The American economy got some more troubling news last week with the passing of industry's long time friend and ally Business As Usual (BAU). Yes BAU, that ever confident arbiter of Americas economic future is dead, the victim of a massive coronary brought on by the demise of Fannie, Freddie, AIG, Lehman and others who gave BAU its leadership position in the markets

Funeral services for Business As Usual were held over the weekend and were well attended by his many friends and admirers. Several thousand grief stricken creditors were also there, lining the procession as BAU's coffin made its way into the cemetery.

While I agree this is a tragic event, we need to stop mourning BAU's loss and re-focus our efforts on ways to get the economy growing again. In order to get the economy back on track we need two things to come together for us. The first is finding that next new thing that will help re-invent our economy. I am not too worried about that part of the equation. We as Americans are pretty clever at the end of the day and once we get our heads out of the real estate market and back into the laboratory things should start to settle down quite quickly.

The second problem we face is finding the money to fund this new thing. Normally we would call on the banks for funding but the banks are in no position to lend to anyone these days , so we will need to find another way to launch something new. We could look to the government for help, but given that they just pledged hundreds of billions of our tax dollars to help out the banks it doesn't look like they will be a reliable source for committed capital either.  

So where can we turn? Do we need to go hat in hand to the sovereign wealth funds for the money to re-invent our economy? Fortunately for us the answer is no since the next new thing for the American economy comes with its own revenue stream. A revenue stream of roughly $150bln a year over several decades that can be used to help collateralize the loans needed to put America back to work and move us in the right direction. I am talking about a new thing that will provide trillions of dollars of committed capital over time which will then be deployed for a new series of industries that will create jobs, improve our national security, drive export growth, and actually keep us cooler in the summertime. "Sounds great you say," looking a bit puzzled. "But what is this new thing you are referring to?"  I am glad you asked. The new thing I am describing is a cap and invest system for carbon dioxide.

What? You might say. How is a cap on carbon emissions going to bail us out of this mess and put us back on track? Let me explain. If a new set of high-growth industries is needed to get America back on track, from re-tooling the auto industry to retrofitting buildings to building the transmission infrastructure needed for a new energy economy, strange as it may seem, a cap on carbon dioxide can get us there. Indeed, if done well, and it is our job as American citizens to make sure it is done well, capping carbon emissions will be as much an exercise in innovation, investment and competing in the global marketplace as it is about keeping more greenhouse gases out of the air. Cap and Invest is a platform that will allow America to invest in a new energy economy that grows jobs and competes in global markets on our own terms.

Competing in the energy markets on our own terms? I thought we were already doing that by opening up drilling in the OCS? How is this any better? First of all, no matter what politicians say, we can't drill our way out of our energy problems. With only 2% of the world's proven reserves we simply don't have enough oil to make a difference. OCS is a great example. OCS drilling is only expected to bring in an additional 200,000 barrels of oil a day at its peak in 15 years. This amount of oil is in the words of the EIA "insignificant" with respect to the global demand for oil, which by that time is expected to increase from 85 to 100 million barrels a day.

This is not to say increasing US oil production won't be done under a Cap and Invest bill. It will, but instead of drilling new holes it will be focused on improving the yields from existing fields using a technique called enhanced oil recover (EOR) with CO2. In fact, according to a study conducted on behalf of the Department of Energy, the US could produce an additional 45 billion barrels or more with sufficient supplies of CO2, exactly what a well-designed Cap-and-Invest bill would supply. This is primarily due to the fact that coal-fired utilities will be capturing huge amounts CO2 from their facilities under a cap and trade program and selling it to EOR producers at low prices. This CO2 will then be used to recover large amounts of stranded oil in existing fields. It's a win-win for America, lower GHG emissions and hundreds of billions dollars in higher oil production, and this is just one of the many double benefits to be gained by focusing our economy on improving its energy security. 

Cap and Invest will help create more and varied supplies of energy for our country. But remember, supply side responses are not our only way of reducing energy costs and giving America a competitive edge. In fact, given that America is the world's largest consumer of oil, supply-side responses are probably not necessarily the most affective way for us to solve our energy security issues. Demand side responses can be extremely affective as well as the American consumer demonstrated this summer. We as Americans reduced our demand for oil by 4% early this summer, which was enough given our size to allow global supply to finally catch up to global demand, effectively putting a lid on oil prices. It wasn't easy, it wasn't fun, but we proved that it can be done. Now its time we up the ante and do things the smart way, by raising fuel economy standards and putting a price on carbon that properly rewards behavior that leads to further demand side reductions.

With a Cap and Invest policy in place, the US will now be looking to reduce the price of oil using technology and efficiency, both of which are good for job growth and our national security.  Indeed, Cap and Invest is not just a tax plan it is an investment plan. By taking a significant portion of the revenues from carbon emissions and investing those in technology driven businesses in the early years, we will be growing industries and encouraging investment into a new energy economy that will provide the next new thing for America in terms of job growth, export growth, and meeting our national security priorities.  

While it could be argued that the US economy's reliance on BAU may have served us well when market forces were predictable, bankable, and non-systemic, those days are over for now. Sure BAU will be reborn over time but when two-thirds of our mortgages are being financed by institutions in receivership, Wall Street banks have shrunk from 5 to 2 in six months, and the autos are waiting in line for a handout for tens of billions of dollars in low interest guarantees it seems pretty clear that BAU is no longer in charge. Things have changed and we need to recognize that fact as we look for the new thing that will drive our economy forward.

Sorry to see you go BAU, you certainly will be missed. Now is the time for America to pull together and start passing that Cap.