It's Going to Be a Green Year

Clean energy is a top priority for the Obama administration and the new Congress. The President's campaign pledges and post-election comments posit clean energy as a key element for advancing the nation's economic recovery, fostering energy independence, addressing climate change, and reinvigorating American leadership in innovation and manufacturing.

Private-sector investment in renewable energy and other clean technologies is driven by federal and state policies providing economic incentives and imposing regulatory mandates. The substantial capital investments needed for the next stage of technology innovation and project development will require increased government intervention, especially as oil prices have (at least temporarily) slumped. Although the Obama administration may ultimately employ both carrots and sticks, it will likely favor incentives to create green jobs over regulatory mandates in the near-term to stimulate the economy.

In short, expect to see action on multiple clean tech fronts over the next six months to one year.

A Market Stalled

From 2003 through the third quarter of 2008, private investment in U.S. clean technologies surged. Investment by venture capital, private equity, and other strategic investors totaled about $2.5 billion in 2007 and at least $3 billion in the first three quarters of 2008. In the fourth quarter of 2008, however, investment activity in this sector sagged.

Accessing the public markets for capital through initial public offerings had been the presumptive growth strategy. That market appears stalled for now. Project finance has also been undermined by the credit market disruption. In addition, many projects were slowed or put on hold when Congress failed through most of 2008 to reauthorize renewable energy tax credits. Then several key tax credit equity financiers disappeared (e.g., Lehman Brothers) or slowed their investment programs.

This combination devastated many large-scale wind, bio-fuels, and other renewable projects. In the public markets, renewable energy and other clean tech stocks (notably solar) fell dramatically in 2008, even more than the S&P 500 and other broad indices.

Now the eventual reauthorization of the renewable energy tax credits may be just the first offering in a growing menu of federal incentives and mandates likely to feed the appetite for future clean tech investment. The question is what additional regulatory and legislative measures the Obama administration and Congress will serve up.

Quick Acts

Barack Obama has suggested he may quickly advance clean energy and climate change initiatives through executive orders and agency regulations even before new legislation.

An important early action could be directing the Environmental Protection Agency to grant California's requested (and previously denied) Clean Air Act waiver to issue greenhouse gas auto emissions standards. This effectively authorizes California (and 17 other states eager to follow California's lead) to mandate their own auto fuel-efficiency standards. As a practical matter, this could potentially force automakers to produce vehicles meeting the states' tougher efficiency standards nationwide.

The new administration could also lead by example as Massachusetts and other states have done by mandating government purchase of hybrid or plug-in vehicles, efficient appliances and equipment, electric power from renewable sources, and development or occupancy of green buildings.

Beyond this, the Council on Environmental Quality could require greenhouse gas emissions to be assessed for major federal projects reviewed under the National Environmental Policy Act. The Department of Energy could increase research and development grants for carbon capture and sequestration demonstration projects at coal-fired plants.

More broadly, December 2009 will see the much-anticipated Copenhagen Conference of the Parties to the United Nations Framework on Climate Change, which will work to develop a successor treaty to the Kyoto Protocol. At the conference, the Obama administration may aim to lead international diplomatic efforts to address climate change based on a newly coherent domestic policy.

Perhaps most significantly, greenhouse gas regulation, stymied by the Bush administration, can proceed even before the long-simmering cap-and-trade debate comes
to a head. With the Supreme Court's conclusion in Massachusetts v.
EPA (2007) that the EPA can regulate greenhouse gas emissions as
“pollutants” under the Clean Air Act, the Obama administration may adopt comprehensive greenhouse gas regulations or regulate selectively under, for example, power plant New Source Review.

If the credit markets otherwise return to some normalcy, investors could be encouraged by early signals confirming widespread assumptions about the Obama administration's priorities, perhaps partially offsetting the effects of comparatively low oil prices.

Legislative Incentives

In addition to the actions of Obama, Congress is also expected to act to encourage clean tech.

Recent legislative action extended the Production Tax Credit for wind energy by just one year, which is indisputably insufficient to encourage the necessary long-term investment. Wind-energy developers need a longer-term guarantee.

Likewise, the tax credits for solar and other renewable energy technologies could be extended, the creditable amount increased, and depreciation schedules accelerated.

As a natural counterpart to tax credits, Congress could also authorize project loan subsidies and guarantees to offset the credit crisis and facilitate financing for large renewable energy projects.

Congress is likely to direct additional funding for the National Renewable Energy Laboratory and through clean tech research and development grants to universities and industry.

Although a federal auto industry bailout remains uncertain and controversial, a consensus is emerging that any legislation will require (and presumably finance) more energy-efficient cars from domestic auto manufacturers. Other legislation may encourage commercial and residential building efficiency, bio-fuel production, and the development of energy storage technology.

Potential Mandates

Congress can impose mandates as well as grant incentives, of course. Most significant and controversial is federal cap-and-trade climate change legislation. Last session, comprehensive, economywide bills were proposed in the Senate and the House. Obama consistently supported aggressive cap-and-trade legislation that includes an 80% reduction of 1990 U.S. greenhouse gas emissions by 2050.

Sen. Barbara Boxer (D-CA) recently announced plans to introduce a streamlined bill directing the EPA to develop the cap-and-trade system details through regulation. In the House, Rep. Henry Waxman's defeat of Rep. John Dingell to lead the Committee on Energy and Commerce improves the prospect for a comprehensive and aggressive bill.

Fundamental questions challenge prospects for comprehensive climate change legislation. To auction or allocate allowances? What baseline year? What reduction target (and interim benchmarks)? What sectors to cover? What phase-in period and the effective date? To pre-empt state and regional programs? How to deal with uncapped sectors or China, India, and other developing economies? Answering some or all of these challenging questions will be important if the United States wishes to play a leadership role at the December 2009 Copenhagen Conference, even though final legislation seems unlikely before early 2010.

Even as the cap-and-trade debate continues, a National Renewable Portfolio Standard, specifying a percentage of electricity sold by utilities that must come from renewable sources, seems likely. About half the states have adopted such a standard, ranging from modest aspirations in some states to aggressive requirements in California (33% by 2020) and Massachusetts (25% by 2025).

In the end, though some advocates' high expectations for dramatic action are likely to be frustrated, substantially increased federal investment, incentives, and mandates for renewable energy, energy efficiency, and reduction of U.S. greenhouse gas emissions appear likely in 2009. States will likely continue their own clean energy, green jobs, and climate change initiatives, supplementing federal efforts and resisting federal pre-emption.

Whether these initiatives will constitute a “Green New Deal” or a series of piecemeal steps depends on consistent leadership from the Obama administration and the emergence of a bipartisan consensus on environmental and economic grounds. Such progress is possible, and perhaps even likely, but it certainly will not be easy.

This article originally appeared in the Legal Times, a sister publication of this newsletter.

Clean energy is a top priority for the Obama administration and the new Congress. The President's campaign pledges and post-election comments posit clean energy as a key element for advancing the nation's economic recovery, fostering energy independence, addressing climate change, and reinvigorating American leadership in innovation and manufacturing.

Private-sector investment in renewable energy and other clean technologies is driven by federal and state policies providing economic incentives and imposing regulatory mandates. The substantial capital investments needed for the next stage of technology innovation and project development will require increased government intervention, especially as oil prices have (at least temporarily) slumped. Although the Obama administration may ultimately employ both carrots and sticks, it will likely favor incentives to create green jobs over regulatory mandates in the near-term to stimulate the economy.

In short, expect to see action on multiple clean tech fronts over the next six months to one year.

A Market Stalled

From 2003 through the third quarter of 2008, private investment in U.S. clean technologies surged. Investment by venture capital, private equity, and other strategic investors totaled about $2.5 billion in 2007 and at least $3 billion in the first three quarters of 2008. In the fourth quarter of 2008, however, investment activity in this sector sagged.

Accessing the public markets for capital through initial public offerings had been the presumptive growth strategy. That market appears stalled for now. Project finance has also been undermined by the credit market disruption. In addition, many projects were slowed or put on hold when Congress failed through most of 2008 to reauthorize renewable energy tax credits. Then several key tax credit equity financiers disappeared (e.g., Lehman Brothers) or slowed their investment programs.

This combination devastated many large-scale wind, bio-fuels, and other renewable projects. In the public markets, renewable energy and other clean tech stocks (notably solar) fell dramatically in 2008, even more than the S&P 500 and other broad indices.

Now the eventual reauthorization of the renewable energy tax credits may be just the first offering in a growing menu of federal incentives and mandates likely to feed the appetite for future clean tech investment. The question is what additional regulatory and legislative measures the Obama administration and Congress will serve up.

Quick Acts

Barack Obama has suggested he may quickly advance clean energy and climate change initiatives through executive orders and agency regulations even before new legislation.

An important early action could be directing the Environmental Protection Agency to grant California's requested (and previously denied) Clean Air Act waiver to issue greenhouse gas auto emissions standards. This effectively authorizes California (and 17 other states eager to follow California's lead) to mandate their own auto fuel-efficiency standards. As a practical matter, this could potentially force automakers to produce vehicles meeting the states' tougher efficiency standards nationwide.

The new administration could also lead by example as Massachusetts and other states have done by mandating government purchase of hybrid or plug-in vehicles, efficient appliances and equipment, electric power from renewable sources, and development or occupancy of green buildings.

Beyond this, the Council on Environmental Quality could require greenhouse gas emissions to be assessed for major federal projects reviewed under the National Environmental Policy Act. The Department of Energy could increase research and development grants for carbon capture and sequestration demonstration projects at coal-fired plants.

More broadly, December 2009 will see the much-anticipated Copenhagen Conference of the Parties to the United Nations Framework on Climate Change, which will work to develop a successor treaty to the Kyoto Protocol. At the conference, the Obama administration may aim to lead international diplomatic efforts to address climate change based on a newly coherent domestic policy.

Perhaps most significantly, greenhouse gas regulation, stymied by the Bush administration, can proceed even before the long-simmering cap-and-trade debate comes
to a head. With the Supreme Court's conclusion in Massachusetts v.
EPA (2007) that the EPA can regulate greenhouse gas emissions as
“pollutants” under the Clean Air Act, the Obama administration may adopt comprehensive greenhouse gas regulations or regulate selectively under, for example, power plant New Source Review.

If the credit markets otherwise return to some normalcy, investors could be encouraged by early signals confirming widespread assumptions about the Obama administration's priorities, perhaps partially offsetting the effects of comparatively low oil prices.

Legislative Incentives

In addition to the actions of Obama, Congress is also expected to act to encourage clean tech.

Recent legislative action extended the Production Tax Credit for wind energy by just one year, which is indisputably insufficient to encourage the necessary long-term investment. Wind-energy developers need a longer-term guarantee.

Likewise, the tax credits for solar and other renewable energy technologies could be extended, the creditable amount increased, and depreciation schedules accelerated.

As a natural counterpart to tax credits, Congress could also authorize project loan subsidies and guarantees to offset the credit crisis and facilitate financing for large renewable energy projects.

Congress is likely to direct additional funding for the National Renewable Energy Laboratory and through clean tech research and development grants to universities and industry.

Although a federal auto industry bailout remains uncertain and controversial, a consensus is emerging that any legislation will require (and presumably finance) more energy-efficient cars from domestic auto manufacturers. Other legislation may encourage commercial and residential building efficiency, bio-fuel production, and the development of energy storage technology.

Potential Mandates

Congress can impose mandates as well as grant incentives, of course. Most significant and controversial is federal cap-and-trade climate change legislation. Last session, comprehensive, economywide bills were proposed in the Senate and the House. Obama consistently supported aggressive cap-and-trade legislation that includes an 80% reduction of 1990 U.S. greenhouse gas emissions by 2050.

Sen. Barbara Boxer (D-CA) recently announced plans to introduce a streamlined bill directing the EPA to develop the cap-and-trade system details through regulation. In the House, Rep. Henry Waxman's defeat of Rep. John Dingell to lead the Committee on Energy and Commerce improves the prospect for a comprehensive and aggressive bill.

Fundamental questions challenge prospects for comprehensive climate change legislation. To auction or allocate allowances? What baseline year? What reduction target (and interim benchmarks)? What sectors to cover? What phase-in period and the effective date? To pre-empt state and regional programs? How to deal with uncapped sectors or China, India, and other developing economies? Answering some or all of these challenging questions will be important if the United States wishes to play a leadership role at the December 2009 Copenhagen Conference, even though final legislation seems unlikely before early 2010.

Even as the cap-and-trade debate continues, a National Renewable Portfolio Standard, specifying a percentage of electricity sold by utilities that must come from renewable sources, seems likely. About half the states have adopted such a standard, ranging from modest aspirations in some states to aggressive requirements in California (33% by 2020) and Massachusetts (25% by 2025).

In the end, though some advocates' high expectations for dramatic action are likely to be frustrated, substantially increased federal investment, incentives, and mandates for renewable energy, energy efficiency, and reduction of U.S. greenhouse gas emissions appear likely in 2009. States will likely continue their own clean energy, green jobs, and climate change initiatives, supplementing federal efforts and resisting federal pre-emption.

Whether these initiatives will constitute a “Green New Deal” or a series of piecemeal steps depends on consistent leadership from the Obama administration and the emergence of a bipartisan consensus on environmental and economic grounds. Such progress is possible, and perhaps even likely, but it certainly will not be easy.

This article originally appeared in the Legal Times, a sister publication of this newsletter.