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Sierra Magazine
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Climate Exchange
Cool heads tackle our hottest issue
by Marilyn Berlin Snell
May/June 2007

(page 5 of 5)

Poirier: How is yours different?

Khosla: It creates a variable subsidy that is countercyclical with oil. If the price of oil goes down, the biofuel subsidy goes up. Making subsidies variable with oil prices and smaller than they are today will save the federal government a lot of money, and from a capital-formation perspective, it dramatically reduces the risk. If you reduce the subsidy but provide more downside protection, the safety for new capital coming in goes up dramatically.

Pope: So it's better to incentivize capital than to create windfalls?

Reicher: Exactly. There's a huge difference between incentives and tax policy. As soon as you say we're going to give everybody a 20 percent tax break for doing X, then everybody says, "I'm doing X," regardless of what they are really doing.

We're advanced enough in our analyses that we could sit down and have a rational discussion about incentives, mandates, scalability, capital needs, trajectories for climate, and near-term and long-term approaches. We've finally gotten to a moment where all the right parties are motivated, or most of the right parties are motivated. Goldman Sachs is involved in the conversation now, Citigroup, John Hancock Insurance. People are sitting down at the table and are willing to put money into climate-change solutions.

Coming back to Carl's earlier point, forcing the government to consider lifetime energy costs is critical. We wrote an executive order for President Clinton on the federal government's own energy use. And I'll tell you, dealing with the procurement officers of the different agencies on paybacks was extraordinary. We lost, frankly. It was the same old story: We've got to have a two- or three-year payback, and if we don't have that, it can't work.

Schneider: I had exactly that argument in South Australia, and I had to remind the premier that the treasury doesn't run the government, he does, and that if there's some benefit to the society from a 7 percent rather than a 20 percent return on investment--from the reduction of pollution and the kick-starting of industry--then he'd better overrule those guys from business school who think that 20 percent is the right number.

Khosla: In the U.S., Wall Street needs to start believing that there's a huge risk attendant with being a carbon emitter and that some form of carbon control is inexorable. Let me be blunt: We need to scare business. Even though we can't pick a date for setting a price on carbon, we can start to dramatically increase the internal risk calculation. I'm on a large board, and one of our eight meetings last year was dedicated to risk; we spent a whole day talking about it. You want carbon risk to become a boardroom discussion everywhere.

Anderson: We currently worry about our carbon exposure. We look at every project with and without a cost of carbon, and we take it to the board and say, "Here's your return with a carbon cost; here's your return without a carbon cost." Reicher: Can you tell us what you assume is the likely carbon cost?

Anderson: No, I don't think I should, but I'll tell you that the firm I headed, BHP Billiton--the largest global mining company in the world--makes the same calculation.

Khosla: I can add the following data: The business assumption is that there is a marginal cost to removing carbon from the air of $40 to $50 a ton.

Anderson: In a cap-and-trade or carbon-allowance system, it will be something less than that. With the carbon tax, it'll probably be even less. The thing is, when the board says, "What's the likelihood there's going to be a cost of carbon?" I tell them that the likelihood in a time frame that will affect the economics of this or that project is probably irrelevant.

Pope: What time frame might affect your decisions?

Anderson: It depends on the project. But here's the issue: You not only have to assume that there's going to be a cost of carbon, you also have to assume the form it will take and how you are going to have to pay it and whether it will be a level playing field. There are so many unknowns.

I would be irresponsible to go to my board and say, "You ought to plan on this course of action and for this level of carbon tax" if I weren't certain that a carbon fee was inexorable.

Poirier: What sends a signal to people in business that carbon should be factored in? You all were saying you have entire meetings on risk. How do we get these issues considered in those meetings in the near term?

Anderson: A statement and a commitment by government that it will not grandfather CO2 emissions. Otherwise, it just becomes a question of whether your lobbyist is better. If you say that we are not going to create an asset out of your pollution under any circumstances, that will flip it.

Khosla: I agree. The one thing government could do in the power sector right now is say that no matter what else happens, we're not going to give up on the grandfathering issue.

Reicher: I'm not sure how long it's going to take to get federal carbon legislation passed, signed, and implemented, but I'm optimistic it will happen. Meanwhile, it's important that the states act. They have been great laboratories and implementers. California has acted on carbon; the northeastern and mid-Atlantic states have acted to some extent. There are other ways to get at the problem as well, such as setting standards for renewable electricity, which 23 states have now adopted.

An example: New Energy Capital bought an old wood-fired power plant in Maine and put many millions of dollars into it to cut pollution and increase efficiency. We did this project for one reason: By upgrading we met the Massachusetts requirements for renewable energy credits. We were being paid seven cents a kilowatt-hour for electricity, but with upgrades we will be paid another three or four cents a kilowatt-hour because we can sell the green credits to Massachusetts, which has adopted an aggressive renewable portfolio standard.

Pope: California has passed a bill--and I know it's working because when I go to Wyoming, the governor yells at me about it--that restricts the importation of electricity made by anything dirtier than the state's most efficient natural-gas plant. Would the adoption of these criteria in other states create a ripple in your boardroom, Paul?

Anderson: Anything that will be enduring and create an economic effect will create a ripple. Anything that's a flash in the pan, politically unsustainable, won't.

Reicher: Efficiency standards are another avenue. They have been one of the most effective, least heralded approaches the federal government can take. Some years ago, appliance manufacturers agreed to a consensus standard and thereby avoided litigation and the usual rule-making process. In exchange, they got some money from Congress to work on their appliances. That was a really good bargain.

It isn't controversial like a tax would be. Yet it moves us along. Look at refrigerator, air conditioner, freezer, and furnace standards. Talk about boring technology. But boy, the near-term impacts are extraordinary.

Whether we build from the ground up, state by state, or build candidate by candidate to press in on carbon controls, these efforts will ultimately force boards to realize change is inevitable. They will then start to put time frames around it. Such pressure will also help Washington get done what needs to get done because, at a certain point, folks in industry won't be able to live with the state-by-state patchwork of regulations. That is how we got national appliance-efficiency legislation passed long ago.

Poirier: Are there any other approaches, such as community right-to-know legislation, that could be useful?

Anderson: We need to focus on action versus process. There's no better way to avoid doing something than to study things, gather information, and talk about how we're going to go about doing something. If you're going to take Paris, take Paris.

A hydrogen economy? That's a good discussion over a Scotch. We must avoid peripheral issues or long-term solutions that we don't have to do anything about. This is particularly important with regard to politicians and businesspeople because their watches are limited, and if they can hold the dogs at bay, it'll be somebody else's problem.

Schneider: With regard to the scale at which we must work, let me tell a story. When the Kyoto Protocol came into force in 2005 without Australia or the United States, I got a call from the BBC World Service. The interviewer asked whether I was frustrated that the largest emitter in the world, the United States, had no climate policy as Kyoto came into force.

Her comment was flawed on two counts. First, it's hard to say that Kyoto came into force when there is, in fact, no enforcement. Kyoto is a generation-long, learning-by-doing experiment in how to cooperate. Second, the United States has a lot of climate policy. The Bush administration represents only one part of the government. Nearly 400 cities, in every state plus Washington, D.C., have signed the U.S. Mayors Climate Protection Agreement. Hundreds of corporations also have meaningful climate policy.

All politics is local. That climate-change policy started locally and increasingly includes the corporate world is another example of how change can happen. But we have to have a change nationally as well. Other countries are moving forward--Japan and Europe, for example.

Reicher: Europe has taken advantage of the efficiency opportunities in several ways. First, it decided to charge higher energy prices. Second, there is a much more robust system of time-of-use metering. Third, it has more-robust building and renovation codes. Finally, it has a culture that supports energy efficiency. This has happened in economies that are not that different from our own. Why does it happen in Europe and not in the U.S.? Or in California and not in Texas?

Schneider: There's a political and cultural difference as to private rights versus public protection.

Khosla: I don't know what the kids are like in Texas, but my kids are growing up in a world, in California, where inefficiency, the National Rifle Association, and racism evoke the same emotional response; it is very visceral.

Reicher: There are cultural challenges. But we have the technical means available to make real strides. We don't have all the financial structures in place. There are additional policy tools that would help. The trillion-dollar challenge is deployment. If we put the right policies in place, if we continue to advance the technologies and change cultural attitudes, capital will be driven into the market.

My last thought is about President Bush. If big industry continues to positively step in, if the big investment and technology firms continue to step up, there is a chance that the president might do something on climate change. The pressure is growing; real controls are being put in place at the state level. Ultimately, the federal government will have to act.

Marilyn Berlin Snell is the senior writer for Sierra.

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