Michael Moynihan's blog

Senator Clinton has not run a flawless race this year but as Denver gets nearer, each mistake grows more critical.  If one stands out in yesterday's results, it was not just proposing but pressing for a cut in the gas tax this last week.  The idea suffered from so many flaws it is hard to imagine the conversations that led her advisors to propose it, let alone run ads on the issue.

First, John McCain had the idea first. While her addition of a windfall profits tax on the oil companies made sense enough, that was not enough to differentiate her version.  In a race where Obama has been dying for chances to link her with Republicans, adopting one of McCain's ideas should have been strike one.

Strike two, neither she nor McCain will be President this summer.  Voters want to hear what she will do as President after January 20, 2009. 

Third, the idea was clearly bad policy, guaranteeing its universal panning by economists, energy analysts and pundits.  No doubt her own policy staff probably argued  that a tax cut will not relieve upward pressures on oil prices, will encourage more use of gas that may actually increase prices and undermines her strong message on global warming and energy security.  

Strike four is that the controversy completely doused the firestorm around Senator Obama's former pastor, the Reverend Wright that was lifting her in the polls as recently as last Thursday.

Senator Obama will probably talk about this issue as long as he can. As for Senator Clinton, the episode should be a reminder that in a complex world, good policy is the truest signpost of good politics.

Download the latest version of Internet Explorer, plant a tree.  In its newest marketing drive, Microsoft will help you reduce your carbon footprint by planting a tree in CarbonGrove when you downlod the free upgrade of IE.  For the company that leveraged its operating system to gain almost 100% share of the brower market, this is an interesting move that testifies to the traction that carbon consciousness has achieved.  To learn more, click here.

Thomas Friedman has a great column in today's New York Times on America's upside down energy policy that continues to subsidize consumption of fossil fuels while meting out credits for wind and solar power like Bumble the Beadle offering porridge to Oliver Twist.  At the very moment when oil prices are shooting through the roof, the leading candidates are proposing to eliminate the gas tax this summer.  Yet rather than extend the far less expensive Production Tax Credit to sustain investment in solar and wind power due to expire this year, Congress is dragging its heels.

Quoting Rhone Resch of the Solar Energy Industries Association, Friedman points out that the US has gone from enjoying 40% market share in solar power in 1997 to only 8% today.  Already because of the lead time involved in renewable energy projects, many have been canceled, harming America's fledgling renewables industry.  Here is the article in its entirety:

 Dumb as We Wanna Be

Since its founding 39 years ago by John McConnell, the plastics pioneer and peace activist who first proposed a holiday to honor the Earth at a UNESCO conference in San Francisco, Earth Day has grown in into a global holiday observed by billions. But the idea espoused by McConnell of stewardship of our beloved planet has taken on a new urgency, with the outbreak of multiple crises, the ongoing threat of global warming, sky high oil prices and now soaring food prices and shortages. Indeed the crises are so many and so great that some are proclaiming a neo-Malthusian crisis in a world that has outstretched its resources. Whether one believes as Paul Krugman wrote yesterday—that lack of inventories suggest the world is truly in the grip of a crisis of supply--or like George Soros and many traders that we in the midst of the mother of all commodity price bubbles—it is clear that we are in a crisis.

My view is that human ingenuity is more than equal to the task of sustaining society but that something has gone awry. And what has gone awry is the functioning of markets. Whether one looks at turmoil in the credit markets, volatility in the currency markets where the dollar has undergone a freefall, the seizure of food markets that is exacerbating the food crisis or the hard-to-explain global surge in commodity markets across the board, it is clear that the market system undergirding the global economy is under stress.

In part, the problem is that as markets have grown rapidly in the last fifteen years due to globalization, they have outgrown market structures. Certainly in the area of management of derivatives and bank supervision, market governance has failed to keep up with technology. However, it also appears that markets are failing in agriculture and oil. And more broadly, the global trading system itself is experiencing a seizure as the impulse for free trade that has powered the last 60 years of global growth has stalled—in Doha and recently, in the case of a Colombian agreement, in the US Congress.

When markets seize up—as they do from time to time and did disastrously in the 1930s—the result is a regression to earlier forms of allocation of goods. Anthropologists have shown that markets are a relatively late development in the million year history of human. Allocation based on command and control, is far more basic and when markets seize up, this is what happens. We are seeing this currently in food markets as countries ban exports and hoard grains in the anticipation of riots and political unrest.

Markets are a far better way to allocate goods and essential to today's wealthy societies but they depend critically on confidence. Confidence, in turn, depends largely on transparency and comprehensibility. When economic historians assign a cause to the current recession in the United States, they may place the blame on a technology shock in the financial markets that has created securities that no one can possibly reliably value.

It is no good to repeat the nostrum that we need to let markets resolve the crisis when the crisis is in the markets themselves. Nor are the one-off activities of the Federal Reserve sufficient in the long term. While the Fed seems to have been successful in injecting liquidity into the system, its unprecedented actions are at best an emergency response and do not provide the predictability and stability needed to promote long term growth. Instead, we now have to undertake the painful process of reforming financial, agricultural and energy markets. However, this won’t be easy.

One critical element of the spirit of Earth Day is that people need to work together. When one country goes it alone, the result is mistrust, a decline in confidence and ultimately a downward economic spiral. This was the easily foreseen--but recklessly ignored--consequence of the unilateralist policies pursued by the Bush Administration in rejecting Kyoto, a variety of multilateral initiatives inherited from the Clinton years, and of course in Iraq and foreign policy in general.

The way out of the current crisis is to resume multilateral approaches to creating functioning markets that will replace fear and mistrust with cooperation and confidence. But for that we may have to wait at least until the next Earth Day, after the next Presidential Election.

Why didn’t President Bush wait until next Tuesday, Earth Day to give yesterday’s speech on global warming? The stated reason is that the speech was timed to precede the Major Economies Meeting that begins in Paris today in preparation for the upcoming G-8 meeting in July. The real reason, however, may be that the President’s advisers did not want to get a huge round of negative publicity on Earth Day itself. For that is precisely the reaction the speech received. Typical are the comments in Paris of South Africa’s environmental minister, Marthinus van Schalkwyk who described the speech as a step backward, not forward, from the US position at Bali. While the President—under pressure from large US companies as well as the other G-8 leaders—deserves credit for addressing the issue, his proposals fall far short of those of Senators McCain, Obama and Clinton, many states, cities and universities and much of the business community itself.

Instead of calling for large reductions in emissions by 2020—what all three Presidential Candidates have embraced and many cities and organizations are doing--he called for an end to increases by 2025. And instead of proclaiming the need for America to lead on the issue, he once more retreated behind the fig leaf that America cannot take action unless China and India accept caps as well.

His speech coincides with new research from a University of California team that China has recently surpassed the United States in emissions as its economy continues its torrid pace of double digit growth China’s rising level of emissions underscores the need for US leadership to bring China and India into a post-Kyoto system. However, the refusal of the US to accept any discipline itself, in effect, gives China and India--whose per capita emissions are only a fraction of those in the US--a free ride.

Indeed, in line with its embrace of all things technological, China is blitzing ahead with the deployment of clean technologies across its economy. China has already invested $1 billion in wind turbines and expects to multiply its wind power ten fold by 2020. It is deploying end of pipe technologies to combat its famous pollution. And, embarrassingly, China’s cars already enjoy higher gas mileage, at 37 miles per gallon on average, than America’s fleet.

There is still a chance for the President to show leadership at the upcoming G-8 meeting in Japan in July where leaders from 16 countries including the G8, China, India and Brazil, have pledged to make climate change a priority in a special session at the sidelines. If yesterday was any indication, however, President Bush will not be the one leading the discussion.

Are the Wild West days over? That is the subject of a front page article in today’s Wall Street Journal describing the UN crackdown on carbon credits created through the clean development mechanism or CDM. In the last four years, the market in these credits has gone from zero to many billions, creating multi millionaires such as Marc Stuart, the LSE-educated founder of Eco Securities, one of the subjects of the article.

The CDM is an outgrowth of the Kyoto protocol and was the brainchild of another former policy wonk investor, James Cameron, founder of Climate Change Capital. One of the key compromises of the Kyoto cap and trade system is that participants must limit their emissions to a percentage of their 1990 emissions. The choice of a year as a baseline for every country was designed, in part, to avoid difficult discussions about differences in emissions by country. If each country is compared only to its own baseline, then every country only needs to compete against itself.

This formula proved workable for most developed countries. But for developing countries such as India and China, it did not. The developing countries argued, first, that despite all the pollution evident in their skies, they still create only a fraction of the emissions of developed countries per capita. Second, in order to raise their standards of living to those of the developed world, they argued they are certain to increase emissions so much as to make their 1990 levels irrelevant. Finally, they argued they lacked the technology and capital to reduce emissions.. Thus was born the idea of the clean development mechanism. 

Under the CDM, if anyone—for example a western company—undertakes a project to reduce emissions in a developing country below what they would otherwise be—that company can create credits that can be sold to participants on the Kyoto protocol in the developed world to offset their emissions. The idea is that just as it is cheaper to make sneakers in Shanghai than London, it should be cheaper to reduce emissions there. Moreover, conditions are so bad in many developing countries, that cleaning up factories, in theory, should be low hanging fruit. The problem lies in distinguishing valid projects from invalid ones. And the UN, as the Journal article, observes has been ratcheting up the standards so that they are today approving far few projects than before. The result has been volatility in the price of credits and in the financial fortunes of firms such as Eco Securities.

In the long run, the developing countries must be brought into an internationally complete system of constraining emissions through caps or a carbon tax. In the short term, however, the CDM is the only game in town. While some projects are as simple as reforestation, others expand the market for new technologies such as carbon capture and sequestration, wind power, solar power and cellulosic biofuels. 

To learn more about carbon credits which all three remaining presidential candidates support for the United States—as well as the impact on the economy of exciting new clean technologies--come join me at NDN’s New York event this coming Wednesday “Understanding the Clean Technology Opportunity” where I will dicuss these issues with leading experts, Peter Fusaro, founder of Global Change Associates and David Kurzman, Senior Vice President of the Clean Technology Research Group at Panel Intelligence, LLC.. It's still the Wild West, to a degree, in the world of carbon credits and clean technology. But they are rapidly becoming big businesses.

Event Details:
Wednesday, April 16th
12:00pm
Regency Hotel, Regency Room
540 Park Avenue
New York, NY
Click here to RSVP

Note: In this piece, I take a break from my usual topic of the green economy to discuss the current financial crisis. I'll be back with commentary on green issues soon.--MM

How bad is the economy? According to some well respected financiers, it is in its worst shape since the Great Depression. That was the judgment of George Soros in a recent article. And at Goldman Sachs' annual meeting yesterday, CEO Lloyd Blankfein echoed other Wall Street leaders in calling it the worst economy in 55 years. The consensus on Wall Street is that the travails of the financial markets denote a weak-even cataclysmic economy.

But at yesterday's Goldman meeting, Blankfein also successfully defended his $68.5 million compensation in 2007 to shareholders. And, asked his opinion of the future, he hazarded that the financial turmoil may be almost over and that the economy should resume expanding in the fourth quarter. Another Great Depresssion? Thankfully, no. What we have seen is the collapse of an asset bubble that enriched a limited swath of the population over the last eight years. Those able to benefit from global liquidity made fortunes and some have had to give them back. But current financial market turmoil is not synonymous with the real strength and weakness of the US economy. The strength is that of the American people and the weakness is the stressed state of the middle class.

The source of the recent financial crisis--the inability of sub-prime borrowers to make monthly payments- has its roots in middle class stress. The sub-prime lending boom helped push home ownership from about 65% of American households to about 70%. This last 5%, what might be termed, if flipped around, the 30 to 35% percentile of American households, proved unable to make monthly payments. The conventional wisdom is that they deserve their fate-for taking out no doc loans or choosing to walk away from houses once their equity disappeared. The fact that incomes for the lower four quintiles of Americans have been flat or declining in real terms for years, that sub-prime borrowers typically must pay double digit interest rates in contrast to their well heeled counterparts and that budgets are being devoured by rising health care and gas costs has gone ignored.

Indeed, when one looks at proposed solutions to the housing crisis, conspicuously absent are provisions to strengthen the middle class. The housing bill passed by the Senate yesterday contains billions in funds for home builders and money to demolish housing to reflate prices, but not one provision to raise the after tax incomes of American families..

NDN has highlighted a series of specific ways to rebuild the American middle class from putting a laptop in every backback to strengthening our ideas based economy to reforming health care. Investment in new clean technologies promises to restore American technology leadership while updating environmental standards has the potential to create millions of new green collar jobs. It can be done! During the 1990s, income inequality began to decline thanks to the positive influence of Clinton era policies only to expand as a result of the Bush tax cuts and related measures.

The recent unprecedented activities of the Fed-designed to stem the financial crisis-may indeed be ushering in a new era of Fed activism. While they have an emergency quality, reform of our financial architecture is needed to keep pace with changes in financial markets. However, the Fed's actions and reform at the Fed will not address the problem at the root of the recent crisis-the growing financial stress experienced by America's working families. As Paul Krugman has tirelessly observed but as others have refused to acknowledge, the Gini index of inequality and numerous academic studies unequivocally show the gulf between the wealthiest Americans and every one else increasing at an alarming rate. The next president and Congress must deal with this issue.

At the end of the day, even a stratum as light as that of hedge fund managers and private equity managers cannot comfortably exist astride a financially stressed nation. America must reacquaint itself with the real source of strength in our economy, not the financial markets per se but the economic health of the working families who undergird it.

UPDATE:  The Production Tax Credit was successfully attached to the Senate Housing Bill that passed today.  The action now shifts to the House which must pass its version to send the measure to conference.  We will keep you posted.

The Senate is scheduled to vote soon on rewewing the Production Credit (PTC) and your action is needed. But first, what is PTC and why is it needed?

While the price of renewable energy such as wind and solar power is steadily dropping and that of carbon-based fuels steadily rising, renewable power still requires subsidies to compete with carbon-based power. Why? In part, the technology is still developing. However, the comparatively high cost of renewables also includes the price of building new facilities-in contrast to carbon sources where facilities already exist-and carbon-based power such as oil and coal also receive immense subsidies in the form of incentives for exploration, government support of road infrastructure and other programs.

Moreover, while renewables will eventually become cheaper than carbon sources, it would be a mistake to wait until they are already cheaper to begin investing in these technologies as driving the price down requires scale. Every new technology requires a development period when it is more expensive than its predecessor. Blu ray dvd players, for example are far more expensive than the older kind today, but as volume scales, they are likely to drop in price.

In the case of renewable energy, due to the limited number of customers, there currently is no way to drive down pricing by selling to consumers . The answer to this quandary is the production tax credit (PTC), a 2.0 cent-per-kilowatt-hour tax credit for electricity generated from wind turbines and other renewable energy sources. Unfortunately, the US Congress-unlike legislatures in other countries that now lead the US in wind and solar production-has renewed the PTC on an ad hoc basis. A graph of wind power in the US shows it moving in fits and starts, rising when the credit is in place and falling off when it has not been extended in a timely manner as happened, for example, in 2000 and 2004.

Once again, Congress has put off extending the credit but the Senate is now scheduled to vote-perhaps as early as today or tomorrow on legislation proposed by Senators Cantwell and Ensign to re-extend the credit (the Clean Energy Tax Stimulus Act of 2008). If you would like to express your support for the bill, the American Wind Energy Association has a web page that allows you to contact your Senator easily and urge him or her to extend the Production Tax Credit.

The climate change debate has changed. As a recent New York Times piece by Andrew Revkin makes clear, it is dawning on many observers that mechanisms to slow emissions using cap and trade or other conservation mechanisms won't be enough. Nor are conventional biofuels such as corn based ethanol the answer. What is needed are true technology breakthroughs that dramatically reduce the carbon per unit of energy ratio. The emerging question is how to drive this innovation and deploy it across the economy.

Despite all the attention the climate change issue has garnered since the release of An Inconvenient Truth, real reductions in emissions have been elusive. While it would be a mistake to fault the European cap and trade system for failing to reduce emissions in Europe-the system was in a training phase until a few months ago and some sectors such as aviation will not be included for another two years--it has showcased the difficulty leaders face in setting low emissions targets. More troubling, however, may be the fact that few technologies have arisen so far with the ability to replace carbon-based fuels. Absent such technologies, strong caps would be likely to drive up the cost of numerous goods and services, effectively creating inflation. Conventional biofuels such as corn ethanol consume more energy than they produce according to several studies. Not until real game changing technologies provide alternatives to carbon-based energy will real progress happen.

What can change the game?

In the area of portable fuels, biofuels made from switchgrass and other inedible plants grown on scrubland, holds promise. At a time when food prices are soaring and many countries are hoarding rice, wheat and corn, it makes no sense to devote America's heartland loam-some of the richest land in the world--to the production of corn-based ethanol. However, technologies to convert hard-to-break-down grasses grown on scrubland to fuel do make sense.

In the area of power, renewable sources such as wind and sun might change the game. Here the problem is barriers to scaling production. Solar, for example, is currently stuck in a catch 22 where limited production is keeping costs high, slowing deployment. At a minimum the Solar Tax Credit must be made permanent. But more broadly, utilities must be prompted to purchase a larger share of power from renewable sources through renewable portfolio standards.

Finally, as more and more cars hit the road in China and India, electric cars must be part of the solution. We have written about game changing companies such as Project Better Place on this blog. Even the mass adoption of traditional hybrids technology such as that used in the Prius would make at best a dent in C02 emissions. A pure electric vehicle running on clean electric power, however, could change the game.

Both Democratic presidential candidates, Barack Obama and Hillary Clinton have proposed spending up to $150 billion on energy research and development. The key will be putting whatever money is ultimately allocated to good use to drive the development of new technologies.

Yesterday, in the annual Australian-born event gone global called Earth Hour, millions of people around the world turned off their lights for one hour to save electricity and demonstrate their commitment to fighting climate change. If you pointed your browser to Google, you may seen a black background that the accompanying link explained did not use less energy but was designed to raise awareness of Earth Hour and the climate change issue.

Google has been at the forefront of efforts to fight climate change and last week, I had a chance to learn more in a visit with leaders of the climate change team. The company and its founders became interested in clean energy a few years ago when, in search of renewable power for data centers, they discovered how difficult clean energy can be to find. Since then, the company has launched a series of initiatives such as its program, RE<C.

Last year, Google turned on the world's largest largest corporate solar PV array, capable of generating 1.6 megawatts of power or about one third of Google's needs. You can monitor the power production at the website: http://www.google.com/corporate/solarpanels/home

At its server farms and in the workplace, Google has also set goals of reducing wasted energy from about 50% for desktops and 33% for servers to under 10%. And Google's fabled employee generosity includes green components. For example, Google will pay $5,000 toward the purchase of a hybrid which approximates the up front differential in cost between many hybrids and their conventional equivalents.

Google is not alone among Silicon Valley companies in pursuing clean technology. At a Bay Area listening session for the Green Project last week hosted by NPI's Pete Leyden, entrepreneurs and VCs told us about transformative potential solutions to climate change. They stressed, however, the need for stable policy to reinforce investment.

At a listening session for the Green Project in Washington, NDN members from large and small companies agreed that the issue has reached the forefront of the national agenda. Many companies see good business in energy efficiency. Dell, for example, is developing virtual servers that use less energy, Proctor and Gamble is marketing more concentrated detergent to reduce shipping costs and emissions and UPS has begun introducing hybrid trucks. But they also stressed to me the importance of thoughtful, stable policy to drive the process.

Despite enthusiasm for supportive policy, the clean tech movement has suffered recent setbacks. Californians defeated Proposition 87 which would have shifted incentives from oil production to clean technology and Congress has, amazingly, not renewed the solar tax credit due to expire this year. Due to long lead times for installations, many companies have had to kill or place on hold enterprise-sized solar power projects.

As if to highlight the need for action, last week an ice chunk the size of Connecticut broke off from the ice shelf in Antartica. While this massive piece of ice is expected to refreeze-rather than float off into the ocean as an iceberg-it shows how pressing the case for action has become and how policy must move faster if we are to meet the climate change challenge.