02 Nov 2012

The Election, The Environment, and Beyond


BOSTON—Harvard Business School has established a Business and Environment Initiative to deepen business leaders' understanding of today's environmental challenges and assist them in developing effective solutions. With the presidential election looming, two members of the Initiative offer their points of view. Senior Lecturer John Macomber discusses what the future may hold in terms of this country's infrastructure and funding for "environmentally friendly" cities and towns, while Associate Professor Noel Maurer points to the campaign's lack of serious attention to important environmental issues.

The Benefits of a Better Infrastructure
by John Macomber

The outcome of the 2012 presidential and congressional elections could have vastly divergent impacts on businesses with respect to seemingly disparate public issues like infrastructure, jobs, and the environment.

In the short run, creating infrastructure projects creates hard-hat jobs. This is undisputed – but one party's jobs program is another's pork, a conundrum that can be exacerbated when decisions are made on a political basis (think of bridges to nowhere, high-speed rail from outpost to outpost). However, there is a subset of infrastructure projects in transit, power, and roads that enable businesses and citizens to use core resources more efficiently-- in particular, electricity, water, and their own time in manufacturing, shipping, commuting, and coordination. These projects lead to long-term cost advantages for cities and attract business investment while lowering the day-to-day cost of living. This can lead to a virtuous cycle for jobs and growth, spurred by thoughtful infrastructure investments.

These projects that focus on efficiency also help the environment. When the so-called "built infrastructure" of roads, bridges, power lines, and storm drains is working well, advantages are many. Less time spent in idling cars and trucks, for example; hence less carbon in the atmosphere. Less loss of power line transmission, thus fewer blackouts (and fewer hours operating on dirty on diesel backups) and less consumption of whatever fuel is being used.

If past is prologue, an Obama win coupled with gains in either chamber will presumably lead to more stimulus spending. Some of this will be on the infrastructure I've described — projects that allow us to use resources more efficiently and that lead to more competitive and environmentally friendly cities and towns. But there will also be substantial pressure to deploy funds, as in the 2009 stimulus, via direct payments to individuals or toward infrastructure projects that are selected only to create short-term jobs. Can a Democratic president and largely Democratic Congress be persuaded to make infrastructure investments that look like they help business?

A Romney win, coupled with Republican gains in either chamber, will lead to a different set of conflicts. Can a pro-business administration persuade an anti-spending Congress to allocate any money toward roads, rail, electric grid, or water projects, even if there is an arguable benefit to jobs, personal prosperity, and regional competitiveness in the long term?

A financial strategy of borrowing to fund infrastructure investment has credit implications as well. Multiple municipalities in the US, including Stockton, California, and Birmingham, Alabama, are in or near default. Would the federal government under President Obama lend support to these local municipalities? Would a Romney administration let them fail in keeping with a free-market philosophy? The answer will affect the price of municipal finance and have a major impact on infrastructure investment and job creation, funded by borrowing from the private sector.

If the congressional stalemate continues, the private sector will probably be called on to make additional contributions to resource efficiency and infrastructure that government won't – or can't – execute. This might be through a financial investment, if projects can be made attractive enough in an atmosphere of challenged municipal finance, or through the provision of substitute infrastructure by companies that generate their own power, treat their own waste water, or provide their own transportation for employees. One could expect a Romney administration to promote tax and regulatory advantages for these expenditures. One could expect an Obama administration not to favor these expenditures but instead continue to directly fund initiatives in energy and transit research and development.

The resolution of these issues is crucial to the future of this country, and they will be top of mind for whichever candidate prevails on Tuesday. Let's hope the winner can turn political rhetoric into viable solutions once the long campaign is finally behind him.

Wherefore Art Thou, Energy?
by Noel Maurer

There is a lot at stake in this election — health care and taxes, among many other issues. So when partisans and pundits tell you that this election matters, they are telling the truth. Except when it comes to energy. In this election, I'm sorry to say that energy hardly matters.

On the Democratic side, neither cap-and-trade nor carbon taxes are anywhere to be found. Incorporating the damage from carbon into market prices is the most (perhaps the only) sensible way to address the challenge of climate change, but right now the idea seems about as current as the free coinage of silver. Similarly, the smart money predicts that a re-elected President Obama will find grounds to reverse his decision to approve the Keystone Pipeline, which would bring carbon-intensive heavy oil from Canada to the Gulf Coast.

President Obama has proposed a, shall we say, not-terrible energy bill, the Clean Energy Standard Act. Based on proposals first put forth by Senators Lindsey Graham (R-SC) and Dick Lugar (R-IN), the bill would essentially create a national clean energy standard with tradable credits, including nuclear power, natural gas, and carbon capture. It could be a game changer. Problem is, it has zero chance of passing unless Democrats take the House and 60 seats in the Senate.

On the Republican side, the big idea is to increase drilling on federal lands and water. Love it or hate it, that's a sideshow. It won't produce much compared to what drilling on private lands can do. Moreover, no President can make California open its waters or the Monterey shale. Governor Romney has also criticized Obama's fuel economy standards, which will require cars and light trucks to log the equivalent of 54.5 miles per gallon by the model year 2025, but he has made no alternative proposals. Altering these rules is not that easy anyway. A President Romney would face lawsuits under the 2007 Energy Security Act if he tried to do so. He would also have to take on the auto companies, which support the new rules. In addition, twelve states comprising 35% of the U.S. population would stick with the higher standard.

On another front, President Romney could reverse the so-called "war on coal," except the war is with natural gas, and coal is losing badly. The US is set to retire about a quarter of its coal-generating capacity by 2016 because of market forces. Cheap natural gas will kill coal even if Romney reverses Environmental Protection Agency rules clamping down on mercury (one of coal's nastiest byproducts) and carbon dioxide (CO2).

Chances are also good that a President Romney would try to abolish the $7,500 tax credit for electric vehicles (which President Obama wants to increase to $10,000), but the chances of winning that fight in a Democrat-controlled Senate are far from good. Moreover, while electric cars are fun and well marketed, they are not a game-changer in terms of America's energy use. Without breakthroughs in range and charging time, electric vehicles will not replace internal combustion vehicles anytime soon, tax credit or no.

What should the energy debate be about? First and foremost, putting a price on carbon. Second, permanent incentives for non–carbon energy sources – including nuclear power. Third, fixing the U.S. power grid. And finally, whether the United States should allow natural gas and crude oil to be exported. Sad to say, none of these things have been issues in the campaign. Hopefully, they will get the attention and action they deserve and demand once the next President is in the White House.

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Jim Aisner