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“Hey, stop. What’s that sound? Everybody look what’s goin’ down!”

I frequently am reminded by my kids – and my CAISO Committee Chair, come to think of it – that I often “date” myself with my cultural references. Oops, I did it again with the above referenced lyrics from “Buffalo Springfield.” But these words come to mind as I contemplate the relentless evolution of carbon issues in states across the country and how they are dealt with in an economically efficient manner – or not.

The assaults on allowing markets to clear at the competitive marginal price has been underway for some time. At one time, markets were under assault by regulatory fiat in states where the concern was not enough capacity. Then they were attacked by those who believed that prices were too high regardless of market results. Last year markets were under siege because of the desire to keep some older technologies and fuel types around. Now, the natural process of efficient market clearing is being subverted because of the urgent desire to address carbon. Each time, the onslaught has been because of the false notion that markets cannot deliver. It is a pernicious sentiment held by many, especially when faced with an existential threat such as climate change.

By contrast, my faith in market solutions is nearly absolute. I believe that competitive markets yield the best outcomes for society generally, and particularly for customers. No market disruption – including the so-called “energy crisis” in California (it was a “regulatory crisis”) – has shaken that belief. This is true even in the face of our daunting environmental goals. Beginning in the 1980s, competition drove efficiencies that resulted in lower emissions that would not have been possible under traditional regulation. Now, however, we may be entering a policy epoch in which we embrace command-and-control solutions put forth by state policy makers in a fit of panic to curb carbon. This is different than the other market assaults. This really is something “going down” that – left unchecked – can seriously erode competition.

Let me say that I am not a climate change skeptic. I believe the science that anthropomorphic activity is changing the climate. To my friends who remain skeptical, I have always preached embracing solutions like “cap-and-trade” as a reasonable risk management solution in the event their skepticism proved wrong. Any sensible market participant understands the fundamental importance of hedging. The resistance to sensible hedging when it comes to climate change probably has to do with the religious rhetoric of the climate debate. We have somehow come to a point where rather than debating policy we are impugning the morals of the people on the other side of the debate.

This was not always the case. There were significant points of agreement that we could use market methods to curb carbon the way we had successfully cut acid rain from atmospheric nitrogen oxide (NOx) and sulfur oxide (SO2). There was significant Republican support of the basic cap-and-trade concept in the run-up to the 2008 election. I can recall when it seemed a given that a national cap-and-trade program would be adopted by Congress after the 2008 election and signed by whomever became President. But then came the 2008 financial crisis and, as with so many other things, seismic faults seemed to erupt within the body politic that have refused to close.

The result of this chasm is denial of increasing ferocity on one side, and messianic assertion of doom and repentance that would make Martin Luther blush on the other. Even so, the answers, my friend, seem to be blowing in the wind. The Congress has agreed to tax breaks and investment credits for clean technologies. Meanwhile, many states have imposed portfolio standards that start slowly but often result in “doubling down” on greater and greater requirements vis-a-vis specific renewable technologies. These are scatter-shot efforts that allow politicians to do window dressing that neither addresses real emission reductions or market efficiencies that might help.

I could rail against what is an essentially anti-competitive and likely economically inefficient demand by legislators and regulators for this kind of discrimination. I could offer history lessons on how the increasing tendency to procure these resources may prove to be a mistake as there are no “philosopher kings” among our policy makers – never have been.

I was willing to continue these points of debate, but I am now thinking it is necessary to consider that things have changed. Looking out beyond the typical progressive bell-weathers like California, New York, Massachusetts, I see states with moderate political profiles like Michigan and Virginia that are charging ahead with policies that may be discriminatory but are billed as necessary in the face of Federal inaction. I look at mainstream media that embraces zero-carbon resources like nuclear power plants that heretofore would never have opined in favor of such expensive resources.

This new zeitgeist shows no signs of slowing and, in fact, is picking up speed. Perhaps those of us who believe in market efficiencies risk marginalizing ourselves in this environment without a change of tactics. The alternative may be surrendering the policy battlefield to the parts of the environmental movement that do not care much for arguments of reliability and wasted resources. Now may be the time to jump in and help form the debate of how to meet climate goals without sacrificing reliability or ignoring economic efficiency by engaging some parts of the informed and responsible environmental movement.

If we, the “Knights of Competition” or the “Warriors of Efficiency” emerge from our castles and defensive positions and engage the “Prophets of Green” and “Apostles of Renewables” to form a new basis of discussion. If we do not, the reasonable people in the environmental community – and there are many – will be left to debate with the less responsible members of their movement. If we don’t, I fear we risk the destruction of the market and all the benefits that provides. Besides, it could be as fun as the video below suggests. Here’s to an environmental “Peace of Westphalia” (click on the link).

 

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