In early May, 100 of the nation's top business leaders gathered for a summit at a private resort nestled on 250 acres in California's Napa Valley. The attendees, gathered at the invitation of Silicon Valley venture capitalists, included CEOs and other top executives from such Fortune 500 corporations as Wal-Mart, Proctor & Gamble and BP. They had been invited to discuss ways to end America's fossil-fuel addiction and save the world from global warming. But in reality they had come to make money for their companies – and that may turn out to be the thing that saves us.
For three days, the executives listened as their colleagues and business rivals described how they are using new technologies to wean themselves from oil and boost their profits in the process. DuPont has cut its climate-warming pollution by seventy-two percent since 1990, slashing $3 billion from its energy bills while increasing its global production by nearly a third. Wal-Mart has installed new, energy-efficient light bulbs in refrigeration units that save the company $12 million a year, and skylights that cut utility bills by up to $70,000 per store. The company, which operates the nation's second-largest corporate truck fleet, also saved $22 million last year just by installing auxiliary power units that allow drivers to operate electric systems without idling their vehicles. In a move with even more far-reaching potential, Wal-Mart has ordered its truck suppliers to double the gas mileage of the company's entire fleet by 2015. When those trucks become available to other businesses, America will cut its demand for oil by six percent.
The executives gathered at the retreat weren't waiting around for federal subsidies or new regulations to tilt the market in their direction. Business logic, not government intervention, was driving them to cut energy costs and invest in new fuel sources. "We haven't even touched the low-hanging fruit yet," Kim Saylors-Laster, the vice president of energy for Wal-Mart, told the assembled CEOs. "We're still getting the fruit that has already fallen from the trees."
As the discussions at the summit demonstrated, America's top executives know something that the Bush administration has yet to realize: America doesn't need to wait for futuristic, pie-in-the-sky technologies to cut its reckless consumption of oil and coal. Our last, best hope to stop climate change is the free market itself. There is gold in going green, and the same drive to make a buck that created global warming in the first place can now be harnessed to slow the carbon-based pollution that is overheating the planet.
And green investment will not just enrich a few corporations. We know from past experience that it will strengthen America's economy, not to mention our national security, our economic independence and the effectiveness of our world leadership. During the oil crisis sparked by OPEC in the 1970s, American business and government went into overdrive to promote conservation and develop alternatives to Middle Eastern oil. Between 1977 and 1985, Detroit boosted the fuel efficiency of its automobiles from eighteen to 27.5 miles per gallon. Oil use shrank by seventeen percent – while the economy grew by twenty-seven percent. Even more important, oil imports from the Persian Gulf plunged by eighty-seven percent, breaking the cartel's power over America's economy. Had we stayed the course, we would not have needed to import a single drop of oil from the Middle East after 1986 – achieving true energy independence that, in all likelihood, would have enabled us to avoid the devastating attacks of September 11th, as well as both Gulf wars.
"We customers have more market power than the oil cartel," says Amory Lovins, the physicist whose efforts to get big business to go green have made him the Paul Revere of energy independence. "OPEC has its megabarrels, but we are the Saudi Arabia of negabarrels – the energy we save through conservation and energy efficiency. The reality is, we can save oil faster and cheaper than the oil cartel can conveniently sell less oil."
So why, if we can profitably slash planet-warming pollution, does the world face a climate crisis? The answer is simple: market failure.
The global climate crisis is the result not of an orderly free market, but of a distorted market run amok. A truly free market is the planet's best friend. Free markets promote efficiency. "Efficiency," after all, means the elimination of waste – and pollution is waste. The pollution that is catastrophically heating the Earth is the result of market failure; the incapacity of a poorly designed marketplace to place a proper value on an essential asset – the atmosphere. That market failure has brought us to the brink of a planetwide environmental collapse.
King Coal and the oil barons like to pretend that their industries dominate the energy sector because their products are cheaper and more efficient than alternative fuels, giving them a competitive advantage in the free market. This is a myth. The dominance of fossil fuels is the direct result of corporate welfare and crony capitalism that would make a Nigerian dictator balk. Direct federal subsidies to Big Oil – everything from loan guarantees and research support to outright tax breaks and waived royalty fees – amount to as much as $17 billion a year. That taxpayer money distorts the marketplace, artificially lowering the price of gasoline and making it difficult for other fuels to compete. Little wonder that the oil industry was able to report profits of more than $137 billion last year.
Hidden subsidies to the industry are even higher than the direct benefits it receives from our government. Studies show that oil pollution causes at least $4.6 billion in damages each year to crops, forests, rivers, buildings and monuments – destruction that Big Oil is not held liable for. The industry also fails to pick up the annual tab for the $54.7 billion that Americans pay to treat the host of debilitating illnesses caused by oil pollution. In addition, taxpayers spend as much as $100 billion each year to defend the industry's infrastructure around the world, maintaining bases in the Middle East and providing military escorts for oil tankers bound for America. And that does not include the more than $100 billion that the Pentagon has spent annually in Iraq since the war began – another expense that should appear on Big Oil's tally sheet.
According to Terry Tamminen, former director of the California EPA, the true costs of our oil dependence run as high as $807 billion a year – or $2,700 for every U.S. citizen. If all the hidden costs that Americans currently pay for oil were reflected in the price at the pump, gasoline would cost more than $13 a gallon. In short, taxpayers and consumers are essentially giving the oil industry a subsidy of $10 for every gallon of gas sold in America. If we simply eliminated those subsidies and created a truly free market, renewable sources of energy would beat oil – as well as nuclear power and coal, which receive equally grotesque subsidies. It is only through these giant subsidies that gasoline has a prayer of competing with alternative sources such as biofuels and wind, which produce energy far more cleanly and efficiently, at far less cost.
Back in the 1970s, President Jimmy Carter attempted to level the playing field by creating incentives and minimal subsidies to jump-start clean fuels in the marketplace. But then Ronald Reagan took office and ordered the solar panels that Carter had installed on the White House roof torn off. He rolled back fuel standards for automobiles, killed federal incentives that had given America a commanding lead in wind and solar power, and doubled our oil imports. Reagan's efforts fueled the current oil addiction that has us acting like a crack-house junkie rolling old ladies for drug money. Our jones for petrodrugs has not only superheated the planet, it has embroiled us in the Mesopotamian quagmire and made America a pariah among civilized nations, damaging the cause of democracy across the globe.
Our deadly carbon dependence is the result not just of subsidies, but of a deliberate criminal effort by the oil companies and auto manufacturers to subvert the free market and rig the system in favor of their products. Between 1920 and 1955, General Motors, Standard Oil, Firestone and others financed a front company that systematically bought up and destroyed electric streetcars in forty-five American cities, including New York, Philadelphia, St. Louis and Los Angeles. In an illegal conspiracy to eliminate mass transit, they tore up the rail lines or buried them beneath asphalt tarmac from oil refineries, replacing clean, efficient streetcars with more costly and filthy diesel buses. During the Truman administration, the Justice Department successfully prosecuted GM and the oil companies for antitrust conspiracy, but following their convictions a friendly judge allowed them to walk, slapping one executive with a $1 fine. The crime was done
In 2003, the Justice Department didn't even bother to investigate automobile manufacturers who maneuvered to kill the electric car. After suing California to repeal a rule mandating the production of cleaner vehicles, GM recalled every one of its EV-IS, its popular all-electric car, and sent them to a demolition yard to be crushed. GM also sold its stake in the car's nickel battery system to none other than Texaco – a company with a vested interest in keeping the innovative technology under lock and key.
The truth is, we have designed a perverted market system that rewards oil companies, carmakers and other polluters for bad behavior, allowing them to dispose of their wastes into the publicly owned air for free. But new technologies and materials and the mounting anxiety over global warming give more cause for hope than ever before. With a little tinkering we can reconfigure and rationalize the market so that it punishes bad behavior (releasing carbon dioxide and other greenhouse gases into the atmosphere) and rewards good behavior (reducing pollution and conserving energy). Such a move would unleash the extraordinary entrepreneurial energies of our nation so that every American could profit by devising and implementing their own solutions to global warming. With a rational marketplace, new materials and technologies would allow us to rapidly rerun the playbook strategies that nearly liberated us from oil in the 1980s. Within two decades we could get off imported oil completely – this time for good.
If we really want free markets in America, all direct subsidies to the fossil-fuel industry should be eliminated. In addition, indirect subsidies or "externalities" – the hidden costs of global warming – should be accounted for through a carbon tax. By taxing pollution instead of productivity, America could spur a wave of technological and commercial innovation that would rival the Industrial Revolution, harnessing the power of the profit motive to solve the greatest crisis facing our planet.
Given the clout of the oil industry, however, it will take time and enormous political will to implement a tax on carbon production. Fortunately, there are ways we can foster the immediate adoption of cleaner and more efficient energy technologies – without pissing off the oil industry and its powerful political allies, all eager to stall reform. Here are six modest, tried-and-true mechanisms we can implement to quickly foster free-market solutions to global warming:
California is considering imposing a $2,500 fee on Hummers and other low-efficiency automobiles – and then rebating that money to drivers who choose to purchase more efficient cars like hybrids. This cross between a fee and a rebate motivates manufacturers to develop less-polluting vehicles and is a perfect example of how to give consumers an incentive to conform their self-interest to the public interest, turning every driver into a guerrilla warrior in the battle against global warming.
Cap and Trade
One of the most effective tools for harnessing markets to save civilization is a mandatory cap on planet-warming pollution – one that begins by cutting emissions now and then reduces them eighty percent by 2050. Establishing mandatory limits in all industrial sectors would create a huge market for products and technologies that use less energy and emit far less carbon. In addition, companies that figure out how to cut their emissions to below their limit will earn credits that can be sold to those companies that can't meet their quota, creating a powerful incentive to actually beat the pollution limits. California, New York and a dozen other states are already experimenting with various cap-and-trade systems, recognizing that if they level the playing field with marketwide limits and smart incentives, the market will respond.
Revenues from the sale of carbon credits under the cap-and-trade system should be used to create market-based financial incentives to speed the development and adoption of promising new technologies. Europe has created a gold rush in solar energy by promising to buy energy at premium pricing from homeowners who generate power from rooftop panels. All across Europe, citizens are scrambling to cover their roofs and homes with solar collectors and transform their residences into mini power plants. "Everyone is becoming an entrepreneur," says Bill McDonough, an architect who has received three presidential awards for his sustainable designs. Connecticut already offers a rebate of up to $46,500 for homeowners who go solar, and Congress could boost the rapid expansion of existing technologies by providing similar incentives for solar water heaters, residential wind turbines, geothermal systems, modern electronic lighting and improved insulation. Incentives could also help Detroit convert to electric cars and encourage consumers to replace aging automobiles, washing machines, air conditioners and refrigerators.
Utilities currently make money only by producing and selling us more electricity – giving power companies little incentive to promote energy efficiency. California, however, has decoupled profits from energy sales, creating a new kind of market that rewards efficiency. Utilities make money not by selling power but by helping consumers use it more productively in their homes. The result: Californians use almost half as many kilowatts as other Americans. "We've been able to keep energy demand flat for thirty years with a rapidly growing population, while the average per-capita energy consumption for the rest of the nation has soared by fifty percent," says Tom King, CEO of Pacific Gas and Electric. "And we haven't even made a dent in the potential that's out there – we can go beyond anything anybody's ever projected."
California also took an early lead in this area, allowing homeowners who install solar panels or wind turbines to sell their excess electricity back to the utility. The electric meter actually spins backward when the home is generating more electricity than it consumes, and customers are billed only for the net amount of energy they consume from the utility's grid. "Our objective is to give every homeowner the incentive to turn their house into a clean-energy power station," says King. "We can not only replace gasoline and dramatically reduce carbon emissions, but we'll also have a grid that is more decentralized and hence more resilient."
The quickest way to improve the energy efficiency of appliances, cars, trucks and buildings is to establish minimum standards based on the current state of technology. Rather than prescribing specific solutions, performance standards harness the market by establishing targets and rewarding companies that create the best emissions-cutting technology. The government has successfully done this for energy-intensive appliances like refrigerators, which now consume seventy-five percent less energy than they did twenty-five years ago.
We also need strong standards to keep some very bad technologies from rushing into the market under the banner of energy efficiency. A particularly ugly aspect of the current coal rush, for example, is the desire of the industry and its servants in Congress, Democrats and Republicans, to build a new breed of refinery that would liquefy coal to replace gasoline. Advocates claim that liquid coal is clean, but the process results in nearly twice as much carbon pollution per gallon as gasoline. And whatever the process, why would we want to create an entire new industry dependent on an energy source that is procured by blowing up mountains in Appalachia and strip-mining the West?
What would happen if we created a truly free market, one in which alternative energy could compete on an equal footing with oil and coal? In 2004, physicist Amory Lovins answered that question. In a study co-funded by the Defense Department, Lovins and his colleagues at the Rocky Mountain Institute detailed how the United States can completely wean itself off all oil –and create a much stronger economy – by 2050.
The transition from oil outlined by Lovins would occur in two stages. First, half of our current demand for oil can be eliminated simply by using oil twice as efficiently. We've already done this once – doubling our efficiency since 1975 – and we can do it again simply by encouraging the adoption of existing technologies. Then, the remaining half of our oil demand can be replaced with a combination of natural gas and advanced biofuels. The result would not only end our oil addiction completely, it would also lower our energy costs to the equivalent of $15 a barrel – a quarter of what we currently pay.
The study by Lovins shows how – with a one-time investment of $180 billion – we can completely retool the automobile and aviation industries, create greener and more energy-efficient buildings and foster a modern biofuels industry. Even assuming that the price of oil drops by more than half by 2025, Lovins shows that going oil-free would net Americans $70 billion a year – an impressive return on our initial $180 billion investment! At the same time, we would not only reduce the threat posed by global warming, we would also generate a million new jobs – three-quarters of them in rural and small-town America.
There is no shortage of technology and innovation waiting to be unlocked and put to use by the market. We already possess the high-performance plastics, ultralight steel and carbon-fiber composites needed to reduce the weight of cars and trucks – a move that would cut fuel consumption in half while improving auto safety. This is not the Jetsons' stuff: Opel has already produced a prototype carbon-fiber roadster that does 155 miles an hour and gets as much as 94 miles per gallon. And within the next five years, Toyota and General Motors are expected to market "plug-in" hybrids that will enable drivers to travel at least 150 miles on a single charge. "It's a no-brainer for most drivers," says former CIA director James Woolsey, who views global warming and energy dependence as the number-one threat to America's national security. "And the only infrastructure you need is an extension cord in your garage."
A green revolution is also taking place in building construction. In Lower Manhattan, according to city officials, every new construction project valued at more than $25 million is being built on environment-friendly principles. More than 500 mayors of American cities have passed or pledged to pass green standards for new development, and developers who once fought such moves now recognize that they can quickly recover any added costs of green development through energy savings, higher rents and higher resale values. Indeed, the advantages of building green are now so widely recognized that the nation's top real estate manager, Steven Roth of Vornado, recently told an industry group, "If you build a new building that is not green, you're going to be in trouble."
Even more dramatic is the potential that already exists for unlocking more energy from natural gas. According to Lovins, we can save half the natural gas we currently use – while cutting its cost to as little as one-tenth its current price – simply through more efficient use. Two-thirds of the savings will come from conserving electricity during peak hours – by relying on existing technology like the so-called "intelligent grid," which can dim lighting and turn off hot-water heaters in millions of homes and offices on hot summer days. The remaining third will come from switching to more energy-efficient devices, many of which are already on store shelves.
Even making a few modest changes in our homes could dramatically curb carbon pollution. Widespread use of new LEDs – light-emitting diodes that are brighter, longer-lasting and ten times more efficient than conventional bulbs – could eliminate up to ten percent of U.S. electricity demand. An even simpler innovation – switching to cold-water laundry detergent – would eliminate enough CO2 each year to meet eight percent of the U.S. target under the Kyoto treaty. Using existing off-the-shelf technologies, Lovins estimates, would cut natural-gas costs by $50 billion every year – displacing demand for foreign oil without building a single new natural-gas terminal or coal-burning power plant.
Finally, a marketplace freed from oil subsidies would tap the energy wealth of biofuels already in use around the world. Brazil has eliminated two-fifths of its gasoline demand with ethanol produced from sugar cane, and American farmers have the capacity to produce 4 million barrels a day of cellulosic ethanol without touching an acre of farmland, simply by harvesting switchgrass that protects topsoil, wildlife habitat and water purity. According to Lovins, the combination of advanced biofuels, fuel-efficient cars and better use of natural gas Could create more than enough energy to end America's oil imports from all OPEC countries by 2025. By 2050, when all the gas-guzzling cars and trucks currently on the roads will be reduced to scrap metal, we can completely eliminate oil as a fuel source.
Aggresive action by the federal government could speed up our transition from oil faster than even the most optimistic predictions outlined by Lovins. If, for example, we made national investments in hydrogen fuels, which are more than twice as efficient as hydrocarbons, America could actually export energy from the Great Plains – the "Saudi Arabia of wind." The Dakotas alone have sufficient wind to make all the hydrogen necessary to run every car and truck on the road in America, at nearly triple the efficiency of gasoline. At the Napa Valley summit, business leaders watched a presentation by John Woolard of BrightSource Energy, which builds large-scale solar power plants. With a level playing field, he boasts, "we'll be able to power the entire United States on less than one percent of our total land."
But the challenge facing us today is not one of gambling on unproven technologies, or even of choosing among wind or solar or hydrogen or switchgrass as the best way to reduce global warming. Our challenge is to create a rational marketplace – one that serves the broader interests of our nation by unleashing the innovative power of American entrepreneurs to transform our energy economy. Done right, this transformation will not only curb global warming, it will create an engine of sustainable economic growth for generations. By enabling current technologies to compete with oil, America can triple the efficiency of our cars, trucks and planes, cut our demand for oil and natural gas in half – and walk away more prosperous for our efforts. "Energy independence is possible – and if done correctly, it can fuel economic growth," says King, the PG&E executive.
This new energy economy will not only save the planet from overheating, it will create jobs in the process. "We need to build a trillion solar panels," says McDonough, the award-winning architect. "There are four jobs installing solar panels for every manufacturing job in creating them. The Chinese can't capture those jobs, because the energy is inherently local. The Chinese can't steal our photons."
A new wave of innovation is already taking place all across America. Lee Jensen, a dairy farmer in Elk Mound, Wisconsin, is converting cow manure from his family's farm into enough electricity to power 6o0 homes. Brian Fairbank, a ski resort operator in Hancock, Massachusetts, is building a commercial wind turbine near the summit of Jiminy Peak – a first for a ski resort. And thousands of pioneering homeowners and businesses have installed energy-saving windows, solar panels and compact fluorescent light bulbs, while buying up hybrid-electric cars as fast as they roll off assembly lines.
One of the only Americans left behind in this rush of innovation is George W. Bush. The president continues to insist that improving fuel efficiency would hamstring the American economy and give an economic advantage to China, which is exempted from the global-warming reductions laid out in the Kyoto treaty. To the contrary, boosting fuel standards would give us the economic advantage. Efficiency is strength – that was the lesson Detroit didn't learn when Japan used energy-efficient cars to conquer the American automobile market. In 1970, U.S. automakers had eighty-six percent of the domestic car market, and the Japanese had three percent. Today, Japan has forty percent, while Detroit is at forty-two percent and declining.
Unlike our government, China understands the connection between fuel efficiency and a strong economy. Beijing has already passed efficiency standards for automobiles that are so high that many American-made cars can no longer be legally sold in China. Thanks to our inefficiency, we risk losing a market of 1.3 billion people.
Rather than using the industrial growth in China and India as an excuse to keep polluting, America should seize the economic opportunity that these emerging markets represent. To support its rapid industrialization, China is building a new coal-fired plant every week – generating unprecedented levels of pollution that threaten the entire planet. If we unleash the innovative power of our own market, the United States could be in a unique position to produce the technologies that China will need to avoid destroying itself.
"They are locked on a gerbil wheel," says Alan Salzman, a venture capitalist with VantagePoint, which is investing heavily in climate-saving technologies. "They have to keep up their growth rate of eleven percent to produce enough jobs every year to avoid political unrest. If we don't figure out the technologies that allow them to hopscotch a carbon-based economy, we face an eco-apocalypse."
This story is from the June 27, 2010 issue of Rolling Stone.