Learning to See the Future

A Clear Price Signal to Visualize the Optimal Energy Investment Shift

[The Note for July 2014]

The single most significant obstacle to moving major investment capital into clean energy is uncertainty about the future market value of doing so. Will such a move put a business at a competitive advantage or at a relative disadvantage, if everyone else is buying cheap fuel that fits seamlessly into the prevailing infrastructure? What has long been missing is a way to move market-dominant private-sector capital into clean alternatives. In a sense, the biggest challenge everyone is facing, when thinking about the future, is how to visualize the future itself, and how to trust that one’s visualization is reliable. The most cost-effective and practically efficient way to do this is with a clear, decisive price signal that allows market players to more clearly visualize an optimal investment-transition trajectory.

The right signal will shift market dynamics, create structural incentives for a transition to more efficient practices, and allow the marketplace to go to work solving the big problems that uncertainty has so far prevented us from addressing with sufficient resolve. Inefficiencies in the current energy market model are concealed by direct, indirect and structural incentives that make the fossil fuel (FF) business model appear cheaper than it is. This externalization of costs has its limits, and we are brushing up against them now. The energy marketplace demands ever greater efficiency. Carbon fuels are a finite resource, not conducive to long-term competitiveness on both price and efficiency. Renewable clean energy (RCE) resources have a far higher total energy capacity. Human population is expanding, and societies are advancing. The world requires ever more energy from ever more diverse technologies and resources.

The question is: When will the definitive transition begin in earnest? The current structure of the global economy favors the flow of investment capital to new fossil fuel production. The rate of production from any given well declines steadily once extraction begins, so FF producers must constantly invest in new production. If there were structural market certainty indicating that RCE will replace FF as the smarter future investment, then the dollars going into new production could simply go into RCE production. Instead of a struggle between rival industries, the wealth and technology of the FF sector could secure a strong RCE future. So, how can lenders, investors and industry identify a reasoned and reliable timeline for the optimal transfer of FF capital to RCE?

Financial expertise is not about always accumulating more of one commodity; it’s about navigating diverse opportunities to ensure maximum return on investment. There is a simple example of what it means to see or to miss a moment for optimal investment transition: Pontiac didn’t see how electric vehicles could be muscle cars; Tesla did.

A comprehensive, market-ready, structural solution (a clear price signal) will bring this optimal trajectory into focus. Zero action provides zero clarity and allows massive risks to accumulate. Regulation is costly, puts an unfunded burden on business and taxpayers, provides little clarity. Cap and trade is volatile and creates new artificial markets that can muddy future value calculations. A straight carbon tax gives a clear price signal, but targets consumption, which means it can slow down economic growth and exacerbate uncertainty. A revenue-neutral carbon fee and dividend plan, on the other hand, provides a clear price signal, gives leverage to consumers, provides a clear and market-wide incentive for committed innovation, and a discernible path to sustainable future gain. The saliency of a direct monthly rebate and a steady rate of increase brings the path toward smart future investment into focus, and allows everyone competing in the marketplace to adjust, plan and prosper.


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