The Exchanges

Q capped out by manufacturers. They are today. When you hit a certain number of vehicles, they last longer. However, in order to qualify, there's a bunch of rules. So maybe give a quick overview of like what the, how those tax credits are structured. And let's talk a little bit about like, what is it going to mean in terms of how, and if people can take advantage of them?

A Yeah, so your listeners probably know that right now there is a federal tax credit of 7500 dollars for the purchase of an electric vehicle or a plug-in hybrid with a large enough battery. And that is capped, as you said, um, at I think 200,000, uh, vehicles sold per manufacturer. And so Tesla has already blown through that cap. Ford has as well. Toyota and Hyundai and GM are very close to it. Um, Nissan maybe already passed it. So, you know, one by one, these manufacturers are running out of tax credit. And, um, you know, the current policy is that that's it. There's no more tax credit for EVs. So what does this bill do? Well, first of all, let's put aside the personal vehicle tax credit and look on the business side of things, because here the bill provides a 30% investment tax credit for purchase of clean vehicles. That includes electric and fuel cell vehicles in, uh, by any business. So any depreciable property gets a 30% investment tax credit for the purchase of an electric A electric vehicle or a fuel cell vehicle up to 40,000 dollars for medium and heavy duty vehicles and up to 7500 dollars for light autos and trucks. So if you're Amazon and you're thinking about electrifying your delivery fleet or your, um, Enterprise or Avis and you're thinking about buying EVs for your rental fleet, they all just got way cheaper. And those are not at all tied to domestic content requir…

AI assessment note: “So what does this bill do? Well, first of all, let's put aside”

Q in carbon capture being the decarbonization solution as opposed to fuel switching. And then it also separates out direct air capture and gives it a much larger tax credit of 180 dollars a ton as compared to, what is it, 85 dollars a ton for, for point source. So what does all of your analysis suggest that this does for the world of, of carbon capture, sequestration, utilization, et cetera?

A Yeah, I mean, at a high level, what I think that does is it makes carbon capture a truly viable economic option for the first time outside of areas with very pure CO₂ streams. So if you look at the 50 dollar a ton credit and the kinds of investments that are going forward under the current 50 dollar a ton tax credit, For carbon capture, it's, you know, ethanol, uh, fermentary, you know, fermenting and gas processing units, ammonia facilities, things with very pure CO₂ streams. If the alum cycle, you know, works, uh, as planned, you know, it'll also potentially work at 50 dollars a ton. But that's sort of it. So if you look across heavy industries, the most emitting industries like cement, steel blast furnaces, um, and, um, Uh, and chemicals refineries and, you know, petrochemical refineries. None of those really pencil out at 50 dollars a ton. They do, in many locations, at 85 dollars a ton. Not everywhere. Not every facility is laid out for this. Not every facility, you know, will this be the best option? Some will want to electrify or fuel switch or do other things. But in many locations across the country that are proximate to a good CO₂ storage basin or a pipeline, this will be an economic option to retrofit heavy industry with carbon capture. And so analysis from, uh, Rhodium Group estimated that the 85 dollar a ton, uh, 45 Q credit would spur on the order of a hundred and…

AI assessment note: “makes carbon capture a truly viable economic option for the first time”

Q I guess, let me, I mean, fine. Um, What do you think are the most important, most impactful provisions we haven't talked about?

A Well, let's talk about buildings, um, which is the other, you know, major emitting sector that we haven't touched on. And, and here there's, you know, that's the, the smallest of the emissions reductions that we see across the sectors between now and, and, and, and, and, and it's also the one that took a pretty big hit from the house bill. To the Senate bill in terms of the, the, you know, trimming down of a number of grant and rebate programs that were designed to facilitate building electrification. But there's still, again, everything gets cheaper. There's still tax credits in here for, uh, households and, you know, uh, individuals to purchase, um, heat pump water heaters, heat pump heaters, uh, heating and cooling systems, upgrade circuit breakers to, to handle the higher electric loads, uh, Do home energy audits, you know, install energy efficient, uh, windows and insulation. All of that, uh, is there's a tax credit that is increased. From 10% to 30% and extended through 2032. There are annual caps on how much you can claim from that. Um, so it's 1800 dollars per year, uh, for most things, although that goes up to 2000 dollars for a heat pump or heat pump water heater, uh, or a biomass boiler, if you want to do that. Um, uh, and then there's a similar commercial tax deduction, not credit for efficient building upgrades in commercial buildings. Um, and then for low income a…

AI assessment note: “Well, let's talk about buildings, um, which is the other, you know, major emitting sector”

Q time. And then I think we want to spend some time on the kind of potential mid and long-term effects that this might have. How might this reshape the global energy ecosystem? How might it change the pace of decarbonization? That kind of thing. So let's start with, you know, rewind a couple of months. What was Russia's role in global energy markets? How important was it and to whom?

A So Russia was a, is and was a hugely important part of the global energy market. They're one of the top exporters of oil and natural gas in the world, and particularly for Europe, which is, um, more dependent on Russia than any other source for their imports of energy. Uh, European Union's, 27 members get about a quarter of their oil from Russia, and about 40% of all natural gas consumed in the EU is imported from Russia as well. Most of that via pipelines that come, uh, you know, westward from Russia and other former Soviet, uh, republics, including via transit through Ukraine, uh, which is host to, um, some major pipelines that, um, are built to move gas from Russia through Uh, to Europe. Um, they also supply a substantial amount of coal, uh, about forty million metric tons of coal to, uh, Europe each year as well. Um, so it's not just oil and gas, they're also a coal exporter. Um, and so, you know, Europe has, has been heavily, uh, integrated with Russia, uh, for its energy needs, um, and was actually, you know, strengthening those, uh, ties before, um, uh, Putin's invasion of Ukraine.

AI assessment note: “European Union's, 27 members get about a quarter of their oil from Russia”

Q all, the, the magnitude of the solar and wind capacity additions is, like, staggering. And so, I guess, to what extent do you think that is realistic in the bounds of reality with transmission, with land constraints, with intermittency, all that kind of stuff? Like, presumably, this model accounts for a lot of that. Are we going to be building a 130 gigawatts a year of solar in a decade?

A I mean, we certainly could be. You know, China is. Uh, we have the land for it. We have the financial capital for it. And so, what our modeling does is it really addresses all of the economic Uh, challenges there. So it is optimizing across the energy economy, electricity, and other sectors. That includes all the intermittency challenges with, you know, hourly resolution for, um, a number of, you know, 24 hour periods so we can capture the, the, you know, declining marginal value of wind and solar, which we've talked about before when I've appeared. And we can capture the sort of reliability implications of high shares of variable renewables. And we have done a, probably the most detailed analysis that anybody has yet, um, for where you can build wind and solar potentially across the country. Accounting for, uh, you know, land use restrictions, um, geographic, uh, you know, mountains and ranges and things like that that make transmission routing challenging, wetlands, you know, uh, things like that. And, um, limiting the maximum density, uh, in inverse proportion to population in across, uh, counties across the United States. And so we have costed out the transmission interconnection from each of those sites to, uh, Demand centers, um, that's implicitly included in the cost of new wind and solar in our model, and then we explicitly model the long distance interregional transmis…

AI assessment note: “I mean, we certainly could be. You know, China is. Uh, we have the land”

Q little bit along the major sectors of the economy that are big contributors to greenhouse gas emissions, and then talk about how each of them might be transformed as a result of this bill. Before we do that though, Give us the headlines, just the bullet points of like, what is your analysis of what this will do to overall emissions in the United States and financially to the country?

A So our top line finding from the repeat project analysis of the bill is that it will cut annual U.S. greenhouse gas emissions in 2030 by an additional one, roughly one billion metric tons below the current policy baseline. So an additional billion tons of emissions reductions in 2030 Which is enough to close not all, but about two-thirds of the remaining gap between where we project current policies will take us and where we need to be in 2030 to hit our national climate commitments to reduce emissions to at least 50% below our peak levels that were reached in 2005. So it gets about two-thirds of the work done on its own, and it does that work primarily by making clean energy cheap. It subsidizes through grants, rebates, loan programs, loan guarantees, and most importantly, a robust package of tax incentives that touch basically every sector of the economy, every major emitting sector of the economy, and instantly make All of the clean energy and climate solutions that we need much cheaper for businesses, households, industry, utilities, governments to adopt. And so that's, uh, really important, uh, to note because our modeling doesn't account for any of the follow on action that this bill could spur and make much easier. But by making clean energy cheaper and driving down the cost of adopting clean energy and other climate solutions across the country, It wouldn't be too, uh, …

AI assessment note: “it will cut annual U.S. greenhouse gas emissions in 2030 by an additional”

Q most clearly gets transformed in In part because, you know, a massive portion of the tax credits go toward things that are going to apply in the power sector. I don't even know where to start with the power sector, but tell me what your, what are the high level conclusions on what's going to happen in the power sector over the next decade or so if this bill passes?

A Yeah, so you're right that our modeling finds that accelerating the deployment of clean electricity, a trend that of course is already well underway, but gets sort of supercharged by the incentives in this bill, will drive the largest chunk of the overall emissions reductions, um, just over a third of all of the emissions reductions, um, uh, that we, we model. About three hundred and sixty million tons, um, you know, plus or minus a hundred million tons. Don't, don't read too much into the over the precision of these, uh, these results. Um, but you know, definitely order of magnitude, the largest of the, um, of the emissions reductions across sectors. The way it does that, as I mentioned, is primarily with a set of very robust tax incentives. And so, you know, your listeners are probably familiar with the wind production tax credit and the investment tax credit that has helped propel the solar industry. Um, on an off and on again fashion over the last couple of decades, right? We have, you know, a year of extension, and then it expires at the last minute, and then it, you know, comes back, and then, you know, last minute renewal, and it's just been this totally sporadic, really terrible way to do policy from a business investment perspective, right? You don't know what you can count on a year or two from now. That changes dramatically with this bill, because it provides a long-…

AI assessment note: “accelerating the deployment of clean electricity... will drive the largest chunk of the overall emissions reductions”

Q So that's interesting. So prior to the Ukraine invasion, the trend line in terms of Europe's reliance on Russian gas in particular was up, not down?

A Yeah, that's right. And, you know, I think this reflects a theory of, kind of, global politics, um, in the post, you know, Soviet, post-Cold War era, which is that, you know, greater integration of economies via trade, um, would help reduce the risk of conflict, would make, you know, countries so codependent on one another that they would not risk open conflict or other types of, you know, uh, geopolitical struggles that would, would threaten those economic ties. You know, this was really the Underlying thesis for the European Union at the beginning after World War II, which began as the European Coal and Steel Union, right, to sort of manage, ah, integrated production of coal and steel so that every country, France and Germany in particular, were so dependent on each other for their raw materials that they couldn't, ah, conceive of a third world war between them. Um, you know, similar theory around engagement with China and the United States and our, you know, sort of co-dependence for manufactured goods and, and their, their exports for their economy. So, you know, Germany in particular and others in, in Europe, Thought that, um, you know, many leaders in Germany thought that, uh, strengthening, you know, that tie between Europe and Russia, um, would mean that Russia was so, um, so dependent on Europe for, you know, trade and for their, for their revenue, and Europe so depend…

AI assessment note: “Yeah, that's right. And, you know, I think this reflects a theory”

Q suspect assumption given current events, um, I want to talk for a second about the difference between Europe and North America in this regard, because we're sitting here in the US, obviously, and I think we'll probably spend most of our time talking about Europe in this conversation, because as you said, Europe is heavily reliant on Russia for oil and gas and coal. Less true in the US, right?

A That's right. On a whole, the United States has actually become energy self-sufficient in net, at least. We are net exporters of Petroleum products, liquids, um, and we are, uh, net exporters of natural gas, and we're certainly net exporters of coal. You know, that wasn't the case, you know, when Barack Obama took office in 2008. We imported about 60% of our oil in 2008, and we're, you know, potentially, we're poised to open up a number of liquefied natural gas import terminals across the country to import natural gas from, you know, from Qatar and from Australia and other places with an abundance. You know, the shale gas revolution, and later the shale oil revolution, uh, really changed all of that in the United States in the North American context, so that, you know, moving forward from 2008 to now, we've seen, you know, steady increases in production of oil and gas in North America, and now we have reached that, you know, sort of fabled point of energy independence, at least from a strict physical standpoint, which makes the United States in a very different place Um, then Europe, when it comes to physical energy security, you know, if we were in the position that Europe was, and we had to cut our ties to Russia, we could do it. In fact, the Congress just voted to say we're going to ban imports of Russian oil, and that doesn't really disrupt our, uh, physical, you know, trad…

AI assessment note: “That's right. On a whole, the United States has actually become energy self-sufficient”

Q Europe, you're saying. I mean, is your sense that all the things you just mentioned, accelerating the clean energy transition, Europe was already more aggressive, I would say, on that transition than the U.S. was. Are you saying it's accelerating even faster? And like, what have we seen, again, setting aside the kind of very near-term measures that the European Union is taking, like, what's the three to five-year plan?

A Yeah, so the plan, um, we basically see an acceleration of measures that were already in place. So looking at how quickly they can deploy wind and solar, there's been discussions about changing permitting for onshore wind and other things that could help accelerate deployment. Some countries, Belgium, uh, so far has decided to prolong the retirement schedule for their existing nuclear power plants so that they don't have to turn to gas, uh, to fill the gap in the near term. So, so, Belgium had several reactors that was scheduled to close this year. They're going to push that back by a decade. So far, Germany, who has three reactors that they are about to close this year, has not decided to do that, although it came up as a topic of national conversation, at least, which was, you know, remarkable in and of itself that they were willing to broach the conversation after having such a strong, you know, long-term consensus about the need for the nuclear phase out there. So far, that's not a measure that they have decided to take, but Could, I mean, it could still change their mind before the end of the year if the, you know, if the alternatives to, uh, doing that start to become clear, like we're going to burn a lot more coal, or we're going to see a lot more industrial, you know, conservation and demand reduction, like, you know, the other measures are not easy either. So we're, we…

AI assessment note: “we basically see an acceleration of measures that were already in place.”

Q Why would that be, by the way? I noticed that. Like, why, why does the model not create a lot of demand if, if the results of the Tax credit is that it is quite cheap even today, perhaps not zero dollars today, but cheap today. Why wouldn't the model suggest that there is a lot of demand for it?

A So the demand in the model is primarily going to be conventional demands in industry right now, and, um, It's actually a good question. We don't see as much fuel switching as I would expect in, in say ammonia or, um, uh, uh, refiners. Uh, I guess refiners is probably split out. It's really the only things that we can optimize in ours is, is ammonia production. And I think we do see some switching there. Um, the refinery demands are set outside the model, and that could be that we get some, you know, switchovers from methane reforming to hydrogen in the near term. Um, but we don't see a lot of fuel cell vehicle adoption, you know, given the optimum economics here of EVs. Um, and you don't need hydrogen for clean power or long duration, you know, energy storage in the short term. There isn't as much pressure to decarbonize heating fuel in the near term as there would be in a net zero framework. So a lot of that, and this is true in the Net Zero America study, a lot of the demand for hydrogen shows up in the 20 thirties and 20 forties. And so what this tax credit needs to do in this decade isn't necessarily deliver, you know, tens of millions of tons of hydrogen supply. What it needs to do is take the technology down the cost curve so that it can do that in the 20 thirties. You also mentioned electrification of industrial processes. That's an area I know we've, we both looked at r…

AI assessment note: “we don't see a lot of fuel cell vehicle adoption, you know, given”

Q coordination amongst the EU, I mean, I would have said decade plus, right? But turns out they actually can do it within a year, you're saying. It's, it's, Sort of amazing. Uh, albeit, as you said, it takes a wartime mentality, and it's not without pain, right? I mean, I don't know if you, have you analyzed the potential impact on prices that they would pay? Is it cost neutral?

A Yeah, that's our next step, is sort of the cost implications. I mean, they're, they're significant, right? I mean, there are significant costs incurred, which is why they've been so reluctant to want to do that. But, you know, I think the longer the war drags on, the more, uh, more war crimes that are committed by the Russian military, the more civilian deaths that we see, You know, the clearer the moral imperative is that it's just like, it doesn't really matter what it costs. We just have to do it. Um, and the U S should do everything it can to help Europe, you know, immediately get off of, uh, off of Russian imports. And, and, you know, again, in the short term, that does include increasing fossil fuel exports to Europe, uh, even include includes increasing coal consumption, which is gonna have, you know, short-term negative implications for climate, you know, mitigation and for air pollution. Um, but again, those are gonna be short term measures. They should be short term measures. Um, and in the medium term, we have more degrees of freedom. So if in the near term, there are very costly measures we have to take from either a climate or air pollution perspective, or from an economic perspective, like conservation, or just simply having reduced output in industry, which has, you know, could, could be, could lead to a recession in Europe, right? I mean, these sorts of short te…

AI assessment note: “Yeah, that's our next step, is sort of the cost implications. I mean, they're significant”

Q Okay. So let's fast forward to the invasion. So invasion happens, Russia invades Ukraine. There's a lot to unpack as far as what the impacts are sort of today, but let's start with the natural gas market dynamic, because that feels like that's the most immediate and obvious substantive craziness that's been going on. So what, what did this do to the natural gas market in Europe and in Russia?

A Even, even before the physical invasion and the run up to, to the invasion when, you know, when, uh, Russia was positioning troops and, and, you know, threats of future sanctions were being issued by the West, uh, it was already, uh, you know, sort of tight, uh, gas market conditions in Europe. And, and in fact, many observers, you know, geopolitical observers believe that that factored into the timing of Russia's decision to invade this year and not last year or some future year. Um, in fact, that during the invasion of Crimea in 2014, that was another period of very tight oil and gas markets. You know, so the thinking goes that, that Putin, uh, knew that this was the point of maximum leverage that Russia had over, um, over Europe and others. Um, you know, that the threat of withholding their supplies from the global stage would, um, you know, be most severe. Um, and so time the invasion for that period. And, and, you know, there's some incidental evidence to, to support that in that, Gazprom, the Russian gas company, owns a lot of storage assets for natural gas in Europe, and if you look at the storage volumes for Gazprom-owned, uh, storage assets in Europe, they were much lower than the average for other assets at the time, so it's almost as if the nationally owned Russian gas company was deliberately keeping the tanks partially full going into this winter to, to further exa…

AI assessment note: “natural gas prices were, were very high already, um, in, in Europe.”

Q the likely outcome here is probably a short-term increase in emissions, largely because of fuel switching in Europe, but a long-term acceleration of decarbonization because all the countermeasures that Europe in particular, and hopefully the U.S. and other countries are going to take to wean themselves off of this reliance on Russia are going to be Generally speaking, lower carbon or zero carbon alternatives. Is that your sense of it?

A Yes. Switching from natural gas to coal and power generation will lead to increased emissions from the power sector. But if the European Union is also dramatically reducing natural gas consumption overall through demand side measures and conservation, it may be that that nets out. That the reduction in total gas burn is enough that it compensates for the temporary increase in emissions in, uh, from coal consumption. Again, my team at, at the Princeton Zero Lab is running some models on this right now. Um, just a shout out to the value of open source energy models. We were able to fire up the open source pipes, uh, Europe model from, uh, to Berlin and others in Europe, um, that, you know, built out and published this open source power system model, you know, so we were able to now we're running this week, you know, cases of, well, what, what do we do over the next 18 months in Europe from a power sector perspective? How much coal to gas switching do you need or gas to coal switching you need? All that's really easy to do when you have open source models that are right there, ready to, to fire up, um, when you need them. So. Just, you know, appreciate the effort that our colleagues in Europe have made to, to build these models and make them available, um, you know, so that our team here can now pick them up and try to, to do some rapid analysis that, you know, really matters. So …

AI assessment note: “Yes. Switching from natural gas to coal and power generation will lead to increased emissions”

Q from various groups. Some groups just saying to kill the bill, but, but others saying they want changes to it. So you've seen auto OEMs lobbying to make changes to some of the provisions we'll talk about later. You've Heard about Kyrsten Sinema, the senator from Arizona, talking about changes that she might want to make. Presumably, the second anything starts changing, it delays that timeline. Is that not true?

A I don't know how exactly the procedure will work there. I assume that, you know, the parliamentary review will only have to occur for whatever changes are made, and those may be fairly straightforward when it comes to the parliamentarian. The question is, you know, what changes can be made while still holding together all 50 members Members of the Democratic Senate caucus. You know, they can't afford to lose a single one, so every change has to be unanimous amongst the Democratic caucus, and so I think it's the careful negotiations that are going to be required there to get this done. You know, most members, I think, are fully on board and ready to get this passed, and, um, you know, uh, Kyrsten Sinema is the sort of remaining holdout with, you know, the odd decision to try to go to bat for, uh, hedge fund managers and, um, you know, super wealthy to try to protect their carried interest loophole.

AI assessment note: “I assume that, you know, the parliamentary review will only have to occur”

Q Unpack sort of what have been all the immediate ramifications, and have they all just generally served to exacerbate the existing trend line, which is short supply of oil and gas, and so prices spiking, or is it more complicated than that?

A Yeah, so it's interesting, you know, to look at the response of, you know, the Western powers, right, that, you know, basically said, we're going to do everything we can short of, you know, actually engaging NATO troops in combat. But so far, they actually haven't been willing to do everything, right? They have exempted energy trade very deliberately from the economic sanctions that were imposed pretty rapidly after the initial invasion. You know, I think Putin miscalculated a lot of things here, right? Right. Obviously miscalculated the ferocity and bravery of the Ukrainian troops. Um, you know, miscalculated how efficient, efficient and effective his army was, um, and how quickly they would take Ukraine. They also miscalculated how effective Western financial sanctions would be, um, on, um, on the Russian currency and the value of the ruble and, you know, the strength of their economy. So the fact that the U S and other central banks were willing to seize, um, The Russian central bank's foreign currency reserves overseas and basically say you cannot, you can no longer transact in euros and dollars was not something that, that Putin anticipated. And they, in fact, they tried to build up this sort of fortress Russia In anticipation of further sanctions by building a huge foreign currency reserve they could use to prop up their, um, their markets. And I promise this all comes ba…

AI assessment note: “They have exempted energy trade very deliberately from the economic sanctions”