• Some highlights from this interview
• Why CEOs are calling for carbon regulation
• How realistic is "clean coal"?
• Where Wall Street is placing its bets
• It's naïve to think market forces will solve the problem
• The debates going on in Washington

How are we to understand the journey that most CEOs have taken on this issue of climate change over these last three or four years? ...

... CEOs [differ] widely in how they approach this thing. But … to whatever degree they disagree or agree with the scientific argument that man is a major contributor to global warming, that's sort of becoming less and less relevant in the face of the political reality as they see it: that they're going to get hit with a regulation, and therefore they need to try to shape that regulation as best they can. ...

We see a lot of green advertising from the automobile industry, from the oil business, from the coal lobby. What are we to make of it? ...

Clearly, companies want to put the best face on their operations that they can. … The fact that they're deciding that it's relevant to advertise heavily based on environmental issues as opposed to, say, in the auto industry, based on cupholders or horsepower is itself some measure of where they feel consumer sentiment is going. Now, whether their ads are an accurate measure of all their operations, one can determine or quibble with. ...

Do people want to buy green?

... This is the dilemma that faces an auto CEO. ... People say they want to buy green, but do they really? If you look at the numbers in the market, there's quite a lot of talk about hybrid vehicles. And indeed, hybrid sales in the United States have shot up, but off a really small base. And so now hybrid sales in the U.S. are something like 2 percent of U.S. auto sales. That is not something you build an auto company on. ...

Remember that auto CEOs, just like oil CEOs, have long memories. They remember the 1970s. In the 1970s, oil prices shot up, and auto companies ... retooled for smaller cars. CAFE [Corporate Average Fuel Economy], the federal fuel economy legislation, came into being. Oil prices were high, and it worked for a while. The smaller cars sold; the lighter cars sold. But lo and behold, oil prices went back down again, and those cars didn't sell long term as well, which is the period in which SUVs were invented.

And so the question that an auto CEO faces is, is this ephemeral, or is this a fundamental, structural, long-term shift? Do I reinvest? Do I retool my factories, or is that just going to be a cost that I'm going to regret 10 years down the road?

And when they think about whether or not this is some kind of long-term shift, fundamental shift, they have to begin to think about climate change?

Yeah. I think there's a general sense among industrial CEOs, auto CEOs included, that the situation that we're in now is different, for two reasons. One of the reasons has to do with oil prices, and one of the reasons has to do with climate change.

The cause of the 1970s oil crunch had do with an acute constriction in supply. The Mideast turned off the spigots, or closed the spigots. What we have now is a sort of more chronic issue. ... You fundamentally have a rise in demand, largely driven by the developing world, that is tightening the cushion between supply and demand. And there's no reason, really, to believe that that's going to fundamentally change long term. ...

I just want to go back to this issue of advertising and what the consumer or viewer is to make of all those green ads. Many of those cars are not going to be on the market, right? I mean, when we see BMW or Chevrolet advertising a hydrogen vehicle, what's that about?

There's a term in Detroit which is called the halo car. That's what it's about. What it's about is advertising a vehicle that creates an aura around the brand. But this is not specific to environmental issues. This is why Detroit advertises race cars when the average person isn't going to go more than 65 miles an hour on a highway.

And so the halo that Detroit, or the auto industry more broadly, chooses to advertise is a good indication of where these companies feel the energy -- again, the zeitgeist -- is. And so it's a measure that's significant in that sense. ...

The place where these companies get hurt is in a politically charged atmosphere like we're in, on an issue that is so heartfelt by some people as the environment. If these companies are deemed to be greenwashing … then I think it's arguable that they get hit harder in the court of public opinion than they would if they were seen to be pushing the limits of advertising in some other issue. ...

How is the industry doing in terms of their investments in alternative vehicles?

... All these companies start from the premise that they see something coming; they're going to get hit with something, and they would like to steer that hit so that they can continue to build what they're building. ...

GM is looking at fuel cells, and GM is looking at hybrids. And in Europe, half of all of GM's vehicles are diesels, which is very different from here. But GM knows how to make diesels.

But what GM really wants to steer the debate toward is ethanol in this country. ... The reason is that GM can tweak an existing engine to accept E85 -- 85 percent ethanol, 15 percent gasoline -- for about $150 a car. That's vastly cheaper than what it would cost to make a car a hybrid or a diesel engine. It's not that GM doesn't know how to do these other things, but GM believes that at the end of the day, people may say that they want a green car, but people aren't willing to pay that much more for a green car. ...

And by the way, this E85 question raises a question of whether the onus is on the auto industry or the oil industry to solve the problem, because making E85 viable would require more change in the infrastructure of delivery of fuel in this country than it would in the design of what's under the hood of a car.

Let's say everybody's driving an E85 vehicle. What does that do for reducing carbon emissions?

There are disagreements about that. It has to do with how that ethanol is produced. There are studies which say that there's a net benefit in carbon emissions. There are studies that say that that net benefit in reducing carbon emissions isn't so great. It's clearly -- and this is, I think, where GM starts this question -- it's clearly potentially a benefit in terms of reliance on Mideast oil. ...

... Is ethanol is a measure to reduce dependence on foreign oil or a measure to reduce carbon emissions? It seems there's confusion.

But let's remember how ethanol started. Ethanol started in this country before oil prices were high, before concern about climate change was pervasive. It was a political push by corn producers in the Midwest. ...

There's an increasing sense that corn ethanol is not the answer, and you see that in the falling prices of stocks of corn ethanol producers, which is quite a switch from a couple of years ago, when they were sort of investor darlings. There's a general sense that the solution is something called cellulosic ethanol, which is ethanol made from things other than corn that don't impinge on the food supply. But how you get from A to B is very much an unanswered question.

And how does that really bring down carbon emissions anywhere close to the targets that are being talked about, 60 to 80 percent by midcentury?

It doesn't. Nothing alone does. I mean, everyone talks about there not being a silver bullet here, and this is a good example of that.

But transportation is the second largest contributor to global carbon dioxide emissions, behind utilities, behind the production of electricity. And so, clearly, the world is not going to get to 60 to 80 percent reductions in carbon emissions if transportation is not solved. So the search is on for something that's an economically viable solution. ...

You raise this issue of where the onus is to solve this climate problem in the transport sector, whether it's on the oil companies or on the car companies.

There is, throughout the history of all of this, a chicken-or-egg problem. And there have been many attempts to find a green solution to transportation, and none of them have worked very well. There have been multiple attempts in California, across this country, to find alternative fuels, and they've not worked very well, largely because either it's been impossible to erect the infrastructure of alternative fuel stations, or because it's been impossible to find a way to reduce the cost of the technology under the hood.

So you have the famed electric-car experiment in California. And it failed, essentially, for both reasons. ...

So you describe a kind of standoff between the automobile industry and the oil business and nothing really getting done. How are we to judge the sincerity of companies like Exxon and General Motors?

I think sincerity may be the wrong test. These companies don't exist to be morally upstanding, although they would certainly tell you that they want to be. They exist to make money for their shareholders. They will respond to the signals with which they're presented in the market. And I think that, at the end of the day, is where this whole question comes around to.

Heretofore, these companies have not had market signals which have driven them to produce the kind of products we're talking about. Exxon hasn't had market signals to shift away from oil. GM hasn't had market signals to drastically improve the fuel economy of its vehicles. Now, that may be changing. But we're talking about changes here that have begun to become evident in, say, the space of two years, and these are industries that exist with capital planning scenarios of decades. And so there's huge resistance to making decisions on a dime. ...

[Do they want to slow down the process?]

I'm not sure the point is that they want to slow the process down. I think the point is that they are not convinced that they have the signals that justify speeding it up. And here's where we come to Washington.

About a year ago, essentially, CEOs of a large number of big industrial companies in all these industries got together in this organization called USCAP [U.S. Climate Action Partnership], and it was quite an interesting declaration. They basically called for carbon regulation -- a huge switch from their public lobbying positions in the past. Why did they do it? Well, they didn't do it because suddenly they changed their environmental outlook. They did it because they could read the political handwriting on the wall, and it became clear to them that politics had changed such that they were going to get hit, likely with something like this, and it would behoove them and their shareholders to shape it rather than get shaped by it. ...

They're also worried about state-by-state regulation and want some sort of overarching rulebook laid down by the feds, right?

Yeah. The word that you hear is "patchwork," and there is much, much consternation among CEOs in all these industries about what they refer to as a patchwork of regulation. And they find themselves in a bit of a pickle here.

Historically, these industries have fought the notion of federal regulation on these issues. ... What these companies are presented with is the really scary specter of differing regulations in multiple states and a hugely inefficient regulatory system. So they are now deciding that [it would be] better to go to Washington and be presented with one regulation than with many, and hopefully, in their view, one regulation they have a better chance of shaping, because many of these industries are actually more powerful in Washington than they are in the capitals of many of the states that are making these regulations. ...

... Where has the car business been over these years on fuel economy standards, and where are they today?

Not to be Pollyanna about this, but just to be clear, the auto industry makes metal that it thinks people will buy. I'm not sure there's any ingrained sense in the auto industry that it is hell-bent on producing inefficient cars. ... But it has, at least in this country, thrived in an environment of low regulation and low fuel prices, where the cheapest, throatiest, glitziest cars are the ones that sell the best. So the question is, to what degree has that changed?

The history of the U.S. is a history of a country of cheap energy. This country sits or sat on vast pools of oil. The economic expansion of this country was fueled by that oil. The growth of the auto industry starting in the '50s was fueled by that oil. There was no reason to care about how much oil cars were consuming or how much coal power plants and houses were burning. And so the auto industry did very well by servicing that market.

But there were repeated attempts to raise fuel economy standards for reasons of energy security, for reasons of peak oil, ... and now climate change is added to that. And consistently over the years they've fought it.

Absolutely they've fought it, which is an entirely rational response. They have a sunk cost. They have factories that cost a lot of money that are cranking out a certain product. Wouldn't you resist any attempt to force you to change what you've invested in? ...

Now, whether it's the morally benevolent response is another question. But again, that's not their issue. The issue is, at least in one sense, what helps the shareholders now.

Is it naïve to raise the issue of corporate responsibility?

No. But different people define that term differently. And there's a big debate within these companies about whether corporate responsibility means delivering the best quarterly result to your shareholder or whether it means reducing emissions into the atmosphere.

Is there any shift in that?

I think these CEOs are asking that question. I think they think there is a shift in that. But again, these are all very amorphous issues, and these questions are going to be answered in the space of decades. So these folks are in a tough spot. They are having to make decisions that are going to have a real economic impact on their company soon when it's not going to be clear for years whether those decisions are the right ones.

There have been, as you say, attempts over the years to force improvements in fuel economy in this country. The most notable is in the late '70s after the Mideast oil crisis and the history is that that attempt early on worked. When those rules came into effect, the average fuel economy of the U.S. fleet was about 20 miles per gallon. By the mid-80s, early- to mid-80s it had gone up to about 25 or so. That was quite a significant step in a few years.

But it wasn't just because of CAFE rules. It was also because gasoline prices were high. Oil prices were high. There was a market incentive to push people to buy less consumptive cars. The CAFE rules stayed in effect, but when the oil prices went back down there wasn't that incentive anymore, and you saw the change in consumer buying patterns. …

Were Chrysler, Ford and General Motors, the Big Three automakers, hurt by the Prius?

They were clearly hurt reputationally. When the Prius came out in the late '90s, there was a sense in Detroit that this was a flash-in-the-pan car. ... It was an expensive dalliance. It was sold initially by Toyota essentially at a loss, and that was not the way to run an auto company. It was sold in an environment [in which] gasoline was cheap, and it was pretty unclear that people were going to pay for it. And lo and behold, it was a halo car. It made quite an impression. It was in all the auto magazines. It was written about. It was on TV. But it was not a game changer.

However, it fed the sense that Detroit was behind technologically. ... Now, Detroit executives will argue to you that they're not technologically behind. But certainly in consumers' psyche they're behind, and in the psyche of politicians, which feeds into what's going on in Washington, Detroit is behind.

Now they come out with a lot of hybrids, but many of them are very large cars. What's that about?

Well, this is interesting, isn't it? And it's not just Detroit. It's Toyota, too. So the headline wrap on hybrids is that they're inherently a much better, a much greener alternative. In fact, they are just another technology, and you can, as an engineer, dial up or down various qualities of a hybrid. You can make it throatier, you can make it faster off the line, or you can make it thriftier in terms of how much gasoline it consumes. ...

But it's pretty clear that not all hybrids are created equal. And just because a car is a hybrid doesn't mean it's inherently an awful lot greener than an internal combustion engine car that's designed to be fuel-efficient.

But the consumer is being told that it will be greener and if they buy a big hybrid truck that they're actually contributing to solving climate change?

That's right. And the consumer is pretty willing to believe it.

And it's a false pitch?

There is no shortage of information out there that the consumer can access to find out what the bottom line, miles per gallon, is. Again, these companies market what they think will sell, and the environmental space is not an awful lot different from other spaces in this regard. Advertising works. ...

Let's shift here to what [Wall Street Journal Washington bureau senior editor] Joe White described in a recent column as this tremendous kind of inertia that exists in all these sectors [opposed] to change. Listening to you, I don't get a lot of confidence that they are taking climate change very seriously. Is that unfair?

No. I think these companies don't know what to make of climate change. Climate change is potentially such a game-changing phenomenon that there's a bit of a deer-in-the-headlights situation. I mean, these companies -- auto companies, oil companies, coal-fired utility companies -- have grown up and thrived in an environment that hasn't fundamentally changed in decades, when the measures of success were pretty predictable. And now, all of a sudden, they're presented with the possibility that all of that or a large part of that could go out the window. How you react to that is a hugely difficult question that these guys are still trying to figure out.

And to the point of inertia, again, there are huge sunk costs in the infrastructure that was built around those assumptions that didn't change much over decades.

Talk about that in terms of the oil industry, if you could give me that analysis of their sunk costs.

Sure. There's a statistic that I think is just worth keeping in mind in all of this, from the International Energy Agency [IEA] in Paris. It is that 80 percent of the world's energy comes from fossil fuels today. And 20 years hence, it's going to be about 80 percent.

So when you talk about potential alternative technologies, it's worth keeping in mind that the vast majority of what's supplied is fossil fuel. That's not expected fundamentally to change in the next generation.

Now, to the oil companies, there's a system that has worked well. The oil companies pump oil out of the ground. They put it in the pipelines. They put it in the ships. The ships take it to refineries. They run it through refineries. They crack it into gasoline or diesel or heating oil. They put it into pipes, and they send it off. And that works.

Now there are huge challenges to the oil industry's model of business that have nothing to do with climate change that we're in the middle of right now that are scaring the oil industry significantly. And those are fundamental concerns onto which are layered climate concerns.

So they're busy trying to figure out how to replace their reserves?

That's right. Exxon, the biggest publicly traded oil company, replaced 101 percent of its reserves last year. That is to say, it found enough new oil and gas reserves, as they're defined legally, to replace slightly more than what it pulled out of the ground.

One percent more?

One percent more. That's the worst number at Exxon in 14 years. It's still better than 100 percent, but it's not as good as it has been. And Exxon's not alone here. …

... If you're having trouble replacing your oil reserves, why isn't this a good time to be thinking hard about diversification?

That's absolutely one possible choice. And that's a choice that quite a lot of oil companies are talking up. The other choice is you hunker down and do a better job of what you've been doing for the past 50 years. If the problem is that you're having a tougher time finding enough oil, then you do everything you can to maximize your opportunity to find oil.

So which is it? Which are they choosing?

Exxon would tell you that they're choosing the latter. Exxon would tell you that they are big enough and sophisticated enough [that] they can watch and are watching the development of a whole panoply of renewable energy technologies; that they're investing in long-term research, but that they don't think that any of those technologies have gotten to the point of economic viability yet where it behooves Exxon shareholders for Exxon to invest in a business. And meanwhile, Exxon will do what Exxon knows best how to do, which is run around the world trying to pull oil out of the ground.

Are they really investing in alternatives in a meaningful way?

Look, none of the oil companies are investing in alternatives in a meaningful way if you define meaningful as a sizable chunk of their total energy investment. They are, all of them, investing the vast majority of their money in finding more oil and natural gas.

Even BP?

Even BP. Even Shell. The differences are at the margins. ... But fundamentally, all these oil companies are still oil companies. No one is "beyond petroleum." ...

Now, for years, some of these companies supported so-called climate change denier groups. Where are they on that now? And what was that about?

Exxon is kind of the poster child of this. Exxon, for years, publicly questioned the science behind claims that human beings were the main contributor to global warming, and Exxon was unabashed about its funding of groups that propagated those concerns. It's not a secret. Anyone who wanted to go on Exxon's Web site and look at their annual corporate giving report would see it broken out pretty transparently.

Exxon changed that about a year ago. … What Exxon said is that its funding of those groups became, in its view, a distraction. It was beginning to get so much political guff from funding those groups that it just wasn't worthwhile.

So it wasn't practical, but it doesn't mean they changed their view?

It was clearly not practical. There are some in Exxon who say that they are starting to regard climate models -- that is, models that predict human impact on the climate and the effects of climate changes -- as more reliable than they did a few years ago. So there is a bit of a scientific change within Exxon. ...

There's another difference between Exxon and other companies, and that is not just on the science but on the business decision about renewables. Exxon is of the opinion that it's not going to invest its shareholders' money in renewable energy -- that is, sun or wind or biofuels -- until Exxon believes that those businesses can make money with subsidies on their own.

BP and Shell are of a different view. BP and Shell are still oil companies; they're not beyond petroleum. But they believe, they say, that it behooves an energy company to gain some expertise in these other kinds of technologies so that if and when these technologies do become more viable, they're sort of on the inside, and they can do more than just buy in.

Do you think that relates to a cultural difference between Europe and America?

I think there's some element of that. ... BP and Shell have grown up ... domiciled in a place that has been more aggressive about regulating this stuff, so it makes sense that they would be, in their public comments, much more supportive of that kind of regulation, talking much more about the dangers of climate change. Exxon grew up in the U.S., where … the approach has been that the U.S. government typically doesn't regulate when it regards big scientific questions as still remaining. ...

At the end of the day, the debate here across industries is fast shifting from science to economics. ... Fundamentally, in terms of the central activity of industry, the debate has moved to how you save yourself faced with impending regulation.

But your description of oil companies is that they're not really investing in alternatives at this point. So how are they going to save themselves?

Well, they're dabbling. First of all, these companies have vast stores of cash. Exxon has about $34 billion in cash. I mean, $110 oil has been very good to the oil industry. So there's a sense that these companies have enough cash that, if the winds shift, they can pounce; they can buy in.

It's a tremendous resource, however. I mean, when you look across the economy and you think, "Who could make a change in how we get our energy?" ... these are tremendous stores of cash, beyond what government has at hand at this point. So when talking about issues like corporate responsibility when facing a climate crisis, is there not a big lost opportunity if they're just sitting on that pile of cash?

Sure, there are lost opportunities on two levels if they're sitting on that cash. Wall Street is concerned about the lost opportunity of margins, of returns. And Wall Street has been increasingly concerned with the mounting piles of cash that these oil companies have, because Wall Street feels like, quite apart from the issue of global warming, the mounting piles of cash aren't doing as much for the bottom line as they could be doing if they were invested in, say, pulling oil out of the ground. ...

But yeah, it's an environmental question in the sense that, clearly, if Exxon decided to spend $10 billion on solar panels or on wind turbines, that would have a fast effect on the development of these industries.

The question is, is that something that one should expect Exxon to do, or Shell or BP or GM or Duke Energy to do? Is it the role of these companies to juice these technologies because someone thinks it's the right thing to do? Or is it the role of government to force companies to juice these technologies? Or is it the role of government to force consumers through financial incentives or subsidies? Is it the role of taxes? Is it the role of government to force consumers to clamor for these things, because the history of the economy is such that companies respond pretty well to consumer demands?

... Is there pressure from Wall Street to get oil companies sitting on mountains of cash to invest in alternatives?

I don't think there's much pressure from Wall Street in that regard. ...

So we're not going to see Wall Street and we're not going to see large oil companies investing in renewables in any meaningful way in the near future?

Well, we might, depending on what signals they're given by government. ...

... The coal lobby, the utility lobby, how are they gaming this out?

They're essentially going through the same calculus that the auto industry and that the oil industry is going through. They have been very profitable on a very predictable model. They've had a steady supply of a fuel they know how to process that's cheap. They know their regulatory scheme. …

That's changing. It's changing in multiple ways, but most fundamentally it's changing because the raw material that they use is suddenly being challenged like it hasn't been before because of climate change concerns.

But they are saying they can clean that up.

Yes, they're saying they can clean that up.

How realistic is that?

... There are sort of three ways to look at this. One is they can burn something other than coal; they can build wind turbines. Another is they can figure out how to burn coal more cleanly; that is, they can buy more efficient turbines to burn or generators to burn the coal. Or they can do something called carbon capture and sequestration, which is sort of the whiz-bang technology here. It is to the coal industry what fuel cells are to the auto industry.

The notion is that you can continue to burn coal, but you can do it without any environmental damage because you can do it in such a way that allows you to capture the carbon dioxide emissions that come off that stream of burned coal and then shoot them underground, hopefully permanently, hopefully safely. And if the industry can figure out how to do that, then coal no longer is a global warming problem. ...

This is a huge allure, not just in the U.S. but essentially in every industrial economy in the world -- in Germany, in China, in the U.S., all of which have vast stores of coal. There is not a concern about peak coal like there is about peak oil. ... But the question of whether we can burn coal cleanly is not an easy question.

Where are we on that carbon capture and sequestration technology?

We don't know where we are. ... One question is, will it ever be viable? But the second question in a carbon sense is, if you believe that we as a world have to start reducing our annual carbon emissions steadily to avoid getting atmosphere concentrations of carbons that scientists say are dangerous, then you can't just sort of sit pretty for 10 or 15 years and wait for carbon capture and storage to perhaps arrive.

So the question is, what do you do between now and then? And the problem that you're faced with if you're the CEO of a coal-fired utility is it's not static between now and then. You have to make decisions today about what you're going to build because electricity demand is rising. ... Many plants are coming to the end of their useful life, so you have to build new plants simply to maintain what you're producing. And you have to make those decisions now, and you're going to be stuck with those decisions for 40 or 50 years, which is the useful life of a coal-fired power plant. ...

I talked to [CEO] Mike Morris at AEP [American Electric Power]. He says that ... he can pass along all of his costs to the consumer, that his rate base is calculated off of what he invests in. So no matter what he invests in, that cost can be passed on. Is he pulling my leg?

No, I don't think he's pulling your leg. Hanging over this whole discussion of the U.S. is the specter of what has happened in Europe. Three years ago, Europe imposed carbon caps on about half of industry in the European Union. The majority of the burden fell on utilities, on coal-fired utilities, and what happened was essentially what Mike Morris describes.

Not to get into the weeds of the tales too much, but government regulated the utilities, and the utilities passed on the costs to consumers, and electricity prices rose, and consumers squealed. And manufacturers squealed more than the average consumer because manufacturers use more power than the average consumer. And now what's going on in Europe is the next iteration and the next iteration beyond that of these caps. And there's immense political pressure on governments not to tighten the screws too much. That's probably a pretty good harbinger of what's likely to happen in the U.S.

And so if you're Mike Morris or Jim Rogers at Duke, and you sit down and you try to assess what's likely to happen politically, you're probably not terribly worried in this respect. If you're a regulated utility like AEP is, as Mike Morris says, you can pass those costs on to your customers. And if the regulators will not let you pass along those costs, you have a pretty good case that they can't force you to implement technology.

In Congress, there is a lot of discussion about a potential cap-and-trade regulation. But let's look at the math. There are about 25 states in this country that get half or more of their electricity from coal. That's 50 votes in the Senate. And if you're the CEO of a coal-fired utility, you have a fair degree of confidence as a result of that math that you're not going to get hit with anything that's going to be, in your view, too draconian. ...

We'll come back and talk about cap and trade. But let's go back to the question of those investments that a utility is going to make. They say only coal provides the reliability that they need. Is that fair?

Well, the picture's changing. Let's compare coal for a second to renewables. ... There's been a huge change in the wind-power industry over the past year or two. Something like 25 percent of the power capacity in the United States that was added over the past year or so has been wind -- 25 percent. In Europe, more wind has been added than electricity from any other fuel.

It's still a small percentage, but its growth rate is dominant.

That's exactly right. And maybe more to the point from the standpoint of a utility CEO, to the degree that wind was viewed as just a kind of laughable niche, it is starting to approach materiality.

But they say it's not reliable.

It's clearly not reliable like coal is reliable. Wind has been typically viewed as peak power as opposed to what's called baseload power. The problem is that coal burns all the time, where the wind doesn't blow all the time, or it doesn't blow consistently all the time. And so you have really interesting scenarios developing in places that have invested heavily in wind. ...

Typically when a company announces the opening of a wind-power project, it will tell you that there is a certain number of megawatts capacity of that project. But depending on where in the world it's located and how consistently and hard the wind blows, the reality is that the reliable output of that project is typically a third of what that number is. So that brings the contribution from wind down even more.

But to make matters worse for a utility CEO, you have to figure out when the wind is going to be blowing and whether when the wind blows is the same time that everyone gets home from work and turns their TVs on and their air conditioners on. And so it introduces an entire new level of complexity to managing, again, a system that for decades has been really pretty predictable.

So therefore, renewables like solar and wind that are intermittent, that can't be stored up like a pile of coal outside a power plant, they are not reliable; they can't solve the problem.

I think that there is a general feeling that they can't solve the problem on their own. But the sense that they are immaterial, I think, is probably fading away.

So it's about reducing carbon emissions by supplementing coal-fired power plants with solar and wind?

I think at the end of the day, the answer to that is yes. Now, there are huge political disagreements about whether the world ought to essentially ban new coal-fired power plants and shift all its energy toward renewables or toward nuclear. We haven't talked about nuclear, but that's a huge portion of this discussion.

And what about nuclear?

Nuclear is effectively a zero-emitting technology. The debate about nuclear is about the other costs of nuclear; that is, proliferation and waste disposal. And you will find people on both sides of the debate. Proponents of nuclear will take you to France, which in the early '70s cast its lot with nuclear and gets now about 80 percent of its electricity from nuclear energy.

But again -- and this returns to sort of a theme we've been talking about -- that didn't happen simply because someone decided that they like nuclear energy. It happened because the government decided it was going to impose a strict policy, and it followed through with that policy much to the consternation of a lot of consumers and environmentalists over decades. But ... that takes immense political will, and it's not clear that other countries are going to follow there.

But just to get back to renewables for a second. I think there is a sense among CEOs in the fossil fuel industry that renewables are much more real than they were, say, two years ago. That is not to say that they are going to solve all these problems. But wind is not viewed as the kind of dalliance uniformly that it was viewed as a year or two ago.

Major Wall Street banks are making big investment in wind. Wind investments have emerged as a significant chunk of quarterly profits for certain Wall Street banks in the past couple years. So there is clearly seriousness about it.

But the question of whether traditional industry can make money from renewables is different from the question of whether renewables can solve global warming. It is a slice of the pie, and clearly that slice is growing, and clearly that slice is immensely profitable. Now, whether that slice will get large enough to solve global warming is a different question and a tougher one.

So let's come back, then, to carbon capture and sequestration, because that's the major bet that's being made. What is Wall Street's view on that?

Earlier this year, three major Wall Street banks -- Citi, JPMorgan[Chase] and Morgan Stanley -- came out with something pretty interesting that they called "The Carbon Principles." And what it was, fundamentally, was a pronouncement that Wall Street is much less comfortable with conventional coal-fired technology than it has been.

So this is a statement by the people who financed the construction of coal-fired electricity in this country, and what they said is, in the absence of federal regulation at this point, they are going to start assuming federal regulation in their decisions about what they're going to finance. And that will make it much tougher, much less likely that they will finance conventional coal-fired power -- not certain that they will not, but less likely that they will. And that's sort of a shot heard 'round the world within the coal-fired power industry. ...

The problem that Wall Street has is the same problem that coal-fired utilities have, which is they don't really know what the feds are going to do, so they're making assumptions. And some of them will be conservative in their assumptions and will incur the wrath of their potential customers. ... Some of them may be more permissive in their assumptions, and lo and behold, if they're wrong, those investments may not look so good under federal carbon constraints.

... What's your assessment on how realistic carbon capture and storage really is, as a solution?

... I think there's a reality check going on about carbon capture and storage right now. There was huge, rosy optimism about carbon capture and storage. It was really the quintessential silver bullet. It would allow you to take what was fundamentally a dirty fuel and burn it cleanly -- cheap and dirty fuel, and you can burn it cleanly. And at least a huge chunk of the problem would be solved.

And what's wrong with that?

Well, what's wrong, I think, is that reality is intruding. It's becoming clear to the people who are in the weeds on this, ... first of all, that assuring that you can bury CO2 underground and not have it pop up somewhere that you don't want it to pop up is a daunting proposition; and secondly, that assuring that you can capture the CO2 in the first place and inject it underground at a cost that people are going to be able to afford is really a tough proposition. ...

Earlier this year, the federal government, the U.S. government effectively nixed a program called FutureGen, which was kind of the quintessential government moon shot program. This was the idea that the government was going to work with the coal-fired power industry to develop a clean coal plant. And if you go online, you would see a picture of a pretty plant and nary a smokestack in sight. But the program was essentially stopped because the costs got too high.

I thought they just were rejiggering the project.

Sure, they're rejiggering it. I guess it's a question of what word you apply to it. But they're rejiggering it pretty fundamentally. They've decided that they need to do more real-life projects as opposed to sort of fundamental research in this area. But the bottom line is that the trajectory is not as smooth as they thought it would be, and it raises new questions about when carbon capture and storage is going to work. ...

Well, let me understand this. The idea is that they would capture the carbon and then inject it into the earth, and where they can't inject it into the earth, they've got to put it in a pipeline, move it across state lines, many hundreds of miles in some cases, to a place where they can sequester it or bury it. It's an enormous new waste grid, if you will.

It suggests an enormous new infrastructure, just like ethanol does with cars, just like all of these technologies do.

Is that part of the wakeup call, then, about whether this is feasible?

Sure.

Any estimates on how much that's going to cost? Or is it just too big to even estimate?

Oh, I think that there are estimates. It's a mind-boggling number, whatever the number is. I mean, it is huge. But again, this is the sort of reality check that people are undergoing.

... Is carbon capture and sequestration, carbon capture and storage just the death throes of an industry trying to save itself, or is it a real prospect?

It may be both. Look, the supporters of carbon capture and storage are not just utility CEOs. They're prominent environmentalists who have essentially staked their reputations on the possible viability of carbon capture and storage. It is the centerpiece of the environmental strategy for electricity, for not just the U.S. but Germany and multiple industrialized countries, China. So if it goes up in smoke, there are a lot of people who are going to be hurting. ...

I think the consensus is that if this does not work, then it becomes really unclear how the world can, in an economically viable way, curb emissions at anything like the levels that scientists say are going to be necessary.

And when will we know?

Well, this is the problem, isn't it? Because if you look at what scientists say, the world needs to drastically reduce emissions of CO2 by midcentury to avoid dangerous concentrations of carbon in the atmosphere. Yet the consensus seems to be that the world is not going to know until 15 or 20 years from now whether carbon capture and storage is viable.

Or, alternatively, technology will come along down the road and this will all be a lot easier than we all thought.

Right. And that's what companies argue. … They argue that human ingenuity is boundless, and the record of industry's response to environmental problems is that industry responds, and that if industry is given the right market signals and government signals, that industry can do it. But what they also say is that there is no free lunch and that electricity prices, indeed, will rise.

As will gasoline prices.

As will gasoline prices.

Any fossil fuel costs are going to rise.

Right. Right. And I think that the fundamental message here is as much to consumers as it is to industry, which is that if you think that the world is going to thread this needle without your getting stuck, you're probably wrong.

It's naïve, then, to believe that business, on its own, through the market forces, is going to solve the problem of carbon emissions. Correct?

Yes. Correct. … What business is concerned about is that when consumers realize how much it may cost, they'll go to their politicians, and politicians will then change the rules.

And so business, having invested in technologies that might get at this problem, will find that it can't then recoup its costs because politicians are changing the rules and not letting business pass those costs along to consumers.

In other words, Mike Morris goes out and buys a bunch of wind farms and then suddenly gets a signal that, "No, no, no. It's fine to keep burning coal." But he hasn't built any new coal plants.

Yeah. And, I mean, look at renewable energy in this country: If you look at a graph of the construction of wind power in this country, it looks like an EKG chart with peaks and valleys that essentially exactly approximate decisions in Washington on subsidies, something called the production tax credit. So when Washington passes a subsidy, a tax break that reduces the cost to wind developers of developing wind, wind power construction goes up. And when that subsidy comes to the end of its life and there's uncertainty in the industry about whether Washington's going to renew it, wind production goes down.

And if you're in business and you're watching this, you don't have much reason to be confident that there's going to be suddenly consistency here by Washington. So you're skittish, because you've made investments and then those investments have fallen off and up and down and up and down. And suddenly you're presented with people saying that this is a game changer, and you're concerned that it's a game changer in the wrong direction.

And that's a big difference between here and in Europe where the signals have been more consistent?

That's right. And I think that's a really important difference to keep in mind. I mean, part of this starts with what the U.S. sits on -- and what Europe and, for that matter, Japan do not sit on -- which is oil. So, as we talked about, the development of this country has a lot to do with the assumption that there's going to be cheap oil. There was never that assumption in Europe and Japan and so there was always a premium put on energy efficiency.

And as a result of that, governments bit the bullet in Europe and Japan and imposed policies that were not popular with consumers, but over a period of years imposed tax policies that had the effect of first, making gasoline much more expensive and second, making cars that got lower fuel economy much more expensive through painful tax policy.

And the result is evident on the streets of Europe or Japan now, where you see smaller cars, more efficient cars. It's not because Europeans are inherently greener than Americans. It's because they live in a political system that forced them to behave a certain way.

Washington now has to go about redefining how the markets work by putting a price on carbon in some way. How are they going to do that?

It's a hugely fractious question in Washington right now. This is why this environmental issue is so much more bedeviling than other environmental issues, because you can't just slap a filter on a factory and say, "Done with it." This goes to the very core of how this economy and the world economy operates.

What do you mean?

Heretofore, the environmental issues that the world has struggled with have been largely localized environmental issues. So let's talk about clean air for a moment, smog from cars perhaps the most famous one. Smog from cars happens where there are a lot of cars, and so jurisdictions that have a lot of cars, like California, impose policies forcing the auto industry to clean up cars.

And the history of that fight is that the auto industry didn't want to do it. The government forced the auto industry to do it, and it was done, and cars are vastly lower-emitting in terms of smog emissions than they were. But that was one localized area, and that was slapping something on the end of an auto tailpipe, or, in the context of a power plant, slapping something at the end of a smokestack to reduce the bad stuff that comes out.

This is fundamentally different in the sense that you have to burn less in the first place. ... And what one jurisdiction does doesn't palpably affect the problem because it is, by definition, a global problem. ... It's technologically tougher, and it's also vastly politically tougher.

Now Washington talks about some kind of cap-and-trade legislation. How is that going to work? What's the thinking behind that?

... The notion is that the government imposes a cap beyond which companies cannot emit. Companies that emit more than their quota of allowances buy them from companies that emit less. And you have a trading regime, and the system finds the cheapest cuts, and therefore the cost of compliance is reduced for everyone. That's the notion, and it's worked swimmingly with the SO2 [sulfur dioxide] system.

With acid rain.

With acid rain. So now the notion is to take that system and apply it more broadly to carbon dioxide. And so you have had a fight in Europe over how those rules will be written, and you now have a fight in Washington over how those rules will be written.

And what have we learned from Europe?

We've learned that it is tough for reality to match the rhetoric. There were aggressive ideas about how the government was going to stick it to industry in reducing CO2 emissions three years ago, when Europe went down this road. And what's largely happened is that industry prevailed on government to soften those standards.

It was not working?

... It's working or it's not working, depending on where you approach this from. It's not working in the sense that it's not palpably affecting the environment. The amount by which Europe is reducing its emissions is having a negligible effect on global warming.

It's working in the sense that ... it is a foot in the door toward assigning a price to carbon with the idea that the next foot will follow and the next and the next. And the price of carbon will rise because government will lower the cap, toughen the cap, and once we get down that road, industry, in fact, will be forced to change fundamentally how it does business.

So the idea here, if I understand this correctly, is to get some kind of mechanism in place that then can be tweaked, adjusted, toughened over time to produce real reductions in emissions. But it's not going to happen quickly.

That's right. The history suggests it's not going to happen quickly. But again, how quickly it happens doesn't just depend on the mechanism. It depends on the decisions of the people who implement the mechanism, because just like any machine, the levers can be pulled in multiple ways, and the machine can be made to go faster or slower.

And business is going to be pushing back.

Yes.

Hard.

Yes. …

[What is the scene in Washington?]

There is an increasing sense on the part of industry that industry is going to get hit with a cap-and-trade program. There's a debate about whether it's going to be a carbon tax or a cap-and-trade program, and I think that most of the money is probably on a cap-and-trade program.

That's mostly because taxes are just sort of --

It's the T-word. So then the question is, how does this thing get structured, and who gets hit? There are going to be winners and there are going to be losers, just like in any big regulation. And so what you have is lobbyists of every stripe fighting against each other over how to structure this thing. So you have fights between one industry and another. You have fights within one industry between one company and another. You have fights on a global level between the industrialized world and the industrializing world, U.S. and China. …

One of the real questions in how it gets structured is how these allowances are distributed. So under the cap-and-trade system, the government imposes a cap, and then it essentially prints up a currency called allowances, which are permits to pollute, and it passes out those permits to industry. One question is, who gets how many? But the other question, the sort of more salient question, is, do you have to pay for them or not? And there is a pitched battle going on now that's becoming part of the presidential debate about to what degree industry should have to pay for them.

Coal-fired utilities are pushing strongly not to have to pay for them, to have them allocated, in the lingo, based on their pattern of emissions in the past, which would essentially mean that a coal-fired utility would be able to continue to burn coal -- the theory being that the number of allowances it got would be reduced over time, but that that would be a gradual change that wouldn't be dislocating. It would not force utilities that burn coal to shut down their coal plants and open up gas plants or build wind farms tomorrow.

There is a point of view by others that that's not the way to go, that if the goal is to get to drastic reductions like you were talking about, then the economy needs to be dislocated. And so you should force people to pay for these permits to pollute, and if it's dislocating, so be it.

That would essentially mean that a utility would have to go into some kind of auction and buy these things at some kind of market price, depending on scarcity and demand. And then they would just pass those costs along to the consumer, right?

Right.

So our electricity rate would go up.

Yes. And that's what happened in Europe. What happened in Europe, interestingly, is that the utilities were given these permits, and yet the electricity price still went up. There were government investigations of the system. There were cries of what's known as "windfall profits," the concern being that utilities were given permits for free, yet electricity prices rose because of the marginal value of these permits; that even though the permits were given to utilities for free, utilities were of the opinion that they could have then gone and sold these permits on the market.

And to the degree that they were not able to sell these permits, because they had to hand them back to the government to comply with the rule, that was effectively a cost, and the price of electricity should rise as a result of that cost. And there was a huge hue and cry in Europe. There were government investigations. And that is, again, a specter that hangs over the whole Washington debate. ...

So either way there's a cost to the consumer, or do we expect that in the United States there won't be this sort of charging the consumers for the opportunity lost?

The Democratic position in the presidential race is that there will be auctioning, and something close to 100 percent auctioning, which is to say that no permits will be given for free. There is less certainty on that point on the Republican side, but it's pretty clear that the trend is toward more charging rather than more giving out for free.

And the question then is, does that happen? Is that just a campaign trail platitude? When someone gets in the White House, are they presented with the reality of the Senate votes and the hue and cry from coal-fired states, ... or do they push this through? This gets pretty complicated pretty quickly, but there are all sorts of detailed proposals being bandied about for how you lessen the impact of that.

Hybrid solutions.

That's right. That's right. And/or how you take some of that money, the revenue, that the government would get by selling these permits, and redistribute some of that revenue both to offset higher electricity prices in parts of the country that burn a lot of coal and therefore would see their electricity rise at prices rise the most, and also taking some of that money and investing it into clean technology. And that's the ultimate play here, is that this is a revenue raiser that funds investment in technology that ultimately gets at emissions.

Now, that raises another issue, and that is that the government then is going to be picking winners, which a lot of people will suggest is a very bad idea.

... History is replete with examples of governments trying to latch onto one technology and being surprised in the end. It happened in California with electric cars. It's happened in Washington at least with the early iteration of carbon capture and storage.

And so that is, proponents say, the beauty of the market mechanism: that you create a market, you've given incentive to the market to find some cleaner way, and then you let the market set about figuring out what that cleaner way is. And people will say that the acid rain market has done that.

... There is a great range here of the severity of measures now, and a lot of different congressmen, senators, coming up with legislation.

That's right. One thing I think is worth remembering here, before we get into the guts of this, is that energy is actually not really a partisan issue. Energy is a regional issue. ... If you are a Democratic senator in West Virginia, you're going to have a different view than if you're a Democratic senator in California or, for that matter, if you're a Republican senator in California. It has to do with whose ox is getting gored, what kind of energy source is getting hit by the regulation. So that goes some way toward explaining what's happening in Washington. ...

How much money is at stake?

Billions of dollars is at stake. There's a huge amount of money at stake. The International Energy Agency estimates that globally, the world will spend about $20 trillion on energy infrastructure over the next 20 or 25 years. Now, that's global, but that's an immense amount of money, and the U.S. is the biggest energy consumer in the world. There is going to be a lot of money spent on energy, and how this cap-and-trade legislation gets written is going to have a good bit to say about how that money is spent, and therefore who wins and who loses. ...

And again, it's why you see fascinating fights. ... Into this whole debate about cap-and-trade legislation is subsumed all sorts of other debates about policy on energy -- fuel economy rules, alternative energy subsidies. It all becomes part of the mix.

Energy security.

That's right. All of these things become part of this superstructure that is coming to be known as cap and trade. And so all of the lobbies are pouncing.

All these industries have notionally endorsed cap and trade. Again, because they realize that they're likely to get hit with something, ... they want to shape the cap and trade. So the auto industry wants a cap-and-trade program that it hopes will remove pressure for toughening fuel economy regulations. If the auto industry can get an economy-wide cap-and-trade program, then that shifts the burden beyond simply the auto industry, in a fuel economy sense, to other industries.

And if you look at third-party assessments of what's likely to happen under an economy-wide cap-and-trade program -- there was one pretty famous one that was done by McKinsey, the consulting firm -- what you see is that the cheapest cuts are actually not in the transportation sector. And so one calculus that's going on, let's just say in Detroit, is probably that if there is an economy-wide cap-and-trade program, someone else gets hit, or someone else at least takes part of the hit. And similar calculations are going on in all sorts of industries.

It's all about spreading the pain.

Yeah, exactly. It's all about spreading the pain. ...

With the growth and consumption, with the welfare gains that you're seeing in developing countries and the increased consumption that you're seeing here, how is it even reasonable to think that we can reduce the amount of carbon emissions?

There's not a lot of precedent for reducing carbon emissions in a growing economy.

Well, we've never tried, on the other hand, to reduce carbon emissions, have we?

... There is a precedent in California for at least vastly slowing the growth in carbon emissions. And the success story in California is on the electricity side, where government policies were put in place -- in the lingo known as "decoupling" -- to essentially change the economic incentive for utilities from, on the one hand, making money simply by selling more megawatts to, on the other hand, making money for inducing efficiency gains. And that's a whole complicated process, but there is some history that suggests that that works. And now there's quite a lot more interest in profligating [sic] that elsewhere.

But we're not propagating that elsewhere, are we?

There are other states that are interested in doing that. And there's some discussion of doing that in Washington.

So that means if it's a hot day and there's a lot of air conditioners on, the utility doesn't necessarily make more money as a result.

That's right.

They simply get paid for reliable service, then.

They get paid, yeah. They're essentially guaranteed a certain amount of revenue and efficiency gain. They can monetize efficiency gains just like they have historically been able to monetize the sale of juice. ...

But that is a heavy hand of government, and it's unclear how broadly that's going to be accepted. And that is only one part of the global warming puzzle. There is much less precedent for success on the transportation side. It's much easier to legislate improvements in efficiency, reductions in emissions out of a small number of smokestacks than it is to do that out of millions of tailpipes. ...

You know, efficiencies seem to me to only buy us time; they don't really get us to any kind of permanent solution, because welfare gains and growth and consumption will subsume any efficiency gains that we see. In other words, we're going to drive more cars, even though those cars may be more efficient.

I think most people would agree with that. Efficiency alone is not going to get 60 percent reductions in carbon emissions. But the other things without efficiency won't either. And that's the really tough part of this whole thing; that it's not clear what, again, the silver bullet is.

There is no silver bullet.

There is, everyone says, no silver bullet. ...