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Almost, But Not Quite, Mr. President

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Washington, D.C. -- President Obama delivered some stellar remarks yesterday after the passage by the House of H.R. 2454, the climate and energy bill championed by Congressmen Waxman and Markey and steered through a narrowly divided House by Speaker Pelosi. President Obama pointed out, most importantly, that the bill is far more than the cap-and trade-system that has received most of the media attention and generated the political heat:

You look at the constituent parts of this bill -- not only a framework for cap and trade, but huge significant steps on energy efficiency, a renewable energy standard, huge incentives for research and development in new technologies, incentives for electric cars, incentives for nuclear energy, clean coal technology. This really is an unprecedented step and a comprehensive approach.

President Obama also focused heavily on the importance of energy reforms designed to encourage a shift to getting far more work out of each BTU of energy that our economy uses and on the number of new jobs that would be created by the combination of investments in new energy, regulatory reform of the energy sector, and capping carbon emissions. The president's emphasis on the importance of combining a cap with investments and regulatory reform was strongly reinforced from an unexpected quarter -- the Business Round Table.

In a massive analysis of proposals to limit carbon dioxide emissions by putting a price on carbon -- whether through a cap or through a tax -- the Roundtable concluded that combining price mechanisms with regulatory reform and investments would enable us to reduce carbon emissions roughly twice as fast at roughly half the cost to the economy. For example, the Roundtable determined that a price mechanism alone would be unable to drive auto fuel economy beyond 32 mpg -- but with policy support for new technology and market reform, we could get over 50 mpg. In the commercial building space, a cap or tax alone would reduce emissions by only perhaps 15 percent -- but with regulatory support at a lower cost we could cut emissions by 35 percent.

And the Roundtable's study confirmed what environmentalists and the president have already been saying -- that policy support is essential if we are going to harvest the potential value of the new economic growth and green jobs that could come with reducing carbon.

The Roundtable study is -- in my view -- thoughtlessly focused on the desirability of opening up the coast to oil and gas. It spends a disproportionate amount of its time on nuclear energy but interestingly concludes that nuclear energy is likely only to maintain its present market share, not grow rapidly. But it provides a very powerful validation for the importance of policy -- as well as price -- in moving us forward to a new energy economy.

This interaction is illustrated by the one part of the president's remarks that I thought missed the boat. Asked by the media about the provision in the bill that would require, after 2020, border-adjustment fees levied on imports of energy-intensive products such as steel if the exporting country had not entered into the global climate-protection agreement, the president fell back on the suggestion that such fees, per se, might be protectionist. He correctly pointed out that the bill contained a number of other mechanisms to help protect against trying to eliminate pollution from industry by exporting the industries. But, long-term, if certain countries want to try to grow their share of the global steel industry by allowing their steel mills to continue emitting carbon pollution, there needs to be a price signal to discourage that behavior -- and the current WTO prohibition against such "process" standards will need to be modified.

Now, this needs to be done in a smart and fair way. The U.S. can't declare that, if Korea or China doesn't go our way on climate, we will simply prohibit the importation of their steel. But if these countries are running dirty steel industries, then trade sanctions seem entirely appropriate, especially once the world has agreed on a set of standards for the steel sector globally -- those standards need to be enforced against all countries. So here again, a price mechanism needs to be combined with appropriate standards and regulations to work.

That's the big challenge as the debate moves to the Senate. The House bill contains some of the right regulatory mechanisms, but it's also missing some important ones. It sets up a price mechanism but then allows too many potential ways around it. It invests in clean energy but also invests too much in keeping dirty technologies going. Getting the three legs of the climate-solutions stool -- new technology, regulatory reform, and carbon limits -- all in place at one time will be tricky, but nothing else will do the job.

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