Government Should Hold Auctions to Accelerate the Transition to Green Energy

By Blair Levin

A tactic successfully pioneered by the US government to accelerate next generation wireless services — while also garnering over $7 billion for the Treasury and a Nobel Prize — should now be used to accelerate a greener economy.

By way of background, the twin oil shocks of 1973 and 1979 shook the United States economy to its core, triggering that era’s notorious stagflation. The two crises stemmed from American dependence on the oil and gas resources of the Middle East. In response, the United States government provided massive incentives to exploit domestic carbon fuel resources and using coal for electricity generation and manufacturing processes.

Coal was the primary source of fuel for electricity generation until the early 2000s when produced new natural gas reserves that put competitive pricing pressures on coal. In addition, governments began recognizing the multitude of costs of greenhouse gas emissions and shifted policy accordingly. What government once encouraged it now discourages. As a result, coal producers face headwinds from both market and policy shifts. But the transition is slow and the costs in terms of climate change are high.

The government faced a similar transition related to spectrum held by broadcast television when mobile communications emerged. The FCC had authority to allocate spectrum to the mobile industry, but that spectrum already was used by other businesses. In 2009, in response to a National Broadband Plan study suggesting the country would face a “spectrum crunch” that would hinder next generation wireless services and cause significant damage to the economy. Meanwhile, the value of the spectrum used by television broadcasters was diminishing, as their programming — now transmitted by cable and the internet — was no longer spectrum dependent.

The agency developed a auction that in which broadcast television owners competed to sell excess spectrum to wireless carriers. Congress approved and the FCC held an “incentive auction” that resulted in broadcasters voluntarily selling nearly $20 billion worth of spectrum, with the government taking a share, about $2 billion provided to assist with transition costs, and the economist who helped the FCC winning a Nobel prize. Just as important, because of its voluntary nature it faced limited political opposition and did not get tied up in long judicial and regulatory battles that often characterize spectrum disputes.

The same idea should be applied to coal reserves. Specifically, the government should create an auction in which coal reserve owners compete to sell their reserves to a central entity that will retain such reserves as opposed to extracting and selling the tonnage. The entity — perhaps a government-funded nonprofit — would not be able to sell the reserves unless carbon capture and storage were commercially perfected or a national emergency akin to the 1970s shocks caused another change in policy, requiring the use of the reserves.

Owners of coal reserves would not be compelled to sell. Some may have particularly valuable customer use cases, such as for manufacturing processes or for utilities that need coal reserves to assure grid reliability. But owners of reserves caught in the transition to new fuels, lacking a practical exit path, could accept bids at the levels they thought fit. The auction, not the government, would set the price. And the auction would avoid the kind of regulatory and legal battles that would tie up EPA efforts for years, with no guarantee of success.

The United States coal reserves are estimated to be almost a quarter of global reserves, the industry’s annual revenue is less than $20 billion. That relatively modest amount reflects the limited and declining economic prospects for the reserves and suggests that the financial capital necessary to have a big impact on emissions is not out of reach. Of course, as with the FCC auctions, experts will have to design the details to account for specific market conditions and incentives. In addition, just as with FCC auctions, funds should be provided to assist with the transition; in this case providing generous funding to employees and companies affected by the sale of the reserves.

Where would the buy-side money come from? It could be funded by a direct congressional appropriation. Alternatively, it could be obtained by a surcharge on the new entrants in the power generation markets, solar and wind and natural gas. The source of the funds, however, matters less than fairness in the transition from what the government used to promote to the current needs of the country and the speed by which a voluntary but critically necessary transition can occur.

Blair Levin was the Executive Director of the National Broadband Plan and is now a Non-Resident Fellow at the Metropolitan Policy Project of the Brookings Institution.