NRDC agrees that we need innovation. But the idea that we should chose between insulation, or efficiency in general, and innovation is a mistake. Insulation and other energy efficiency technologies can achieve far deeper emission reductions than people realize. This is because innovation is not some reified concept that needs to be pursued for its own sake. Innovation occurs as a result of market motivations that occur in efficiency whenever market failures have been overcome by policy.
Mr. Gates is right that we need to keep the long-term goal of 80% reductions by 2050 in view when deciding what to do over the near-term, but interim goals are critical to making sure we stay on the path toward meeting our long-term goal.
The single best thing our country can do to meet our 80% by 2050 goal is adopt federal interim and long-term carbon pollution limits. Efficiency will play a key role in meeting these limits. And by adopting the policy mechanisms that meet the shorter term (for example, 2020) goals, we will be encouraging the bottom-up innovation that we need for the longer term. We will also increase the political consensus on the need for these policy mechanisms, as has occurred in nations and states that have adopted short term caps.
This policy-driven acceleration of innovation has worked in the insulation and home construction industries. Compared to the 1970s, insulation manufacturers now produce products with more insulating power than before. New and existing insulation companies have introduced more types of insulation as well. In addition, installers have developed ways to make better use of the products that are already on the market, saving more energy than they would have 30 years ago with the same products by significantly reducing air and moisture flows. If we promote insulation over the next five years, we can expect continuing innovation and improvement in its performance. This improvement will be reflected in a combination of greater cost savings to the consumer—both in the form of lower construction costs for the retrofit and greater energy savings, reduced fuel usage that will result in lower fuel prices for everyone, and reductions in greenhouse gas emissions. These reductions come on top of the reductions we would have had with the older technologies and methods.
Retrofitting a house today can save some 25% to 50% at moderate cost. But if we try to retrofit all the homes in the nation over the next 15 years, as U.S. Department of Energy proposes, and we do it in a market-based way that fosters competition between better insulation, more efficient furnaces and water heaters, better lighting and appliances, etc, we can expect that new technologies and construction methods will evolve even more quickly. With continuous improvement, this 25-50% savings will grow over time and accumulate to better than a 80% reduction compared to where we are today. It would be as foolish to bet against this as to bet that software in 2025 will be substantially the same as it is today. Similar arguments about continuous improvements in efficiency apply across all major energy consuming sectors.
Mr. Gates points out that the power generation and transportation sectors need to get to near-zero emissions by 2050. Actually all sectors do. But 70% of electrical generation is for buildings, so if we get buildings near zero, that action alone (and of course, efficiency policy can help industries as well as buildings) will reduce the need for generation is about one third of what it would be otherwise, a level which can be satisfied virtually 100% by renewable sources. And personal transportation emissions can also be reduced to near zero by a combination of improvements to fuel economy, increases in location efficiency, and the use of biofuels and electricity to fuel cars.
But these improvements won’t happen on their own. Markets for insulation don’t work well enough to support the needed levels of innovation. Even though insulation and other home retrofit techniques save far more money than they cost (and also increase comfort and safety), very few people take advantage of them. Most homeowners and virtually all renters have no idea about how to get a thorough home retrofit: how much insulation a house needs, how efficient it can become and how much lower the utility bills will be, and who is a reliable contractor. The same problems confront all other uses of energy and sources of greenhouse gas emissions. The challenge is to adopt policies that strengthen the market forces that will enable faster innovation in home retrofits and other energy efficiency technologies. But we know how to meet that challenge.
Mr. Gates achieved monumental financial success through innovation. But he did not establish the market structure that allowed his company to prosper. Quite the contrary, he succeeded by noting conditions in the market that would allow the innovative approach that Microsoft would use to work, and exploited that niche. Innovation proceeded for decades because software market conditions supported it.
Through government policies, we need to create the same market conditions for insulation and other clean energy technologies as we have for software and computers, where companies that innovate profit from those innovations and grow. When companies profit from innovation, they will do more of it.
Mr. Gates states that, “you can never insulate your way to anything close to zero.” Both theory and practice; however, show that, even with 1980s technology, we can build houses that use near-zero energy. Germany’s Passivhaus project cuts heating by at least 90%, and according to Wikipedia there are at least 15,000 such homes today. This is only one of many near-zero energy projects for both homes and commercial buildings. While it would be costly to extend this result to all buildings today, it also would have been costly to extend high speed internet service to all households in 1995. Just as with the industry cluster around home computers and the Internet, we can count on innovation and continuous improvement in the energy efficiency sectors if policies support it.
It is possible to make large reductions in energy and emissions throughout all sectors, not just housing. California has reduced electricity use per capita by 40% compared to the rest of the nation, making steady reductions that accumulated over 35 years to this large savings. And at the same time, the 60% that is left has been decarbonized by constructing 14% in new renewables and by replacing oil generation at moderate efficiency with gas at high efficiency.
Mr. Gates also says that the way to meet a 2050 climate goal is to focus on long term innovation rather than short term implementation.
No one makes decisions today for meeting 2050 goals in the business world. I’m confident that Microsoft is not paying people today to design 2050-vintage software.
No, innovation proceeds by designing something today that is just a little better than 2010 technology and trying to introduce it in 2011 or 2012, or maybe even as late as 2015. Current high tech products such as smart phones were realized by incremental innovations on a time scale less than five years, not by having planned in 1970 to sell a smart phone in 2010. Long term results are achieved by repeated innovations on 1- or 3- or 5-year time scales.
So establishing only a 2050 goal will have almost no effect on business.
The only entities that make decisions today that affect 2050 technologies are governments. Governments can make long term commitments to provide infrastructure, and fund research projects whose goal is long term technology innovation. Climate stabilization will require changes in these types of decisions.
The idea of producing a breakthrough in research on clean energy has been pursued for almost 40 years without success. Accelerating the spending on the belief that surely the next 40 years will work out better is not a prudent strategy. But on the other hand, national research has yielded dozens of examples of small scale efficiency and renewable energy improvement—incremental improvements—that have made a big difference. An expanded efficiency R&D effort, coupled with the policies that make the business sector interested in using the results, is a more effective and safe strategy than hoping for the winning lottery ticket.
The way to meet our climate goals for 2050 is first to set a carbon pollution limit for 2020, as the energy and climate legislation pending in Congress does. We will also need complementary clean energy policies such as more stringent building codes, appliance efficiency standards, renewable energy standards for utilities, and major investments in R&D and clean energy deployment incentives. All of these policies are designed to foster innovation, and where they have been applied in the past, they have done so. A number of these policies are in the climate and energy legislation Congress is considering.
Protecting our climate, and our economic health, will require more attention to pursuing efficiency and other clean energy options at the same time. Both will benefit from market-based policies that encourage innovation. Experts agree that energy efficiency is the largest, fastest, cheapest, and cleanest way to meet our climate goals and recharge our economy. The efficiency savings make us wealthier, and the policies that get us the efficiency will enable more, not less, investment in innovation for the shorter as well as the longer term. These savings are even more needed in poor countries (in terms of their economic as opposed to environmental benefits) than in the developed world.
Efficiency is the biggest and cheapest resource even if we froze technologies at current levels, which conventional studies always assume. But if we try to implement this resource through the policies described we will establish the engines of innovation that will enable it to be far bigger.
David Goldstein is co-director at the Natural Resources Defense Council's energy program. He’s also the recipient of the MacArthur fellowship and Szilard Prize for physics in the public interest. The issues discussed in this blog are developed in depth in his forthcoming book, Invisible Energy, which will be available in early February through Bay Tree Publishing.
]]>“Remember how ten years ago, at the turn of the Millennium, the media were full of retrospectives of the last ten years, or hundred years, and of starry-eyed predictions for the next ten? The authors of the predecessors to blogs were excited about the future, and speculating about what we could call the next decade. If the previous decade was the nineties would be next one be the “aughties”?
If you fast forwarded to today, a viewer/reader would have to be amazed at the lack of interest—and the lack of confidence, as we move to the next decade. It is evident that the right name for this decade would have to be the Decade of Zero. Because the main story of the last ten years, at least for America, is the story of failures, of missed opportunities, or at best of laying the foundations for future progress, as opposed to achieving it.”
...when I happened to look at Paul Krugman’s column, where he says the essentially the same thing.
Dr. Krugman explains the economic failures of the decade: the failure to see growth in family income, in jobs, in housing values, or in the stock market, or in America’s importance in the world economy. Commenters on this column also point out failures in other measures of American success and welfare.
The environment is also beset with failures to take action. Global concentrations of greenhouse gases are more than 5% higher than they were in 2000. America has made almost zero progress as a nation in curtailing greenhouse gas emissions (although some individual states and regions have done a lot). We are ten years closer to potential tipping points in the global climate system, and still operating without a global plan to solve the problem. Climate change can still be mostly averted, but it is that much harder now than it would have been if we started in 2000 (much less 1992).
For both the economy and the environment, we (meaning the public policy decisionmakers in the federal government and in businesses organizations) closed our eyes to obvious problems, hoping that if we could convince everyone to have confidence, the problems would go away. Or at least not be noticed. This is a key problem that we need to overcome to avoid another Decade of Zero: we need to face facts and recover the recognition that problems demand solutions.
The first solution we need to address is to pass a climate protection bill. Anyone who worries that solving climate change will compromise the economy should take note: during the decade where we dithered and procrastinated on taking action on the environment, the economy stagnated and developed systematic problems that still are not under control.
But this is actually a reason for hope, not for gloom. We can solve both problems with the same policies. There is a tool for job creation and economic recovery that is dramatically underutilized in the economy: Energy Efficiency. The National Academy of Sciences recently released a study showing the potential to invest almost a half trillion dollars in energy efficiency in buildings alone over the next decade, an investment that will pay itself back in less than three years and then go on saving over $150 billion a year for the foreseeable future.
My own analysis will be presented next month in the new book Invisible Energy, to be published by Bay Tree Publishing. It highlights something buried in the details of the NAS study: that the assumptions understate the true potential for stimulating the economy by reducing emissions of greenhouse pollution through efficiency. We actually have the opportunity to invest trillions of dollars in climate solutions that also address some of the core causes of the Great Recession of this decade, causes that are still only minimally discussed in the national economic dialogue.
Tackling the climate change problem will provide an impetus to solving American’s underlying economic problems, and Invisible Energy will show how.
Krugman’s op-ed notes that it is hard to find anyone, of either party, willing to address the fundamental causes of the problem. The same is true for energy efficiency. But we have the choice. There are ways to exploit this immense resource for economic recovery and climate stabilization in a way that enhances markets and helps make America more competitive. We need to make them a priority for the decade of the teens.
]]>What is the relevance of this to climate change? Energy efficiency is the embodiment of new technologies for providing energy services that can surpass and take over the market from the fossil fuels that are responsible for climate change, just as the new technology of digital took over the market from film.
The revolution that occurred when digital photography surpassed performance of film was largely unforeseen. Digital photography was invented some 40 years ago, but did not appear in commercially significant products until 1995. Even then, the cameras produced output suitable only to small market niches where instant images in electronic form were preferable. Digital cameras were much more expensive and heavier than comparable film-based products, and produced greatly inferior pictures. But the fact that there was a market for these products at all spurred a process of technological improvement that resulted in continuous gains in the quality of digital images and reductions in the cost and size of the camera. The compound rate of improvement in number of megapixels exceeded 20 percent per year, while the cost of the cameras declined.
Exponential improvement, particularly when the rate is as low as 20 percent (equivalent to a doubling period of 5 years) can go largely unnoticed. Even those in the know fail to see this. One of the widest circulation photo enthusiast magazines, Popular Photography, published an article in March 2001 that stated that "in less than 5 years, some predict, film use will be relegated to fine artists and anti-tech renegades - the rest of us, it appears, will be trading in our film-based cameras for... digital cameras." But the section heading was "Pompous Prognosticators" and the rest of the article went on to conclude that there was an assured future for film. In fact, five years later the manufacturer of film cameras virtually disappeared. As noted by the photographer quoted above, the quality of digital pictures has surpassed that of film.
When exactly did this happen? I have looked through the photo-enthusiast literature and have yet to find an article that noted when the typical digital camera began to exceed film in quality. Looking back at product specifications and reviews, and looking at my own pictures, it is apparent that 2002 vintage product had already done this. But you wouldn't know it from reading photo magazines and blogs. The only direct comparisons I was able to find were four reviews of specific digital camera products. In the two cases that were printed, these referred to professional level cameras costing more than $7,000. The other two were very obscure online comparisons, again, pointing only to one specific camera each.
Even with those with their ears closest to the rail failed to see the revolution coming and failed to call it after it had already come and gone.
Energy efficiency is a little different than digital photography in that technology improvements confront dramatic market barriers. Whereas the consumer will readily choose a 10 megapixel camera over a 5 megapixel camera, and allow producers to respond accondingly, markets fail to provide this encouragement for the next level of energy efficiency in uses such as washing machines, computers, or air conditioners. But where we as a nation (or even particular states) have tried, we have been able to overcome these failures of the market and produce the same kind of improvements in efficiency that we see in high tech areas like digital photography.
Why this relates to climate is that, just as the experts were unable to see the tipping point when digital photography took over from film because it offered more value and quality for the money, current pundits on climate are underestimating the impact that new technologies in efficiency can have on reducing greenhouse gas emissions in a way that saves money rather than costing money.
Just as Kodak got into trouble by being overcommitted to the old technologies of film, so we as a nation can get in trouble by overcommitting to preserving our existing fleet of polluting power plants, automobiles, and industrial processes, rather than "investing" in the development of newer and greener technologies.
We do not yet have any examples of efficiencies that have improved at a rate approaching the 20 percent of digital photography, much less the 80 percent of portable storage for computers. But in areas where we have paid moderate policy attention for the past 30 years, we have seen annual improvements of about 5 percent. If we can extend these areas throughout the energy economy and speed up the pace of improvement to only 7 percent or 10 percent annually, previously daunting-looking goals of 80 percent emissions reductions sooner than 2050 don't look very difficult anymore.
But surely, skeptics would argue, there are limits to how far you can go with energy efficiency. The laws of physics impose limits on how long continuous exponential improvement can continue. For digital photography, we are about at the end of the road with respect to megapixel counts and ability to take pictures in the dark. This is shown in my paper published on line at http://www.northlight-images.co.uk/article_pages/guest/physical_limits.html.
But just as it is possible to calculate where the physical limits are in photography, one can do the same for energy efficiency. This exercise has not been carried out comprehensively since the 1970's, but a quick look at where the limits are shows that for almost all end uses of energy, we are far, far away from the point where we have exhausted the energy efficiency potential.
This issue will be addressed in my forthcoming book "Invisible Energy."
]]>We here in the United States have been slow to recognize this connection, perhaps because of a national political dialogue on climate change that focused on the costs of cutting emissions while ignoring the much larger economic benefits. This has been less of a problem in Europe, where attempts to meet the goals of the Kyoto protocol have spawned deep interest in energy policies to promote efficiency.
The progress that Europe is making can be heard in an interview between the Alliance to Save Energy's President Kateri Callahan with European Energy Commissioner Andris Piebalgs.
The Commissioner discusses some of the more ambitious goals that the European Union has established and how the EU and its member states are working to meet them.
The Alliance to Save Energy (ASE) is a strong partner with NRDC in the effort to bring policy attention to energy efficiency globally as well as in the United States. ASE will be holding a conference and trade show - the Energy Efficiency Global Forum and Exposition - in Paris from Monday, April 27 through Wednesday, April 29. Commissioner Piebalgs will be speaking, one of 100 leading voices representing 26 countries and six continents expected to be at the conference.
I hope that NRDC's members and supporters who are able to be in Paris at this time, or are willing to make the sacrifice of travelling there, will attend.
For more information on EE Global 2009, to register for or serve as a sponsor of the event, please visit http://eeglobalforum.org; or contact Mindy Berman at (310) 915-5947 or mberman@ase.org.
]]>This week's Group of 20 meeting in London will arise from the death of one system of ideas even as another struggles to be born.
He discusses the concepts of government oversight of markets in terms of socialism and capitalism (as in "one system of ideas/another") and suggests that the common wisdom is that unregulated markets are capitalistic and regulation is related to socialism or at least European style social democracy.
Many policy makers act as if free markets are the result of an absence of government regulation and assume that such markets always automatically produce the best results for everyone. I call this belief "economic fundamentalism" (and describe it in Saving Energy Growing Jobs) because its believers treat it as revealed truth that need not be subject to empirical verification.
The global recession and its direct cause -- the financial sector meltdown -- offer dramatic empirical evidence that unregulated (or even weakly regulated) markets can fail.
What has not been recognized is how regulation is always necessary to make markets work in the first place. Government regulation is not a move from capitalism to some form of socialism, instead, regulation is a necessary condition for capitalism and free markets to work.
Incongruous as this may seem, I actually saw how unregulated markets can fail during a recent vacation trip to Morocco.
As I wandered through the narrow medieval streets of Fes, I saw shop after shop displaying "18th Century Berber tribal silver jewelry" or "50-year-old rugs made without chemical dyes."
An economic fundamentalist would say that such shops, where prices were set by bargaining, should produce the best deals. But in fact, they will usually produce a bad deal for tourists, who don't know exactly what they are bargaining for, while the store owners do.
How do you know if an article is antique hand made silver? Of what kind of dyes were used in a rug? You only know if there are standard-regulations-on how products are labeled and represented. This is usually a function of government. I describe this problem in more detail in Chapter 4 of Saving Energy Growing Jobs on pages 126-34.
The problem of needing government regulation of markets -- the establishment of standards for what a product really is, whether it is an oriental rug or a variable-rate home mortgage -- is a key to the solution of climate problems.
For example, when you buy a new television, you have no idea what its carbon footprint will be, even though apparently identical televisions differ in the their carbon footprint by as much as 2 to 1. (They have the same 2:1 difference in their effect on your electric bill: the difference could cost you $150 a year.)
But television manufacturers can't advertise the difference today because U.S. law (wisely) requires that such representations be made using government-produced standards. But the standards for energy measurement were designed for black and white televisions of the 1970s! California has petitioned the Department of Energy to substitute a new international standard written just last year, but as of today is still waiting for a response.
A favorable response could empower consumers to cut residential carbon emissions by over 1 percent while saving money. It is one of a long, long list of actions where government intervention into dysfunctional markets for energy efficiency technologies could help get us out of the recession while reducing pollution and creating jobs.
These issues will be discussed in detail in my forthcoming book from Bay Tree Publishing called Invisible Energy.
]]>Particularly astonishing was the recent vote to establish a tax credit for buyers of new homes.
While a tax credit could superficially be seen to help stimulate more housing production and sales, more careful analysis shows that this is just adding to the nation's problems rather than solving them.
The most direct cause of the recession is that prospective homeowners borrowed money that they couldn't repay, perhaps ensnared by lending policies that offered the ability to buy a house to people who otherwise couldn't afford it.
But this is exactly what a tax credit does. Especially since the main costs of owning and operating a house-the cost of driving to and from it and of paying the utilities-still are not considered when originating loans. (As I previously noted, for a typical house lost in suburban sprawl, the median loan is below $175,000 but the average 30-year commitment to utility costs to run the home is $75,000 and the cost to drive to and from is $300,000.)
So the tax credit will perhaps help solve one problem-reducing the inventory of unsold homes-while actually worsening a bigger one: the toxic debt of mortgages that may default.
If we want to stimulate new housing, we should condition it on good energy efficiency and location efficiency. Senator Snowe recognized this in her amendment to the Economic Recovery bill that would offer a $5000 tax credit for building a new home but condition it on achieving a 50 percent reduction in utility bills. The reduction is measured by a home energy rating performed after the house is constructed.
Working with a broad group of nonprofits and business organizations, NRDC has developed a set of programs aimed directly at addressing all of the root causes of the recession through improving energy efficiency in a way that creates lots of jobs quickly but also develops a sustainable program of stimulating spending and provides a way to pay back all the costs through energy savings.
Unlike the tax credit for purchasing a new home, which may alleviate one cause of the recession but only at the expense of exacerbating another, energy efficiency policy helps relieve ALL the causes of the recession.
These issues will be discussed in detail in my forthcoming book from Bay Tree Publishing called Invisible Energy.
]]>Energy efficiency and economic well-being have never been tied together closely in the public’s mind. But economists and public policy experts have made the connection and it is my belief that each of the following economic woes worsened in recent months and years because of our refusal to stay current with energy technology:
The connection with inflation is most direct. Energy costs were the main driver of inflation over the past 5 years, a fact that was well recognized by the Federal Reserve in raising interest rates. In fact, energy was the main culprit behind all of the last runups in inflation, in 1973, 1979, 1992, as well as the last one.
Energy efficiency can cut energy costs by reducing the demand for energy while leaving supply unaffected. The recent drastic reduction in oil prices shows how responsive energy prices are to drops in demand. But unfortunately the 2008 drop in demand was due to economic weakness, not efficiency.
Energy costs were 38 percent of the trade deficit in 2007. Efficiency could cut the amount of imports as well as reducing the cost of imports.
Energy efficiency investments typically pay all their cost back in 3 years, even though they last much longer. If we need to spend more to get out of the recession, we need to spend it on things that pay back; otherwise we just trade solving the problem of spending for exacerbating the problem of government deficits (#5 above).
The low savings rate may be in part of consequence of the rising costs of driving and energy. These costs are also related to the most direct cause of the recession. But consideration of energy and transportation costs in future home lending can help prevent a recurrence of the mortgage mess without preventing all but the rich from owning a home.
The current recession is not just a repeat of the Great Depression or the Japanese “lost decade” that followed the collapse of their real estate bubble. It is also a result of longer-term problems, many of which are fundamentally about energy efficiency.
Fighting the recession will require using all the tools at our disposal, not just avoiding the short term errors of the past.
In sum, efficiency policy is one of the very few government actions that can solve or at least mitigate all of these 7 problems. These issues will be discussed in detail in my forthcoming book from Bay Tree Publishing (http://baytreepublish.com/) called Invisible Energy.
]]>The connection between energy efficiency and economic recovery needs to be continually emphasized: for too long efficiency has been the invisible resource. Its key role in growing the economy has gone largely unnoticed, and so the lag in efficiency for the last eight years has not been connected with the current recession.
The deepening recession was not caused by reckless mortgage lending practices alone. For the last decade or so, commentary from economists such as Paul Krugman and journalists such as Tom Friedman, as well as the official notes from the Federal Reserve, noted several major drags on the economy that are all a consequence of excessive and wasteful energy use.
Of course, the direct cause of the recession was the combination of the bursting of the housing bubble and the massive market failure in mortgage lending. Poor energy efficiency was implicated in the this issue as well: for a typical house built in the last 5 years in suburban sprawl, the median price loan was about $200,000 (median house prices are now down to $175,000) but the average 30-year commitment to utility costs to run the home was $75,000 and the cost to drive to and from it was $300,000. (Both of these could be cut in half by green building practices and smart growth patterns of development.) It is not surprising that a lending system looked only at the $200,000 commitment and not the $375,000 went wrong.
Any economic stimulus that does not address these root problems may succeed for a few years but will fail in the long term. Spending government money as the President has proposed to stimulate spending may help in the short term, but the money will all be borrowed. Unless we pay attention to how it will be paid back, we will not have solved the problem.
That is why it is encouraging that the stimulus package is beginning to address the need to invest in energy efficiency, where there are high rates of return that will allow spending today to be repaid by savings in only three years. There is much more that needs to be done, and we are hoping that subsequent congressional actions on climate and on energy will take advantage of efficiency opportunities that would otherwise be lost.
Many policy makers act as if free markets always automatically produce the best results for everyone. I call this belief "economic fundamentalism" and describe it in Saving Energy Growing Jobs. Today this attitude seems to be reflected in the belief that if we can just solve the immediate problems of the economy--by creating jobs through short term government spending for economic stimulus--everything will take care of itself.
But this belief seems to be premised on the concept that the current recession "just happened," rather than looking at the evidence that it was caused by the specific factors I have discussed here. We saw this recession coming. Many writers noted that worldwide competition for limited supplies of oil was a growing economic problem; it was common knowledge that the growth in consumer spending of the last decade was supported by increasing debt and could not be sustained.
What we seem to have forgotten amidst the storm clouds of recession is that these problems still have not been addressed. Until they are, we would be overly optimistic to forecast an end to recession.
But today we took a first step in that direction with the President's actions to improve automobile efficiency and emissions intensity, and his recognition that this was an economic stimulus action. We hope for much more of that in the future.
]]>This failure is important to understand because one would have thought that financial markets are among the least prone to failure. There have been active markets in loans for hundreds -- even thousands -- of years. The issues are well understood. Even for exotic mortgages, it was pretty clear what the terms were -- what the borrower must repay, what the lender can expect, and what the risks to both were.
The fact that both borrowers and lenders acted irrationally -- or at best irresponsibly -- is incontrovertible evidence that markets can fail.
In the case of mortgages, there are many reasons for failure. One is ignoring the costs of energy and location, as I discussed in a previous blog.
Another cause of the mortgage default problem is the creation of a market failure that went unrecognized by the lending industry and by the financial companies that financed mortgages. It is the trend since the 1990s of separating the business of originating of loans from the business of investing in income-generating financial assets. While lenders used to make their money from the interest payments on the loan, now most lenders make their money on points and fees, and sell the actual mortgages to financial corporations that create mortgage/securities from them. With different parties responsible for different parts of the transaction, there is no one who can act to work out potential problems of non-payment with the borrower.
In the area of energy efficiency in buildings, one of the major failures of the market is called diffuse decisionmaking. An energy efficiency measure with a 100% return on investment accomplished through upgrading the cooling system in an office building may not be undertaken because no one has both the authority and the responsibility for the cost and authorization of the investment.
Today this problem characterizes the mortgage mess as well: because no one has both the authority and the responsibility for negotiating a solution better than foreclosure.
Market failures are at the heart of the discussions about energy efficiency and its potential to protect the climate at a profit. Those skeptical of the ability of efficiency to deliver the solution argue that markets cannot fail: that if you think that there are trillions of dollars of profit from efficiency that could be reaped with the right policies, you are mistaken. Markets could not allow such an unexploited opportunity to exist.
But the mortgage crisis provides irrefutable evidence that markets can fail on a large scale.
Further discussion of the mortgage crisis and its causes will appear in my new book, tentatively titled, Invisible Energy: How Efficiency Can Stabilize Global Climate and Fix the Economy, forthcoming from Bay Tree Publishing. More detail on failures of the market can be found in my current book Saving Energy, Growing Jobs.
Economic fundamentalists might counter that the problem is due to government interference in the market through the creation of Fannie Mae and Freddy Mac. But if this were true, the problem would have focused on these corporations: they would have been the first to fall, and federalizing them would have solved the problem. But other institutions were hit even worse, and as we are seeing, solving the problems of these two did not stop the panic.
The problems are consequences of known failures of the market. The government could have corrected these failures in advance and avoided most of the crisis. And unless it tries to correct them now, it will not succeed in stopping the bleeding without immense cost to the taxpayer.
]]>Some analysts today are saying that we may be seeing the bottom of the default crisis in the foreseeable future.
The reasoning is apparently like this: "borrowers got in trouble by purchasing $400,000 homes that they couldn't afford. But now the prices are down to $250,000, so everything will be all right."
This sort of thinking ignores the key contributor to the crisis - energy and transportation costs. A $400,000 house in suburban sprawl does not commit its owner to only $400,000 of costs over 30 years. It commits the household to almost $800,000: $400,000 to buy the house, over $300,000 to drive to it, and over $75,000 to pay the utility bills. If the price of the house comes down to $250,000, the total commitment is still $650,000. It hasn't changed much!
And since without changes in underwriting standards, the house at the lower price will be considered "affordable" to households with even lower incomes than before (all the lender thinks about is that the purchase price has come down more than 35%), Fannie Mae and Freddie Mac would just be setting up the sequel to the default crisis of 2008.
Now that Fannie Mae and Freddy Mac are responsible to the taxpayer, let's make sure that their lending policies are financially responsible. And also environmentally responsible.
New underwriting standards should be based on the total of monthly obligations resulting from transportation costs, utility bills, and house payments all taken together, rather than considering house payments to the exclusion of these other two large obligations.
Not only will this help with economic growth and financial responsibility, it will also help with fairness in lending. In the cases where we have been able to get data, the most location efficient neighborhoods have much more diversity and also lower rates of home ownership. New standards will help improve environmental justice in home ownership opportunity.
]]>
So we probably won’t do anything to prevent the next price spike: Congress recessed for August when prices were much higher than today without acting on consensus legislation that would have provided moderate-term tax incentives for energy efficiency in homes, appliances, and offices — incentives that would start us on the road to saving 4 times as much energy in the form of gas alone as the oil industry thinks could be found in the Alaska National Wildlife Refuge. These incentives, packaged with tax credits for renewable energy, had strong bipartisan support and were also backed by a broad coalition of business as well as environmental interests.
It seems that we can’t fix the leaky roof when it’s raining, but we don’t want to bother when it’s sunny.
We are especially lax on fixing it when the fix is invisible — when it is based on energy efficiency measures that literally cannot be seen.
Maybe we can take the right steps on energy by realizing that fixing our energy problems will also fix most of what’s wrong with the economy this summer.
And energy efficiency — the invisible but largest energy resource — is at the heart of the economic solution.
I will be blogging about this in the coming weeks. Some of the material in these blogs will appear in my new book, tentatively titled, Invisible Energy: How Efficiency Can Stabilize Global Climate and Fix the Economy, forthcoming from Bay Tree Publishing, which also brought out Saving Energy, Growing Jobs.
The fundamental problems facing the American economy are not broadly based concerns that can be addressed easily through conventional government interventions. Many economic slowdowns were due to broad problems such as weakening consumer demand or increasing general inflation. These could be dealt with by adjustments in fiscal and monetary policy. But most of the problems facing the American economy today relate to the weaknesses of specific sectors of the economy. These weaknesses are not random or accidental, but rather are the result, to a greater or lesser degree, of the failure to address the sorts of energy policies that I have described.
Conventional economic stimulus won’t work to address these problems, because it will worsen some of the problems at the same time that it helps solve some others. Because of faulty energy polices, the economic situation is like driving your car with the brakes on. Pressing harder on the gas pedal won’t solve the problem, it will just overheat the brakes.
This is an apt metaphor, because the brakes are the high cost of energy, much of which results in a flow of dollars away from the United States, and the failures of markets that thwart competition and innovation. I will show in Chapter 2 how energy is at the heart of several of the most important economic problems of the late decade of the 2000s.
But in brief, these problems are:
1. The risk of inflation
2. The large trade deficit
3. The mortgage crisis
4. The low savings rate
5. Productivity increases that are too low
6. Government deficits
7. Weak consumer spending
8. Too few jobs
All of these problems are created or exacerbated by inefficient uses of energy, and by the policy choices that enable inefficiency. So all of them can be ameliorated by reformed policy choices.
Perhaps you are wondering what the mortgage default crisis has to do with energy. Here’s the connection:
The mortgage credit crisis is not only due to subprime lending: even the giant government-sponsored enterprises Fannie Mae and Freddy Mac are seeing their portfolio values decimated by defaults. But these defaults are not random: they have a very clear pattern that has mysteriously been overlooked by the financial services sector. Mortgage defaults occur in places where the need to drive is very high — strolling suburbs with little or no transit service. Urban areas with compact, walkable neighborhoods and good transit services have been largely immune from the credit crisis. What date we have suggests that the lower the auto transportation cost associated with living in a certain neighborhood, the lower the probability of default. A rational energy policy would consider transportation expenses in underwriting loans, and could have avoided a substantial if not dominant portion of the risk that is now afflicting the economy. Concerning the low savings rate, for the past 35 years, since the energy crisis of 1973, median incomes of Americans have hardly changed, yet the trend of ever-increasing need to drive cars has continued unabated. At the same time, cities and suburbs were growing in ways that reduced compactness, walkability and transit access, apparently leading to this increased need to drive to maintain the same quality of life. Driving is expensive — it was 18% of household expenditures even when gas was $1.50/gallon. This compares to only 21% for housing itself (considering only paying for the house, not the utilities or furniture, etc.). So if expenses go up, it’s not surprising that savings would go down.
This problem could have been avoided — and a repeat of it could be avoided without crushing new housing construction — if the lending industry started to consider transportation and energy costs along with the mortgage payments in deciding if a borrower can afford the house. This is not hard to do: there have already been small scale testing of Energy Efficient Mortgages and Location Efficient™ mortgages. The Location Efficient™ mortgage test was a complete success — not a single borrower has defaulted.
]]>In response to his Senate testimony about energy efficiency, he notes in the blog that Senator George Voinovich “said that this was ‘poppycock.’” Romm goes on to say that “conservatives simply have a blind spot when it comes to energy efficiency…”
Is this true? Are conservatives simply irrational in dismissing the merits of energy efficiency? Or do they think we are missing something? I invite comments on this blog from conservative skeptics of energy efficiency: how can we reach a common understanding of what the opportunity is? For my part, I will start discussing some of the ways energy efficiency can help get America out of its economic travails in forthcoming blogs.
In my book, Saving Energy, Growing Jobs, I lamented the lack of dialogue between environmentalists and self-labeled “pro-business” advocates. I argued that environmental protection should be seen as an economic development opportunity because environmental protection policies promote the innovation and competition that enhances growth.
What would it take to promote a real dialogue between pro-business interests and environmentalists? Besides inviting discussion on this blog, I am also working with a colleague, Bill Roller, of the Berkeley Group Education Foundation, to develop a one-day workshop to try to make some progress on the issue of how to encourage constructive dialogue for mutually beneficial results. This workshop will be held in San Francisco on the 19th of September.
]]>His article asserts that environmentalists support "radical economic and social regulation." The careful reader must note that he cites no evidence for this assertion. Actual legislation to control climate -- such as AB 32 that passed in California with bipartisan support, and the Lieberman Warner bill in the Senate -- are examples of the types of solutions environmentalists actually support: emissions caps with multiple market-based mechanisms for meeting the caps at the greatest benefit (or in a more pessimistic scenario, at the least cost).
The wolf-in-sheep’s-clothing is a common theme in anti-environmental writing, as I observed in my book Saving Energy, Growing Jobs:
Perhaps the most widespread myth about environmentalists is that environmental activists are truly, at heart, Communists, and that the struggle of the business community against environmental activism is actually a struggle to protect private property from Communism.
To equate environmentalists with Communists is seldom done in so many words by the anti-environmentalist authors, but is quite evident indirectly from their writing, and surprisingly widespread. Chapter 1 notes how a number of advocacy articles on climate change asserted that even environmentalists recognized that global climate change wasn’t all that important! Instead, the articles argued, environmentalists recognized that doing something about global warming would require more government control—perhaps to the point of total government control over private industry, as in a Communist country. They asserted that the hidden agenda of environmentalists was not environmental protection, but rather government control of business.
The above speculation is echoed in the Wall Street Journal’s citation of business concerns about global climate change: "Many skeptics contend that liberal environmental agendas are behind alarming global-warming headlines, although often skeptics bring agendas of their own." It is difficult to imagine what so-called liberal environmental agendas might mean if not state-run central economic planning.
In at least one case the linkage is made explicitly and publicly. Nationally syndicated columnist George Will wrote in a 2005 op-ed column that "For some people, environmentalism is collectivism in drag. Such people use environmental causes and rhetoric not to change the political climate for the purpose of environmental improvement. Rather, for them, changing the society's politics is the end, and environmental policies are mere means to that end."
Such a theme recurs constantly on the websites of conservative think-tank organizations, such as the Competitive Enterprise Institute, that are widely cross-referenced on other business and political organization sites. The Institute’s president, Fred L. Smith Jr., wrote a paper (available on the Institute’s website) in 2004 entitled "Eco-Socialism: Threat to Liberty Around the World." In it, he states, "the ecology has become the battleground on which competing visions [of the economy] now engage." And the text states clearly that the two competing visions are his Institute’s vision of free markets and the opponents’ vision of "centralized collectivist solutions."
This article above is not an isolated case of this story being circulated. The Institute is well linked on the Internet to other conservative sites, and articles and reports of a similar tenor are widespread. Evidently many people believe, or accept the policies of people who believe, that environmentalism is less important in its own right than it is as a "battleground on which competing visions now engage."
The view above would seem to explain much of the business community’s knee-jerk advocacy against environmental protection. American business has been concerned about socialism for well over 150 years. In fact, much of businesses activism against organized labor in the nineteenth century was based on the fear that labor union organizations were the precursor of Communist revolutions that would expropriate property from business.
The fears of Communism are not completely ill founded: many countries, beginning with the Soviet Union, underwent socialist revolutions and did in fact expropriate property. If a real connection between environmental advocacy and Communism did exist, this would be something serious for business to worry about.
Actually, the facts are almost completely opposite: where socialists have expropriated private industry, they have also operated it in a way that is much more irresponsible environmentally than is the case in market-based economies. Centrally planned economies have the world’s worst record on environmental protection, pollution, destruction of natural environments, and the most hostility for citizen-based environmental advocacy.
The concerns about government control are equally mistaken. My experience in the Soviet Union, and more recently in China, shows that the level of state control over actual production processes in these economies is lower that it is in market economies like America and Europe, often to the extent that even when the country seriously wants to change business practices to protect the environment, as is now the case in China, the level of control necessary to do this well simply doesn’t exist.
In other words, a free-market economy subject to the rule of law is a much more fertile field to implement environmental policies than a Communist country. Based on the facts, environmentalists should be at least as anti-socialist as businesses.
It seems that George Will, Krauthammer, and other conservative pundits must have missed the memo. Colleagues Kate Wing and Andrew Wetzler ably demonstrate the pragmatism of today's environmental advocates in responses to Krauthammer's column and a recent Will column, respectively.
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