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Obama's Blueprint for a Daring Green Machine
By JIM MCTAGUE

Special Report: Going Green -- Despite the cost, Obama is determined to turn America green.

PRESIDENT BARACK OBAMA'S $787.2 BILLION STIMULUS PLAN includes the largest government investment in green energy since the expansion of the wind-driven Royal Navy in the 18th century. But the administration and Congress will have to forcibly change consumer habits, and spend billions of dollars more, if relatively expensive green energy is to become a viable alternative to less-expensive power sources such as coal and oil.

Dan Picasso for Barron's
Bills are coming in the House and Senate that seek to change how consumers use energy, how utilities produce it and how pollution is regulated.
They are about to try. The Environmental Protection Agency is drafting rules that will make it unprofitable for utilities to build new coal- and crude-fired plants, and for car makers to manufacture gas-swilling models like sport-utility vehicles and luxury sedans. Separately, Senate Majority Leader Harry Reid of Nevada has pledged to move a big energy bill in the spring with a cap-and-trade regime for greenhouse gases that, beginning in 2012, would raise an estimated $75 billion to $200 billion in annual revenue to fund Obama's green revolution.
Under cap-and-trade, big polluters would have to buy permits from the government to emit carbon into the air, with the cost of polluting increasing each year. If a manufacturer or utility reduced pollutants, it could sell excess permits to other companies. The government aims to reduce harmful emissions by 83% by 2050. The Reid bill may also contain a renewable-energy standard, mandating that utilities produce a specific percentage of power from green sources by a specified date.
Obama included cap-and-trade revenue in his new budget, unveiled last week. But the president's efforts to promote the plan may fail, owing to the fragility of the economy. Even Senate Democrats might oppose measures that will raise operating costs for the nation's farmers, manufacturers and consumers during the steepest economic downturn since the Great Depression.
THE PRESIDENT HAS A WORTHY IF SOMEWHAT utopian goal in mind: He is attempting to create a new industrial base that will produce solar panels, windmills, a smart electrical grid and other clean-energy sources and technologies, while simultaneously boosting the economy and reducing U.S. dependence on foreign oil. Leadership in green technologies theoretically would give the U.S. something to sell to the rest of the world that cheap-labor countries like China and India can't produce readily.
The stimulus bill demonstrates the administration's determination to build this daring green machine. Depending on how you slice and dice the numbers, the bill expends between $20 billion and $60 billion on renewable-energy projects and energy conservation. This dwarfs the previous record for green-energy spending: $1 billion contained in a 2008 agricultural bill for the construction of ethanol refineries.
The final price tag for the green-energy component of the stimulus bill could be considerably higher, according to utility-industry lobbyist Michael McKenna. He points to a 30% investment-tax credit for renewable-energy projects of almost every stripe that is placed in service in 2009 and 2010. The credit previously applied only to solar-power investments. The government estimated the new tax proposal will cost about $218 million over 10 years, a figure McKenna calls "laughably low."
He predicts utilities and other investors will clamor to take advantage of the credit before it expires, investing in technologies such as wind turbines, geothermal power, waste-to-energy conversion, landfill-gas recovery devices and renewable marine technologies. Even so, most private capital will stay on the sidelines until government spending makes the green industry look stable.
BECAUSE SOLAR, WIND AND OTHER forms of clean energy are now much more expensive to generate than energy supplied by coal, gas and oil, Congress would have to pass legislation that in effect forces Americans to use more of it. Jim Lucier, an analyst with Capital Alpha Partners in Washington, says this is far from a slam-dunk, given potential objections from blocs of senators in both parties representing coal, oil-patch and farm-belt states.
"Substituting more expensive energy for cheaper energy doesn't make sense," says Margo Thorning, chief economist for the American Council for Capital Formation. She thinks this realization will restrain Congress from jumping on the clean-energy bandwagon.
But Tony Kreindler, a spokesman for the Environmental Defense Fund, disagrees. "These are the same arguments that were used for opposing seat belts and air bags," he says, noting that lawmakers have been debating cap-and-trade -- the Holy Grail of the environmental movement -- since 2003. "The underbrush has been cleared, and the politics of [Capitol] Hill have changed," he adds.
Many big manufacturers and utilities are promoting cap-and-trade, Kreindler says, because uncertainty about government policing of greenhouse gases has stalled capital investments for years. He points to the U.S. Climate Action Partnership, a business/green industry sector seeking enactment of legislation to require big cuts in greenhouse-gas emissions. Its membership roster includes Duke Energy, General Motors, Ford, Shell Oil, Caterpillar and DuPont.
California Democrat Henry Waxman's Energy and Commerce Committee is preparing to introduce cap-and-trade legislation in the House (see "How to (Maybe) Make Money Out of Thin Air," Jan. 19, 2008.) But McKenna questions whether it will get the necessary votes. The lobbyist, who has polled House members, says about 150 are in favor, about 100 are opposed and 185 are undecided. If the votes eventually line up in favor, it will be a green light for green technologies and investors.