Barack Obama’s election as the next President of the United States portends significant changes to one of the most fundamental drivers of the American economy: energy. Throughout his campaign, President-elect Obama has consistently advocated proposals that—in the face of, and as a partial solution to, America’s economic slowdown—may result in significant changes to how electricity and fuel are supplied and used in this country. Much of this change will likely be driven by regulatory and/or legislative efforts to address climate change. Also, such efforts will likely be complemented by a national Low Carbon Fuel Standard, increased use of sustainable biofuels, improved vehicle and building efficiency standards, a national Renewable Portfolio Standard (RPS), and significant electricity transmission reform. Additionally, President-elect Obama has proposed significant investment in research and development for consumer product efficiency, carbon capture and storage technology, and manufacturing facility conversion. Although many details of these programs are not yet known, the broad strokes of President-elect Obama’s climate change, electricity, and fuel policy proposals provide sufficient information for parties to begin evaluating potential opportunities and pitfalls. Our intelligence indicates that this will be a top priority in the first six months of the new administration.

Climate Change Policy

The core of President-elect Obama’s proposed climate change policy is a greenhouse gas (GHG) cap-and-trade program under which annual U.S. GHG emissions would be capped and reduced on an annual basis, such that GHG emissions in 2050 are 80 percent lower than GHG emissions in 1990. The cap would be enforced by requiring regulated entities (e.g., entities that burn significant amounts of coal or supply large amounts of fuel to the U.S. market) to acquire an emission allowance for each ton of GHG emissions for which they are responsible. President-elect Obama has called for all emission allowances to be purchased through government-run auctions. Thereafter, regulated industries could trade the emission allowances so that emission reductions could be made as efficiently as possible. The revenues from the emission allowance auctions would be used for various government programs designed to speed the transition to a non-carbon based economy, as well as provide transition support for workers and low-income individuals.

Significant parts of President-elect Obama’s climate change proposal remain unknown. For example, the proposal does not provide any details on the rate at which the annual cap on GHG emissions would decline. Similarly unclear is whether emission offsets and provisions protecting domestic industry would be included in the cap-and-trade system. However, President-elect Obama’s support as a Senator for legislation including such features suggests that his final climate change policy proposal may include similar provisions. Additionally, Mr. Obama has committed to making the United States an international leader on climate change, but has not released any details regarding his administration’s position on a future international agreement.

Electricity Supply and Usage

President-elect Obama’s energy policy is directed at spurring the introduction of new energy sources, as well as decreasing the usage and environmental impact of electricity generated from conventional sources. As such, it marks a shift from the current administration’s energy policies. The centerpiece of President-elect Obama’s stated energy policy is the strategic investment of $150 billion over 10 years to create five million new “green collar” jobs, accelerate the commercialization of plug-in hybrids, promote development of commercial-scale renewable energy, encourage energy efficiency, invest in low-emissions coal plants, advance the next generation of biofuels and fuel infrastructure, and begin transition to a new digital electricity grid. Another key feature of President-elect Obama’s energy policy is the enactment of a national RPS. His proposal in that regard would require 10 percent of electricity used in the United States to come from renewable sources by 2012. That percentage increases to 25 percent by 2025. The proposal is also likely to include a long term extension of the production tax credit for wind and other renewables. President-elect Obama also has committed to the development and deployment of carbon capture and storage technology, which includes plans for the Department of Energy to develop five commercial-scale coal-fired power plants with such technology. President-elect Obama also plans to improve supply-side energy efficiency by requiring states to decouple energy-company income from the quantity of energy consumed, as well as by dramatically expanding and updating the electricity transmission grid through grant programs, peak load management technology, advanced technology demonstration projects, and fundamental regulatory reform of transmission. Furthermore, these supply-side initiatives would be matched by demand management proposals.

President-elect Obama’s two key demand management proposals are national building efficiency goals and updates of the federal appliance efficiency standards. President-elect Obama has announced a goal of making all new buildings carbon-neutral by 2030, and interim goals of improving the efficiency of new and existing buildings over the next decade by 50 percent and 25 percent, respectively. Regarding federal appliance efficiency standards, President-elect Obama plans to allocate additional resources to the Department of Energy so that it may regularly update these standards.

Fuel Supply and Use

Like President-elect Obama’s approach to electricity supply, his policy proposals related to fuel supply include mandates for new, less carbon-intensive fuels, as well as measures designed to stretch the quantity of domestic conventional sources of fuel. For example, President-elect Obama would require the use of at least 60 million gallons of advanced, sustainable biofuels by 2030, and he proposes to support that mandate by developing the necessary infrastructure through tax incentives and government contracts. In addition, President-elect Obama proposes a federal Low Carbon Fuel Standard, which would require the life cycle GHG emissions of fuels to be reduced by five percent in five years and 10 percent in 10 years. He also has indicated that he would encourage the further development of domestic oil supplies by requiring oil companies to either use idle leases or lose them, potentially allowing another company to develop idle leases. Additionally, President-elect Obama’s proposed cap-and-trade program would contain incentives for enhanced oil and gas recovery, which could facilitate further recovery from wells previously considered exhausted. Once again, these efforts would be coupled with demand management programs.

President-elect Obama’s proposals to manage the demand for fuels consist of mandates and government investment programs to make the mandates more achievable. He plans to increase mandatory fuel economy standards by four percent each year and to require that all new vehicles be flexible fuel vehicles by the end of his first term. The Obama administration would support the accomplishment of these requirements by investing heavily in “plug-in” battery technology development, by providing significant tax credits for the purchase of advanced technology vehicles, and by providing up to $4 billion in tax credits and loan guarantees to domestic auto manufacturers to help them appropriately retool their manufacturing facilities.

Moving Forward

The consistency with which President-elect Barack Obama has focused on climate change and energy policy suggests that such initiatives will be a primary focus of his initial term. Indeed, the current political chatter indicates that energy policy may be the first major issue tackled by his administration. If successful, there can be no doubt that his policies will profoundly impact the economy at large. There will be winners and losers as a result of what may be a historic shift in energy and environmental policy, and it behooves all entities with a stake in the outcome to position themselves accordingly.