I have recently had the pleasure of welcoming Sam Ori, the Director of Policy for the Electrification Coalition, as a new tenant in my office suite in Chicago.  Sam is a wonderful guy and I look forward to having him close by, not the least because it will permit for closer collaboration between our organizations.

Sam tells me that early next month the Electrification Coalition will meet with senior White House staff to discuss what the Obama Administration can do to promote vehicle electrification over the next two years.  The expected proviso is that it cannot involve the Administration going to a Republican-dominated Congress and asking for more money.  Sam asked me what I thought the Electrification Coalition should ask for.

This being the night before Christmas, Sam’s question strikes a certain cord.  Old St. Nick, it seems, is still in a giving mood, but finds himself short of funds.  What kind of Christmas is that, you ask?  The answer is: a very interesting one.  And as many families have found out over the last few years, sometimes an interesting Christmas can be the very best one.

Here is my list for Santa:

Encourage Utility Purchases of Automotive-Grade Batteries for Distributed Energy Storage.  As I wrote last week, the fastest and most certain way to reduce the cost of plug-in electric vehicles (PEV’s) is to develop a collateral market for automotive-grade batteries outside of vehicle applications.  Such a market would permit battery manufacturers to take advantage of the economies of scale and could dramatically lower the cost of the most expensive component of PEV’s.

The obvious and natural collateral market for automotive-grade advanced batteries is grid-connected, distributed energy storage (DES).  Making the grid smarter depends in large part upon adding electricity storage capability to it. DES describes the practice of locating that stored energy within the distribution portion of the grid, pushing the storage function out towards the “tips” and as close as possible to the ultimate customer.  Grid-connected storage becomes more flexible and more valuable the closer it is located to the customer. DES includes community energy storage, residential energy storage and vehicle-to-grid applications.

In addition to helping lower the cost of PEV’s, wide scale deployment of CES would also stabilize upstream portions of the grid, such as the interstate transmission systems that lie squarely within federal jurisdiction.  The FERC should engage directly with state public utility commissions and encourage them to deploy DES systems that will both promote the national goal of vehicle electrification and help operators of local distribution systems assume greater responsibility for the stability of the interstate transmission systems from which local systems benefit.

Concentrate Vehicle Tax Credits Where They Will Achieve Their Purpose.  If you can’t get more money from Santa, the next best thing is to use the money you already have more efficiently.  This has not been so necessary over the last few years, when Santa has carried a large bag.  But it must be a serious focus going forward. 

To spend money more efficiently, it is important to concentrate on what you are trying to buy.  In the case of PEV’s, the goals are reducing reliance on imported petroleum and reducing greenhouse gas emissions.  But PEV’s only achieve those goals in any meaningful sense if they are deployed on a widespread basis.  Reducing the cost of PEV’s and the batteries that power them is key to achieving that widespread deployment.  Unless the prices of advanced automotive batteries come down significantly, it is doubtful that consumers will buy PEV’s in large enough numbers for PEV’s to achieve their purpose.  Lower battery costs are not just a nice thing to aim for.  They are an absolute prerequisite to PEV’s fulfilling their intended purpose.  If PEV’s cannot be made attractive to the mass consumer market, it is highly questionable whether the government should be subsidizing them at all.

Today the federal government provides consumers with a $7,500 tax credit for purchasing any electric vehicle with a battery capacity of 16 kWh or more.  This is a wonderful incentive for some consumers to buy an electric vehicle.  But it is unclear how much millionaires buying $100,000+ sports cars powered by thousands of camera batteries really do to build a mass consumer market for PEV’s.

It is time to refocus tax incentives on the types of vehicles—or, more accurately, on the types of advanced batteries--that will promote vehicle electrification.  To qualify for the credit, vehicles should be required to use large format batteries that can be used in collateral applications and produced in large volumes.  Only vehicles using those batteries can hope to achieve the cost reductions necessary to permit widespread deployment of PEV’s.  By focusing the credit on a narrower range of batteries, the Congress could increase the amount of the credit for qualifying vehicles, making sustainable progress on vehicle electrification more likely.

Consolidate Smart Grid/Vehicle Electrification Initiatives.  Consistent with the objective of greater efficiency, federal energy policy must focus on key objectives and the government agencies and initiatives meant to promote those objectives must be rationally consolidated.  By way of example, building a smarter grid and electrifying motor vehicles are not two separate problems.  Smart grid initiatives are largely intended to facilitate the electrification of vehicles.  Yet smart grid initiatives and vehicle electrification initiatives are handled by two separate parts of the Department of Energy.  Moreover, numerous federal agencies have jurisdiction, and in some circumstances competing agendas, with respect to vehicle electrification.  Offices within the Department of Energy, the Department of Transportation, the Department of Commerce and even the Department of Defense all touch on aspects of vehicle electrification.  No one seems to be in charge or, more importantly, to be responsible for the success or failure, of achieving electrification objectives.

Santa should change that.  Vehicle electrification and smart grid initiatives should be consolidated within a single office in the Department of Energy under the authority of a single, dedicated Under Secretary.  That Under Secretary should act as electrification czar, coordinating programs relating to electric vehicles and smart grid initiatives across agencies and across government jurisdictions (e.g., with state public utility commissions).  Coordinating and consolidating ongoing electrification and smart grid initiatives would require little additional money, but could pay substantial dividends.

Put a Price on Carbon--But Do It Smart.  Finally, if we want to push Santa for a really good gift, we should ask him to put a price on carbon.  But we should not ask for cap-and-trade.  That train has left the station and hit a wall.  If Santa is going to put a price on carbon, he should do it the smart way: through a fee-and-dividend trust.

A fee-and-dividend trust differs from cap-and-trade in that the trust does not involve a tax or take money away from consumers.  Under a fee-and-dividend program, fuels are assessed a fee based on their carbon content.  But the proceeds of that fee go back to consumers on a pro rata basis in the form of a check, rather than to the government in the form of a tax.  The program would be administered by a national trust in which the federal government would have no right to any of the funds deposited.

A fee-and-dividend trust makes a simple proposition to consumers:  If you use more carbon-based fuels than your neighbors (which consumers will be free to do), you will pay your neighbors for that privilege.  If, however, you do the right thing for the country and use less, you will receive a check from the trust that is greater than the extra amount you will spend for higher priced, carbon-based fuel.  In short, conscientious consumers can make money by reducing on a voluntary basis their carbon footprint.  This kind of program promotes a “race to the bottom”, with consumers interested in making money competing for ways to cut carbon-fuel consumption.  What could be more American and what could be a more effective way to reduce greenhouse gas emissions?

In order to avoid the fate of past cap-and-trade initiatives, however, the fee-and-dividend trust must geographically weighted.  One of the underappreciated reasons why the cap-and-trade plan pushed by the Obama Administration was politically dead on arrival was because it did not address the North Dakota Problem or the Kentucky Problem.

The North Dakota Problem is that it costs about twice as many btu’s per year to live in North Dakota as it does in New York City.  For reasons that should be pretty obvious, it just does.  As a consequence, any tax on btu’s or the carbon-based fuels that produce them disproportionately impacts residents of North Dokota relative to residents of New York City.  Accordingly, no political leader from North Dakota could vote for cap-and-trade and hope to keep his job.

The Kentucky Problem is a little different, but poses the same political problem.  For both geographic and historical reasons, the economy of Kentucky depends on coal.  There simply are no good energy alternatives for the Commonwealth.  Kentucky’s wind resource is poor and large scale solar makes no economic sense.  Coal will be producing electricity in Kentucky for decades to come, no matter how much anyone would like things to be different.  Making residents of Kentucky compete for reducing carbon emissions with residents of California, who have much greater access to electricity generated by wind, solar energy and even natural gas than residents of Kentucky, is a flat-out losing proposition for Kentucky.

The good news, however, is that it is not necessary for North Dakota to compete against New York or for Kentucky to compete against California in order for the United States to reduce greenhouse gas emissions.  It is only necessary that residents of Kentucky and residents of North Dakota compete against each other.  In a fee-and-dividend trust program this can be achieved by adjusting the amount of trust distributions based on the historic greenhouse gases emissions of the zip code districts in which citizens are resident.   If residents of a certain area have historically had to rely on more carbon-based fuel than residents of other areas, they will be entitled to a higher proportionate dividend from the trust.

This disproportionate dividend would compensate residents of North Dakota and Kentucky for the fact that their use of carbon-based fuels will necessarily be higher than those of the rest of the country.  Regional weighting can be reduced over time to encourage long-term improvements in regional fuel mix.  But that transition should occur over a period of decades, in order to reflect the fact that the larger issues that drive regional differences in carbon emissions will likely be resolved only by technologies and technological advances that do not exist today.

The bottom line, however, is that carbon would have a price and price signals will more accurately reflect the true cost of carbon-based fuels in the market.  That would a very nice present from Santa indeed.

Merry Christmas.