economic recession will make elected officials in Washington -- both in the Congress and in the Administration -- less willing to put in place public policies that would increase costs to consumers, such as climate policies that would increase energy costs throughout the economy.

However, if Senator Obama is elected and decides to make good on his campaign's recent promise that it will issue an "endangerment finding" regarding carbon dioxide in its first days in office, thereby letting loose a multipronged regulatory approach under the Clean Air Act, then all bets are off.

Edited Oct. 27 at 9:40 a.m.

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