 My name is Warwick McKibben. I'm director of the ANU Research School of Economics and director of the Climate and Energy Economics program in the College of Business and Economics. I'd like to start off by acknowledging and celebrating the first Australian on his traditional land we meet and his cultures are among the oldest continuing cultures in human history. It's a great pleasure to welcome today, in addition to being the director of the Research School of Economics, I'm also the president of the Australian chapter of the Del Morris Fan Club. Adele is a fellow and policy director for Climate and Energy Economics at the Brookings Institution in Washington DC. She joined Brookings in July 2008 from the Joint Economic Committee of the US Congress, where she spent a year as a senior economist covering energy and climate issues. Before the Joint Economic Committee, Adele served nine years with the US Treasury Department as its chief natural resource economist working on climate, energy, agriculture and radio spectrum issues. Now that doesn't quite encompass but it's an interesting combination. On assignment to the US Department of State in 2000, she was the lead US negotiator on land use and forestry issues in the international climate change treaty process. Before joining Treasury, Adele served as a senior economist for environmental affairs in the President's Council of Economic Advisers during the development of the Kyoto Protocol. She began her career at the Office of Management and Budget where she conducted regulatory oversight of agriculture and natural resource agencies. She holds a PhD in Economics from Princeton University and MS in Mathematics from the University of Utah and a BA from Rice University. I'm pleased to welcome Adele and to mention that this is a collaboration across ANU. This public lecture is presented both by the Research School of Economics in partnership with the HCCUM's Policy Forum at Crawford School at ANU. Adele will speak for roughly 40 minutes and then we'll have about 20 minutes for questions and answers from the floor, which I'll officiate over. And then I understand I hope I'm about to announce that there'll be drinks outside afterwards. Okay Adele. So thank you very much for that kind introduction and I'm thrilled to be here. I want to thank the HCCUM's Policy Forum for inviting me. This is my first lecture in Australia. I'm told everybody's really nice so it makes me all the happier to be here. So I'm going to be drawing from my talk today from a paper I recently completed with two of my senior fellow colleagues at the Brookings Institution, Pietra Navola and Charles Schultz on clean energy and looking at it through the lens of industrial policy. That should be forthcoming in the next few weeks I'm hopeful to say. What I'm going to try to do in this lecture is think about clean energy policy with an economic framework. And in the sense of what is the problem we should be trying to solve when we want to promote clean energy. And I'm going to start with looking at clean energy policy in the US and give you a sense of how significant our policies are from a budgetary perspective. And then look at the questions of if markets are left to their own devices. In what way are they going to get clean energy technology wrong? In other words are they going to under provide it? Why are they going to under provide it? Why are they going to under develop it relative to what would be the economic optimum? And if the government's going to intervene to promote clean energy what's the sensible way economically to think about how to do that. So the first policy problem is figuring out what we mean by clean energy right? We intuitively know what we mean but when you write a policy you have to describe very specifically what you mean. So intuitively we think okay it's going to be low greenhouse gas emissions and I'm going to use carbon as kind of shorthand for greenhouse gas emissions. But as soon as you say low it's like low relative to what? And then you've got to either directly or indirectly specify what you mean by low. And you know there can be trade-offs across different environmental outcomes. Like one kind of clean energy might be clean with respect to say some kind of toxic air pollutant. But it might have land use impacts and you might be worried about the ecological effects. I'll give you an example of that later. We also want to think about clean kind of in a life cycle way. This is important for biofuels where you're growing crops and you want to take into account the life cycle cleanliness if you will of your energy. And this isn't exactly clean energy but you want to add at least intuitively you want to add energy efficient goods. To your overall basket of clean energy technologies. As proponents like to say the cleanest energy is the energy you never actually produce. So if something's energy efficient it means you're at least in theory backing out the need for producing energy. And that's a good thing. So even if we kind of agree on all of that certainly people disagree about some very specific technologies. Here are four examples nuclear clean coal. A lot of people would put quotations around clean coal. Natural gas certainly lower emissions relative to coal but certainly more emissions relative to renewables. And those blue bars are emissions of carbon per BTU. And so you can see natural gas is lower emissions. That's carbon also lower emissions in mercury in particular matter. And other things we care about but also it's not zero right. And new hydroelectric power clean in terms of carbon. But can have very important local ecological impacts somewhat controversial. So OK so let's just assume we've kind of gotten over the hurdle of defining of what we what we mean by clean energy. What are our policy tools to promote it. And certainly in the United States we've got a huge array of policy tools already in play to promote clean energy in one way or another. I'm going to focus in some of my data on the first two direct expenditures spending on clean energy and tax subsidies which is foregone revenue that promotes clean energy. Those are the easiest to measure but they're not necessarily the most influential things to promote clean energy. We have a direct regulation of pollution which promotes clean energy relative to its more polluting alternatives. We have risk transfers and like an example might be capping the liability associated with the nuclear power plant. OK or a loan guarantee where the government is assuming some risk or implicitly limiting the risk of a particular kind of energy. It's not a subsidy per se in some regards but it's a way of reducing the cost of that energy relative to the alternative. A new way we're seeing now is input subsidies and this picture here is of us. It's an artist conception of a solar power plant that's going to be built in the Mojave Desert using federal government land. So it's an input subsidy in the sense these guys are getting free land to do the solar power facility. It's actually going to be a pretty pretty substantial facility if it's completed as planned. And then of course the government can be a procure clean energy or electric cars. This certainly the Obama administration has promoted that. It's not as clear exactly what the subsidy is because they're going to have to procure something anyway. And you want to measure the subsidy for what might be the above market price for that good. It's a little harder to get data on that kind of stuff. So specific examples we've got basic research spending. We have tax credits for renewables. We have these requirements to use biofuels in a certain proportion of the liquid fuels that are blended for passenger vehicles. We have subsidies for low income households to do energy conservation investments. You know really all kinds of stuff labeling requirements that show that how much energy and appliance for example might use. We also like I said before we have direct regulation of a lot of air pollutants a sulfur dioxide being one of them. We have a cap and trade program for that. I'm sure those of you who follow the climate debate have heard about the potential for a cap and trade program for greenhouse gas emissions. And then we have all these loan guarantees many of which were part of our recent economic stimulus package. So how big are these things. Well they're they're they're pretty big. Now these numbers are for all energy subsidies. So the fossil fuel stuff is in here as well. In 2007 the estimate by the US Energy Information Administration of how much we spend on energy subsidies was about not quite $18 billion. In 2010 that had gone up to over $37 billion. A lot of that increase like I said had to do with the economic stimulus. Some of those numbers are coming down in 2011 and 2012 roughly divided by electricity fuels use outside electricity sector. A lot of that is biofuels like ethanol by liquid fuels and conservation and including the low income program I mentioned before. Now one might say well okay one of the reasons you want to clean energy subsidy is because we've had these subsidies for fossil fuels and we're trying to level the playing field. Well even on that basis our clean energy subsidies are relatively large. For example if you look at the electricity sector this pie chart is the different fuels we use in the United States to generate electricity. The orange slice is the renewables other than hydroelectric. So that's solar, wind, geothermal and biomass. That's about 3% of our total by kilowatt hour basis of electricity. Most of the 55% of subsidies for electricity went to those technologies. So on a BTU basis that's pretty big. Now a lot of those subsidies were for new construction of capacity that's not yet online. So it's not exactly maybe the most fair comparison but the fossil fuel incumbents are going to be quick to point out that on a BTU basis overall renewables get 49 times the subsidies that fossil fuels do. So there's a lot of debate on what the right measures are to think about how big these things are. So if we want to just kind of drill down in the tax expenditure side what is our foregone revenue from having tax credits. We also have a big program called grants and lieu of tax credits because a lot of the renewable firms don't have enough income. They don't even pay much taxes so they got grants instead but it still goes on the tax side of the ledger when we calculate all these things. So the green line here is for tax now these are tax expenditures. So those are fossil fuels the biggest you know the so why do we subsidize fossil fuels. A lot of it in the United States is the intent to substitute domestic production for imports. So what we're trying to do is get people to explore and develop US US resources as opposed to be dependent on imports. So that's you know a tax expensing of exploration and development is a big comment on that. Now here's our renewables here you see them spiking up here to almost 17 billion dollars of foregone revenue for renewables. And that's part of the stimulus package that we had as well you can see how it comes right back down again. And some of that is those grants I was talking about for new renewable electricity capacity that is coming online in the next while. So we see a similar pattern now this is research and development spending. Again see this big spike in the stimulus package. And now really this is not how to do. You think about research you think about hey we're going to you know start up experiments and develop new technologies and whatnot. And this is not exactly the most timely targeted and maybe temporary but it's sort of a goofy way to do research for any of those of you who get grants. I feel like I have one year of research spiked by that multiple. Anyway so but it is big dollars right. So it behooves us to think carefully about how we allocate these resources. So I'm going to go through three really typical arguments in the US for why you should care about clean energy. I know what I might do is map them to economic principles of you know why economically do we intervene in markets. And there's a ton of reasons and I have a short lecture so I'm going to do three of them. The first one which I'm going to argue like if you're already to go to snacks I'll give you the bottom line. The best reason to care about clean energy is that it's clean relative to conventional energy. There are environmental damages that are currently uncontrolled associated with conventional energy and we care about that. And that's worth the devoting resources to the second is energy security which is kind of this amorphous concept. Gosh who can be who can be opposed to security. Right. So we're going to examine that a little bit. And then the third argument which seems to be interestingly argument made in nearly every country that we're going to somehow take advantage of global markets and tilt them in our direction. Now obviously you can't be doing that in every country right. But so the US is not immune to the idea that somehow we're going to be special. And if we if we if we just develop clean energy we're going to exploit some kind of potential gain there. Now if we're in kind of a rigorous policy making mode we want to distinguish all these arguments in the way in which they relate to economic principles from pure rent seeking. Because out there every firm that's got some clean energy technology and you know I've met with these guys they want me to come to their meetings and it's like oh man we're like we got algae algae oil and it's going to be great. And we're going to we're going to serve the protein to the animals. And it you know has like spinning this great story. And you know I'm not a technologist and it sounds plausible. But imagine if you're a policy maker and you've got dozens upon dozens of these folks coming to you with great ideas. How are you going to make policy around that. And so really you want to have a rational way of doing that. So OK this is my little map between these arguments and economic principles. So the first one like I said I think is the most persuasive is where there are genuine market built markets left to their own devices are going to under provide clean energy. The first is the external cost. I'm going to explain that and public goods. And this is the idea that firms are going to under invest in basic research because they're not going to be able to capture all the benefits of that research. And so the government's got a role then in providing funding for some of that research because the social benefits of doing that are going to be higher than just the private benefits. And that's something that's worth subsidizing. So with energy security in order to kind of actually give it an economic principle I got to come up with something. So I'm going to focus here on the macroeconomic risk of volatile oil prices. So that's economic concept. It's a way of thinking about the security of the economy. And the third one I'm going to frame as a distributional objective. Basically the question is can Americans benefit to the expense of other countries if we make certain strategic investments. That's the idea. Let's go go through them. The first environmental damages from conventional energy. So when I put gasoline in my car the price I pay for my gasoline reflects the costs of producing and transporting and marketing the fuel. The price I pay at least in the United States does not include the cost of the environmental damage from from that gasoline. Once it's combusted and CO2 in the air disrupting the climate there's a cost associated with that. It might be hard to monetize but it's not zero right. But my price I pay for gasoline doesn't include that. So I'm going to over consume gasoline because I'm not charged for its full social cost. So the standard economist prescription is if I got external costs I want to internalize them. So I want to put a price on carbon specifically that's going to induce me to use less gasoline in a way that's cost effective. Meaning that the cost to the environment are reflected in my choices. So all right how do you do that. Well in the United States what we've done where there's big interagency process and they they when you write a rule that lowers carbon emissions and you have to do a cost benefit analysis. What benefit do you give to carbon. It's not zero. It's not infinity. You got to put some. So they had a big interagency effort and they figured it out as best they could. And their estimate for the social cost of carbon in 2010 is somewhere between about five dollars and sixty five dollars. So that kind of narrows it down. But believe that me that's narrower than some of the ranges out there in the economic literature. Now for practical purposes they usually set a line about twenty three dollars. And the difference relies on parameters like your discount rate and how much you value future damages in the present and all that stuff. I'll spare you. But but the point is you want to put some price on and something in that range would be reasonable under the approach by the Obama administration. Now you can't have an economics letter lecture without somebody talking about marginal something. So OK. So all right. I'm not going to disappoint you. This is a graph of the marginal abatement cost of carbon and the horizontal axis. If I can get my laser work maybe I'll just kind of do it right here. So the horizontal axis I'm reducing emissions relative to business as usual. So the environment is getting better as I go to the right. And the vertical axis is the dollars per ton of carbon. OK. So right down here at the origin this is incremental cost for that next ton I reduce. So down here when I first start reducing relative to business as usual it's pretty cheap. My first few times this could be energy efficiency. Some people even think that there's a negative cost associated with that. I'm going to I'm going to say in business as usual people are smart and they're doing profitable stuff. So above business as usual it's going to cost me something that's not going to be too bad. So then up here now here I'm probably switching from cold to natural gas in my electricity system. So I've done my energy efficiency. I've done my fuel switching. Maybe up here I'm doing some renewables. You know I'm kind of getting up a little higher and cost per ton of carbon abated. And then way up there I'm shutting down my economy. We don't want to do that. Right. So my marginal cost is the red thing. So the area under it is my total cost. I'll show you what I mean by that. So believe me this is going to relate to technology. I promise you. So so if I put a twenty dollar a ton tax on carbon then I'm going to reduce my emissions as an economy until it's cheaper to pay the tax. Right. So I'm going to go out here. I'm going to reduce this much emissions. And then after that I'm just going to pay the tax because I'm not going to pay more than I need to. So the area of this triangle here is my total cost of abatement. The area of this rectangle is actually supposed to be green is my tax revenue. OK. So my actually this is kind of the scale of the proposals we've been looking at tax revenue is a lot bigger than total cost of abatement in the proposals under consideration. Now if I want to reduce more I can raise my price. Right. See my blue triangle's gotten bigger. I'm my blue arrow a pound of time reducing has gotten longer. OK. So I can always raise my price. But what happens if I develop new technology then I've changed my red curve. This is what we want to do with technology development. We want to change our red curve. I've shifted it down. And now for that same price on carbon I get way more emissions reductions. So strategically what you want to do with your energy your clean energy policy is shift the cost of abatement so that you get more bang for your buck. So makes sense so far. OK. So what what the policy what you want to do is move technologies that were up here in terms of abatement cost down here. So that's what you're going to do with your R&D. Now notice that firms with that price on carbon already have the incentive to do the R&D for all the abatement that's going to be cheaper than my $40. We don't have to pay them to do that. They're induced to do it because they get to avoid the tax and they're better off doing that investment than paying the tax. So this idea that we got to pay everybody for the emissions reductions once we have a price on carbon just doesn't hold up. What we want to do is strategically invest in technology to make make every dollar count. So the price signal doesn't have any lifting. We need the government to do the R&D that's under provided. But other than that you know the markets are going to come up with the lowest cost abatement. We don't have to pick the technology. Now I do want to make one point. There's no logical relationship between the size of this rectangle and what we should be spending on R&D. OK. A lot of people say oh well we get to take the tax revenue and fund clean energy. Well I just explained the private sector is going to be investing in clean energy anyway. So you could just be compensating them for stuff they were going to do anyway. Or you might be over or under investing. We don't know but don't rely on this kind of goofy tight ear marking of tax revenue because there's no logical relationship. So what if we don't have a price signal. We can try to adopt policies that would mimic a price signal. What would firms be doing if we didn't have a price signal. We're going to try to be convincing them that there will be a price signal. Because remember firms invest not just on today's relative prices but to what we think prices are going to be. So if we can convince people prices are really going to be different in the future. It's almost as good as having a price already there. But what you don't want to do is take those. This is my opinion is take those technologies way up in the red curve and start finding that because you're going to get way less environmental benefits per dollar spent. Then if you focused on the stuff just on the margin of people weren't going to do already. But it's still pretty cheap to do. And it's a policy challenge finding that sweet spot. But that's the idea. So why don't we just have a tax credit and give people to buy more energy efficient equipment for example. So my colleagues my esteemed colleagues work McKibbin and Pete Wilcoxson and I wrote a paper looking at this very idea. So we compared a tax subsidy for energy efficient household equipment and a carbon tax. And we we jiggered it so they were roughly had about the same fiscal footprint. Of course the tax expenditure you lost revenue and a carbon tax you you gained revenue. But we just gave it all back to households or taxed everybody to finance it. So it's all fiscally neutral. And said OK which is going to reduce emissions more. So you can see. Well maybe you can't put that that dash red line up there relative to that very faded gray thing. That's the emissions reductions of carbon relative to business as usual that we estimated with their model for that tax credit I was telling you about. It's about 130 billion dollars a year of lost revenue. And you got very little. OK. Now compare that to the tax on carbon. And that's the green line. OK. So dramatic difference in the emissions performance of a carbon tax relative to this tax credit for energy efficient equipment. Now why is that. Well. Glad you should ask. Now. So if you think about it the carbon tax does everything the tax credit does and more. It changes the preference of households for what it what stuff they buy right. You want more energy efficient stuff. But you're also going to use it less. So in addition to getting my high efficiency boiler and how could you not want that. I'm going to keep the thermostat lower in my household in the winter. Right. Because my energy bills are higher because now electricity prices fully reflect the cost of carbon. Likewise the carbon tax is going to induce the electricity guys to use different fuels. So you might be switching from cold and natural gas. We saw how it have roughly the carbon emissions. OK. But a tax credit for for this boiler is not going to do anything in the electricity generation industry. Right. And finally. And this this this is a result that's going to vary across models in particular. But so essentially what you're doing with the energy efficiency program is taxing people to buy down their energy bills. OK. That's how you fund the tax credit is through general taxation. OK. So people have this savings from their energy bill that they spend on some. What do they buy. Well energy in part. So you get this offsetting effect of that energy savings. Whereas with the carbon tax. They're spending more on energy. Energy is now relatively more expensive. So all I'll sequel they're going to buy less of it. So all of these things together drive that my my green line down a lot more than my orange line. OK. So that's the end of the environmental damages. Thankfully. Now we're going to talk about energy security. This is very much a US focused discussion. OK. So you've seen. Well maybe you haven't. But it's it's incredibly tempting. The politicians want to make their political ads. They have this beautiful landscape behind them with windmills in the sunset. And then there's some kind of Malif Lewis voiceover about energy security or energy independence or something like that. Well in the United States this is just goofy. Because all of our electricity fuels are North Americans. I don't think we're worried about the Canadians. We're we're net exporters of coal. We've got natural gas supplies that were undreamed of 20 years ago. Right. So it just doesn't make sense to think about energy security in terms of unstable supplies in the context of electricity in the United States. So what about oil. Well just over one percent of our electricity is generated from oil. And that's going down. So really energy security is a story about oil for the United States. We do import oil and oil prices are volatile and there might be a problem associated with that that we want to do something about with our policy. But here's the rub. It's not a straightforward. Not none of this is straightforward but really really. So we care about oil prices when they're high. Right. That's when people are losing income or or our current capital stock is not optimized for the price of oil when it spikes. OK. People have gas fuzzler cars when they really should have or fuel efficient cars. But when we're going to substitute oil for something else it's expensive. What are you going to do. You're going to buy a fuels. You can do public transportation. You're going to do electric cars. There's a Tesla there. That's about sixty thousand to one hundred and nine thousand dollars per vehicle. We just we just gave them a big loan guarantee of four hundred and sixty five million dollars and a tax credit of seventy five hundred dollars per vehicle. I mean we're doing doing what we can for electric car guys but I'm sorry they're just not penetrating the market. And some of the substitutes for oil like we had this whole thing of coal to liquids in the 70s when there was a big oil price spike. It's nasty in terms of the environment. It's all kinds of carbon emissions. So try as we might. You know you have to think hard about whether you really want to back out of oil. It's one of the highest costs of abating carbon emissions. And you have to have a strong story about what problem you're trying to solve. The story about our import dependence is not always kind of the way you hear the rhetoric. Our import dependence has been going down for a few years and actually the Obama administration's just come out with with statements touting this fact. A lot of it has to do with reduced oil consumption in general. Seeing how prices are high and the economies tanked but you know there you have it. Also where we get our oil it's not all kind of sketchy Middle East dictatorships are two of our top five biggest sources of oil in Canada and Mexico. And you know half of it nearly is from the western hemisphere. This is not to say that we don't care about instability of supply because obviously it's a global market. It's a fungible commodity. But the story is not quite as stark as some people make it. But so if I was going to go back to my economic principle what am I worried about. I am worried about the fact that when oil prices spike people have less money in their pocket to do other things with and that has a macroeconomic effect. And I'm also worried that you know that can trigger inflation right. And so you have to be ready to respond to that. So the thing is though what's the best response to a threat of inflation. Is it electric cars or is it responsible monetary policy. Certainly my co-authors on my paper would say it's responsible monetary policy. And if you want the answer to be electric cars I think you got to you got to tell a stronger story there. So let's go to our third rationale for clean energy. Okay so this is again sort of partly yeah it could be an economic argument but it could also be partly rent seeking by people who just want to tell a story about the benefits of clean energy. Nobody wants to talk about clean energy being more costly than conventional energy. You want to tell a story that clean energy is good for the economy. It's going to create jobs. It's going to it's going to provide the renaissance of the American manufacturing sector. Whatever story you want to tell and people you know there are people who sincerely believe that that's that's a golden opportunity. This is in the tradition though of a lot of arguments about industrial policy generally it was you know okay today it's clean energy it was automotives it was electronics. The Japanese were going to eat our lunch on on cars now the Chinese are going to eat our lunch on on solar panels you know but it it sort of rings familiar from that perspective. And there are a lot of counter arguments for for this this belief system. And one is that look if if the United States if we're thinking okay clean energy is going to be a manufacturing boom to Americans. Well why is clean energy different than other technologies. What is it about clean energy that's different than electronics and all the other things where manufacturing has moved to other economies. You don't hear a really a strong story about why clean energy is different. Maybe in some cases in specific technologies it is but it's really going to be hard to subsidize your way into a comparative advantage over the long run. It may not just be fiscally sustainable. And this idea of creating jobs okay in a in a in a normal economy or not in a massive recession where those jobs can come from. Well they're going to come from other jobs. You're going to shift around what sectors employ people but you're not going to change the total employment. And clean energy obviously is a risky technology. And who's going to buy it. It's going to be a function of who's mandating people to buy it right. As long as it's more expensive than conventional energy we're going to have that issue. And if you want to invest in a strategic industry why clean energy. Maybe it should be biotech or you know exportable business services or something else. You got to tell a story why clean energy in particular. Finally you know there's something to be said for you know if the Chinese want to make solar power cheap knock yourself out. It's cheaper for us. It's better for the environment. It's good for the U.S. economy. If we're going to have states with renewable mandates that's going to be less costly for them. And and and you get to do business with this nice lady right here from from Chinese solar dot com. Okay so all right well what about the job situation when we're in a recession. We've got an employment. This is you know a serious question. So how does clean energy stack up to other forms of fiscal stimulus. And there you have to look at the sort of the standard criteria of timely targeted and temporary. I showed you the goofy R&D chart. What about these energy efficient retrofits. Okay. High labor compliment to this. Not a lot of skilled labor. That that might work. Okay. You're helping low income people. There's a distributional benefit. They're getting lower energy bills. They got a high marginal propensity concern. There could be some multiplier there. You know renewable deployment. I'm not so sure because there you're trying to introduce more electricity capacity in an economy where there's not a lot of new demand for electricity. I mean the whole point is your economy is contracting. And so unless you've got conventional energy being retired which we do actually some now because we've got new mercury and air toxic rules. We're seeing some coal plants come out of a business. But in general you got to be careful about trying to spur deployment and sales of something in the middle of a recession. And the other problem with these guaranteed loans as a stimulus really what's going to be the long run benefit. You're really going to have to make company viable that wouldn't otherwise be. Because you're not going to subsidize your way into a firm's long run competitive advantage. You just can't do it. So it might be the case that we're able to do that. But also you know we've already seen some bankruptcies associated with these loan programs. So that so I've gone through this read the three arguments and kind of expressed my interpretation of how they line up with with economic principles. And now there's there's practice what really happens. OK. So it's a political process. You're spending money. It's irresistible. You know I worked on Capitol Hill. I saw this and people can't help themselves when there's a big slush fund for wanting to direct money to favor constituents or regional areas. Oh our areas hard hit. We need these we need these subsidies. You being hard hit and you being a cost effective place to put clean energy funds is in two entirely separate stories. And we've seen this massive waste on what I would call political wins. It was sin fuels or it was breeder reactors. The hydrogen economy is the most recent one. We just spent one over two over a billion dollars on the hydrogen economy. Did you hear anything about the hydrogen economy anymore. Maybe you guys have it in Australia. But we don't we don't have a hydrogen economy and we're not going to hit in my lifetime. And so you want to have a system where the spending is sort of insulated by this this political dynamic. And nobody no politician wants to give this spending authority over to some kind of objective apolitical body. So it's a real conundrum of how you actually get a policy to to to devolve into into a more efficient direction. So I'm going to conclude here. You heard it already. Strongest rationale for promoting clean energy is that it's clean. And the most efficient way to do it is to tax the bad stuff and to make those price signals clear. A lot will take care of itself if you do that. And you don't have to pick technologies. You just put that price on people. The market has a way of figuring this out. But you do still have to have a carefully crafted R&B program as much as possible objectively delivered because there is a market failure there. And you do have that potential to move that red curve. I thought that was a really terrific, coherent presentation. But what you didn't refer to was what climate science is telling us about the rate at which we need to reduce emissions to avoid dangerous climate change. And it seems to me that I think in the USA as an Australia we probably have to transform our energy sector more quickly than that type of policy framework would permit, for example, we have to go through electricity generation from coal to natural gas. But we need to move on from gas for a year because I think that changes the sort of economic framework that we have to do your analysis. And I think it's probably somewhat challenging on one of your thoughts about that one. So I would say this. I'm not a scientist. I'm going to remain agnostic on the true social cost of carbon. But whatever it is, you need to optimally turn over capital stock in the most emissions efficient way to minimize the cost. You don't get any browning points from the climate if you spend more than you need to. So because there is this potentially profound economic cost associated with meeting your environmental goals, whatever they are, you want to be responsible about that. So I think that you may not like $40 a ton, you may not like $65 a ton, you might like $100 a ton and going up from there. But whatever it is, putting that price on carbon and ensuring that all economic activity through everything from electricity to cement and everything else incorporates that cost to the environment. That's going to be your way, the ideal way to transform your economy. If you start mandating, you know, okay now we're going to have, and people propose as 80% renewable electricity generation by 2020, okay? Well, you know, how does that help you optimize your costs associated with your overall economic transformation? It's dictating your technology, but at an arbitrary cost. So I think, I agree with you that some people are arguing for much more aggressive emissions reduction. I'm not sure it changes the big picture of what the policy next would need to be. This question in the hearing department. I don't know if you're aware of the negative renewable energy target here. I've heard a little bit about it and certainly we've had discussions back home about similar policies, yeah. Yeah, there was a lot of work done at the time of renewing the mandated renewable energy target, which is essentially creating a new market for renewable energy. And whether you needed that if you have carbon price, there has been a lot of discussion about that probably a couple of years ago. And I think the problem with having an R&D program and then having a carbon price is there's a very big gap in the middle about turning your R&D into affordable technologies in a reasonable time frame. And I really think you're missing that gap. So that's why I think we have gone in this country having a mandated renewable energy target. So there's a market. There's the R&D. We still have a gap in terms of commercialization of those technologies in that whole process. So I guess what I would say is if your focus is crystal clear on the environment and not so much how much of our goals are met with solar or wind. Why do I care about solar? I care about the environment, okay? And whether my environmental goals are met with energy efficiency or reductions in deforestation or whatever, I want to do it the cheapest way possible. And as soon as you say, okay, well, X percent has to be renewable. Well, maybe you could get a much bigger reduction for a lower price if you went to natural gas instead of coal, okay? It's not renewable, but it could be for dollar spent. You could get way more emissions reductions. So I'm not convinced that mandating certain technological approaches necessarily makes sense. And I would also probably argue that the whole point of the price on carbon is to give you a market for that new technology. So if you just have R&D and you don't have a price on carbon, you produce supply, but you haven't produced demand. And without the two of them, you haven't done much. So you've got to have both. And if you have the price on carbon, people are going to adopt your technology. And if your technology is not competitive, too bad for you, somebody else is going to be and the economy is better off for it. Not you and your firm, but the economy overall, because you've got to compete with everybody else to provide that abatement for the least possible cost. There's a lot to be said for that just to create a construct. Is the least possible cost can be brought forward for the great deal if you invest in that new ground between research and commercialization. And given the rate of climate change and the need to address it more quickly, we shouldn't be having the price on carbon 20 years ago. We didn't. We've got a lot of ground to make up. So just putting in a theoretical, let's have price on carbon in an R&D program is just not going to get us where we need to be in the timeframe that we need to be there without some other additional measures. You know, a lot of people believe that. But I think this is where economists are different. So generally economists believe in downward sloping demand. You raise prices, people want less of it. And whatever it is you raise the price of, they're going to want less of it. So you raise the price of carbon, they're going to use less of it. It's kind of a fundamental belief system amongst economists. And I think the environmental community is not always there yet. I mean, we heard this in the cap and trade discussion in the United States. You know, it was very interesting. So the environmental community felt very strongly you need a cap, not a price. So a cap was acceptable, but a tax wasn't. Right? Though never mind for the fact that there's going to be a price for every cap and there's a cap for every price. But they felt very firmly they wanted a cap. And for the built-in suspenders, they want appliance standards and fuel economy standards and all this stuff that said dictated where the emissions were going to come from, even under the cap. All you're going to do is raise costs. If you tell where the emissions reductions have to come from, you're not only capping it, you're making it more expensive and constraints. So I think this is the communications challenge for my profession in this topic is to convince people to demand slopes downward. Right? And we haven't done a very good job. Sorry. Sorry. I'm sorry. We can continue this. I've got one here. I've got one there. I've got one here. Can you please state your name? Hi. I'm Sandita. I'm doing a master's in managing trade and comfort school. Thank you very much for your such a comprehensive presentation. It was really interesting. Maybe because I'm in the front row. But my question is like, if we have trade versus red analysis on renewable energy, the renewable energy being added with a minute source of energy is a long debate. So I'm interested to know if there is any policy in U.S. to deal with this particular problem. How's it going? So right now renewables like solar and wind, the truly intermittent sources, are such a small part of our overall generation capacity. We haven't really grappled with that. Although over time as we see more and more deployment of renewables, it's a bigger share of our base load capacity. We're going to have to deal with the sentiment and see more. And a lot of what you're seeing is when they deploy wind, they also deploy natural gas backup. So when you're estimating the net carbon benefits of a renewable, you have to incorporate some estimate of what fossil fuel backups there might be to deal with intermentancy. And somebody who knows more about the technology will give you a better answer. Okay, gentlemen. Mark Lonell from the MBA program in Budget Business and Economics. I was actually living in the States 20 years ago during the first Clinton administration after the Rio conference where one of the legislative initiatives was a carbon tax, which didn't get very far. And as I recall, the killer argument was in the Congress was that cheap energy gave the United States a key competitive advantage both domestically and in the world economy and the world to give that up. I guess I'm wondering how much the debate is going in 20 years in relation to your second dot point about pricing. Yeah, so it was a BTU tax and it crashed and burned and a lot of people who have promoted that were scarred deeply. And it explains the reticence in part for, well, carbon tax has two problems, carbon and tax. But be that as it may, hope brings eternal. But I do think that that experience with just how politically badly that went led in part to this emphasis on a cap and trade program because it's not a tax. Although for practical purposes it has the same economic effect as a tax in terms of output prices to consumers. But the hope was to sell it differently. And it got through the House of Representatives and then it died. And now everybody's scarred by that experience. And so the hope now is, so there's this like rumblings of discussions in Washington and, well, can we bring back the idea of a tax, make it a carbon tax, but then wrap it up in corporate tax reform and meeting our fiscal deficit and kind of overall emphasis on reforming the tax system. So that's kind of where the discussion is now. But yeah, it is cap and trades truly dead and people kind of have that sort of bad dream of the BTU tax behind them as they contemplate a carbon tax. The other option of course is of a Kevin Wilcox and hybrid. I won't even bring that up. I have a question here and then David Stern will back. Tom Worthington from the Engineering and Computer Science School here. I guess my question is how much of a role does economics play in the overall society's decision making on this? I teach students how to measure and reduce carbon emissions using computers. But I say to them, when you're presenting it to the boss, you've got to find something to get their attention and make them do what you want. And it's probably not due to the costs involved because they're very low. And you've got to find what motivation it is. For example, you'll all get iPads. So, I mean, how much do the economic factors influence the approach and how much of the other political factors? And do we need a new form of economics to deal with that? So, I would say that firm level choices are different than government policy level choices in the answer to your question. And certainly at the firm level, if you're not concerned about the economics of your firm, you probably won't last very long. So, hopefully the finances of your firm weigh heavily on your investment decisions. Not to say that's everything. Because certainly we see firms lowering emissions and, you know, it has a PR value where it's got a sort of a lower regulatory risk exposure. And there are reasons to reduce emissions. But now I think in the business as usual trajectory, it's around saving energy and having more efficient production methods. Now, in the government policy, I have to say, okay, so I've worked in the policy world for 15 years now. And pretty much every economist I know has tire tracks up their back on, you know, one thing after another, whether it's agricultural subsidies or carbon pricing or free trade or any number of the things that we try to opine on and get overruled on. That said, I do think one of our biggest roles is to shoot down incredibly bad ideas. And if you measure our value added in terms of killing really bad ideas, I think it's pretty good. So, yeah. So it kind of depends on your metric. We are running out of time. I've got David Stern, I've got Frank Yotso, and then I may or may not have time depending on the things that he answers. Yeah, David Stern from the school. I guess I wanted to use the case version of the argument that a carbon tax internet can get the kind of issues and reductions we want is that you agree that we need to have some investments in R&D. So the question is, what was ultimately being a balance between carbon taxation and the opposite of somehow subsidizing or funding R&D? And then if that carbon tax isn't politically feasible, is there an argument for it over going beyond the first best points in terms of investing in R&D? Yeah, so there's R&D and D&D, there's research development, demonstration and deployment. Okay, I get my D's mixed up. And so, okay, one way to interpret your question is how far out the D's do you go? Well, I tend to think it's hard to scale up R&D really quickly because if you think about it, it's a very specialized labor pool. You know, all you're going to do is bid up the inputs for R&D. If you try to do it really quickly, it's not that you can't do it, but you're going to, to do it efficiently, it's going to have to be ramped up in a sensible way so you don't just, don't just bid up inputs. And then the optimal mix, I think, is sort of where you think markets are not going to operate. So if you have a price on carbon and you think, okay, that price is not sufficient to induce the kind of technological change you think you need, you're going to have to supplement it. But I think what you don't want to do is use government tax dollars to pay people to do stuff you're already requiring them to do because that's a transfer and that's going to end up being efficient because it costs you money to raise that revenue. You know, there's a deadweight loss associated with raising taxes. So you've got to use your tax dollars as efficiently as possible and minimize the transfers involved in there. So I don't know if that helps, but there's a way to think about it. Frank? Yeah, Frank, you're also, it's good. Back to that question of when possibly the U.S. might be putting a price on carbon in the future. China is about to see the virtues of this starting on six or seven demonstration schemes in fairly large areas of the country. Talk about a national system in China possibly well before 2020 for carbon tax or trading. Do you think that once China demonstrates that this is a good idea, the U.S. might have another go at it? Or are we more in a space where we are realistically looking at regulatory approaches prevailing for a very long time to come? So, good question. So it is easier to establish these policies when you don't have a representative democracy and I think more power to the Chinese if they can pull it off. In my opinion, the U.S. should be making a big deal in support of the Chinese efforts because I think we should, my own view is that we should be out there helping them. We may not be able to do it ourselves, but we have a really good tax administration system and I think that there's a story to be told to helping them with the logistical issues involved in that. I do think that for the U.S. to undertake very vigorous climate policy, it is a necessary condition for our major competitors to be doing something substantial as well. I don't know that it's a sufficient condition, but it's certainly necessary. We certainly saw that in the climate talks. I do not think it is possible to meet our climate goals without a price on carbon. I do not think it's possible to subsidize our way out of this problem. There's not enough willingness to tax, at least in the U.S., to do that. So we got to have a price on carbon sooner rather than later. I can only hope that as the science becomes more compelling and inarguable, that it will move the political process. So far the opposition has been winning on that, but I kind of view it as a short-run victory. Or maybe medium run, we'll see.