Michael Levi discusses the next steps after the signing of the Paris Climate Agreement, its implementation, and implications for future climate change diplomacy.
MCMAHON: Mike directs CFR’s Center for Geoeconomic Studies. He’s the senior fellow for energy environment—energy and environment. And he regularly provides smart insights on global climate policy on major media, including CFR.org, where he’s on our webpage today.
I’m going to speak with Mike for about 15 minutes about the significance of today’s events, and then we’re going to open up the call to those of you on the line with questions. We are set to run to about 11:45, maybe a little bit later, because we’ve got to go in a little bit later today, and look forward to your questions.
So Mike, why don’t we kick this off? As we speak here, a record number of leaders are set to be on track to sign the Paris climate agreement. But can you walk us through what this step today—what today means, what—and what’s going to matter in the weeks and months ahead? I mean, this is more of a sign of good intentions at this point, is that right?
LEVI: It’s a sign of intentions of varying ambition, but on top of that, it’s a framework for trying to maximize the odds that countries follow through with those intentions, and that they increase their efforts over time.
We’ve had negotiations for a very long time around global climate agreements, typically focused on what we call a top-down approach, coming to a common goal and then dividing it up among countries. We’ve switched in recent years to what’s called a bottom-up approach, where each country goes through its own domestic process to figure out what it can try and deliver. And that’s where the Paris agreement was built around, a set of domestic efforts by each country, and layered on top of that, a set of measures for transparency, for verification, and for increasing efforts over time.
And so in December in Paris, countries agreed that there was going to be this Paris agreement. Today, they are signing the agreement; I believe there are 168 countries signing the agreement today, some heads of state, some high-level but not head-of-state officials. And then there will be a process of ratifying or otherwise confirming the agreement in different countries. For some countries, that will be ratification by a legislature; for others, it will be an executive decision. For the United States, it will be an executive decision.
So this is a part-way point in the process, but obviously a very high-profile one, and one that is intended to magnify the political importance of delivering on the promises that countries have made.
MCMAHON: And the agreement is not supposed to take effect until at least 55 countries representing 55 percent of the world’s emissions ratify it; is that right?
LEVI: That’s right. And that would be easy if there was a straightforward way for the European Union to ratify, because you’re going to have there a little difficulty with the United States, which is not doing congressional ratification, and with China, which does not have an independent legislature. But in Europe, which is the third-largest emitter if you look at the collective emissions of the EU, you need processes to work their way through in each member country. And that’s going to take—
MCMAHON: Twenty-eight, right?
LEVI: —a decent amount of time—At last count. A decent amount of time.
I don’t think a lot of people expect that to happen by the end of this year, so then you have to start putting together combinations of other countries. Can you do India? There’s a fractious relationship well beyond climate between the prime minister and the legislature right now. Can you put together countries like Brazil, like Indonesia? So there are different ways to add up to 55 percent; it is doable this year, but it is not a trivial task.
MCMAHON: So all that being said, there’s still kind of a feel-good vibe occurring today at the U.N. There certainly was one in Paris, and you were there and posted on it soon afterward, and sort of gave some sense of how to read it. But it was definitely seen as a—as a positive step. And there were some smart, you know, signposts laid out for how countries can meet their goals, which are still seen as fairly modest, I believe.
But meantime, even in the period between Paris and today, there’s been a number of sobering reports coming out on the climate. You’ve had, you know, first three months of 2016 listed as hot as ever recorded. You’ve had this huge amount of melting on the Greenland ice sheet, the warming waters creating whitening of coral reefs in the Great Barrier Reef and elsewhere. I mean, is this—these kinds of events, are they going to focus minds or focus leadership even more so, or the complicated math that you just mentioned, it’s still going to intrude? Is there going to be a climate focusing moment, perhaps, in the midst of all of this?
LEVI: I mean, I’m going to say two, maybe two things. First, I think you need to separate what it takes to get a deal ratified and what it takes to drive climate policy forward. The two are related, but they are far from being the same thing. Having a deal ratified should, all else being equal, help move climate policy forward, but climate policy is ultimately driven by a host of forces, primarily domestic political forces, economic change, technological change. That’s the reason that Paris took this bottom-up approach. And research seems to indicate that it’s local events that make the potential risk of climate change salient and visible and visceral for people, that really motivate them. So it actually isn’t necessarily the big headline-grabbing thing halfway around the world; it’s the smallest thing that we might not see in the headlines in major papers that happens within a city or a state that actually changes some of that politics.
So I don’t know that you look at the—at these really big things to have—to move the needle all that much.
The other thing I’d say is when you look at the Paris agreement, it’s important to judge it against two benchmarks: One is, does this address the large risks—fully address large risks of climate change that we’re worried about? And the answer is, of course it does. We have—we have scientifically informed judgments about what kinds of risks, what kinds of thresholds we want to avoid. International talk typically focuses on two degrees centigrade; 3.6 fahrenheit, and you can pick other goals that you’d like. Whatever sensible goal you pick, the collective efforts underway globally don’t meet it. So against that measure—and it’s really important to remember that measure—we’re still well short.
But I think you also need to judge international diplomacy by what’s possible for international diplomacy to deliver, right? It is not possible for a gathering of leaders to come to some kind of formula that eliminates the realities of domestic politics, economics, and technology. And you know, within that reality, I mean, Paris does a very good of maximizing the potential for international diplomacy to help move domestic efforts forward.
So those—there are those two different judgments. One is about how this matches up to the ultimate goals on climate change; the other is, how does this match up to what international diplomacy can deliver? And it’s not—this is not a unique division to climate change. We have a lot of global problems where international diplomacy can make things better, but can’t solve the whole thing by itself.
MCMAHON: Now, so let’s take, obviously, one of the crucial countries here—second-largest emitter, the United States. The Obama administration has navigated its diplomacy through—helped by, you know, executive actions and especially the—placing a lot of importance on the Clean Power Plan. This is the Environmental Protection Agency plan for reducing carbon emissions from power plants. But that’s now under legal challenge. There is a political race going on in which, you know, lead—some of the lead candidates on the Republican side are, you know, challenging the notion of human-caused climate change. And so how—can you talk a little bit about the challenges on the U.S. side on carrying forward from this moment and the signing today?
LEVI: So this administration came in and tried a legislative route to dealing with the climate challenge. And particularly in the early years, that hit some very large roadblocks. They wanted to pursue a cap-and-trade system, as did John McCain during the 2008 campaign. And that went—that did not fly in Congress. So they turned to executive action under existing rules—rules that were not designed for this problem, but that could be adapted to the climate problem.
So the benefit of that, if you are focused on reducing emissions, is that that would be done without strong congressional support. Obviously, the flipside is that an executive action can be reversed, at least in principle, by a future administration.
What we have now is a—is a legal challenge to the Clean Power Plan, to the administration’s rules under the Clean Air Act for reducing emissions from existing power plants—power plants. And that’s been a bit of a topsy-turvy road the last—the last few months. The Supreme Court, 5-4, granted a stay the opponents of the—of the plan, a stay on the plan, which was widely interpreted as indicating that the Court might be hostile to the plan, because arguments for a stay were considered to be relatively weak. But Justice Scalia then passed a week or two—or, you know, a week or so later, and so now the Supreme Court is presumably deadlocked 4-4 on the Clean Power Plan.
So the plan sits right now with the D.C. Circuit Court. We don’t know what the outcome will be there. Whatever it is, it will probably be challenged by the other side. Depending on where the Supreme Court stands, it will either come probably to a 5-4 ruling, or if there is a 4-4 ruling it sets no precedent and the—and whichever side loses will probably bring up the case again. So there is that one piece.
The other big piece of executive action that’s happened is on cars and trucks. There are fuel-economy rules for cars and trucks that extend through 2025. There is a mandatory review of the stringency of those that is supposed to happen over the next year or so, and that’s going to be a contentious review. We know more now about the costs of more efficient technologies, but we still have enormous disagreement about exactly how difficult it will be to bring those into the fleet, and we have lower oil prices. My colleague Varun Sivaram and I wrote a study, published late last year, redoing the cost-benefit analysis with lower but also more volatile and unpredictable oil prices, and came to the conclusion that while the case for the fuel-economy rules wasn’t as clear-cut as it was several years ago when they were put into place, the benefits still well exceeded the costs, and exceeded the costs more than they would if we were to weaken the standards.
I’ll put it—I’ll say one more thing. In the near term—you know, we’re talking about the Paris agreement, 2025 goals, U.S. reducing emissions by 26 to 28 percent below 2005 levels. The first benchmark is really the 2020 goals that the United States laid out back in 2009, and that’s a goal of reducing emissions by 17 percent below 2005 levels by 2020. There was concern that, with a stay on the Clean Power Plan, with a delay on the start date to 2022 to accommodate some industry concerns, that the United States would have trouble meeting that goal. The surprise legislative move was last December, when Congress agreed to a very large extension of the tax credits for wind and solar energy. And that, combined with these persistent low natural gas prices that we’ve seen over the last few years, should make it possible still to hit that 2020 goal, which other countries will be looking at, even if the Clean Power Plan is in limbo for a while.
MCMAHON: Well, why don’t you just—touching on that point, one more question before we open it up. So, but on the broader energy picture, we have this phenomenon—I’m not sure if it’s a phenomenon anymore—of lower oil prices with oil prices. Is that making the clean energy adoption that we’ve been seeing, that is certainly incentivized—is that making it more difficult?
LEVI: There’s no question that it makes it more difficult at the margin. But the—you know, the wider reality is pretty complicated. Clean energy adoption is driven by technological change, by the price of the competition, and by policy. And you’re still seeing a lot of impressive technological change.
You see, obviously, more impact in the transportation world—cars and trucks—because there’s direct competition with oil. And you see varied impact in electricity, for a variety of reasons: first, because the passthrough from changes in oil prices, changes in natural gas prices vary across the world; second, because natural gas is the primary competition only in some places.
And then there’s this overlying theme, which is that oil prices don’t just have a direct economic impact on lower-carbon technologies, they have an impact on politics and policy. And that policy, in turn, affects deployment of these technologies.
Now, in some countries, the oil price is a marginal factor. So if you look in Europe, gasoline taxes are driven primarily by revenue needs and to some extent by environmental concerns, and not really by anything that changes when the price of oil drops. In contrast, in the United States, fuel-economy rules have historically been driven by a desire to reduce the national cost of—or oil dependence, and in some sense reduce our oil import bill. And so one could imagine that the political support for that sort of thing might weaken in a lower oil price environment, and that’s in fact what we saw in the mid-1980s. So this—the policy connection—by the way, there are also cases—and we’ve seen these recently—where the lower oil price has strengthened emissions-reducing policy. We’ve seen a wave of reforms to energy subsides around the world that economists and environmental advocates have been begging for for years. We’ve finally seen them with the lower price of oil because they’ve been less politically painful to enact. So that’s—so that’s a peculiar dynamic, where lower oil prices leads to a policy change that actually helps on climate change.
So watch the policy connection. I think that’s my bottom line there. The direct economic impacts that pass through to emissions may, in the long run, be similar or even smaller than the ones that result from policy shifts.
MCMAHON: That’s a fascinating take.
Well, I’d like to, at this point, invite members to join our conversation with their questions. And a reminder this conference call is on the record, and please limit yourself to one question and keep it concise so we can get as many as possible members to speak on this call.
So, at this point, Operator, can you let me know if there’s a question on the line?
OPERATOR: Yes. At this time, we will open the floor for questions.
(Gives queuing instructions.)
OK, our first question will come from David Goldwyn with Goldwyn Global Strategies.
Q: Hi, Mike. Thanks for doing this this morning.
I wonder if you could talk a little bit about the status of INDC implementation. Are countries ready to implement? Is there help for them to figure out how to implement? And do you have any sense of what the mix of gas and renewables will be if they follow the plans they have submitted? Thanks.
LEVI: Thanks, David.
So one of the—you know, for those of us who live in acronym-land, one of the exciting things about the Paris agreement is it’s going to turn the INDCs into NDCs. And I’ll—let me spell that out for people who aren’t in the weeds of this. INDCs are intended nationally determined contributions. What that means is that the countries came up last year with their plans. They were nationally determined because they weren’t negotiated—they were determined within countries—and they were intended because there was no deal yet. So now we’re dropping the “I” because these are no longer intended. Once they become part of this agreement, they are what countries have promised to do. They are nationally determined contributions, period.
What’s the status? The status hasn’t changed all that much since the Paris agreement was signed. I mean, if you look at the most prominent countries, we just talked about the United States. In China, you obviously have had a lot of economic turmoil. So far, I don’t see that having an impact on their energy-and-climate-related efforts. Obviously, if you have substantial economic slowdown over time, you will have less capital stock turnover, less opportunity to reduce emissions. That’s sort of paradoxical. You’d think that with lower growth you could have lower emissions, but it in some ways works the other way. If you see substantial rebalancing, which we also are seeing signs of, then you shift to less emissions-intensive activities. And in Europe, the other sort of big pole there, has its continuing economic challenges, continuing challenges to European unity, no real signs of change on the climate front.
On the gas and renewables piece, in most ways this remains up in the air. Again, let me just give you two examples.
In China, there is an ambition to bring a lot of natural gas into the system. That’s mostly supply limited, not demand limited. What that means is that’s limited by the ability to get pipelines built, to get firm arrangements with suppliers, to develop a domestic shale gas industry. So whatever China’s ambition is on gas—on gas demand, that’s probably an upper bound on what gets delivered.
I think the biggest change is probably in the United States. There’s some really nice work by the Rhodium Group that looked at the impact of the Clean Power Plan on the U.S. electricity generation mix before the wind and solar tax credits were extended and after the wind and solar tax credits were extended. Before, most of the additional emissions reductions that were needed to meet the Clean Power Plan goals were going to come from gas. That was just what a sort of least-cost pricing would have predicted. But once you include those subsidy extensions, they found that most of the emissions reductions ended up being delivered by renewables—in the short term because renewables were cheaper because of the subsidy; and in the longer term because the subsidy helped renewables gain scale, which drove down their cost, and then ultimately allowed them to beat gas on its own merits.
Now, there’s huge uncertainty around that. We don’t know what the price of natural gas will be in the 2020s. We don’t know what state-level policies will be. But that’s the sort of dynamic we see.
So, in some ways, gas is getting squeezed out by the support for renewables. And the most likely way you’d think of gas regaining some share is actually to pursue stronger targets. We have this huge source of lower-carbon energy. If we’re not using it to meet our emissions-reduction goals, it probably means that we aren’t being sufficiently ambitious on those goals.
MCMAHON: Thanks for that question, David.
Do we have another question, Operator, from a member?
OPERATOR: Thank you.
(Gives queuing instructions.)
OK, there are no further questions in the queue at this time. I’d like to turn it back over to you for closing remarks.
MCMAHON: OK. Well, I wanted to follow up, Mike, on the—on the question. When you were talking about renewables, I was thinking about in particular China, which is obviously investing heavily in this area. And as the largest emitter, there’s a great deal of interest in how—first of all, how motivated China remains in this area, and how much it continues to invest, and how its pace and scale could influence this whole market. Could you talk a little bit about what you see as the trajectory for China in the renewables area and how this—how you see this playing out after today’s signing?
LEVI: Absolutely. And we should make sure that everyone on the call knows that this is not necessarily the closing. You can still dial star-1 on your phone to ask a—to ask a question.
So, you know, China has pretty aggressive industrial policies aimed both at building out their own renewable sector and building a platform for global renewables exports. They have very ambitious goals for deployment of solar and of wind.
The other one, which people don’t pay as much attention to, but they ought to, is that India has highly aggressive goals for deploying solar energy. They’ve had some very successful auctions where potential providers have been allowed to bid in. They’ve been bidding in at levels on the order of 5 cents a kilowatt hour for solar, extremely low prices. Some controversy over whether the developers can actually deliver at those prices, but as yet, no hard evidence that they can’t.
So each of these is going to build out serious markets for renewables, and I’m pretty confident that that will continue.
I would say two things: I think we’ve become a bit too—we’ve become a bit too instinctively inclined to equate renewables with dealing with climate change. If all we do is build out renewables, we are not going to get anywhere close to our goals, and in particular, if we only build out wind and solar, we’re not going to get close. So we forget often about hydro, which is huge and enormously important as you look, for example, to the next wave of development in Africa. You know, there are a lot of places where you won’t do wind and solar, but your choice will be between hydro and coal. And so, you know, hydro isn’t necessarily as exciting as wind and solar, but it’s incredibly important.
You have China making a push on nuclear. If they’re able to bring costs down significantly, that will be—that will be important. And you still have countries looking to build a lot of coal. And if we are not able to do carbon capture and sequestration at a reasonable cost, we run very high risks.
And then across—you know, coming across all of that, efficiency is still a big part of the equation. It’s more challenging to get people to be more efficient than I think a lot of folks instinctively assume, but it can be a significant part.
So I think it’s really important to not conflate success in renewables with success on climate change. You could have a thriving renewables industry with amazing year-on-year growth, and because the scale of the climate challenge is so large, you still would not come close to meeting your goals. And again, Germany is a case in point here: massive renewables growth, far too much of it at the expense of nuclear and gas, rather than helping to reduce emissions by displacing coal. So it’s important to be very—to be very careful.
MCMAHON: No, I think that those are important points. And Germany in particular is interesting, they sort of did an about-face on nuclear after the Fukushima disaster, because they were moving in that direction. And then you have a place like Ukraine, which 30 years after Chernobyl, is embracing nuclear quite a bit, actually. So it still—it still matters in certain parts of the world, and it’s—
LEVI: Well, it matters in a lot of the world. And I should—I should also emphasize, you know, when you look at modeling of very high penetration of renewables, you find that being able to have reliable baseloads of consistent supply of something zero-carbon, even if it’s for 20 percent of the supply, can make a very large difference in the net cost. Pushing renewables that last bit can turn to be very expensive.
And that gets to a basic point about what I would call the new approach to international cooperation on climate change that Paris embodies, that it’s—at some level, it’s experimental. It acknowledges the fact that we don’t know a lot about what the right solutions will be in the future, what will work properly, and so we’re going to move ahead with a lot of different things and different countries and try to learn from it, and try to build from those lessons across borders.
And that means, among other things, that while the Paris agreement is important, there are a whole host of other international institutions that are going to matter a lot. So the International Energy Agency is trying to spread best practices on energy efficiency. We have the International Renewable Energy Agency, IRENA, created several years ago in Abu Dhabi, trying to create standards and best practices and help developing countries with their planning on renewables. We have an institute based in—a multilateral institute based in Australia on carbon capture and sequestration. We’re working—there are countries working on a plurilateral agreement within the WTO to lower trade barriers to lower carbon energy technologies so that countries can access them more cheaply.
So there are all of these other pieces of that institutional framework that matter, and while it’s great to have all of this attention on climate change at the Paris agreement, all of those pieces of international institutional architecture are going to be important.
MCMAHON: Thanks, Mike.
I want to go back and see if there are some questions from members. And, Operator, could you let us know if there are any on the line?
OPERATOR: Yes, sir.
We have a question from Frederick Tipson, retired.
Q: (Chuckles.) Retired.
Hi, Michael. What do you think—
MCMAHON: I don’t believe—I don’t believe you are ever retired, Fred.
Q: (Chuckles.) What do you think the prospects are for, sort of, massive transfer from the richer to the poorer countries to implement some of these technologies? Is that a—are there realistic goals? And obviously, other agencies become very important in this process.
LEVI: I think massive is in the eye of the beholder. Massive tends to be a different standard when you’ve giving than when you’re receiving.
What I would say is that the scale of intercountry private capital flows that drive low carbon energy adoption are going to dwarf the scale of public capital flows that drive low carbon energy adoption. That doesn’t mean that public money doesn’t matter; what it means is that public money needs to be deployed in clever ways that help de-risk private investment and draw it out.
So for example, you could imagine large buildout of innovative clean technologies in parts of the world where they haven’t been demonstrated. You don’t really know how much they’re going to cost to build, there—so there are these uncertainties. No one wants to take the risks with something really new, and so a public source of money could come in and take a piece of that risk, so that—so that private finance could come in and finance the bulk of an installation.
So there are pieces like this—and I think, again, we’re seeing experimentation. We’re seeing the World Bank, through a variety of funds, experiment. We’re seeing export credit agencies experiment. I think we’ll see experimentation from the AIIB, from the Asia Infrastructure Investment Bank. I think we’ll see a greater variety of institutions.
I know there’s been a lot of focus on the Green Climate Fund, the GCF, based out of Korea that was established several years ago through the U.N. Process. It’s a few years old; it’s still not dispersing meaningful funds; That’s a bit worrying. What makes that a bit better is it’s only one piece of a broader consolation.
So we’re getting nontrivial amounts of money, many billions of dollars being directed toward this from public funds, but the mentality really needs to be how do we most efficiently use the public funds to de-risk private financing of these technologies.
Q: Mike, is that—is that public funding you mentioned, is that equated with the hundred billion dollars a year pledged at Copenhagen for helping these developing countries with their low-carbon transitions and adaptations and so forth, or is that something different?
LEVI: Right, so—no, that’s the same. And so first, that’s for both mitigation, so reducing emissions, and adaptation, adapting to the climate change that isn’t avoided. You know, depending on who you ask, we’re either well on our way there or we’re nowhere close. And it depends a lot on how you account for private finance and on how you account for loans.
The reality is that these are all targets, they’re frames, everyone comes into these agreements with eyes wide open about what reality actually is, and these—you know, they can drive ambition, they can drive politics. But—and I actually expect there to be renewed debate over that number, because—so that’s a 2020 number, and you’ll notice that while countries have come out with emissions reducing plans for 2025 and 2030, they do not yet have plans for money beyond 2020. And you know, that was tough for some countries to set aside in Paris, but they have not set it aside permanently, and it will come back. And they still have some leverage, because there’s a lot of detail still to be filled in in the Paris agreement, and so countries will be bargaining over the course of that filling in of detail.
So again, there is an OECD study that says we are at 50 (billion dollars) to $60 billion, if you count things their way. There are other countries that say that that number is a factor of five perhaps too high. And I don’t expect that debate to be resolved; I don’t know that it needs to be revolved. Again, what matters is—the hundred-billion-dollar number isn’t gospel; what matters is getting the financial flows that actually drive adoption.
MCMAHON: Got it. Thanks, Mike.
Operator, I’d like to see if there’s another question from a member on the line.
OPERATOR: Yes, sir.
Our next question will come from Damian Bednardz with Kivvit.
Q: Hi Michael, this is Damian.
And just a quick question. Do you see any action taking shape, any real action happening on the—on some of the sectors’ front that were left out of the agreement, particularly on aviation or shipping? I know that’s been picking up in the news and just wondering if you— if you have a view on any of that.
LEVI: I think there’s a big push to do something on aviation this year. So I don’t have a specific view on that, but I know that a lot of countries see an agreement through the International Civil Aviation Organization to be a priority. I know that there was some criticism of the Paris agreement for not including aviation or shipping; the reality is that the ICAO, the International Civil Aviation Organization, and the IMO, the International Maritime Organization, are actually in some ways more effective than the U.N. framework convention on climate change. So focusing on how to deal with those through more—through better functioning institutions may actually be a positive. So I think this division of labor is perfectly fine.
I think shipping is one that we are probably going to need to pay more attention to. In some sense, a few years ago, shippers had enormous incentives to keep their emissions low just for financial reasons. You know, so when fuel is very expensive, you want to save fuel, and on top of that, the market was tight, so—or sort of—so basically, you wanted to save on fuel. Now, fuel costs are lower, so you are not as incentivized. And so that means that you want to deal with that.
There’s another sectoral piece that I’d also watch out for. There’s been a real sustained effort over the last several years, particularly by the Obama administration and by the Chinese, to come to an agreement on what are called HFCs. They’re materials that were basically used—they replaced an ozone depleting chemical, but it turns out they’re a potent greenhouse gas. And so there has been an ongoing effort under the Montreal Protocol, which was designed to deal with ozone depleting substances, to phase out HFCs.
And I think it’s made considerable progress in recent years, so I think that’s another one to watch—to watch this year. You—if you look at joint announcements with President Obama and Xi Jinping or with Narendra Modi, you’ll notice that for the last several years, HFCs have figured prominently, and I think that that reflects a certain amount of focus in that area.
MCMAHON: Thanks for that question.
We have a few more minutes; we’re going to take it a little past 11:45 because of the late start. And, Operator, I wanted to see if there’s another question from a member on the line?
OPERATOR: Yes, sir.
We have a question from Chris Field from Carnegie Science.
Q: Hi, Mike. Great comments.
I wonder if you could say a few words about the way you see the role of the state and regional initiatives in the U.S., and particularly if you have comments on the ambitious multilateral efforts like California’s U2 MOU?
LEVI: So I mean, the state and local pieces are incredibly important. I think they’re important in a couple of ways. First, if we go forward with the Clean Power Plan, the implementation is all going to be at the state level. These—the Clean Power Plan sets state goals, and then states decide how to meet them. So the states will inevitably be important there.
I think as we go to review the fuel-economy standards, you know, we have this history where California kind of pushed the country forward. The last round of fuel-economy rules were sort of the first where it was all done together. If there is any sign of weakening at the federal level, you might see California again take a leadership role.
Let me—let me just throw out a few other things that really matter at the state and local level. First, a lot of the support for innovation in the space is coming at the state level, and again, California is important. And on top of that, a lot of these things that really matter to driving the cost of clean energy down, like permitting, regulation, whether that is, you know, streamlined permitting for rooftop solar, or whether it’s having the right regime in place that lets people do shale gas development without causing unacceptable public harm, all of these are generally state and local matters, so they matter enormously. They affect the costs, and the costs affect the willingness at the federal level, among other things, to drive emissions down.
On the multilateral linkage part—and this is a really tough area—so California is looking at international linkages, there are—we already have robust cross-border electricity trade off in clean energy with Canada. Ideally, we will ultimately have more cross-border electricity and energy trade with Mexico—this is tough when you’re trading carbon credits, for example, because a credit purchase from another country is not going to be able to provide compliance with the Clean Power Plan, at least under the section of the Clean Air Act that it’s currently using. And, if at some point in the future you wanted to do a federal-level emissions trading scheme or even an emissions tax, figuring out how to grandfather in state-level systems that are entangled with foreign regulatory systems through things like joint emissions trading, that gets really complicated and potentially very diplomatically fraught. I don’t have an answer on that, but I think that’s one that we ought to be out ahead of and thinking really carefully about.
So those are a few thoughts. But I do think that’s a sort of—I think people who are excited about climate action look at state and local and federal as inevitably mutually reinforcing, and I think a lot of the time they are, but that doesn’t mean that we shouldn’t look out for the places where they may not be.
MCMAHON: Thanks for that question. We’re at 11:45, but I did want to give us at least one more question, if there is one, to, again, give you the full 45 minutes. Operator, is there another question on the line from a member?
OPERATOR: I am showing there are no questions in the queue at this time.
(Gives queuing instructions.)
OK, we have—I’m sorry?
MCMAHON: Sorry, go ahead.
OPERATOR: OK, we have a question from Cedric Suzman with World Affairs Council of Atlanta.
Q: Yes, thank you. I wondered if you could address the nuclear power issue in a couple of ways. On the one side, has there been any progress or discussion on the disposal of spent fuel rods and nuclear waste? And on the other side, are there any design—progress being made in better design of the plants, to make them less expensive and also more efficient, and that might address the disposal problem? I think these are the main inhibitors of—
LEVI: Yeah, so I mean, that’s a fantastically important question that we’ll get nowhere close to giving its due in the couple minutes we have left.
I will just say there is progress. There has been a lot of investment in new technologies, particularly focusing on smaller reactors that might reduce some of the construction risk, and so reduce the financing cost. There’s also been progress—and not just in recent years, but over a longer period of time—on reactors that have—that are essentially self-limiting, that substantially reduce meltdown risk. There are a couple basic problems, still. And, to your question on the—on the spent fuel piece, just it varies by country. In this country, I would say we don’t have much progress on that yet, and we’re still doing sort of onsite storage.
And then the two things I’d flag are, one, there is always this challenging interplay between innovation and regulation on the nuclear front. More innovation can in principle bring costs down, but every time you do something new you get tangled in a complicated regulatory process that drives the cost of the first plant up, and so you can get in this trap. And we still haven’t found a great way to break—to break out of this—that trap.
The other is, in a lot of parts of the world, you could solve the spent fuel problem, you could solve the permitting problem, you could solve all of this, and no one would build these because they can’t sell power at a competitive price from them—they can’t sell electricity at a competitive price. And they—and the risk—the per-unit risk is just too massive. You’re basically—if you want to build a couple plants, you’re betting your whole firm’s balance sheet.
So, actually—and I don’t—unfortunately, I’m going to end this on a down note, but the big challenge in the United States in the next five years is making sure that merchant nuclear generation—generators that aren’t regulated, so can’t point to the coming of the Clean Power Plan as a reason to keep rates high—the big challenge is making sure those stay online because they’re getting squeezed by cheap natural gas and by cheap renewables. And, you know, as difficult as the challenge of reducing emissions in the United States is, it will be all the larger if we lose several very large zero-carbon power plants. So figuring out a way to solve that I think is one of the more important challenges for the next few years in U.S. energy and climate policy.
MCMAHON: And we’re going to end on that note. I’d like to thank Michael Levi for taking us on a thorough and bracing tour through energy and climate policy, and really providing crucial context for what is happening in New York, which is the signing of the Paris climate agreement. With that, we are concluding this CFR on-the-record conference call. Thanks, everyone.