Douglas Holtz-EakinOpinions differ on the quality of John McCain’s domestic policy agenda, but you’d have trouble finding anyone in Washington who would disparage the man he’s chosen as one of his top advisers. Douglas Holtz-Eakin has a dauntingly long resume and a reputation among policy wonks on both sides of the aisle for fair-minded number crunching. He has taught economics at top-notch universities, served as a senior economist in both Bush administrations, and run the Congressional Budget Office from 2003 to 2005 (where he was a "thorn in the side" of the current administration). He is now running the Center for Geoeconomic Studies at the Council on Foreign Relations. I caught him by phone to get the scoop on McCain’s climate and energy policy.

(A highly abridged version of this interview can be found here.)

David Roberts: How urgent a problem is climate change in John McCain’s mind?

Douglas Holtz-Eakin: Senator McCain has a very serious sense of urgency about moving on [climate] legislation, directly from his hearings and his travel to Antarctica to the Arctic. It is augmented by the national security component. Given his strong beliefs on the need to make America safe, the idea that we’re sending $400 billion to nations where it is actively turned into financing for terrorists — and other nations who are simply not supportive of democracy — he finds that incredibly troubling.

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DR: At the ECO:nomics conference, and again in an interview with E&E ($ub. req’d), you distinguished McCain’s policy approach from his competitors’ by saying he favors putting a cap-and-trade system in place and otherwise refraining from further policies and regulations — even getting rid of a lot of sector-specific or industry-specific regulations and subsidies. Is that fair?

DHE: Right; that’s a fair description of the philosophy.

DR: How literally should we take that? Is the idea that cap-and-trade is going to be, at the end of the day, the only necessary policy on this issue?

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DHE: Probably wouldn’t take it that literally. What you want to think about is stepping back and asking yourself, what should an appropriate policy toward climate change look like? What are the components that matter? The components that everyone has agreed are essential are, No. 1, pricing carbon in some way — the caps do that, showing a value to emissions reductions. No. 2, lots of flexibility in responding to the need to reduce emissions, so that you can take advantage of low-hanging fruit. And No. 3, radical technological advances, which would allow us to do business better.

There’s going to be a role for policy in augmenting the technologies — basic research, targeting whatever it may be to allow us to burn coal cleanly, sequester carbon if necessary, those kinds of things. But to the extent possible, he’d like to not have too much interference in allowing the ingenuity of Americans to find the emissions reductions in the easiest places.

DR: That notion has gotten some pretty heated reactions in the environmental community. The reports and research I’m familiar with say that cap-and-trade is a necessary but not sufficient step. I’m trying to get a sense of where McCain draws the line.

DHE: So would this rule out efficiency measures, with the evidence that people don’t buy the most lifecycle-energy-efficient appliances and as a result might need some help where pricing alone doesn’t do it? I don’t want to suggest he’s taken that off the table; of course he’d still be interested in that.

I think he’s more interested in not having large, redundant mandates like carbon cap-and-trade and a low-carbon fuel standard, because those are both going to end up being the same thing when taken for the transportation sector as a whole.

But I don’t it want to come across as some sort of ideological adherence to no things other than cap-and-trade, because that’s not John McCain. John McCain’s style is to solve problems. In that way, he’s going to be pragmatic about it. But he certainly doesn’t want too many of these things simultaneously, with the impact that you undercut your ability to do it well.

DR: Let’s focus for a second on the transportation sector. Analyses have found that the price of carbon would have to reach politically untenable levels — $200, $300 per ton — to move gas prices even a dollar or so. We’ve already seen a $2 rise in the price of gas, which hasn’t produced much of a sea change away from emission-heavy transportation. So if you’re going to get rid of CAFE, or the low-carbon fuel standard, how do you move the transportation sector?

DHE: The basic construct is, you don’t target the transportation sector. Obviously as part of the overall policy we’d expect it to change, but when you do the economy-wide cap-and-trade, you don’t pick each sector to have a particular part of meeting the caps. If you can trade across sectors, then off you go. It’s always important to remember that, because people do start to think, "I’ve got to get this sector down 65 percent by 2050." Well, not every sector’s going to come down uniformly. That’s point No. 1.

Point No. 2 is, you don’t get rid of CAFE — which was just passed and increased — right away, because we haven’t even implemented cap-and-trade. So there’s no reason to imagine this is all being suggested as an in-the-door, 2009 approach to the problem. It’s not. You would not simultaneously find an effective cap-and-trade program creating movement away from petroleum and then double up on your CAFE standards anyway. I might’ve said it too bluntly at the [ECO:nomics] conference — it was 8:00 at night on the West Coast after I’d gotten up at 4:00 in the morning on the East Coast. [Laughs.]

When we saw those large oil price spikes in ’79, ’80, we saw dramatic changes in the energy content of the U.S. economy. We cut it in half. And then oil got cheap again, and we stopped. I would never want people to underestimate the power of just pricing oil. Sustained changes in energy prices matter — "sustained" being the key — and you have to have policy to ensure that.

DR: One of McCain’s signature issues is opposition to a lot of subsidies and earmarks. But on climate policy, this is coupled with a stated insistence on heavy subsidies for the nuclear industry. Is there a principled distinction between which subsidies are good and bad?

DHE: There’s a pretty straightforward philosophy. The fundamental concern he has — not with just climate policy but on earmarks and things like that — is that you are using the taxpayers’ dollars for special interests, not for the national interests. When you have a practice of providing subsidies, you invite lobbying on the part of special interests, and this leads to political corruption, if not criminal corruption. That’s point No. 1.

No. 2 is a powerful belief that the private sector will pick the right thing, and the government doesn’t need to be in the business of doing that. You set the broad incentives and let it go.

But then, there are roles for government. And if there’s a genuine national interest in using nuclear power as an available, feasible, zero-emissions technology, I don’t think he would argue that that’s a special-interest thing. It’s something the nation needs to do as a priority, and if that means a subsidy, then we need to make the agreement we’re going to do that for those reasons. I think that’s an appropriate role for government, in his view.

The other thing he believes is that we need research in all sorts of technologies, including carbon sequestration and things like that. If that research is best conducted in the private sector, the government providing the monies for that research is not an inappropriate thing to do. But you’ve got to make sure, in the conduct of those efforts, that you are not having funds allocated on the basis of political connections instead of good science.

DR: One of the ideas behind cap-and-trade is precisely as you said, to put the incentive for carbon reduction out there and let the market see who can reach it first. If you give nuclear those subsidies, you are giving it a head start in that market race — precisely, it seems to me, the distorting effect of subsidies you claim to be trying to avoid.

DHE: I think his view is that those [subsidies] simply offset powerful political obstacles to using grid power that he thinks are inappropriate, and he’s willing to take on that battle. He views this as leveling, not subsidizing.

DR: Is that a top-line goal, leveling the playing field? If so, it seems like there’s a lot more to do than boosting nuclear. Don’t fossil fuels enjoy political, technological, and regulatory advantages?

DHE: The stated use of cap-and-trade is to harness market forces to the greatest extent possible; that’s the basic philosophy. Obviously there are differences of opinion on the starting point, but I don’t think his intention is to disfavor biofuels in any way.

DR: Is he opposed to ethanol subsidies?

DHE: Yes.

DR: Will he work to eliminate existing ethanol subsidies?

DHE: Yes. The exclusive reliance on corn-based ethanol is, in his view, inappropriate, relative to other potential sources for ethanol. And the combination of the subsidy and the tariff barrier against the sugar-based ethanol from abroad strikes him as inappropriate.

DR: Is he willing to go the mat to battle Big Ag?

DHE: He was certainly willing to stand up in Iowa, with his political future on the line, and tell people the truth. There was a speech at the BioEconomy Conference during the Iowa primary — he said, I’m a good Republican, and I like Iowa, but I’m opposed to these subsidies.

DR: You said something to E&E that raised my eyebrow a little bit — that McCain’s not necessarily committed to the McCain-Lieberman climate bill. Does he still stand behind that bill?

DHE: Obviously it was his bill; he thought it was the best effort at the time. But what he said when he introduced it was: Here’s my bill. I think this is an important issue and we ought to get moving on it. If you’ve got a better bill, let me see it. Let a thousand flowers bloom. It’s not so much that this bill is the end-all and be-all; it’s that this issue must be addressed.

DR: Does he now think there’s a better bill on the table?

DHE: He certainly would revise the bill in light of what’s transpired, and I expect he’ll put out, during the course of the campaign, something like an updated version of his view of how it should go.

DR: Will he vote for Lieberman-Warner?

DHE: We don’t generally take positions on Senate legislation, as a campaign rule, until it gets to the point where you see the final legislation, exactly what’s up for vote. But obviously this is an important initiative and he’s following it pretty closely. We’ll see how it goes.

DR: What are his concerns with the bill as currently written?

DHE: If you look at the kinds of things talked about on the trail, one might be greater allowance for offsets out of the agricultural sector; another might be a stronger nuclear section.

DR: Does he have an emissions target in mind?

DHE: I’m just going to defer until he puts out the climate policy.

DR: Economic models vary quite a bit in their assumptions and their outcomes, but most of them project that cap-and-trade will raise energy prices for average families and slow the growth of GDP. What’s McCain’s response?

DHE: One has to be cautious and judicious in looking at the results of models. I am a Ph.D. economist and a former computer scientist; I have built econometric and simulation models of the U.S. economy. They are very good tools for ordering the impacts of different policies — for comparing Policy A vs. Policy B vs. Policy C to see which has the greatest impact on emissions, which might involve the most dramatic sectoral shifts, which would lead to higher retail energy prices, a whole list of things in which you have a deep interest. They force the analyst to put in the assumptions and comprehensively model the problems to the extent of their ability. They’re very valuable for that reason.

They are least useful for predicting the actual outcome. The impact of the policy is ultimately the outcome of whatever you decide will be the world in the absence of policy — which is a fundamentally impossible projection. We’re going to ask what the world would look like without a carbon policy in 2050, then put the carbon policy in and pretend that somehow we’ve got it right? You really have to take all those things with a grain of salt.

DR: Do you think the models have consistent biases, or are they just all-over-the-map wrong?

DHE: Economic models have consistently underestimated the capacity of the U.S. economy to recover from shocks and to be flexible and grow. Econometric models of the current oil price increase would have said that it was over — that the U.S. economy would be badly damaged by it. And that just has not been the case. We’ve continued to grow; oil prices are $100 a barrel. We have consistently underestimated the capacity of the U.S. economy to adjust to things. You learn from that, and the next generation of models might be better.

DR: Do you think climate policy could be a net positive, a net GDP boost?

DHE: As an economist, I find the framing of the question disturbing. I understand it’s a conventional framing, but it suggests that GDP growth, per se, is the right objective. But the world is a better place if you do this policy, even if GDP growth is a little bit smaller.

Say Katrina knocks down billions of dollars’ worth of houses. They’re gone. Then we start building them. GDP growth is the value of production — we produce houses; GDP goes up. Are we better off? No. People were wiped out. If you think the world is driven by GDP alone, you’re making a very big mistake. You have to be careful with it.

But I absolutely agree it’s quite possible that instead of having what [the Energy Information Administration] is estimating to be modest impacts — a tenth of a percent on GDP growth — it could turn out to be positive. That’s well within the margins of error of these things.

DR: Do you think it’s fair to say that McCain will not implement mandatory caps in the U.S. until and unless China and India implement some sort of cap?

DHE: I think that’s fair. You could begin down the path toward the mandatory caps. You could demonstrate leadership. You could begin research programs. You can do a lot in the area of improving the probability of having a successful climate policy, domestically and internationally. The main concern — expressed by folks who don’t want to see India and China free-ride and not suffer the same cost-containment issues — is that we do it, they don’t, and we’re at a competitive disadvantage. The senator’s very cognizant of that issue and doesn’t want to put anyone in the United States in that position.