Financial crisis: still bad for the environment

Has it really been only four months since our financial system caved in? Back then, I made a few predictions about how the crisis would affect clean tech. It’s time for a periodic check-in.

The credit crunch remains flatly terrible for clean energy development. Energy developers have curtailed plans for new plants so dramatically that the industry seems to be in virtual lockdown. The Freakonomics blog provided a good round-up recently. John Whitehead predicts that “almost all large, private renewable-energy investments will be put on hold in 2009.” George Tolley notes that “Florida Power and Light has reduced wind power investments by 500 megawatts, and Duke Energy has dropped $50 million of solar power projects.”

The problem is both the tightening of credit markets and another unforeseen consequence of the broader recession: the impact on tax credits. Wind farms and other renewable energy projects often rely on tax credits as a source of funding, but such credits only have value when firms have profits to tax. A broad-based recession means low or no profits, less tax revenue, and lower value for tax credits.

Four months ago I noted that the booming clean tech market faced supply constraints. Wind manufacturers, for example, were so backlogged with orders that they couldn’t keep up with demand. That situation, alas, appears to have reversed itself dramatically. Wind manufacturers are laying off employees. So are solar energy companies.

Fourth months ago, I predicted that long-term upward price trends for oil would help the clean tech industry, but near-term volatility would blunt the effect. Although broadly true, this prediction was way too hedged and wimpy. Fossil fuel prices have plummeted due to the recession, with predictably bad consequences for clean energy.

When the crisis hit, it cast a cloud over the prospects of environmental legislation. That cloud remains, but in the interim the political landscape has shifted dramatically with the election of Barack Obama. Make no mistake: the financial crisis is still a setback for broad-based regulation of greenhouse gases. But the incoming administration remains committed to the goal of fighting climate change, and the need for stimulus spending has made available a massive amount of cash, much of which will be directed toward clean tech. More generally, the crisis has opened up a window for proposals that under normal circumstances might be political non-starters. Obama’s call for a rapid doubling of clean energy production in the U.S. seems like an appropriate first step. Assuming the incoming administration is both smart (it is) and continues to be blessed with the goodwill of the American people, we may look back at 2009 as a foundational year in the clean economy. It likely won’t, however, be the year that the U.S. passes a federal cap-and-trade bill.

Stepping back a bit, it’s worth remembering that many of these factors differ greatly in their long-term outlook. Fossil fuel prices are low now, but will be back at record levels when the recession ends. The clean tech industry is experiencing a contraction, but such contractions are not unusual after a period of fast growth. Political progress is impossibly slow, but change does come eventually. So while the financial crisis is undoubtedly a near- and maybe even medium-term setback for clean tech, the long-term fundamentals remain sound.

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