How Secure Are Green Jobs?

It's been an article of faith among advocates of "green jobs" from expanding renewable energy deployment that wind and solar installation jobs are secure because they can't be sent offshore, even as the manufacturing of wind turbines and solar equipment increasingly shifts to Asia.  A story in MIT's Technology Review casts doubts on that assumption, for reasons that have much to do with recent reductions in the cost of solar photovoltaic (PV) cells, modules and panels.  Green jobs, which in any case shouldn't be viewed as the main selling point of renewable energy, turn out to be much like other jobs in facing competition from automation, as well as from globalization.

Why would it suddenly make sense to consider installing utility-scale solar panels using the robots highlighted in the article?  PV module costs have declined dramatically in the last two years.  As I've noted in other postings, this trend reflects the expected experience curve effects--such goods become cheaper as you produce more of them--but also the fierce competition resulting from enormous over-building of global PV manufacturing capacity as countries competed with each other to offer generous subsidies for this industry.  One consequence of these PV hardware price declines is to increase the share of "non-module" costs in the total installed cost of solar panels. Because the power produced by PV is still more expensive than conventional energy in most markets, that tends to shift the focus of innovation toward ways to reduce the costs of the mounting hardware, inverters, and labor used to put these arrays in place.

The article makes it clear that only certain parts of the solar installation trade are currently threatened by robotic installation.  Robots apparently aren't suited to rooftop and small ground installations, yet.  However, with politicians busily blurring the distinctions between outsourcing and offshoring, while neglecting the ongoing transformation of work by automation, computing and telecommunications, it's worth recalling that energy remains a capital-intensive commodity business.  Keeping costs down is crucial for both energy providers and their customers, and thus for the entire economy they energize.  When labor is involved in producing energy, its productivity must be very high, or it naturally becomes a target of innovation and process reengineering.  That needn't mean low wages, but it does imply fewer workers working smarter, with more automation.

The energy industry offers excellent opportunities in many sectors, especially those that are growing rapidly because of new technology or the removal of artificial constraints.  Yet we shouldn't fool ourselves that these jobs are any more protected or permanent than any others, especially in segments that aren't yet cost-competitive.

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Can the US Military Afford More Biofuels?

Last week the US House of Representatives passed the fiscal 2013 National Defense Authorization Act by a wide, bi-partisan margin. It included two controversial provisions relating to energy that will presumably be debated when the Senate Armed Services Committee takes up the bill this week.  Sections 313 and 314 would exempt the Department of Defense from a provision of the Energy Independence and Security Act of 2007 (EISA) barring the government from purchasing alternative fuels with higher emissions than conventional fossil fuels, while prohibiting the purchase of any alternative fuel that costs more than the conventional fuel it would replace, except for testing and certification purposes.  If enacted, the bill would require drastic revisions to the current alternative energy strategies of the US military branches. 

It would be easier to attribute these provisions to partisan maneuvering, if our economic and fiscal circumstances hadn't changed so dramatically subsequent to the passage of EISA in 2007.  Although I don't dismiss the influence of election-year politics in such matters, we are now in the third full year of a recovery so weak that many Americans still think we're in a recession, and we face deficits and a ticking debt bomb that forced a reluctant Congress to agree to deep spending cuts starting next January.  Nearly $500 billion of those cuts are targeted at military spending.  Moreover, our perspective on US energy security has been altered by the emergence of shale gas and so-called "tight oil", and by our recent shift from net importer to net exporter of petroleum products--though certainly not of crude oil.  While it remains desirable for the US military to diversify its energy sources, the value of that diversification has arguably fallen.  Meanwhile, the biofuels industry, despite tremendous growth and advances, has been unable thus far to compete with petroleum-based fuels without either large subsidies or strict mandates, even with a global price of oil that has remained consistently above $100 per barrel since January 2011. 

Last year I had a couple of opportunities to question Defense Department officials about their alternative energy strategies, as part of an Army/Air Force energy forum and a subsequent Air Force media briefing at the Pentagon.  Although I was impressed by the changing military culture concerning energy and the methodical way they were approaching the introduction of new fuels, I was concerned that at some point the services' procurement of higher-cost renewable fuels would conflict with their other priorities, including the need to replace equipment worn out in Iraq and Afghanistan and to field the next generation of aircraft and naval vessels.  What I thought I heard very clearly from the Air Force Deputy Assistant Secretary for energy was that his service was not going into the fuel-production business, and would only buy renewable fuels--other than for certification with their fleet--if they were competitive with conventional fuels. That approach seems very different than the one embodied in the Navy's "Great Green Fleet" initiative.

The rationale behind the military's adoption of alternative fuels rests on many complex issues, including the vulnerability of military supply chains and budgets to potential disruptions in oil supplies and price spikes, consistency with the government's imposition of renewable energy mandates on the private sector, and the desirability of reducing the environmental footprint of the military's global activities.  There's also the human dimension of personnel put at risk delivering fuel to front-line units, although it's not clear how biofuels would alleviate that risk unless they were produced in forward locations. In any case, however, all these concerns must be reconciled with a realistic response to budget constraints. That looks extremely challenging, and it shouldn't be divorced from deeper questions about the evolving drivers for biofuels or other alternative fuels for the US military.

Consider the question of supply disruptions, for example.  US oil production looks set to continue increasing and oil imports to keep falling, while we now enjoy a refining surplus that is supporting new product exports.  We also have a Strategic Petroleum Reserve that could replace up to half of our net crude oil imports for up to 5 months, or a smaller disruption for much longer.  As a result of these factors, it's become more difficult to envision a scenario in which an oil market event affected the military's access to fuels in a manner that the present renewable energy industry could alleviate.  And with the cost of most alternatives still above even today's elevated prices for oil and its products, the investment required to develop an alternative fuel industry capable of making a meaningful dent in the military's needs under such a scenario would be very substantial.  Should the military make that investment, should someone else, or should it be left to the market?  And that doesn't begin to address the issues related to the non-renewable alternative fuels that would be enabled by Section 313, including synthetic fuels derived from natural gas or coal, though these would still be subject to the restriction that they must be price-competitive with conventional fuels. 

I suspect that the House bill will not be the last word on this subject, though I also imagine that in the new world of "sequestered" budgets and the fiscal challenges that lie ahead, the US military may need to rethink what can be achieved in this area without sacrificing readiness and combat capabilities. It's also important to note that the 2013 Defense Authorization Act's provisions on alternative fuels shouldn't affect the services' efforts to integrate renewable electricity generation, which looks like a real boon for some forward-deployed applications.

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Turning to Energy for Jobs

Yesterday's Energy Jobs Summit at the US Capitol, hosted by The Hill and API, focused on the potential of the energy sector to add large numbers of new jobs to help alleviate the national jobs crisis that President Obama will discuss in tonight's speech. The figures presented by API and others were impressive, with the oil and gas sector alone capable of creating over a million jobs if provided increased access to US resources. Panelists also discussed "green jobs", including those from energy efficiency projects. Yet I was struck by the inherent tension between today's job-creation imperative and our long-term need for an energy sector that is as productive and cost-effective as possible, in order to support economic growth and reemployment in the roughly 92% of the economy beyond energy. That makes highly productive private-sector energy jobs requiring little or no public investment especially valuable.

In a new study released at the summit, Wood Mackenzie estimates that the US oil and gas industry could increase its employment by 1.4 million by 2030, with a million of those jobs attainable by 2018--more than half in the next two years--under new policies that would lift the current bans on offshore drilling outside the established areas of the Gulf of Mexico and on shale drilling in New York, speed up permit issuance in the Gulf, open up new onshore acreage for leasing, and approve the Keystone XL pipeline. In the process, domestic production of oil and gas liquids could eventually nearly double, while natural gas output would grow by over 60%. Even better, from a deficit-and-debt reduction perspective, this effort would require no new government expenditures and stands to contribute a cumulative $800 billion in additional federal and state royalties and tax receipts.

The potential jobs impact is extraordinary, when you think about it. Oil and gas is an incredibly capital-intensive industry with very high worker productivity--one reason that salaries in the industry tend to be much higher than average. An industry like that is hardly the first place one might think to look when seeking massive job growth. The fact that such growth is even possible is both a validation of the tremendous untapped resource potential we still possess, and an indictment of decades of bipartisan energy policy mismanagement that has preferentially outsourced US energy production, rather than exploiting our own resources.

What about the contribution of "green jobs"? The growth of cleantech--renewable energy and energy efficiency--can certainly contribute to US job growth, yet we should understand clearly that such jobs won't spring forth spontaneously from the private sector without substantial continued government incentives and subsidies. Nor are those a guarantee of success. The US wind industry installed just 2,151 MW of new capacity in the first half of 2011. While that was considerably better than last year's pace of 1,250 MW, it's still 47% below installations in the first half of 2009, despite last December's against-the-odds extension of the Treasury renewable energy grants, which paid out $2.2 billion to wind projects this year. And the recent solar bankruptcies and the aggressive offshoring by solar manufacturers fighting to stay competitive with Asian suppliers also demonstrate that green jobs, other than those in installation and construction, are just as vulnerable to global competition as in any other US manufacturing industry.

Conventional energy jobs aren't immune from competition, either. I was startled to read yesterday that regional refiner Sunoco plans to exit the refining business after more than 100 years. Its two Philadelphia-area refineries will either be sold or shut down by mid-2012, with 1,500 jobs at stake. Prospects for a quick sale of these facilities look poor, because these plants are among the most exposed to global oil prices that have been running more than $20 per barrel higher than for crudes produced in Canada and the US mid-continent. Idling these plants would take a big bite out of east coast gasoline supplies and inevitably lead to both higher product imports and higher gasoline prices in the northeast and mid-Atlantic regions. As someone pointed out at yesterday's session, it's a sad commentary that Sunoco can make more money selling sodas and snacks at its retail facilities than it can refining crude oil.

That dynamic makes the production-related jobs in the Wood Mac study even more attractive: Despite being tied to a depleting resource, US oil & gas exploration and production enjoys a greater sustainable competitive advantage in the global marketplace than either refining or cleantech manufacturing, at least when it has sufficient access to domestic resources.

However, these opportunities also pose a test of our seriousness on the jobs issue. Opening up the Virginia and California coastlines, for starters, along with the coastal plain of the Arctic National Wildlife Refuge to exploration raises a host of NIMBY and environmental concerns. I don't want to trivialize them, but I would suggest that the time when we could afford such sensibilities may have passed, heralded by our continued descent in the rankings of national global competitiveness and the rapid growth of our indebtedness. Creating a number of "green jobs" comparable to Wood Mac's estimate of 1.4 million from oil and gas would require the expenditure of tens to hundreds of billions of dollars the federal government doesn't have, and that the current Congress seems unlikely to be willing to appropriate. It would also risk embedding expensive energy at the core of the US economy, hobbling our non-energy economy, where most Americans are employed.

Yesterday's energy jobs summit was held in the new Capitol Visitor Center, which I hadn't seen before. It's a gorgeous facility and a suitable addition to the paramount edifice of our democracy. However, I was also struck by the contrast it provided with the meeting's subject matter. Recall that the Visitor's Center ended up costing over $600 million, well over twice its original plan. I hope that when the President presents his jobs program tonight, it will be grounded in the crucial distinction between that kind of government-funded, "shovel-ready" project that might put some of our fellow citizens back to work for a few years and an energy-and-jobs resurgence funded entirely by companies and their investors.

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Big Energy Stories of 2010

Many of the main energy trends of 2010 were predictable at the year's start, including the growing reliance of renewable energy on government assistance in the aftermath of the financial crisis, the debate over US greenhouse gas legislation, the emphasis on green jobs and competition with China, the delayed arrival of cellulosic biofuels, and the anticipation surrounding the product launches of the first mass-market electric vehicles. As interesting as all this was, the year in energy was dominated by two transformative events: the Deepwater Horizon accident and the multi-million barrel leak that ensued, and the less spectacular but no less profound awakening to the possibilities of the shale gas revolution.

The Deepwater Horizon disaster has been the subject of such extensive coverage and investigation that there's little I can add concerning the facts, other than to note that we have not heard the last word on just how much oil actually leaked into the Gulf of Mexico. The consequences of our response to the spill will be with us for a long time, both in terms of reduced offshore drilling activity and the decline in US oil output that must inevitably follow. The impact will reach far beyond the tens of thousands of workers whose livelihoods are directly or indirectly linked to the US offshore industry. Early in 2010 it looked like the industry would finally be offered access to areas that had been off-limits for decades, and by year-end not only has drilling in the central and western Gulf come to a near standstill, but the prospect of leases in the eastern Gulf and the mid-Atlantic coast has been foreclosed, perhaps permanently.

The psychological impact of the event could extend even farther than its physical and economic fallout. Whatever misgivings many people had about offshore drilling before the accident, the industry had built up trust through an impressive string of technical achievements--pushing the boundaries of resource accessibility from depths of a few hundred feet into nearly two miles of inhospitable ocean--and a solid reputation for safety. In the space of one day and the following weeks, that trust was shattered. Coming on the heels of a financial crisis that destroyed the trust of millions of Americans in the nation's largest financial institutions and markets likely amplified the effect. As fickle as we Americans sometimes seem, I wouldn't bet that this trust can be restored quickly, or to the same degree.

The shale gas revolution is a completely different kind of story, though it, too, has arguably been tainted by Deepwater Horizon. As it unlocks a resource that has converted the US natural gas supply outlook from one of scarcity and growing import dependence to expected abundance for decades, the gas industry can't assume it will receive the benefit of the doubt concerning the environmental impact of the drilling techniques that have made this turnabout possible.


Perhaps one reason the impact of cheap natural gas hasn't sunk in yet is that the main market price for gas, the futures price at the Henry Hub in Louisiana, doesn't have much relevance for the average consumer. Residential gas customers don't buy their gas in the million-BTU (MMBTU) lots in which the futures contract is denominated; we buy gas in therms--one tenth of an MMBTU--and by the time we see it on our bills all sorts of handling and distribution fees and mark-ups have been added on. But when you compare the price of traded gas in barrels of oil equivalent (BOE) to the price of West Texas Intermediate crude, the remarkable divergence of the last two years becomes obvious, as shown in the chart above. Between 2000 and 2006 gas and oil tracked each other closely, allowing for the greater seasonal volatility of the former. There were even periods when a barrel-equivalent of gas was worth more than a barrel of oil. Yet while oil and gas prices fell precipitously when the recession and financial crisis burst the various asset bubbles, they have diverged sharply since then, with oil advancing back up to today's $91/bbl and gas settling into the $20-25/bbl range in which we were accustomed to see oil prices a decade ago. Adjust that for inflation and you're looking at an average natural gas price for 2010 equivalent to $20/bbl in 2000.

That might help explain why the developers of renewable electricity sources such as wind have struggled so much this year, despite receiving $3.9 billion in direct cash grants from the US Treasury. They're not competing with $90 oil; the US generated less than 1% of its electricity from petroleum this year, through September. Instead, they're competing with gas at an effective price of $25/bbl or less. But if this is a new obstacle for some renewables, it surely represents a huge opportunity for the country as a whole, as we struggle to find our way out of the fiscal and competitive pit we've dug. Cheap energy has always been a key to growth, and right now, gas is the only energy source offering that without requiring an enormous up-front investment. It's no panacea, and it can't take on every burden without being spread so thin that its price advantage would disappear. But I'd much rather be looking at the possibilities this presents than at the constraints that high-priced oil and natural gas imposed only a couple of years ago.

That's probably as good a note as any on which to end the year. New postings will resume the week of January 3, 2011. In the meantime, I wish my readers a happy holiday season.

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Christmas for Renewables

Last night the US House of Representatives passed the compromise tax bill without any amendments and by a healthy margin, though narrower than the 81-19 vote in the Senate on Wednesday. The bill now goes to the President for his signature. The provisions added after the initial negotiations between the White House and Republican leadership delivered a substantial Christmas present to the nation's renewable energy industry, including several key items on the industry's wish list: extension of the ethanol blenders' tax credit at its current rate of $0.45 per gallon; extension of the Treasury Renewable Energy Grants, which provide cash in lieu of investment tax credits; and a retroactive extension of the $1.00 per gallon biodiesel tax credit, which had lapsed at the end of 2009. However, as with many Christmas presents, the bill that will come due next year is also substantial. And the one-year extensions granted to these incentives leaves their long-term fate in the hands of the new Congress, which is widely expected to be more focused on deficit reduction than on stimulus.

This result constitutes a remarkable trifecta. As recently as a week ago it seemed likely that the Treasury Grant program would expire on schedule, and that the ethanol credit, if not actually allowed to expire, would at least be reduced to reflect its redundancy with the Renewable Fuel Standard (RFS), which requires refiners and fuel blenders to add biofuel to gasoline. As for the biodiesel tax credit, it looked like a lost cause all year, having failed on multiple previous attempts to reinstate it. The US ethanol industry even prevailed in having the $0.54 per gallon duty on imported ethanol extended for another year, in order to shield taxpayers from paying incentives to foreign producers and the industry from cheaper competition--though I'm not sure how competitive Brazilian cane ethanol really is these days, with sugar trading at around $0.30/lb ex duty. (As I understand the tradeoff, a gallon of cane ethanol consumes roughly the same raw materials as 10 lb. of cane sugar.)

It's a tribute to the greatly expanded scale of renewable energy that the price tag for the one-year extension of these three incentives is as high as it will be. This year, even with US wind turbine installations running well behind their record pace in 2009, the Treasury has spent $3.9 billion on the grant program for projects installing geothermal, solar, wind and other renewable electricity equipment. With continued strong growth in both solar thermal and photovoltaic projects and even a modest uptick in wind installations, the tab for 2011 could easily break $4 B. (A separate manufacturers tax credit, which had a better claim on creating green jobs here in the US, was not extended.) Meanwhile, with conventional ethanol and biodiesel blended at the mandated rates for next year, they should account for around $5.9B and $0.8 B, respectively. That comes to $10.7 billion for all three programs.

Although the tax compromise has extended the energy policy status quo for another year, change is in the air. With continued, though narrower bi-partisan support, the ethanol industry's argument that its tax credit is still necessary after 32 years--even with a steadily increasing RFS mandate--is losing credibility. Part of the industry would prefer this money to be spent encouraging infrastructure for E85 and other higher-percentage blends that represent ethanol's future growth opportunity, if any. As for the Treasury Grants, a temporary stimulus measure intended to make up for the disappearance of the tax equity market during the financial crisis, the defensibility of treating the investment tax credit on which it is based differently from any other credit in the tax code is waning. This mechanism looks increasingly exposed as the broader category of "tax expenditures" becomes an obvious target for deficit cutters, and the justification for extending it beyond next year would probably vanish if the Congress enacted legislation along the lines of Senator Graham's Clean Energy Standard. The industry should make the most of the current Christmas package, because the odds are against a repetition of it turning up under next year's tree.

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Green Jobs Aren't Renewable Energy's Value Proposition

The recession and its aftermath have been simply awful for the emerging renewable energy industry, even though governments have tried hard to insulate the industry from the worst effects of the slowdown. Not only did the recession make it much harder for renewable energy projects and technologies to secure financing, due to weak demand and the hangover from the financial crisis, but it has focused the industry's management on a counterproductive metric: green jobs. Factories and projects are pitched on the basis, not of their efficiency and profitability, but of adding jobs that "can never be outsourced." Tell that to the 3,000 Danes who are being laid off by wind turbine maker Vestas, or the Scots whose jobs are in jeopardy due to the financial problems of a smaller wind supplier, Skykon. This problem isn't unique to renewables, but the misplaced emphasis on green jobs makes them particularly vulnerable to the collision of this aspiration with the realities of global energy markets.

I don't blame the industry for picking up on this theme. Politicians hit on it first as a way to justify continuing to invest taxpayer money in the subsidies required to keep renewables growing. That included the large infusions that became necessary when the "tax equity" market upon which project developers had depended to convert future tax credits into current cash became frozen after the bankruptcy of Lehman Brothers. As of this month, the US government has spent $5.4 billion on these renewable energy grants to fill this gap, with nearly half of that awarded in the second, third and fourth quarters (to date) of this year, even though tax equity transactions are showing signs of life again. Without a compelling story linking this money to employment, which understandably remains one of the primary economic concerns of voters, this would have been an even harder sell than it was.

One problem with this rationale is that the world has changed a lot since most of the current members of Congress came to Washington. Supply chains for practically every industry have become globalized, and renewables are no exception. If anything, as renewables increasingly become a global industry--growing out of their localized roots in places like Denmark and Silicon Valley--that trend will accelerate. The lion's share of future demand will likely be focused on Asia and Latin America, because of their higher economic growth rates and the related need to add enormous amounts of new energy infrastructure. That's a very different proposition than replacing existing energy infrastructure in the mature, developed economies because we don't like its emissions or its dependence on unsustainable fuels. Vestas understands that to serve the market in China, it needs more factories in China, and fewer in Denmark.

An even bigger problem is that making renewable energy more, rather than less labor-intensive works against it in the long run, by increasing its costs relative to conventional energy. In a recent analysis on green jobs the Geothermal Energy Association (GEA) touted its finding that geothermal power plants create more than 10 times as many person-years of employment per megawatt of capacity as equivalent natural gas-fired power plants. Unfortunately for the GEA, outside the Washington beltway and the state capitals where this message might play well that counts as a disadvantage, not an edge, because it translates into higher construction and operating & maintenance expenses. In order to arrive at the point at which they can compete without subsidies that look increasingly unsustainable in light of the large fiscal deficits in the developed economies, renewables must focus on driving down these costs and improving their productivity.

I am sympathetic to the plight of the millions of unemployed workers in this country and elsewhere in the developed world, and cognizant of their effect on the overall economy. However, energy is by its nature a capital-intensive business, and not a particularly labor-intensive one. To the extent its capacity to provide low-cost energy to the rest of the economy is influenced by the number of workers it takes to produce a megawatt-hour of electricity or a barrel of oil, fewer are generally better. Without diminishing the value of the jobs involved, I can only hope that once the economy resumes creating many kinds of jobs at a decent rate the renewable energy industry will return its focus to its primary value proposition for consumers and investors: providing low-emission, diverse and secure--and hopefully someday cost-effective--sources of energy for the economy, rather than putting more people to work.

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California Prop. 23 vs. A.B. 32

Aside from the question of which party will control the House and Senate for the next two years, next month's mid-term elections also feature a number of important state contests, including California's closely-watched Proposition 23, a ballot initiative that would suspend enforcement of the state's major greenhouse gas legislation, Assembly Bill 32. Prop 23 has national implications, since California has taken a leadership position on emissions regulations at a time when national climate policy has become deadlocked. Yet as I've watched the coverage of Prop 23 in the blogosphere and mainstream media, I've been amazed by the consistent mischaracterization of precisely what is at stake in this initiative, most recently in Tom Friedman's column in yesterday's New York Times. Californians surely deserve a better assessment of the issues involved.

When the loudest objections to any candidacy or initiative are focused on vilifying its financial backers, this often indicates that its opponents' arguments on its merits are weak. The fact that several oil companies with refineries and other operations in the state are supporting Prop 23 shouldn't trump the pros and cons of the actual initiative, any more than the fact that much of the funding for the anti-Prop 23 effort apparently comes from venture capitalists and companies that stand to profit if Prop 23 is defeated. For example, the portfolio of VC firm Kleiner Perkins Caufield & Byers, one of whose prominent partners is reported to have donated $2 million to oppose Prop 23, includes investments in biofuels, wind, solar and geothermal power, along with other green technologies, many of which would benefit if A.B. 32 were upheld. From my perspective, this whole line of argument is a colossal red herring. Valero, Tesoro and the other oil company supporters of Prop 23 are part of a $50 billion-a-year California refining industry that employs thousands of Californians and fuels more than 99.9% of the state's 33.6 million registered motor vehicles. The initiative's cleantech-based opponents are part of a smaller but growing sector that has emerged as an offshoot of Silicon Valley and the state's premier research universities. All of these entities have a stake in the outcome, and an equal right to take a position. Their involvement shouldn't constitute a compelling argument for or against Prop 23.

So what is this really all about? Contrary to one of Mr. Friedman's assertions yesterday, it is most certainly not about "making the state a healthier place". The conflation of the greenhouse gas emissions (GHGs) that A.B. 32 explicitly addresses with local air quality is probably the most misleading aspect of the entire debate. Perhaps this was an inevitable consequence of the US Supreme Court decision that labeled GHGs as pollution, but it is a most unfortunate one, because it obscures the crucial differences between a law that was intended to restore California's GHG emissions to their 1990 level by 2020--thereby reducing the state's impact on global climate change--and the extensive state, federal and local laws and regs targeting the causes of the smog for which parts of California became infamous. As a long-time California resident during the period when most of the latter were implemented, I can attest to their effectiveness at cleaning up the state's air, despite the enormous growth in population and vehicles that has occurred in the meantime. However, voters should understand clearly that none of this progress, and none of those existing measures regulating the emissions of SOx, NOx, carbon monoxide, unburned hydrocarbons, and the other contributors to local air pollution is at risk on November 2nd. Simply put, both A.B. 32 and Prop 23 deal with climate change, not local pollution.

As for health effects, any connection between the emissions that A.B. 32 regulates and public health in California is tenuous, at best. Understanding why depends on the numbers involved. In 2007 California emitted just over 400 million metric tons of CO2, the primary greenhouse gas implicated in climate change. This constituted 6.7% of total US CO2 emissions, an enviable performance considering that the Golden State accounts for about 12% of US population and roughly 13% of US gross domestic product (GDP). But on a global basis--and climate change is very much a global problem--California emits just 1.4% of the world's anthropogenic CO2. The state could stop emitting CO2 altogether and the global climate would never notice the difference. That doesn't justify doing nothing about the problem or shirking responsibility for the state's contribution to climate change, but it does mean that tracing the future health impacts of the expected future warming of California to the highly attenuated effects of the state's current emissions stretches cause and effect to the breaking point.

Then there are the economics that are at the heart of Prop 23's proposal to delay implementation of A.B. 32 until the state is in better financial shape, and of the opposition's arguments concerning the current law's benefits in fostering a clean energy economy in California. It's noteworthy that when the legislature passed A.B. 32 in 2006, California's economy was booming. Nominal state GDP in 2006 grew by over 6%, on top of 7% growth in 2005 and 8% in 2004. And while Mr. Friedman notes that the state's unemployment rarely falls below the 5.5% threshold on which Prop 23 would make the implementation of A.B. 32 contingent, that's precisely where unemployment was when the law was passed, and for the following year. I don't think that's a coincidence or an arbitrary choice. Whatever its merits--and it has more than a few, in my view--A.B. 32 is the kind of thing you take on when an economy is healthy, not when it's on its knees. That's because it cannot help but increase the cost of energy and the cost of doing business.

California has been down this road before. Starting in the 1980s the state imposed some of the most restrictive specifications in the world on gasoline and other fuels sold there. It also made it much more difficult for refiners to expand operations to keep pace with the growth in fuel demand in a state with a rapidly growing human and vehicle population. This turned California into a virtual "gasoline island", which has contributed to consumers in the state paying an average of 25 cents more per gallon--or 11% more--than the national average for gasoline over the last decade. With the implementation of the Low Carbon Fuel Standard (LCFS) included in A.B. 32, it will become even costlier to make gasoline in California, and this price differential could expand significantly. Considering that the state consumes 42 million gallons of gasoline each day, this already amounts to an extra $3.8 billion per year in costs. Increasing that disadvantage is not a trivial consideration. It won't even do much for the domestic ethanol industry, since much of the ethanol produced in the US won't qualify as "low-carbon" under the LCFS's definitions. This is a matter over which the ethanol industry is currently suing California.

With regard to the "green jobs" and cleantech growth that Prop 23's opponents cite, I am skeptical that these will result in meaningful growth in overall employment and output, as the pressure on the rest of the state's economy increases with the ratcheting-down of A.B. 32's emissions cap and LCFS. The recent experience with green-energy deployment incentives at the national level suggests caution in assessing how effective these measures will be in stimulating green jobs in California or the rest of the US, as opposed to offshore, where much of the green energy hardware that is being installed is manufactured. A recent article in MIT's Technology Review also questioned whether the consequences of Prop 23's passage would be quite as severe for the state's emerging cleantech sector as opponents suggest, because other incentives would remain unaffected. Ultimately, the market that matters most for California's cleantech companies is the global one, where they must compete with manufacturers from Asia and Europe. Creating a bubble market on their home turf will do little to advance that cause, as German photovoltaic firms are currently learning to their regret.

When we dispense with all the questionable arguments concerning who is for and against this initiative, whether it will alter the quality of the air Californians breathe, and how many green jobs it might affect, the choice becomes clearer. Proposition 23 asks voters to decide whether California should proceed with the nation's most aggressive effort to curb the greenhouse gas emissions implicated in global warming now--despite high unemployment, low growth and deep deficits--or whether that effort should be postponed until the state has returned to growth of the kind that prevailed when the law was passed, before the housing collapse, financial crisis and recession. The context of this choice should be equally clear, consisting of a complex global environmental challenge that California's efforts can't solve alone, but might help to influence at the margin. Having spent so much of my life in the state, including my entire education, I can easily understand that many Californians would believe it was their responsibility to move ahead at any cost, even if no one else followed. However, I can also envision that many of the state's voters would conclude that, for the moment, the costs and risks associated with A.B. 32 look too high. This is a difficult and consequential decision, even if some choose to portray it as a one-sided no-brainer.

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Climate-Proofing Infrastructure

Even in an election year, it's hard to make infrastructure repair sound glamorous. Perhaps that helps explain why the latest annual report card on the condition of US infrastructure from the American Society of Civil Engineers was so dismal, a "D" overall. In any given year, there are usually more exciting things to spend our money on, until we realize we haven't spent enough on these necessary props for our civilization for decades. The president's latest proposal to improve roads, rails and runways could help, though it faces skepticism from those who thought such fixes were already covered by last year's federal stimulus package. Perhaps what's missing is a green angle, and I don't mean that cynically.

If there are any aspects of infrastructure that have acquired a hint of glamour, lately, it's the ones that deal with making energy more sustainable or reducing emissions. The "smart grid" comes to mind, along with renewable power generation. As I was reading a recent New York Times op-ed concerning whether this year's bizarre weather is attributable to global warming--it's not, but it could be a taste of things to come--it occurred to me that climate-proofing our roads, power lines, train tracks, sewers, and other basic infrastructure could be at least as important as much more controversial policies addressing whether and how to reduce greenhouse gas emissions. In fact, whether climate change is caused in whole, partly, or not at all by humanity, we must still deal with its consequences. And even if all greenhouse gas emissions ended tomorrow--an impossibility--the climate is predicted to continue warming for a long time. That makes adapting our infrastructure to withstand climate change a suitably green endeavor.

However we explain this year's odd weather, including massive floods, heat waves and the fires in Russia--which incidentally contributed to a spike in US ethanol prices by driving up corn prices--scientists expect our future climate to include more such events. A few years ago, "adaptation" was taboo to some environmentalists, signaling defeatism. They bet everything on "mitigation"--reducing emissions. Since mitigation may not happen soon enough, on a large enough scale globally to make a difference, nothing we do can avert the need for adaptation to a world of less benign weather. In that respect any jobs created by a concerted effort to shore up our infrastructure to cope with more frequent weather events would be just as green as those associated with building and installing wind turbines and solar panels.

What might this entail? Well, most of the detail is outside my area of expertise, but if a bridge needs to be replaced, perhaps the new one should be designed to provide more clearance between the river and the roadway, with higher floodwaters in mind. Similarly, should highways be built (or rebuilt) with better drainage where flooding is a growing risk, or using concrete or asphalt formulated to withstand more extreme heat and cold? And having spent more than a decade living in regions subject to high winds and ice storms, putting utility lines underground makes lots of sense even without climate change, and it could become indispensable with it. In some respects this merely boils down to widening the routine assumptions that engineers make concerning the conditions that a piece of infrastructure must withstand during its lifetime, in order to cope with more uncertainty.

All of this costs money and competes with other priorities. The more resilient (and expensive) we make each project, the fewer of them we're going to do, unless we make upgrading our infrastructure--and not just the semi-glamorous parts--a much higher priority than it has been. That would require a different mindset, and not just with regard to the risks of climate change. Nor are the political rewards likely to be quick, because if anything, it involves the antithesis of the "shovel-ready" projects the stimulus targeted, since much will need to be rethought first. That wouldn't have deterred the generations of Americans that built the systems that must now be replaced; it shouldn't deter us, either, particularly if we recognize the connection to what many see as the greatest challenge of our century.

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Green Energy Competitiveness

As I was catching up on recent op-eds in the New York Times, I was intrigued by one with the snappy title, "Red China, Green China." As the author, an "executive in residence at Columbia Business School," built his case for why the US is falling behind China in clean energy technology, I was hopeful that he'd offer some sensible recommendations for resolving the problems that have made it harder for the US to compete across a whole range of industries, not just cleantech. Unfortunately, two of his three suggestions were focused on measures to ensure a market for clean technology, and the third on R&D for carbon capture and storage. These are worthy goals, but there wasn't a word about making our manufacturing sector more competitive. That blind spot seems to be shared by the Department of Energy, which according to an article in MIT's Technology Review ran out of money for clean energy manufacturing tax credits, but spent more than $3 billion funding renewable energy projects, many of which are being built with imported hardware. If we're serious about competing in a global clean technology race, we've got our priorities backwards.

I must admit that I'm generally skeptical of anything that smacks of industrial policy. Industry has a mixed record at picking technologies in which to invest to create the industries of the future, but government is often worse. For example, does it really make sense to spend taxpayer money helping companies build factories to make batteries for electric vehicles that consumers haven't yet embraced, and that may only capture a small share of the total car market, similar to today's hybrids? However, this might still prove wiser than shoveling money at the deployment of green energy technologies that either don't need much assistance, or that haven't developed sufficiently to meet the needs of the economy.

It might also help to think about our competitiveness in cleantech from the perspective of the entire economy, rather than the usual practice of looking at it in isolation. From that vantage point, the main thing the economy needs from the energy sector is cheap and reliable supplies of the kinds of energy that we use: liquid fuels for transportation, gas for heat, and electricity for nearly everything else. Reliability was licked a long time ago--except for the occasional blackout--and renewables don't bring much to the table in this regard. For several of the most popular forms, such as wind and solar power, it's their weakest suit. As for cost, the price tag on wind capacity has come down significantly over the last couple of decades, and off-peak wind power is sometimes the cheapest supply available. That's still not true for solar, however, though solar thermal and some novel forms of photovoltaic cells have the potential to get there.

It's also important to recall that while we can employ subsidies or mandates to make renewables appear more competitive locally or to require their use, whether competitive or not, that doesn't alter their impact on the global competitiveness of the US economy. If we are embedding expensive energy at the heart of our manufacturing, services, transportation and distribution networks, then that must make us less competitive--unless everyone else is doing the same thing.

We should also be asking to what extent taxpayers (or ratepayers--often the same people) should subsidize the creation of a market for renewables. After all, the market already exists, and most of it is outside the US. The world apparently added 38,343 MW of new wind generating capacity last year, and only 26% of that was installed in the US. Instead of concluding that we should pay or require companies to install more wind turbines in the US, as Mr. Usher suggests in his op-ed, wouldn't it make more sense to help US wind turbine manufacturers become more competitive in the larger global market? That seems like an obvious conclusion, especially when we consider that US manufacturers accounted for less than half of the wind turbine capacity installed here last year, according to data from the American Wind Energy Association, and that the bulk of the Treasury grants issued under the stimulus have gone to non-US firms to develop wind farms equipped mainly with non-US turbines.

Nor would shifting our focus to supporting the production, rather than installation of cleantech hardware lessen the impact of US policy on reducing global greenhouse gas emissions. A wind turbine or solar panel generates emissions-free energy in any country in which it is sited, and it might even reduce more emissions if it were installed in a location where the generation source it backs out is an inefficient coal-fired power plant with minimal pollution controls, rather than an efficient gas turbine, as is often the case here.

Effective policy requires clear thinking. If we want to promote clean energy technology for reasons of job creation and global competitiveness, then shouldn't we focus our efforts where they can have the greatest positive impact on those priorities? Manufacturing is a strong candidate for that point of maximum leverage, while deployment suffers from many drawbacks, including "leakage" and higher costs that get passed on to other sectors of the economy. Whether our best approach to bolstering cleantech manufacturing is to single it out for special treatment or to focus on corporate tax reform and other measures that would help all manufacturing is a subject for another day.

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The SOTU and Energy

Given the central focus of this year's State of the Union Address on the economy and jobs, I wasn't surprised to hear the President highlight "clean energy jobs"--a phrase that seems to have replaced the formerly ubiquitous "green jobs"--though I was relieved that he didn't hang the whole weight of his administration's jobs focus on them. I was even more pleased at the apparent evolution and broadening of his perspective on energy, compared to his first address to a joint session of Congress last February, when oil was only brought up in the context of its imports, and nuclear power wasn't mentioned once. By contrast, last night the President spoke of the need for expanding nuclear power and "making tough decisions about opening new offshore areas for oil and gas development." If he is serious about the latter course, he must reinforce that message with the agencies involved.

It's just as well that the green jobs refrain has become more muted, since as I've noted before, the main employment impact of energy isn't from the people who are employed producing and distributing it, as I formerly was, but from its cost and availability for the other 92% or so of the economy not engaged in some aspect of the energy business. Simply put, if we want the economy to grow at a healthy pace and create lots of new jobs, then it's more important that energy be as affordable as possible, than that we employ as many Americans as possible in the energy industry. That means we must not only increase our production of new renewable energy, which while growing rapidly contributes just 5% of our total supply, but also those sources that still account for 95% of our energy use.

If President Obama is willing to make "tough decisions" on oil and gas--presumably to open up access to them--then it is unfortunate that as he was proposing this, his Department of the Interior was engaged in a hay-throwing contest with the American Petroleum Institute over the oil & gas leasing results for 2009, which brought in $6 billion less than in 2008, just for offshore. Whatever explains this anemic performance, the record of the last year strongly suggests that this administration is a much more reluctant participant in this activity than its predecessor. Although that may please some constituencies, it hardly advances the cause of delivering more domestic energy supplies from these sources. And for Interior to cite a 14% increase in oil production last year in defense of its current practices makes me wonder how well its new management really understands the processes involved, since the time required for permitting and construction makes it extremely unlikely that the increase is attributable to leases awarded since January '09.

In order to promote the affordable energy needed for growing the economy and creating jobs, the President should also rein in efforts to entangle the most important energy development of the last decade, natural gas produced from shale and other unconventional resources, in new regulations surrounding a decades-old drilling practice that in essence involves injecting water into the subsurface, along with chemicals quite similar to those that drillers are seeking to extract from there. Promoting domestic energy will also require taking a much more pragmatic approach to climate legislation than that represented by the 1400 page monstrosity of Waxman-Markey that he praised last night, and avoiding the temptation to turn the EPA loose to regulate greenhouse gas emissions from facilities consuming the equivalent of as little as 150 barrels per day of oil, or roughly one tank truck a day.

If the President has truly begun to embrace an "all of the above" energy strategy, that would be very good news for the country. We need more energy from our abundant domestic sources--including oil, natural gas, nuclear power and renewables--to get the economy growing at a pace sufficient to generate millions of new jobs. Unfortunately, I can't help recalling that only a few months ago a top official in the Treasury Department offered Congress his view that the US was overproducing oil and gas. The onus is now on the administration to demonstrate that the energy commitments President Obama made last night will be carried through.

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Green Energy and Productivity

In the last year or so the rationale for renewable energy has evolved from emphasizing mainly energy security and climate change to focusing on the creation of "green jobs" and the development of an industry that many perceive as the "next big thing": a new global growth wave along the lines of information technology and telecoms. Unfortunately, neither of these newer justifications withstands serious scrutiny. I've devoted several postings to the shortcomings of the green jobs angle, which founders on the mistaken notion that we should want an energy sector any bigger than the minimum necessary to furnish the energy needed by the rest of the economy. The IT analogy looks harder to dismiss, because it capitalizes on our innate affinity for technology, the newer and trendier, the better. I share that bias and have been fascinated by the technology of alternative energy since my undergraduate years. Yet as inherently cool as the devices for deriving energy from wind, tides, solar radiation, biomass, and exotic forms of nuclear energy are, that doesn't automatically set them up to be the next world-transforming and wealth-creating industry in the manner of IT in the 1980s and '90s.

Understanding where this analogy fails requires delving into the drivers of the IT revolution. It wasn't just that technology was improving by the quantum leaps in processing power and decreased cost described by Moore's Law. Nor was it merely the result of nebulous "market forces", though the market's ability to deploy capital nimbly to the cleverest entrepreneurs helped a lot. Fundamentally, IT took off and continues to grow because it spurred breathtaking improvements in productivity and innovation, not just within the computer industry itself, but more importantly across the entire economy. IT enabled the automation of numerous manufacturing processes, the discovery and exploitation of vast new energy resources, and the launch and sustained growth of entirely new industries, including cellphones, personal electronics and the Internet. Yet while renewable energy holds great potential for reducing our emissions and our unhealthy reliance on imported oil, it cannot offer the kind of productivity revolution that IT delivered.

Start with the fact that most forms of alternative energy are still uneconomical without government incentives or mandates. If you doubt that, recall that new US installations of wind power, which is generally regarded as the most cost-competitive of the newer alternative energy technologies, were on the verge of grinding to a halt when it appeared that the Production Tax Credit might not be renewed at the end of 2008, and again when the markets for translating those tax credits on future earnings into current cash froze up earlier this year. The wind sector only revived when the government provided a substitute Investment Tax Credit and made it available in the form of direct grants from the Treasury.

Now, there's a strong argument that these incentives are necessary to compensate for the inherent advantages of fossil fuel-based power generation that doesn't pay for the environmental externalities it creates. However, that doesn't alter the fact that the expansion of this industry is not being driven by the underlying wealth-creating force of productivity improvements, but by government funding and regulations. Thus much of the growth of the alternative energy sector comes at the expense of other parts of the economy, or of larger deficits that impair the long-term health of the economy. That might be necessary, but it won't create vast new wealth in the way that IT did.

In fact, as long as wind, solar and other forms of renewable energy require government support or mandates such as Renewable Portfolio Standards to keep them growing, they will tend to reduce the overall productivity of the economy by embedding higher energy costs into everything we do, whether those costs are reflected directly in higher energy prices or indirectly in higher taxes or bigger deficits. Meanwhile, less glamorous technologies associated with energy efficiency offer genuine productivity improvements today and well into the future, though probably still on a smaller scale than those wrought by IT, since energy accounts for only about 8% of GDP. I'd put the electrification of transportation into this efficiency category, too, once the cost and capability of batteries improve enough to make them attractive without massive subsidies.

Renewable energy looks likely to continue its impressive growth, building new companies and making fortunes for some entrepreneurs. It has great potential to contribute an important share of our future energy mix. Unlike IT, however, this transformation will largely be limited to the energy sector, with relatively little impact beyond it. Devices that consume electricity won't run any better on green electrons than on any other kind, and engines won't suddenly begin performing at higher levels on renewable fuels--in fact, the opposite is often the case. So rather than sugar-coating the green energy proposition with inflated claims that are likely to lead to disappointment later, a dose of stoicism seems to be in order, here. If accelerating the growth of renewable energy is the right thing to do for the planet and for our energy security, and if its long-term benefits outweigh the costs, we should dispense with the hype suggesting it will make us all rich and just get on with it.

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Missing the Point on Energy and Jobs

Two emails I received yesterday delivered press releases from two organizations with very different agendas, both emphasizing the impact of energy on jobs. With US unemployment showing little response to the economic stimulus, the rebounding stock market, or the "green shoots" appearing in some sectors, it's understandable that companies, groups and even the government would want to play up the direct employment impact of key initiatives or policies. Yet when it comes to energy, I believe much of this effort misses the mark. Our employment goal for energy should not be to have as many people working in the energy sector as we can, but to have the most efficient and cost-effective energy sector possible, in order to promote job creation and retention in the rest of the economy, where the vast majority of jobs are found. Our decisions about energy policy should not depend on the creation of a few green jobs.

I'm hardly suggesting that energy jobs are insignificant or inconsequential. I've spent my entire career in energy, and I recommend it without hesitation as a field in which one's contributions can have a measurable impact on society, often with better remuneration than in many other pursuits. The Oil & Natural Gas Industry Labor-Management Committee isn't wrong to stand up for the millions of industry-related jobs at stake in the current Congressional debate on energy industry tax benefits, any more than Wind Capital Group is to highlight the 2,500 jobs associated with the supply-chain effects of their Lost Creek Wind Project. But as important as preserving or expanding energy-related jobs appears today, it is even more essential for the long-term interests of the country that we not obsess about this one aspect of energy, to the detriment of others that will affect overall US employment and international competitiveness long after the unemployment rate has returned to its normal range.

Putting this into perspective requires recalling that by its nature energy is a capital-intensive business, rather than a labor-intensive one. One way to gauge that is to look at the labor productivity of energy companies. The latest annual report of my former employer, Chevron, reveals that on average in 2008 its 61,675 employees each accounted for $4.3 million of revenue, resulting in nearly $700,000 of pre-tax net income (after covering their own salaries and all other expenses.) In the utility sector, the comparable figures for FPL Group were $1.1 million and $137,000, respectively. Even a small, rapidly-growing renewable technology firm such as First Solar enjoyed revenue and pre-tax profit per employee in 2008 of approximately $354,000 and $132,000, respectively. With its high labor productivity, the primary employment impact of energy occurs where it is consumed, not where it's produced, because energy is such a crucial input for so many sectors and the sine qua non of more than a few.

When legislation like the Kerry-Boxer climate bill, which includes many provisions that would make energy more expensive for consumers and businesses, is marketed as a jobs bill it merits a skeptical reception. Stimulating jobs in the 6-10% of the economy devoted to energy seems unlikely to compensate for the loss of jobs that would ensue throughout the broader economy, if climate legislation caused energy costs to soar. That may, however, be a necessary evil, and the question we should really be asking is not how many green jobs such legislation will create, but whether on balance its provisions are truly justified in order to address climate change--even if they resulted in a net loss of employment, as I strongly suspect they would. Unless the answer is an unequivocal yes, we could be setting our long-term energy policy on the basis of a metric that is only a minor contributor to either energy costs or total economic activity, for reasons that seem unlikely to stand the test of time.

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