Paulson on Energy Rationing

by Julie Walsh on January 15, 2009

in Blog

Secretary of the Treasury Henry Paulson took time out of his busy schedule wasting 700 billion dollars of taxpayer money (and thereby turning a credit crisis into a depression) to speak at Resources for the Future on Monday afternoon on the subject of how markets can address climate change and other environmental problems. What he meant of course is, how can markets be manipulated by government to achieve outcomes desired by government? He looked somber and did not laugh or smile at the pleasantries made when he was being introduced, but he didn’t look exhausted, worried, or baffled, either. I guess spending other people’s money, even when getting so little for such stupendous amounts, is always fun.

Despite good questions from RFF President Phil Sharp, Paulson spoke in generalities and didn’t give anything away. He did say that the science on global warming was clear and overwhelming. Paulson defended President Bush’s record and said that he didn’t think the president had gotten credit for changing the global debate on what to do about global warming in three important ways. First, Bush had convinced the world that any actions to reduce emissions must involve all major emitting nations and not just the developed nations. Second, he had convinced people that developing new technologies was the key to reducing emissions. And third, Bush had emphasized the role of trade.

Paulson said that Treasury would play a key role in developing climate policies because the critical thing was getting the price signal right, which was something Treasury knew about. He commended Billy Pizer, whom Paulson hired away from RFF and who was in the audience, and the team Pizer has assembled at Treasury on their work designing possible regulatory regimes to constrain carbon dioxide emissions. He added that the work Pizer and crew had done meant that the next administration would be much better prepared to take action than he had been.

Getting the price signal right–that is, raising energy prices just the right amount–will give companies the incentive they need to develop the new energy technologies that were needed, according to Paulson. But although he was a leading promoter of cap-and trade while heading Goldman Sachs, Paulson would not say whether he preferred a carbon tax or cap-and-trade. If it’s done right, the effect of cap-and-trade will be indistinguishable from a carbon tax. The choice would be up to the next administration and Congress. Whether the price signal is conveyed through a tax or a cap-and-trade program, Paulson said that price increases must be gradual and incremental and predictable, so that companies would know what they needed to do.

As for those new technologies, Paulson said that while he had learned from his time in Washington that many problems were intractable because the politics were so complex, he had found one bright spot. The scientists at the Department of Energy had convinced him that the technological breakthroughs needed to solve our energy and climate problems had already been made or were on the verge of being made.

It struck me as odd that Paulson talked about the price signal providing an incentive to develop new technologies without referring to the experience of the European Union’s Emissions Trading Scheme. There, although the costs to consumers are apparent, it appears that companies are too busy scrambling to round up enough rationing coupons to meet this year’s quota to spend any time developing breakthrough technologies.

Paulson noted that countries would not be willing to take action to reduce emissions (that is, raise energy prices and thereby reduce economic growth) unless there was sustained economic growth. He did not see and therefore did not address the conundrum he had created. It is a common blind spot among the energy rationers.

Questions from the audience had to be written on cards, which were then culled by Ray Kopp of RFF. I was surprised that my question was not selected. I did note in parenthesis at the bottom of the card under my name and affiliation that CEI was proud that we had opposed his confirmation, but my question was friendly: I asked whether he thought the purpose of cap-and-trade was not reducing emissions but rather transferring wealth to special interests such as investment bankers acting as middlemen in the trading of rationing coupons.

Paulson’s most interesting answer was in reply to a question about how he planned to be involved in environmental issues after he left office next week. He said that he would give some thought to it before deciding what he was going to do next and then added that his various involvements with conservation organizations had all been at the urging of his wife, Wendy, who was in the audience, and that his next steps would be taken with her guidance as well. When Paulson was chairman of Goldman Sachs, he also served as chairman of the Nature Conservancy, one of the world’s most sinister organizations.

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