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The Manufacturing Leap of Faith

by Richard T. Stuebi

Despite all the optimistic talk about green jobs in the advanced energy economy of the future, many manufacturers from the industrial heartland are deathly afraid of the potential passage of climate change legislation, concerned that cap-and-trade will increase their electricity costs and thereby make their operations less profitable.

A poster-child of the heavy industry here in the Midwest is The Timken Company (NYSE: TKR) of Canton, Ohio. Timken is arguably the world’s leading manufacturer of bearings, for a wide range of applications and industries. Last week, Timken reported its second-quarter 2009 financials: a loss of $64.5 million.

The article in The Plain-Dealer reporting on Timken’s results painted a very bleak picture — right up until the very last paragraph, in which a Timken spokesperson noted that the wind industry represented a “bright spot” for the company. Across town, Crain’s Cleveland Business was profiling Timken’s $200 million in recent investments to more aggressively pursue the “fast-moving” wind industry.

Of course, the “bright spot” afforded to Timken by the “fast-moving” wind sector will only remain attractive if it maintains momentum — something that is far more likely to occur if climate legislation is passed. On the other hand, it is all the other pieces of Timken’s business — the ones that are currently in the dumps — that many of those who oppose climate legislation are trying to protect.

It may be a leap of faith for a company to make a bold manufacturing commitment away from mature (in many cases, dying) industries of the past towards high-growth industries of the future — such as renewable energy. But the results of Timken suggest that those who try to make this shift at least have a chance at pockets of profitability even in these trying times, while those who avoid or defer this transition may face a lingering period of weak and declining prospects.

Manufacturers who protest against the Waxman-Markey bill may be spitting in the face of one of the few good manufacturing opportunities available to them in the coming decades. It’s time for the manufacturing world to build bridges to the future, rather than digging tunnels to the past.

Richard T. Stuebi is the Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Effective September 2009, he will also become Managing Director of Early Stage Partners.

If Larry King Wrote My Column….

by Richard T. Stuebi

You heard it here first: the energy consultancy Douglas-Westwood is claiming in a May 11 white paper that “peak oil” may have already happened, as far back as October 2004, and that the oil price boom followed by economic collapse is indicative of how things will play out over the decades to come as oil supplies are unable to expand in the face of increasing demands. Stay tuned….

The American Wind Energy Association (AWEA) exposition WINDPOWER 2009 attracted 23,000 attendees to Chicago earlier this month. Glad AWEA didn’t ask me to do the headcount!….

Your stock portfolio isn’t the only thing that’s plummeted. According to a snippet in the March 2009 issue of Power, so too have PV prices fallen, by an estimated 10% since last October, with a further 15-20% decline expected in the coming year. Seems that, after several years of tight supplies, there’s now a glut in the market, due to collapsing demand in Europe….

Lots happening in DC these days. Looks like cap-and-trade requirements for carbon dioxide emissions are making real progress, embodied in the grandiosely called “The American Clean Energy and Security Act” (H.R. 2454) — better known as the Waxman-Markey bill. Cap-and-trade might even pass the House sometime this summer. Don’t think it’s going to be so easy in the Senate, though….

The U.S. Department of Energy (DOE) has created ARPA-E, to fund the initial evaluation of new whiz-bang ideas for energy, just like DARPA’s been doing for out-of-the-box defense gizmos for decades. One can only imagine what’s going to come out of that shop in years to come….

It also appears that the e-DII concept floated by Brookings earlier this year, to create Clean Energy Innovation Centers mainly affiliated with universities, is gaining traction, now having been tucked into the Waxman-Markey bill. Wonder what the national research labs, such as NREL, NETL, ORNL, LBNL and other alphabet soupers, think of this?….

Speaking of NREL, hats off to Joel Serface, who just completed a year’s residence there on behalf of uber-VC firm Kleiner Perkins to help accelerate technology commercialization and spin-outs from the lab. A year in Golden/Boulder is hardly hardship duty, but as Joel indicates in a recent post at this very CleanTechBlog site, it wasn’t enough time to make much of a dent in the bureaucracy….

Congratulations to my former colleague Cathy Zoi, who’s been tabbed by President Obama to lead the Office of Energy Efficiency and Renewable Energy at DOE. Wish her good luck: she’ll need it!….

Let’s hear it for Joseph Romm, now a Senior Fellow at the Center for American Progress. He calls ‘em like he sees ‘em. In a note in the May/June Technology Review, Romm claims “it’s not possible to have a sustained economic recovery that isn’t green” and calls our economic system a “global Ponzi scheme: investors (i.e., current generations) are paying themselves (i.e., you and me) by taking from future generations.” Whew!….

The U.S. Chamber of Commerce just released a study performed by Charles River Associates estimating 3 million jobs to lost in the U.S. by 2030 as a result of climate change legislation. Last year, the Chamber commissioned a similar study announcing a similar doom-and-gloom result. I’m not saying there won’t be job losses as a result of cap-and-trade – there certainly will – but I don’t think it’s going to be apocalyptic either….

Gotta hand it to Bob Galvin, former Chairman of Motorola. Not content to be retired, he has launched the Galvin Electricity Initiative to promote a “Perfect Power System” to help prevent future blackouts. In a sense, he’s trying to Galvinize the grid….

Last Wednesday evening, the Cleveland Chapter of the American Jewish Committee honored The Cleveland Foundation for its advanced energy initiative. Accepting the award on behalf of the Foundation was President and CEO Ronn Richard. A good time was had by all….

Richard T. Stuebi is the Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Later in 2009, he will also become Managing Director of Early Stage Partners.

The Role of Government in Advancing the Green Economy

by Richard T. Stuebi

as posted to Huffington Post

Last week, I wrote a sizable check to the IRS. I wasn’t exactly happy about it, but I was happy for the fact that it stemmed from a nice payday in 2008 from one of my investments. Ah, the joys of capitalism, and the obligations of responsible citizenship.

This particular investment is advancing the cause of clean energy, as it involved the sale of interests in a pre-development windfarm to another firm that will (hopefully) take the project to fruition.

Clearly, the public sector played some factor in the fundamentals of my investment. States have imposed renewable portfolio standards driving the market for new windfarms to be developed, and the Federal production tax credit represents a significant portion of the financial value of an operating windfarm to its owner.

But, by and large, it was the forces of the marketplace – entrepreneurs, suppliers, landowners, financiers, customers – that drove the underlying business opportunity, the transaction, and its associated value-creation.

I hope that those days aren’t long gone.

Over the past year, there has unquestionably been a shift towards more government intervention in virtually all markets. It’s far beyond the scope of one blog post to delve into all of the causes and effects and all of the pros and cons of this shift.

In the cleantech realm, the tendency for increased intervention has been especially aggressive. The chatter in political circles is the notion of pushing forcefully towards the new energy economy – to achieve the admirable environmental benefits, but more for the prospect of creating some arbitrarily-large number of so-called “green jobs”.

Though I admire visionaries like Van Jones who newly brought the green job notion to the forefront of the public discourse just a few years ago, I’ve decried the excessive hype and the weak analytics behind the claimed magnitudes of green jobs that may or will emerge. I don’t doubt that many new green jobs will emerge, and I think they will be great for this country. It’s just that I don’t put any validity on any of the estimates of job creation, and I also acknowledge that there will be some job losses in other sectors that also need to be considered (but often aren’t).

I also lament the way in which many public sector leaders talk about “creating” green jobs, as if the job positions can somehow be invented by the government itself through the stroke of a pen or the wave of a wand.

Unless we want to move to a command-and-control economy where the government dictates the majority of all economic activity (remember the Soviet Union?), large-scale job creation is a private-sector phenomenon. In turn, the private sector (i.e., investors) must spot an opportunity to earn favorable returns, to generate attractive profits, in order for them to incur the costs of hiring people to perform work. In other words, value-creation (or at least the promise thereof) must precede job creation.

If a government throws money at inventing jobs that the market won’t somehow sustain after they’re created, this can’t be legitimately called job creation; it’s “make-work”. (And, never forget: the government doesn’t have any money of its own; it’s actually your money that the government is spending.)

In my humble opinion, the role of government is not to try to create jobs. Rather, governments should establish the playing field in such a way that the private sector will operate in its ruthlessly efficient manner to exploit – and, in so doing, hire a lot of people.

Governments can never match the intensity and the innovation of millions of properly-motivated private sector actors. Instead, governments should focus on aligning and harnessing these interests in ways that drive the system towards outcomes that are good for the public.

To be sure, the government has a key role – indeed, a responsibility – for setting policies that serve, advance and protect the public’s interests in transitioning towards an energy system that is more sustainable from both a supply and environmental standpoint. But, in the name of green jobs, the case is sometimes being stretched too far. An article in the April 4 edition of The Economist is particularly illuminating.

Spain is often touted as a model for how the public sector can exert leadership in setting a whole host of progressive policies (mainly generous subsidies) for rapidly pushing a move to green energy and creating many jobs while doing so. Yet, according to a recent study by a professor at King Juan Carlos University in Madrid, this way of building an industry is more than twice as costly on a per-job basis than if the private sector were to act on its own. Put another way, the study finds that, for every green job created by public sector prodding in Spain, more than two run-of-the-mill jobs were destroyed in the private sector. Ouch.

There’s a lot of talk in Washington about industrial policy these days. I’m a skeptic. I see Japan, and while it’s true that the Japanese industrial sector was the world’s envy in the 1980’s due to its strong government intervention, I also see nearly 20 years of uninterrupted economic stagnation now.

In sum, I just don’t think the public sector can actually build an industry better than the private sector can. In my ideal world, I would like to see the government intervene in the energy markets, for environmental and supply security, in one (and only one) simple way: high taxes on fossil fuel burn, to account for the social costs of climate change and dino-resource depletion.

High fuel taxes! The horror! The horror!

It’s lonely for me to write this, but the biggest problem facing the U.S. energy system is the enduring insistence of a “low price at any cost” energy policy, and the customer entitlement that bestows.

I see public service announcements (PSAs) about the little things that a viewer can do to become green, like changing from incandescent to fluorescent light bulbs, or using a reusable canvas shopping bag instead of use-and-chuck plastic bags. I understand that the average American needs to get engaged and feel like they can do something, even if it’s something simple and small, to contribute to the solution, but…. Please. Really. Enough feel-good talk about these piddling things.

I’d like to see some frank PSAs that confront the big issue head-on: higher energy prices, get used to it.

Obviously, a move to higher energy taxes will be unpopular, so we need some set of respected or well-liked voices in the public starting to lay the groundwork for its actual desirability, if not inevitability. In the grand scheme of things, shifting the U.S. mindset on the topic of energy taxes is much more important than urging people to put a recycling bin in the garage.

With energy prices that are predictably much higher, via a big jump in fossil fuel taxes, the private sector can go to work, busily eliminating wasteful energy consumption and developing new technologies that reduce fossil fuel requirements.

The twist is that the revenues collected from higher energy taxes can be offset by dramatic reductions in income and capital gains taxes. The way I figure it: we shouldn’t be heavily taxing things that are supposed to be good – such as income and savings – while undertaxing things that are supposed to be bad – like burning non-repletable fossil fuels that damage the atmosphere.

In the future, I want to get more good-sized checks from my cleantech investments, and I want all of you to get some checks from cleantech investments too. I also don’t want to send as big a chunk of those checks to the IRS. In return, I am willing to spend a lot more at the gas pump and in my utility bills.

Besides, I use my credit card when I buy those things, so higher energy prices means accumulating more points. In the move to the green economy, it’s important to always looking for the silver lining in every cloud encountered.

Richard T. Stuebi is the Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Later in 2009, he will also become a Managing Director of Early Stage Partners.

Green Jobs or Industrial Calamity? Dueling Economic Models in Carbon Politics

by Richard T. Stuebi

In early June, the U.S. Senate considered the Lieberman-Warner Climate Security Act (S. 2191), which proposed the establishment of a cap-and-trade system for CO2 emissions, analogous to the cap-and-trade program in place in the U.S. for acid rain pollutants since the mid-1990’s.

Predictably, the bill was defeated, before even going to a formal vote. In a press release, Senator Lieberman bravely painted the defeat with a positive spin: “We have convinced a majority of the Senate to support mandatory, comprehensive, market-based legislation to curb global warming and enhance U.S. energy security.” No-one expected the bill to make it out alive from the Senate, and even if it somehow had, the House would never have passed a similar bill, and surely President Bush would never have signed any such bill into law.

As might be expected, the Senate debate on the Lieberman-Warner bill largely came down to economic considerations. Those who favored the bill foretold of the massive “green economy” that would be spurred by its passage: the creation of wealth and jobs that would occur by pursuing technology innovations and growing businesses in renewable energy and energy efficiency necessary to combat climate change. On the flip side, those who voted against the bill saw the threat – increases in energy prices, loss of industrial competitiveness, declining economic activity – much more acutely than the opportunity.

In my view, both sides of this debate are guilty of hyberbole and exaggeration. Let’s take each in turn.

Regarding the green economy, perhaps no phrase is more in vogue these days than “green-collar jobs” — a concept most compellingly articulated by Van Jones, the Founder and President of Green For All. A dynamic speaker, Mr. Jones was among the first to recognize that the adoption of green energy (renewables and energy efficiency) leads to local economic activity consisting of jobs that look very much like what used to be called “blue-collar” jobs – which offers the opportunity to rescue a segment of the U.S. population that has been increasingly disenfranchised in the past few decades.

I think this line of argument is conceptually solid. Certainly, energy efficiency retrofits and solar panel installations cannot be sent offshore: they must be done locally. And, in many instances, the best opportunities are available in downtrodden urban areas that badly need building rehabilitation, economic revitalization and new job possibilities.

My primary beef with the green economy crowd is not with Van Jones, but to his often overly-ardent disciples that assign way too much credibility to estimates – in my view, guesses – of how many green jobs exist or will be created. Every politician and reporter wants to know the number of new jobs that will result from a move to an advanced energy economy. My pat answer to that question is “It’s likely to be a very big number, but no-one can possibly quantify it with any degree of rigor.” Yet, these “job studies” invariably produce numbers that are told and retold until they become accepted as fact — when actually, they are pretty darn dubious.

This is most pointedly illustrated by the 2007 study commissioned by the American Solar Energy Society, developed by Roger Bezdek of Management Information Services, which claims a current “direct” green energy job count in the U.S. of 3.7 million. The incredulity of the study’s results becomes clear when reviewing a case study for the state of Ohio, in which about 500,000 jobs are credited to 2006 energy efficiency activities in Ohio. Note that Ohio’s current employment level is about 5.3-5.4 million. Does anyone who knows anything about Ohio really think that nearly 10% of today’s Ohio workforce is employed in energy efficiency products and services? I sure don’t.

The other side of the climate change policy debates, those clinging to the status quo and skeptical of the advanced energy economy, is also guilty of overstatement to defend their position.

Earlier this year, the American Council on Capital Formation (ACCF) and the National Association of Manufacturers (NAM) commissioned a study by Science Applications International Corporation (SAIC) of the economic implications of Lieberman-Warner. The ACCF/NAM/SAIC study projected strong adverse impacts on manufacturing and industry, especially for many key states.

However, as well summarized in reports by both the Electric Power Research Institute (EPRI) and the Congressional Research Service (CRS), the ACCF/NAM/SAIC study is just one of several studies on this issue, with results that are far more economically scary than others performed by unbiased organizations such as U.S. EPA, U.S. DOE’s Energy Information Agency, and MIT. The ACCF/NAM/SAIC results are outliers – yet, they are used again and again by those interests who wanted to see Lieberman-Warner killed.

In short, both sides of the carbon debate – green jobs vs. economic destruction – use economic models inappropriately to justify their stances. This tendency reflects badly on both sides. But, of course, it is the side with the deeper pockets – the established industrial sector – that wins. And, good policy loses.

As an economist, I wish that people would use economic models for insights, not numbers – a point very well summarized in an excellent white paper by Janet Peace and John Weyant issued by the Pew Center. If political leaders were to strip away the overly bold rhetoric and review the facts and analyses with the proper context and perspective, I think we would make a necessary first large stride towards forging an agreement on good carbon policy. In the meantime, the world is hostage to dueling models wielded by careless advocates making overly bold statements.

Because insight is desperately needed to cut through the fog of biased chatter, to provide some closing perspective on the tradeoffs between the costs and benefits of climate change policy, I’ll leave the last word to remarks made last year by an eminent economist, the former Chairman of the U.S. Federal Reserve, Paul Volcker, who gives a succinct personal view on the thorny economic questions associated with climate change:

“First of all, I don’t think [taking action on climate change] is going to have that much of an impact on the economy overall. Second of all, if you don’t do it, you can be sure that the economy will go down the drain in the next 30 years. What may happen to the dollar, and what may happen to growth in China or whatever, pale into insignificance compared with the question of what happens to this planet over the next 30 or 40 years if no action is taken.”

What more need be said?

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also Founder and President of NextWave Energy, Inc.