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Journalist Markham Hislop interviews leading energy experts from around the world about the energy transition and climate change.
Welcome to episode 280 of the Energy Talks podcast. I'm energy and climate journalist, Markham Hislop. 2 years ago, Russia invaded Ukraine, touching off a nasty bout of energy insecurity. The consequences around the world were many, including spiking gas prices, both methane and gasoline. 6 months later, the United States passed the inflation reduction act, a climate bill designed to fight global warming the right way, in my opinion, by speeding up the adoption of clean energy.
Markham:Gernet Wagner is a climate economist at the Columbia Business School, and he recently wrote a piece called the Ukraine war blew up the world's energy economy. But it was the subhead that really caught my attention, and the US inflation reduction act is surprisingly well designed to deal with the fallout. He generously agreed to chat with me about his case in favor of the IRA. So welcome to Energy Talks, Werner.
Werner:Hi, Malcolm. Great to be here.
Markham:Well, it's nice to have you back. I read your pieces on a regular basis.
Werner:You're the one. Oh, okay. Okay.
Markham:Well I did subscribe to your newsletter.
Werner:Okay. Like I said, you're the one.
Markham:I'm on the list. So let's talk about this. I think the basic facts behind Russia's invasion of Ukraine, how that affected energy and security by creating shortages, particularly natural gas, and then Europe had to go out into the market and get LNG, and then that affected Asia. Next thing you know, we're all dealing with higher higher energy prices, and that some to some to a large extent has settled down somewhat. But then 6 months after that, the, inflation reduction act is introduced.
Markham:How do those all work together?
Werner:So they do and they don't. And let me start with the don't version. Right? So the inflation reduction act has not and will not cut inflation in the, you know, on the time scale that we usually think about or worry about inflation. Or put differently, it's a horrible reelection strategy for president Biden.
Werner:Right? Because he will not be able to say the IRA will you know, has cut inflation. So reelect me. Inflation went down, but it went down for all the normal reasons that macroeconomists, you know, will drone on about, and, I won't largely because I'm not a macroeconomist. But alright.
Werner:So yeah. Of course. Right? Fed setting interest rates and all that sort of stuff matters a lot. But here's the case for why the IRA is perfectly named and why in the long run, it is the only strategy to get off fossil inflation.
Werner:And I think fossil inflation summarizes the argument. Right? Because, you know, at the end of the day explanation needed. No explanation needed. Right?
Werner:Like, every decade or so. Right? Oops. Surprise. Somebody blows a fuse somewhere.
Werner:Right? Some despot or, you know, Putin blows a fuse, invades Ukraine, energy prices spike, fossil energy prices spike. And, yeah, it's this interconnectedness of energy markets, that is causing the problems. And, no, energy independence, right, isn't the answer. Actually, here we go.
Werner:The US, right, energy producer? No. We are not independent from what happens halfway across the world. So, yes, fossil inflation is the problem. Getting off fossil fuels is the answer.
Markham:Okay. I wanna run a hypothesis past you that my regular listeners will know all too well, and that is that, you know, 25 years ago, China decided that it was going to invest in clean energy technology manufacturing, solar panels, wind turbines, electric vehicles, batteries, all of it, 25 years later, it is the 800 pound gorilla in the clean energy space. It has I mean, this is common knowledge, I don't have to repeat it here. I there are speeches by American politicians, and Gina Raimondo, the Secretary of Commerce, is the one I read the most, where she said, once the pandemic started in 2020, we suddenly realized like a bolt from the blue, how dependent we were on Chinese supply chains, and that was not going to fly. And so we put in place infrastructure act, the chips act, and then the inflation reduction act, all of which is designed to build, to re shore manufacturing, and for us to catch up to China and also to Europe in clean energy manufacturing and the adoption of clean energy.
Markham:And so essentially, we now have a situation where China leads, the US and Europe are trying to catch up, and we now have a clean energy arms race. And the IRA is in part the response to that. Your response to my hypothesis.
Werner:It is not wrong. Let me start with that, which is always, you know
Markham:Hey. Anytime a professor tells me that I'm not wrong, I'm okay with that.
Werner:Well, you know, half hearted compliment. Right? So okay. So of course. Right?
Werner:And, frankly okay. I'm, you know, not a Biden campaign spokesperson here, but, yeah, Bidenomics, however you want to define it, is all of the above and then some. And when I say all of the above, right, it's to, you know, it's basically the reindustrialization of previously industrialized, areas of the United States. Right? And, you know, no Soho lofts are going to disappear, to get, you know, manufacturers back into lower Manhattan.
Werner:That's not what we are talking about. But, yeah, kind of, sort of, the equivalent for Pittsburgh, for places where manufacturing has left for the past few decades for, by the way, reasons other than climate, of course. Right? Lots and lots of other factors that are in play here. And okay.
Werner:What has had what has has that led to? That has led to all sorts of direct pain on the one hand, gain on the other, gains from trade, of course. I'm enough of an economist to, you know, to have to point to that on a semi regular basis and remind myself that I don't weave my own clothing. Right? So, yes, there are gains from trade.
Werner:Of course, there are. But there are also some massive implications. Right? It's one thing for you and me, right, to say, you know, from trade. Right?
Werner:It's another for the person whose lie livelihood, is at stake here. And okay. All put together, yeah, and maybe, you know, the best example, might be the United Mine Workers of America, endorsing, supporting the inflation reduction act. Basically means, yes. You know, not if but when we get off call.
Werner:Cool. That's good. But there are implications. There are, you know, the the just transition isn't just a buzzword. It actually needs to happen.
Werner:And, yes, the IRA is instrumental in, helping make it so.
Markham:I I am a student of energy transitions and, in fact, did my graduate work on the 100 years ago on, from horses to to tractors and combines. So I
Werner:So is the story correct? Like, the 18 96, the conference in Manhattan where he couldn't agree on what causes the horse manure and how to get rid of it?
Markham:You've been reading too much, Tony Seba. I I don't I don't, didn't didn't pay attention to that, so don't know that story. But here's what I will tell you, is the basic processes that drove the transition from animals and steam to, the internal combustion engine and petroleum, the the same functional processes are at work in this energy transition. We have new technologies that have become competitive in the marketplace, and they're pushing out old technologies, And we are restructuring markets. We are restructuring all sorts of things.
Markham:And this is in the period of disruption, things get restructured. And I think that there are plenty of there's China. There's Southeast Asian countries. There's India who We're looking at this and going, industrial 6th industrial revolution. I like it.
Markham:Let's I wanna play I wanna be a player in this. This opportunity is not gonna come along for a long time, and we're gonna put we're gonna get the government behind it, and we're gonna put money behind it, and we want a piece of this pie that previously we did not have. And so I think, finally, North America and Europe have woke up woke up to the fact that there is major change going on, and and if they wanna maintain the their economic hegemony, They need to do something, and here we are. This is what they're doing.
Werner:I mean, this is the infamous famous infamous, Economist Magazine cover from Petrostate to Electrostate. Yes. Right? And there you know, there are 2 bits here. Right?
Werner:So one is okay. Yes. From Petro to Electro is fantastic, but, of course, not everything will fall in place automatically. Right? If, you know, in in an undemocratic regime, now stops selling its oil and needs to look for something else to do, doesn't mean that the replacement will be, you know, Nirvana.
Werner:Right? It isn't. It won't. Can't be, necessarily automatically. Right?
Werner:It takes much, much more. Broadly speaking, I completely agree with, of course. Now here is one huge difference. Big horse wasn't nearly as profitable as big oil. Right?
Werner:That is a massive massive drift. Right? Sort of the world's most profitable ever companies, are those who, in many ways, tend to lose a lot in this process. Right? And, you know, not to go straight to the CEO of Exxon blaming the public for climate change.
Werner:Right? But, yeah, he has. He he's done that, right, recently, a week ago. So in this for for a Forbes Fortune or so interview. And, okay.
Werner:Again, right, so the CEO of Big Horse did not, I mean, also tried, presumably. Right? But, well, there isn't one. There isn't one person. There isn't one company.
Werner:There aren't, you know, a handful of companies. You'd need to look much, much broader. And in many ways, that transition back then grew into a void, if you will, whereas the current one isn't. That's the big difference.
Markham:I would say that there was not a such a thing as a as big horse, but that doesn't mean that horse breeders and other people in the industry didn't have influence over governments and policy and so on. But in it the environment in the 19 twenties, let's say, is very different. The political structures and and and expectations from a 100 years ago are so much different today. And so today, incumbents, are able to exert a tremendous amount of influence on politicians and on policy and on regulations in order to protect themselves from the from the forces of disruption. And we see this in the US all the time.
Markham:We saw it with the coal companies and the gas companies opposing Obama's, clean power plan. It just it it's baked into the cake that this is part of the one of the things that has to be, overcome, and China, just as one example, doesn't have that problem. When the Chinese government sets its its 5 year plan and then it sets the goals and it's and allocates the capital, And then the provincial governments and the local governments look at that and go, okay. Now I know what I have to do, and I'll go away and, you know, change my grid or, you know, install some solar panels, whatever the case might be. It's, in some ways, easier to respond to this transition in an authoritarian system than it is in a more market based system.
Werner:Let me agree with you and I think add something that is, important here, which is China China's energy transition, if you will, is also growing into a void. Right? And what I what I mean by that is right? So when China adds, you know, 100 of gigawatts, 1,000,000,000 ton a 1,000,000,000 watts of, of, solar, it adds that in addition to the existing coal plants, the existing gas plants, and, you know, all the while building coal plants still to this date as well. Why?
Werner:Because it is increasing its overall demand by so much, so fast that, yeah, this is the growing into the void. Right? As opposed to, what is happening frankly in, you know, Europe, the US, where, solar, wind, and so on capacity is basically replacing or to replace existing power capacity. That's a huge, huge difference. And it it also you know, it makes a difference.
Werner:So from horse to cars, right, you know, we build highways. Right? They didn't replace horses. I mean, they replaced Service stations
Markham:and other kinds of refineries. Yeah.
Werner:Exactly. Right? So we build suburbs. Right? Basically, we like, cars enable suburbs.
Werner:Right? And, that is a very different scenario than in some sense what we are looking at now where we say, oh, wait a second. Maybe it wasn't such a good idea to build all those single family homes in the middle of nowhere. Maybe there is something to, you know, walkable urban neighborhoods. Maybe maybe there's something to the American Enterprise Institute's walkable, neighborhoods program.
Werner:Right? I mean, that this is sort of the the usual. Right? Like, when some from on the political rights say, oh, yeah. This is, you know, you leftist urbanites.
Werner:No. It's AEI that has, you know, puts an emphasis on, wait, walkable neighborhoods, pro family. Good for the sort of things that we also stand for in other dimensions.
Markham:Yes. I I can see your point. A pro a pro, family and pro small business and pro a whole a whole bunch of, stakeholders in the American economy. Now one of the things that is fascinating to me is to watch the American States and their regulators, and other stakeholders frantically reengineer the power grids that make up the US power grid in to accommodate variable renewable power.
Werner:Yep. That
Markham:and I had, Gerhard Schlage, on here, who is the chief technology officer for Hitachi Energy, and he talked about how look. I mean, you, when you bring in variable electricity generation, you have to add a whole bunch of technologies from storage to AI to digital controls, power electronics. It's a different grid.
Werner:Yeah.
Markham:And the it seems like the Americans have made the decision at the top levels that that's the grid we want. We want a modernized smart grid with all this fancy technology that will accommodate the lowest possible generation cost, which at this point is wind and solar. And is that a fair way to to characterize that?
Werner:Yes. Let me also add, I'm I'm old enough to remember that we've been talking about the smart grid for, you know, 2 decades at this point. And I don't think anyone, you know, to this date can define what that actually is. But it's clearly smarter than whatever the heck we have right now. Right?
Werner:I mean, that's clear. And, yes, frankly, energy efficiency demand response, right, the sort of things where I have my fancy German design dishwasher sitting in my 3rd floor walk up in lower Manhattan. And, yeah, it does certain things very, very well. The smart start feature doesn't work because it can't talk to the grid on this side of the Atlantic. Right?
Werner:It just you know, con Edison is not not smart enough yet to have a grid where it sends a signal to the dishwasher saying, okay. And now is when you turn yourself on because, you know, the sun is up and demand is down or the wind is up and demand is down. And, that sort of thing, of course, takes investment in grid infrastructure, which in many ways by definition means government needs to step in and do something there, do something major. And again, right, back to the Inflation Reduction Act, yes, it does lots of those things. It's not gonna solve it all, but, clearly a right step in the right direction to get off fossil fuels overall.
Werner:And that's the reason why it's beautifully named and why frankly we should cheat on the broad, direction of this transition. No matter what no matter where you're from. Right? No matter which energy company you work for, we know it's not if it's when to march in this direction.
Markham:One of the things I appreciate about the IRA is the way in which it has embraced the future. They brought in people like Jigar Shah, the Department of Energy. Now he's running the loan program. I think they've got, like, $200,000,000,000 worth of loan applications. I mean, it's been wildly but he's out he's an evangelist for innovations like virtual power plants.
Markham:He's out talking about them all the time and and out in the corporate world, you know, bringing along people, you know, maybe stakeholders who might be a little more conservative and a little more reluctant. And and there's and he's not alone. There are many people attached or not attached to the to the Biden administration who are out there evangelizing. And so there's a culture change. People are beginning to go, oh, oh, yeah.
Markham:Okay. I should have a, you know, a a power wall in my garage and the solar panels on my roof, and I can do this and that, the other thing with them. And, you know, the culture around energy management, energy generation, how we approach this is changing in the US in a way that is certainly is not in Canada. Like, we are laggards in Canada. I think that's pretty clear, not to the policymakers, but it's clear to me.
Markham:So the IRA is more than just a climate bill. It's more than certainly a whole lot more than an inflation reduction bill, and it seems like this is one of those nation building moments. It's like building the highway system after the you know, during and after the the war, that sort of thing. Like, in Canada, we talk about building the Canadian National Railway in 18/85. It was a nation building exercise, and this switch is like that.
Markham:Would you agree or disagree?
Werner:I agree that, I would say it's it's one of it's it's a positive tipping point. It's the sort of thing, right, you know, in the climate world, we you know, way too many negative tipping points, and, you know, they're they're for real and they're bad and much worse than most think and so on. And, yeah, in this case, it's one of these positive socioeconomic tipping points that goes well beyond, frankly, the mere economic incentives. But, yes, it it's it's it's basically it's what I would call the this green growth mindset. Right?
Werner:Okay. So I thought you know, I teach you the business school. Right? So growth mindset, right, is the you know, that's what TED Talks are made of, right, and LinkedIn postings and so on. Right?
Werner:Cool. Okay. This is the green growth mindset version where, yes, it's, you know, frankly, it's this can do spirit. It's the can do attitude. And, yeah, of course, right, it's the incentives, the economics, the policy that aligns with that attitude, and, you know, wishful thinking alone isn't gonna make it so.
Werner:And it's it's it's amazing to me to just look at some of these numbers. So we have the IRA originally cost something like $400,000,000,000, a bit less than 400,000,000,000. That was the projection, congressional budget office projection. Okay. A year later, 18 months later or so, by now we know the congressional budget office is saying, actually, it's twice as expensive, right, which depending on your political situation, you can spin as, oh my god.
Werner:Right? This is bad. No. This is amazing. It's twice as popular.
Werner:But more importantly, Goldman Sachs comes in and says, wait a second, guys. Dear CBO, bureaucrat, number crunchers, us financial types are going to project this or we can project it too. And they come up with $1,200,000,000,000 over 10 years in government spending. Right? Three times as popular.
Werner:And freeing something like 3 $1,000,000,000,000 in private money and, you know, 10 +1,000,000,000,000 in the next 30 years that are jump started by the inflation reduction.
Markham:We're getting to close to the end of the the interview, Werner. And one of the things that is crystal clear to me is the resurgence of industrial policy. Now I'm old enough to remember when Ronald Reagan was elected in 1980. But you know what preceded Ronald Reagan?
Werner:In 1980. So, you know, that's sort of old old. Thanks for
Markham:making me feel old. And but you know what preceded Ronald Reagan? A decade of debate about Milton Friedman.
Werner:Yep.
Markham:And a shift away from the sort of welfare state attitude of the sixties seventies into, no. We want more market forces. We want less regulation, less government, less less less. And industrial policy was one of the things that suffered. It became unpopular.
Markham:It became it wasn't cool anymore. And with the China used industrial policy to build all of its clean energy manufacturing. The Europeans have used it. Now the Americans have reembraced it. And you can people like Brian Deese, the former, chairman of the advisory committee for the Biden administration, they talk explicitly.
Markham:Here's why we're doing this, what we hope to achieve. It's partly energy security, it's partly reshoring manufacturing, it's partly a whole bunch of things, but it's clearly back on the table. And if your government if your policy makers do not have a particular specific approach to industrial strategy and industrial policy that flows out of it, then you are gonna be a loser in the energy transition. My take.
Werner:Yes. And and right. If it okay. This is binomics. Right?
Werner:I mean, you know, that's what binomics is defined as by those who design binomics. And, yes, it's this, you know, long arc of history, if you will, story where you do say you do see, industrial policy, come in together with this climate, mandate, if you will. Right? The sort of the the the the clear push towards decarbonization, that, yes, does have something to do with fossil inflation, does have a lot to do with it, is about insulating, insuring ourselves, creating more resilient supply chains that allow us to no longer be as dependent as we've been now for decades on, right, what happens halfway across the world in energy exporting, nations. That combination makes it a powerful, powerful instrument.
Werner:But, actually, I I I remember now that I don't wanna advertise The Economist Magazine too much here, but it's actually Brian Deese, national security adviser, and John Podesta, the 3 of them together, writing one of these by invitation pieces for The Economist, basically making those points. Right? Talking about energy security, national security, industrial policy, decarbonization. Right? Climate meets national security meets energy security.
Werner:That's a powerful combination. And having the economic incentives in place to make it so, is of course, well, again, that's the Inflation Reduction Act in a nutshell.
Markham:It it is indeed. And one of the things that the Inflation Reduction Act doing is doing is mobilizing private capital. It's astonishing to me the amount of capital that has suddenly become available for hydrogen, for wind and solar farms, for investing in in investor owned utilities that need to upgrade their operations and their power grids, and and and all of the wonderful technologies that are just, I mean, they're transforming urban environments for sure and urban economies. And I look at at at Canada and just shake my head because it's not happening here. It's not to the same extent.
Markham:We are we are basically tweaking our 100 year old grids, because we have 10 provinces and each one of them has their own their own grid. They rarely talk to each other. It's not much east west trade. And it seems to me that if if the 21st century economy is electric, and it is, that's electricity is the foundation, it's this table stakes to play in this game, that those countries that that transition to, so that their grids are are dominated by low cost, clean, reliable electricity, already have a huge competitive advantage over countries that do not. Amen.
Markham:On that on that note, Werner, thank you. It's always a pleasure, and continue writing those great op eds, and we will, we won't we won't let 2 or 3 years go between interviews next time.
Werner:Sounds great. Great to be here.