Economics meets ecology

A talk with Vijay Vaitheeswaran, energy correspondent for The Economist and author of "Power to the People"

Vijay Vaitheeswaran covers energy issues for The Economist. In his book Power to the People, he calls for more distributed power and demand management, explains to his fellow Americans why global warming is not debatable, and calls for proper pricing of fossil energy sources to include "externalities" rather than for subsidies for renewables. Craig Morris spoke with Mr Vaitheeswaran for Telepolis at the Malente Symposium on Energy, Climate and Future Welfare - Changing Global Dynamics organized by the Dräger Foundation.

Mr Vaitheeswaran, in calling for consideration of external costs in the pricing of fossil energy sources, you are essentially saying that these energy sources should be more expensive. Germans have implemented such an ecotax and Europeans generally have higher energy prices, but how are you going to sell this idea to Americans? In his keynote address last night, John Deutch:http://en.wikipedia.org/wiki/John_M._Deutch seemed opposed to anything that would lead to higher energy prices. So how do you sell the idea of price-based, free-market mechanisms instead of subsidies, for instance, to Americans?

Vijay Vaitheeswaran: It has been seen as political suicide to use the word "tax." But I am very encouraged to see public discourse changing. You now see a range of voices supporting environmental taxation and similar mechanisms, such as Thomas Friedman of the New York Times and the magazines Forbes and Fortune. Senator Richard Lugar, the powerful head of the Foreign Relations Committee, is now pushing for action to get off of oil. There are different motivations for different people. But the way to get the United States to embrace eco-taxation is to form alliances.

What you are finding is this unusual coalition of the left and the right. National security people like John Deutch are very concerned about the implications of oil imports, the traditional left is concerned about global warming, and now evangelical leaders are stepping in and saying we have to do something in terms of good stewardship. They are an influential segment of the Republican Party. Then you take a look at the state and local level, which is where most things are happening, and you see that Republican governors (California, New York, Massachusetts) are leading the charge on climate change in regulatory approaches.

The question of whether they will switch to the kind of eco-taxation I support is perhaps not that important at the end of the day. The more important thing is that the US move in a meaningful way. Under Bush, the EPA is challenging the definition of carbon dioxide as a pollutant at the Supreme Court to prevent it from being regulated.

Because aside from climate change, carbon dioxide really isn't a pollutant, but something we breathe all the time.

Vijay Vaitheeswaran: Sure, they have a leg to stand on, but the conceptual problem is that the administration does not want to admit that carbon dioxide emissions are problem. They do not want to do anything about it. On the other hand, Congress is in a different mood that reflects more of the bottom-up demand for change. Senator Lugar publicly advocates a tax on oil. Of course, Al Gore advocates it as he did in 1993 under Clinton, but a Democratic Congress voted down his initiative. Since then, the words "tax" and "energy" have not been put together.

About four months ago, the New York Times conducted a poll asking Americans if they would support a gasoline tax. Eighty percent said no. But then they asked a second question: "If it reduced foreign imports of oil, would you support it?" 50 percent said yes. "If it would mitigate the effects of global warming, would you support it?" More than 50 percent said yes. So if you ask the second question, I think you will find that there is political opportunity here.

Here, I have a bone to pick with you. Al Gore, as you mentioned, is talking about a revenue-neutral carbon tax that would be used to make American labor more competitive. Germany has already been doing that for years in its Ökosteuer. This approach is so market oriented that the group behind it, Green Budget Germany, awards a prize every year for environmental economics called the Adam Smith Prize. So the idea that the free market can be merged with environmentalism is nothing new in Germany.

Vijay Vaitheeswaran: In some ways yes, but another ways you have incredibly distortionary government policies in Germany. Today, the government is picking winners in the form of solar. Why should solar be subsidized at the level it is?

The government set down with industry and worked out the price of a kilowatt generated by photovoltaics, and they also set a goal for it.

Vijay Vaitheeswaran: That is a Stalinist approach. That's not the market.

But it's a fact that a kilowatt-hour of photovoltaics costs around 40 cents in Germany today, so the government is basically giving the industry a window of around 15 years to cut costs almost in half.

Vijay Vaitheeswaran: But you had a bone to pick with me.

You bring up all the right things -- environmental taxation, distributed generation, etc. -- and you even talk about how the liberalization of markets is necessary to accelerate a shift towards a more sustainable energy supply. You and I are very alone these days as Americans in supporting market competition in the electricity sector after the fiasco of the regulation in some parts of the US. That's why I believe that the success that Germany has had is all the more important. The open market in Germany has been excellent for renewables. So the bone I have to pick with you is that you don't mentioned any countries by name in your book where a liberalized market lead to such a shift. Wouldn't it have been good to give a specific example?

Vijay Vaitheeswaran: So the bone is not with what I say, but you merely think I should give more examples? Sure, I have no objection to that. If I could have had a 400-page book, it would have been better. Fewer people would have read it. I was writing for the average reader who would never have picked up a book on energy.

Whether Germany should be the textbook example or not would be a different conversation. I talk about Great Britain and the country of California (laughs), not from the academic view but from where they resonate in popular culture. If I were doing a series of articles for the Economist, I would pick a number of different countries. New Zealand would be interesting. India is a textbook case in terms of electricity reform -- what not to do and what hasn't yet been done. So I take your point entirely, but that wasn't the book that I set out to write.

Okay, but let's come back to Germany for a moment. Do you not feel that Germany is a good example of what should be done? After all, the country is using market mechanisms to restructure its energy supply, and this approach has made it the world leader in solar and wind.

Vijay Vaitheeswaran: I think if you set aside the transport sector and just take a look at its electricity supply, there are things to applaud and things to criticize. But it is not a textbook example of what should be done. What I would applaud is the speed at which the electricity market has been liberalized. There is genuine competition at the retail level. France was very slow to go there and had to be forced by the EU Commission, and Italy is not there yet. But if we consider that coal is still highly subsidized...

Yes, but this is also highly criticized in Germany...

Vijay Vaitheeswaran: ... and then they turn around and hand out heavy subsidies to renewables, it's a farce. You can't have a Cold War of energy subsidies. That is apathetic to market approaches. You should have no subsidies for either but instead have market mechanisms for the externalities.

Right, and this is basically what everyone in the renewables industry in Germany is also saying. In the wake of the parliamentary elections last year, the chief of SolarWorld AG, Germany's largest solar firm, stated clearly that he would love to be able to compete on a level playing field, i.e. he would gladly forgo subsidies for photovoltaics if the subsidies for all other forms of energy were also abolished.

Vijay Vaitheeswaran: I see eye-to-eye with that.

I would also like to pick a bone with you concerning fuel cells. I don't feel that you make a clear distinction between the different types of fuel cells. In other words, you conflated those that run on hydrogen, such as the PEM fuel cells that everyone is talking about (the ones that will be used in automobiles), with those that do not. If I were a lay reader and read your book, I would not have a clear picture that there are some that run on hydrogen and others that don't.

Vijay Vaitheeswaran: Give me an example of a fuel cell that does not run on hydrogen.

QA: The high-temperature fuel cells: SOFCs and MCFCs.

Vijay Vaitheeswaran: They also use hydrogen. They just use other things with the hydrogen.

But you don't put hydrogen in them as the fuel. In fact, MCFCs cannot even run on pure hydrogen.

Vijay Vaitheeswaran: With a methanol reformer fuel cell, you don't use pure hydrogen either.

What I'm trying to get at is the supply of hydrogen. For instance, if you can use coal gas as your fuel, which contains CO that would poison the catalyst in a PEM fuel cell, that opens up a whole new markets, which is why these high-temperature fuel cells are so important. This is another step to cleaner coal and distributed power.

The reason why I care about this is because I don't know where I'm going to get all this hydrogen. You talk about what you call "The Great Hydrogen Hoax" in your book, but I don't feel that you give proper treatment to the problem of where we are going to get our hydrogen from.

Vijay Vaitheeswaran: If you look at those pages more carefully, you'll see that the structure is 1) safety, 2) storage, 3) supply. I explain there and throughout this book that our source of hydrogen will have to be carbon-neutral. It could be renewables; as you know any source of renewable energy can be converted into hydrogen. And we will be able to use hydrogen to store excess renewable energy. If you are going to have, as the EU plans, 20% of your electricity from renewables, you're going to need to store some of this energy. Ultracapacitors are very expensive.

But I also say in my book that fossil fuels will be a bridge towards this future, particularly coal -- mainly because the giants (the US, China, India, South Africa) have vast quantities of coal. Some believe that nuclear will be able to provide large amounts of hydrogen, but I think that will be too expensive.

And solar is not?

Vijay Vaitheeswaran: Nuclear is a mature technology; solar is not. But I am agnostic. I am happy to see all of these energy sources compete, and may the best one win. My point is that there is a multiplicity of sources. Biomass also has a lot of potential. Each region will probably come up with its own solution based on local potential. There will therefore never be an OPEC of hydrogen. It will be made in different ways, and we should be indifferent as to how it is made.

But according to all estimates, a gallon of hydrogen made from photovoltaics by means of electrolysis is going to cost at least 10 dollars and perhaps as much as 25 in the near future. And that is without taxes.

Vijay Vaitheeswaran: So your point is not that there are no ways to make hydrogen. I think you would agree that there are many ways. Let me remind you that your starting assumptions will determine your conclusion. So let's change our starting assumptions. The world currently uses a large amount of hydrogen. The hydrogen that the US produces right now what more than suffice to power all of the cars in the US. Of course, it is currently being used in the oil complex. Right now, if you go buy this fuel to power a fuel-cell car currently available -- I am not talking about the cars of tomorrow -- then you basically come out with around $1.50 for the equivalent amount of power in a gallon of gasoline.

Because it's made from natural gas.

Vijay Vaitheeswaran: Right, almost all of it. And at a cost of between $15-$20 billion dollars, you could give 60% of Americans meaningful access to hydrogen. You don't have to change every gas station tomorrow, just make sure you have one at least every 25 miles. We would use natural gas reformers for this. For the long term, you would try to get hydrogen from renewables, clean coal, and nuclear down to competitive prices -- this could be a 20 or 25-year plan -- then you have a multiplicity of sources to make hydrogen. But natural gas will be the bridge fuel. And we have a lot of inexpensive electricity late at night in countries like France. And as we move towards more wind energy, we will be producing excess wind energy at night.

In engineering terms, this does not make sense; after all, you are going to lose a large portion of this energy every time you convert it. But in market terms, storing inexpensive excess electricity produced at night and selling it at a prime during peak hours in the afternoon is a profitable business. So what we need is a smart meters and real-time pricing, like you already have all over Italy, and intelligent meters like you have in California. This will help intermittent sources of energy, such as solar, to get the compensation they need under market conditions.

I'd like to end on a lighter issue. You make a clear distinction between conservation and efficiency, which is good. But when you talk about conservation in your book, you really only talk about it in terms of losing something. You really pull at my heartstrings when you write, "should Granny really turn down the thermostat on a cold winter night?" On the same page, you write that conservation "always means less of the things that energy brings." I would argue with that "always."

I am an American living in Europe, and every time I go back to the US I have a culture shock. People go to drive-up windows at fast food restaurants and wait in line is for five minutes to get their food instead of turning off their car and walking inside. Americans also generally like to leave their television sets on all day even when they are not watching it just to provide some background noise, which is becoming incredibly expensive with the new energy-hungry plasma TVs. This is a total waste of energy, and I don't see how changing this behavior would really be giving anything up.

Last night, the Germans wanted to walk back to the hotel from the reception, whereas the Americans were looking for the shuttle service to drive them back. Aren't we healthier if we take these 15-minute walks instead of driving everywhere?

Vijay Vaitheeswaran: Hang on, let's take that specific example. What was being offered was mobility, but it has environmental penalties as we both know. By turning it down, we conserved energy, but I got home later and had less time to prepare my speech today. I was too tired to do it, so I had to get up earlier today. In other words, it did cost me something. Of course, I worked off some of the meal, and I will live a year longer if I walk more. My point is that there is a trade-off. So while efficiency is always good, there is always a trade-off with conservation. That's why I don't put conservation up on a pedestal. People should have choices, and if you make conservation the basis of national policy, that policy will fail.

But you are being unfair when you say that conservation is killing Granny. (laughs)

Vijay Vaitheeswaran: I want Granny to live, dammit! (laughs)

So would you at least back off from the "always" when it comes to conservation?

Vijay Vaitheeswaran: That is a value judgment, and I encourage people to make their own choices. If you don't want cold beer and hot showers and that make you feel pious, more power to you. I want to world where you have the choice to be pious.

Thanks for taking the time to speak with me.

Craig Morris is the author of "Energy Switch" and translates at Petite Planète Translations.