Pollution Limits Are Essential for Clean Energy Investments

Provisions necessary in a comprehensive clean energy bill

A critical element of President Obama’s domestic agenda is transforming the United States to a low-carbon-pollution economy, which would spur recovery, create jobs, and generate long-term prosperity. The president also made clear in his State of the Union address this year that we need to ramp up our exports, especially of clean energy technologies, if we are going to stay competitive in the global economy. Comprehensive, bipartisan clean energy legislation that establishes a price on carbon pollution could provide the resources for a strong clean energy investment agenda. Yet an “energy-only” bill that excludes pollution limits and leaves carbon unpriced would make it difficult to raise the investment dollars we need to boost American competitiveness in the global clean energy market.

Achieving the president’s goals requires comprehensive clean energy and global warming pollution reduction legislation. Nearly every other country that has pulled ahead in the race to innovate, develop, manufacture, deploy, and export clean energy and efficiency systems has done so through a set of comprehensive policy and investment measures. For example, Germany has invested heavily in the creation of a domestic clean energy industry, in part due to the European Union’s overall “20-20-20” goal: 20 percent reductions in greenhouse gas emissions from 1990 levels, 20 percent use of renewable power, and 20 percent reduction in energy use. Germany has responded by spurring market demand; helping to finance clean energy innovation, production, and deployment; and investing in the infrastructure necessary to move renewable electricity to market. As a result, it is the “global leader in installed solar energy capacity … Germany was the number one renewable energy system exporter in the world from 2003 to 2008.”

China, meanwhile, races ahead of the United States. A Pew Charitable Trusts analysis found that China leads the world’s major economies in clean energy investments. According to their research, in 2009 “China invested $34.6 billion in the clean energy economy—nearly double the United States’ total of $18.6 billion.” China is now the world leader in solar PV cell production—a technology that was invented in the United States. It is time for us to catch up.

An effective clean energy investment strategy has two necessary and interrelated parts. This first is a shrinking limit and a rising price on carbon pollution to drive the private sector to invest in and deploy low-carbon technologies. The second is a set of targeted investments in clean energy technology sectors. These investments would help the United States overcome short-term barriers such as lack of up-front financing that have stalled the wind, solar, geothermal, and energy efficiency sectors from getting to commercial scale. They would also move forward the energy innovations of the future through research, development, and commercialization.

A global warming program that establishes a shrinking limit on carbon pollution and leads to a rising price on carbon would help drive massive private investment toward these clean energy technologies. Venture capitalist John Doerr and General Electric President Jeff Immelt noted that the United States must “send a long term signal that low-carbon energy is valuable. We must put a price on carbon and a cap on carbon emissions. No long-term signal means no serious innovation at scale, which means fewer American success stories.”

Forty-five members of the House Sustainable Energy and Environment Coalition recently urged Speaker Nancy Pelosi (D-CA) and Majority Leader Steny Hoyer (D-MD) to ensure that “comprehensive energy legislation includes reductions in greenhouse gas emissions necessary to spur private investment in American clean energy technologies.” They also noted that “billions of dollars of private capital sit on the sidelines in the United States as investors and banks wait for the price signal that a limit on greenhouse gas emission [sic] will provide.”

And the head of New England’s power grid sounded a sobering note last week when he argued that renewable energy projects in the region are popular but on hold, mostly due to market uncertainty. “The single greatest issue facing the operation, expansion, and regulation of the power system is the uncertainty about national energy policy,” he said.

In short, these leaders are all saying that there is little short-term economic incentive to abandon the status quo absent a pollution price—even if that course leads to a long-run economic disaster.

Setting a price on carbon is not only critical for America’s long-term competitiveness; it is necessary to pay for the energy programs that will help companies, consumers, and workers make a smooth and swift transition to a low-carbon economy. The House and Senate have already proposed some very effective policies and programs to help with this transition, all of which carry significant costs.

House and Senate low-carbon economy proposals

Taken together, these programs could cost at least $114 billion. This excludes the costs for the NAT GAS Act and the siting of new interstate transmission lines, which could add billions more to this price tag. Yet these investments are essential to provide the start up capital for some new technologies and speed commercial deployment of others.

Most global warming bills would use a small amount of revenue from the sale of global warming pollution permits to fund these and similar clean energy investment programs. The House of Representatives took major strides to spur investment in June 2009 by passing the American Clean Energy and Security Act, H.R. 2454. This bill establishes a price on carbon pollution—a critical market driver that makes low-carbon technologies cost competitive with traditional fossil fuels. ACES combines this pollution price with a $24 billion investment  in specific incentives for research, development, and production of these technologies. These programs would create demand for low-carbon technologies with essential investment dollars that would enable the alternative and efficient energy industries to scale up and make their products as affordable and available as possible.

The Clean Energy Jobs and American Power Act, S. 1733, which passed the Senate Environment Committee on November 5, 2009, would also invest at least $6.5 billion in clean energy programs.

Both these bills generate enough revenue to provide seed capital for clean energy investments, protect ratepayers from price increases, and even reduce the federal budget deficit. The Congressional Budget Office projects that ACES would reduce the deficit by $24 billion from 2010-19, while S. 1733 would reduce it by $21 billion from 2010-19.

The Carbon Limits and Energy for America’s Renewal Act, S. 2877, which is pending in the Senate but with no action scheduled, would also invest in clean energy technologies. It would return to taxpayers three quarters of the revenue generated by its “cap and dividend” program, while using the other quarter for a Clean Energy Reinvestment Trust Fund for investments including “clean energy R&D … and need-based, regionally-specific assistance for communities and workers transitioning to a clean energy economy.”

Sens. John Kerry (D-MA), Lindsey Graham (R-SC), and Joe Lieberman (I-CT) are drafting a comprehensive bipartisan energy bill, expected by mid-April. According to Sen. Graham, this legislation could invest as much as 40 percent of the funds generated from its limits on carbon pollution from utilities and industrial sources back into clean energy.

Yet some senators are opposed to such legislation despite the pressing need to move forward with a clean energy investment agenda. These senators instead advocate passage of an energy-only bill that would not adequately spur investment in clean energy technologies—even though there is little hope of catching up to our global competitors in the clean energy race without a strong investment strategy.

The fundamental flaw in an energy-only bill is that it would not include a price signal to favor investments in low-carbon energy or any revenue-raising elements to provide seed capital to invest in the transition to a clean energy economy.

For instance, the American Clean Energy Leadership Act, S. 1462, which passed the Senate Energy Committee on July 16, 2009, would not limit or put a price on carbon pollution. Potential investors in clean energy technology would continue to lack certainty about the future market for clean energy, and investments in underpriced dirty fossil fuels would remain relatively attractive.

ACELA does include several important clean energy investment programs, including the Clean Energy Deployment Administration, or “Green Bank,” and assistance for manufacturing to become more energy efficient and competitive. It would also provide financial assistance to the nuclear energy industry and has a renewable electricity standard that could increase investments in wind and solar if it were enhanced. Yet CBO estimates that ACELA “would increase budget deficits by about $13.5 billion over the 2010-2019 period.” Put simply, the clean energy programs included in this bill are not paid for.

Any energy bill that does not include revenue raisers to pay for investment programs will only add to the budget deficit. One potential revenue raiser is the elimination of tax breaks for big oil companies, which could generate $36.5 billion over 10 years. Comprehensive energy bills also create revenue from their limits on carbon pollution. Yet energy-only bills do not include such a provision or establish a price on carbon pollution, and would therefore have to increase the deficit to pay for its investments.

Basing investment programs on the assumption that Congress will continue to borrow to pay for them is a high-risk proposition that could create uncertainty about these programs. And companies may shy away from such investment programs if funding is uncertain or unstable.

The United States must promptly take steps to boost its investments in clean energy technologies to keep up with our economic competitors. A price on carbon pollution is an essential ingredient in this strategy to level the economic playing field between dirty, old fossil fuel energy and new, cleaner efficiency and renewables. A carbon pollution price is also essential to provide the funds for an investment agenda. An energy-only bill lacks these two elements.

Sen. Graham worries that: “Every day that we delay trying to find a price for carbon is a day that China uses to dominate the green economy.” He warned that an energy-only bill is a “‘kick the can down the road’ approach … It’s putting off to another Congress what really needs to be done comprehensively. I don’t think you’ll ever have energy independence … until you start dealing with carbon pollution and pricing carbon.”

An energy-only bill might address some important energy needs, but is unlikely to provide the investments essential to transforming of our economy or help us catch up in the clean energy technology race for the future.

Provisions necessary in a comprehensive clean energy bill

We believe that a truly bipartisan, comprehensive clean energy bill should include these important energy provisions, along with a mechanism to raise the revenue to pay for them.

Clean Energy Deployment Administration: $10 billion

The creation of a federal Clean Energy Deployment Administration would provide the initial public investment to help drive the market commercialization of clean energy technologies. CEDA would provide loan guarantees, so the federal government would only need to fund the cost of any potential default, rather than funding the entire cost of a direct loan or grant.  This subsidy would leverage private investments, and a $10 billion appropriation—the amount included in the Senate bill—would actually produce about $100 billion in investments.

The House-passed American Clean Energy and Security Act, H.R. 2454, includes CEDA. The Senate Energy Committee passed American Clean Energy Leadership Act, S. 1462, includes a slightly different version of it.

HOME STAR program: $6 billion over 1-2 years

The HOME STAR program would create incentives for American homeowners to quickly cut their monthly energy bills by 20 percent or more by improving the energy efficiency of their homes. It would establish a $6 billion rebate program over the next one to two years to encourage immediate investment in cost-effective energy efficient products and services as well as whole-home energy efficiency retrofits. The program would be facilitated and coordinated through existing state programs using federal standards and incentives as a common platform to keep program costs as low as possible. It could create thousands of construction jobs.

The House Subcommittee on Energy and the Environment passed a bipartisan HOME STAR bill on March 24. Sens. Jeff Bingaman (D-NM), Mark Warner (D-VA), and Lindsey Graham (R-SC) introduced a similar proposal, S. 3177.

Building STAR Program: $6 billion over one to two years

Building STAR would provide rebates and tax incentives to quickly put hundreds of thousands of people to work conducting energy efficient retrofits of commercial and multi-family residential buildings. It would rebate approximately 30 percent of the cost of installing energy efficient products and/or providing energy efficiency. The program would leverage $2 to $3 dollars of private investment for every $1 of federal investment. Every $1 billion investment would create 25,000 jobs—many in the hard hit construction industry. And it could reduce industry energy costs by $3.3 billion annually. Sen. Jeff Merkley (D-OR) introduced the Building Star Energy Efficiency Act, S. 3079 on March 4, 2010.

Investments for Manufacturing Progress and Clean Technology Act: $30 billion

The Investments for Manufacturing Progress and Clean Technology Act, S. 1617, would authorize $30 billion for state-revolving loan programs to assist small- and medium-sized firms in retooling, expanding, or establishing domestic clean energy manufacturing operations, and to improve energy efficiency in industrial operations. IMPACT also provides funding to the Manufacturing Extension Partnership program to provide technical assistance to these firms in entering the clean energy supply chain.

The House-passed American Clean Energy and Security Act, H.R. 2454, includes a version of IMPACT; IMPACT is also included as a pilot program in S. 1462, but there is no funding authorization level for the program in that bill.

State and local energy efficiency programs: $65 billion over 8 to 10 years

ACES would provide significant resources to state and local energy efficiency programs by providing them with “pollution permits,” or allowances, that they could sell on the carbon market. A CAP analysis projects that this would generate a total of $65 billion between 2012-2020. These revenues could fund investments such as insulating and weather stripping homes, constructing “green” rooftops, replacing leaky windows, installing efficient heating and cooling systems, and replacing inefficient appliances with those that have high Energy Star ratings. This would save consumers $63 billion on their electric bills and create up to 137,000 jobs in 2015.

Cash for Coal Clunkers: No authorization level

This program would create incentives to retire or reduce utilization of dirty, aging coal plants, and increase the use of cleaner power from natural gas or other cleaner sources. Such a program has not yet been introduced.

NAT GAS ACT: No authorization level

The New Alternative Transportation to Give Americans Solutions, S. 1408, and H.R. 1835, would create tax incentives to power heavy trucks and fleet vehicles with natural gas instead of diesel or gasoline. This bill would save the United States millions of barrels of oil over time.

Siting of interstate electric transmission facilities: No authorization level

The United States must enhance its transmission system to increase its efficiency and reliability. And the expansion of the grid is essential to transmit electricity from wind and solar power generated in the more rural or remote places to urban areas where electricity demand is highest. S. 1462 would strengthen “the Federal Energy Regulatory Commission’s role in siting interstate electric transmission facilities.” This includes the Federal Energy Regulatory Commission’s coordination of regional planning and back stop authority for federal action if states fail to plan and construct essential transmission lines, and it would “ensure just and reasonable allocation of the cost of high-priority national transmission projects.”

Daniel J. Weiss is a Senior Fellow and Director of Climate Strategy, and Kate Gordon is VP for Climate Policy at the Center for American Progress.