Volts podcast: Lauren Melodia and Kristina Karlsson on energy inflation and how to tame it

In this episode, Lauren Melodia and Kristina Karlsson of the Roosevelt Institute explain why it’s counter-productive to increase domestic oil and gas production when energy prices rise, and how building out clean-energy infrastructure is the actual best way to address the price volatility of fossil fuels.

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Text transcript:

David Roberts

Americans are struggling with two related problems: one, there’s general inflation, which means pretty much everything is expensive; two, there’s energy price inflation, which means that energy in particular (specifically, oil and gas) is expensive.

This has led some politicians, mainly Republicans-and-Joe-Manchin, to propose a dual solution: cut back on government spending (to tame inflation) and increase domestic oil and gas production (to tame energy prices).

This approach is wrong-headed and counter-productive on both counts. The reasons why are laid out in a new issue brief from the Roosevelt Institute, the first in a series called “All Economic Policy Is Climate Policy” (which, hell yes).

Lauren Melodia, deputy director of macroeconomic analysis at the Roosevelt Institute, and Kristina Karlsson, the institute’s program manager for climate and economic transformation, argue that fossil fuel prices are inherently volatile, and that volatility has serious macroeconomic effects; on the flip side, electricity prices — specifically renewable electricity prices — tend to be far more stable and manageable.

It follows that government spending to build out clean-energy infrastructure is itself anti-inflationary; it removes a source of price instability and replaces it with stability.

This argument is my favorite kind — it put words to something that’s been rattling around in my head for years — so I was excited to talk to Melodia and Karlsson about the volatility of fossil fuels, why we’ve come to accept it as an inevitable fact of life, and why it is, in fact, a choice that we could make differently.

With no further ado, Lauren Melodia and Kristina Karlsson from the Roosevelt Institute. Welcome to Volts. Thanks for coming.

Kristina Karlsson

Thanks for having us.

Lauren Melodia

Thanks so much for having us.

David Roberts

You have written this report about energy and inflation. It's one of my favorite kinds of reports, in that, after I read it, I was like, "Oh, well, duh, of course that's true." But it's like it hadn't occurred to me before. It's one of those things where just hearing it stated clearly, I think is very eye-opening. So let's walk through a little bit, the pieces of it, and then we'll get into what it means for policy. So to start with, something I found interesting and didn't really know, which is that these traditional measures of inflation, which are gently sort of like bundles of products through which inflation is measured and tested, exclude energy.

Typically, energy is not included in them because energy is sort of inherently volatile and is swinging up and down all the time. And so the idea, I think, is if we include that, it's going to sort of obscure what we're trying to look at. So we'll set that aside and look at another bundle of products, and if they are going up, then it's real inflation. This is sort of how things are typically done. But as you say, this can be somewhat misleading since energy price volatility plays a huge role in inflation, and, specifically, is playing a huge role in current inflation.

So explain briefly sort of the role of energy prices in the inflation we are currently experiencing.

Lauren Melodia

Sure, absolutely. I mean, I think that there's two ways that they're at play, despite the fact that the Fed or certain macro analysts might not want to think about energy prices in the overall inflation rate. One is simply that people spend a lot of money on energy. And so even if the core CPI, Consumer Price Index, or other indicators show that there's price stability, people are experiencing rising gasoline prices. And we've seen over the past year, that really fuel the conversation around inflation.

David Roberts

Consumers definitely don't hold energy as some separate category, right. Like they experience it as inflation when prices rise.

Lauren Melodia

Exactly. So if we're talking about rising prices in society and trying to ground that conversation and connect with consumers, people who are consuming the media, your constituents, these are the prices that people are going to be talking about. The other way that they really do influence kind of the overall economy is that these energy price volatility, the changes in energy prices, actually do have a huge impact on our economy overall even if we don't want to be thinking about them when it comes to inflation. And that simply is because energy is foundational to business operations and household consumption.

If there's a spike in gasoline prices or other energy prices, it is something that people just have to deal with. You can't delay consuming energy, you have to pay the higher price, and it means that you're going to have less money to spend in other parts of the economy. So we've seen actually, historically, that ten out of the last twelve economic recessions in the United States were actually preceded by a spike in crude oil prices. Meaning that you've got this rise in prices there, people have to pay it, they can't pay for other things in the economy, and it leads to kind of a slowdown of economic growth.

David Roberts

I want to sort of put an exclamation point on this because I feel like it's super important to understanding the rest of it is. It's not like cars or bread or something, where if the prices rise you can buy less of it or switch to an alternate product. Energy is a non-negotiable. You have to heat your house, you have to run your business. So rises in energy prices just mean you're spending more on energy, which automatically means you're spending less on other consumer categories.

Lauren Melodia

Yeah, absolutely. One of the concepts we try to really highlight here is the concept of energy insecurity. When the price of energy rises and people just have to pay it, it means that they can't pay for other basic necessities, not to mention other things that fuel economic growth and productivity. Those other things where we've got people out there working, making those things to produce and sell to consumers who have disposable income to spend.

David Roberts

Right. And can you quantify sort of how big a role energy volatility is playing in the current inflation relative to ... we've seen all these other consumer goods rising in prices, too. So is there some way sort of dividing the responsibility?

Lauren Melodia

Yeah, I mean, people are aware of gasoline prices rising a dollar or two in their communities. The way that inflation is calculated is based on the change in price of an item, but it's weighted based on how much people spend on that item. So energy prices are one of the biggest ticket items for the average household. The average household is spending roughly 11% of their annual budget on energy consumption. And so that gets weighted in the calculation of what inflation is. So inflation, the number that we hear monthly when the numbers come out is rather abstract.

Like last month it came in at 8.3% over the past year.

David Roberts

Right.

Lauren Melodia

But we can attribute 2.1% of that to energy prices alone, and largely gasoline price increases.

David Roberts

Yeah, you said in the report, gasoline price increases specifically responsible for 75% of energy inflation. So gasoline is the big ticket here. And just, aside from the economics of inflation, gasoline is also probably the single consumer price of which US consumers are most aware, most hyper aware. They see it advertised to them every day. So insofar as part of inflation is sort of the psychology of it, the consumer psychology of it, that is also a big piece.

Lauren Melodia

For sure.

David Roberts

So you say, you lay out a couple of reasons why fossil fuels are not accidentally volatile, but sort of intrinsically volatile. Could you lay those out insofar as this is not like a solvable problem? So explain why fossil fuel — what is it about fossil fuels that make their price fluctuations kind of out of our hands?

Kristina Karlsson

Absolutely. I think you started that question with the exact takeaway. This problem is not solvable, so long as we are continually reliant on fossil fuels. And that comes from a few things. I mean, the most obvious place to start is that these are hard to find hydrocarbons buried deep underground. They require significant investment in production up front, and they also happen to be located in different places around the world that sort of tie us into a default geopolitical web. And as we can see right now, with Russia's invasion of the Ukraine, geopolitical conflict has a huge impact on our domestic oil prices.

And that has been the case for a very long time, not just in current situations. And I think that's very well exemplified in that graph that we share, where we show that ten of the past twelve economic recessions are preceded by an oil spike. A lot of those oil spikes come from geopolitical conflict. And beyond that, I mean, beyond just the fact that there's conflict in this international market, the fact that it is international, and that we are one player in a much bigger market than we would be for other types of goods that we consume, is another part of this volatility.

I mean, when we are faced with situations like we are in now, where international conflict is driving changes in our domestic prices, we have very little ability to mitigate those supply chain blockages by boosting our own domestic production.

David Roberts

I wanted to ask about that specifically. This, I think, is a lot of people's initial instinct or intuition, and not just a lot of random people, but a lot of members of Congress in both parties. This idea is, like, if this international volatility, these international problems are causing oil prices to go up, it makes intuitive sense to people, I think, that if we just produce more of our own oil and gas, we will to some degree protect ourselves from that volatility. And that just turns out to be...

Kristina Karlsson

Not the case.

David Roberts

... very straightforwardly wrong. Explain why.

Kristina Karlsson

Yeah, I think there's two things, I think, one, even if we increase our domestic supply, the way that — especially crude oil — is priced is through an international sort of price cartel, which is OPEC. They have a strong price setting power, and any changes that the US makes will still be influenced by the prices that are coming from that organization.

David Roberts

Right. And if they want, they want to set prices, and if the US boosts its production, such as to lower prices more than OPEC wants them lowered, OPEC is perfectly capable of dialing back production in other places ...

Kristina Karlsson

Exactly.

David Roberts

... to get the price they want.

Kristina Karlsson

We can't beat them.

David Roberts

Exactly. Theoretically, there's some limit. If we were a big enough producer, if we had like 50% of the world's, or 80% of the world's oil, or something like that, there's some size we could reach where we could have a bigger influence.

Kristina Karlsson

But we don't want that.

David Roberts

But a. we don't have it and b. probably couldn't get it even if we sort of maxed out.

Kristina Karlsson

Exactly. I mean, and the second reason, which is even in this imaginary world where the US becomes the mega producer of crude oil, it's not going to help domestic consumers, because our current domestic producers are very heavy exporters at the moment. Most of our domestic production is actually being exported, even in times of elevated demand at home, even when we're having price crises at the pump in the US, we can't make oil companies choose to sell their product domestically, especially if there's a profit incentive for selling abroad. And that's exactly the case.

David Roberts

Yes. Like taking care of like "Oh, our people, our domestic people are suffering. Let's divert some of our oil and take care of them." It's just not really a thought process that like your Exxon execs ...

Kristina Karlsson

They get a lot of undue patriotism put on them because, in these moments, when this is really hitting the fan, we can see where their priorities are. And this ties to the nature of fossil fuels again, which I think will contrast with renewables later on, is that these energy products are transportable overseas. The reason that they are exported so much is because we can. And early on, when natural gas came online in the US it was supposed to be the solution to US energy independence. That was all well and good until liquefied natural gas happened.

David Roberts

Yes. I want to lay this out a little bit because the conventional wisdom, and I think probably a lot of people still have this in their heads, I think, insofar as they're paying attention to energy, the conventional wisdom is: yes, oil is this sort of perfectly fungible international market, and the domestic supply is almost irrelevant to the prices. But natural gas is different. It's harder to transport, it's harder to send overseas. So insofar as we're boosting domestic production, we are satisfying domestic demand. But as you say in the report, the sort of growth of the liquid natural gas technology and industry means that more and more natural gas is starting to sort of mirror oil.

Kristina Karlsson

Absolutely.

David Roberts

In being international, an international market.

Kristina Karlsson

Right. I think, we can observe sort of similar skyrocketing trends in exports around the same time between liquefied natural gas and crude oil, which is when the crude oil export ban was lifted and during the time that liquefied natural gas technology was really coming online. And now we're at the point where we are the number one liquefied natural gas exporter in the world, and we are actually exporting faster than domestic production at the moment.

David Roberts

Oh, wow.

Kristina Karlsson

Which is very concerning.

David Roberts

So we're exporting more than we're producing.

Kristina Karlsson

Yeah, we have reserves, but we are exporting at a pace that is higher than our domestic production, and that is actually causing us to draw down inventories, at this moment, when we are really struggling, to maintain our export commitments.

David Roberts

So then this idea, because there's a lot of congresspeople who are real hot on the idea that building more LNG terminals is the way ... like, that's how we can get our "freedom gas" to Europe, so they can stop using the "autocrat gas" and start using the "freedom gas." But that, again, fundamentally mistakes how international markets work. Like the market is fluid. Once the LNG is out there circulating in the natural gas market, it's just part of the gas market. It's not marked. You don't have a little "F" on the "freedom gas," and a little "A" on the "autocrat gas," it just all becomes gas that you buy on an open market.

Kristina Karlsson

Exactly. I mean, it's important to remind ourselves also when we play out these potential scenarios, if we invest further in our own fossil fuel dependence, even if the sake is to export "freedom gas," we are now further entrenching ourselves to our vulnerability to price fluctuations from gasoline, which are still not going anywhere, is just further and further entrenched. The more infrastructure we bring online, the more we are tied to international dynamics.

David Roberts

Right.

David Roberts

And there's no getting through that, right? There's no level of domestic production at which you outrun that effect.

Kristina Karlsson

Right. And even if we had the capacity for that level of domestic production, the oil and gas companies in the US would not give it to ourselves. That's the key part.

David Roberts

Much like OPEC, they would fiddle with their production based on prices and profits, right. I mean, that's sort of how they work.

Kristina Karlsson

Exactly.

David Roberts

And say a little bit, in terms ... this gets it at some of why sort of fossil fuels are intrinsically volatile. But there are two other pieces. One is say a little bit about speculators. I don't think I had really fully understood this until I read your helpful summary.

Kristina Karlsson

Yeah, well, I think it's important to understand that speculators basically are betting on price changes and making money off of those bets, in the most simple of terms. So it makes sense that speculators love volatile prices because there's a lot to bet on. And oil and gas or commodity futures market is extremely big and powerful. And especially starting in 2000, the Commodity Futures Modernization Act started to really open the floodgates on this. And it was a direct affront to the Commodity Futures Trading Commission, which is tasked with keeping a handle on this. And since then, it's been a huge part of how energy prices are determined.

Dodd-Frank tried to reel this in some. But the great thing about it being an international market, is if commodity traders want to continue to do business, they can start private commodity trading desks housed in other places. And that's exactly what happened after Dodd-Frank. And during the past year, the top three or five of these private commodity trading houses, many of them almost doubled their profits in 2021, during a time when people's energy burdens were as high as they could be, when people are tipping into energy insecurity. And they're particularly effective during times of like crisis when energy demand is at its highest.

And we talk about the Texas storm example, where people's energy bills were at $15,000. Part of that comes from the energy companies, themselves, price gouging. But another part of that is that these speculators, on top of that, are taking advantage of these times of desperate need.

David Roberts

Yeah.

David Roberts

And whatever you might say about energy prices being tied to sort of foreign events or foreign conflicts or economic fluctuations in other countries, we can't control that, but at least it's legible. Whereas once they start being dependent on speculators, then they're just volatile with no rhyme or reason, which is even worse.

Kristina Karlsson

Right, exactly. And speculators can make money if the price is going down or up. That's another thing. So it expands the volatility, and I will say and the other part is that it's vulnerable to climate events.

David Roberts

Right.

Kristina Karlsson

So the ironic thing about burning fossil fuels, maybe it's not ironic, maybe it's obvious, is that burning fossil fuels is terrible for climate change. In fact, it drives it. And then we have extreme weather events, we have extreme temperatures, and those weather events and those extreme temperatures jeopardize fossil fuel infrastructure, which means that fossil fuel companies are paying to fix pipelines that have frozen or they're limiting their supply for two months while there are wildfires going on. And the fact is that we're just burning our way into our own demise in this way.

David Roberts

Yes, we're exacerbating the natural volatility, you might say. So as you conclude, and here I'm quoting, "effectively managing energy price inflation, while retaining a fossil fuel based economy, is nearly impossible." And this, I think, again seems obvious once you say it out loud. Of course we can't control fluctuations in the prices of international commodities, the bulk of which come from other places and are traded on an international market. Like, we are subject to that market, and there is no recourse, there's no secret weapon, there's no increasing domestic production ... doesn't get you out of this. Releasing oil from the strategic petroleum reserve.

Kristina Karlsson

Like the secret space.

David Roberts

Yes, we tried that, and it was like a blip.

Kristina Karlsson

The tool that we typically turn to when it comes to managing inflation ...

David Roberts

Well, I meant to ask about this. I'm so glad you remembered that. Why won't just the conventional response to inflation, which we're seeing play out now is just for the Fed to boost interest rates, why won't that get at this?

Kristina Karlsson

Well, I think there's two layers. I think one, that is a very blunt tool that's meant to basically slow down the productive capacity of the entire economy, because it's running too hot, or our demand is too high. So it's already a pretty blunt tool, and I would argue that probably it isn't the right tool for the moment period, but it's not able to deal with specific supply chain issues already. We know this. But the fossil fuel supply chain, especially, is out of the hand of our domestic government to deal with because of all of the reasons that I just stated.

So it's already the wrong tool for dealing with supply chain blockages. And then supply chain blockages in the fossil fuel markets are even more so out of our reach.

David Roberts

Right. So just to sort of put a pin in this part, insofar as your economy is dependent on fossil fuels, you are stuck with a level of volatility that has real macroeconomic effects. Yes, some of which we're living through now, in part. So let's pivot then to my favorite subject, electricity. One of the initial points you make, and this is even sort of, in here we're just sort of bracketing renewables, we're just talking about electricity in general. You make the point that electricity prices historically have been much less volatile for two big reasons. So tell us why historically electricity prices have been more stable.

Lauren Melodia

Yeah, that's a great question. I mean, there's two main reasons that we point to in this report, acknowledging that the electricity industry is super complicated. The production and transmission of electricity, also, beyond the scope of what we can really outline here. But all that said, the first thing is that the electricity grid draws on a variety of sources. So whereas most cars run on one type of gasoline that you can buy at a gas station, or your home furnace can be powered by one type of oil or gas — when you use electricity, you're plugging into a grid that is drawing on power generated from a wide variety of sources.

And so it has built in these mechanisms to kind of balance the desire for consumers to have electricity whenever they want it and all of these different sources generated in all of these different places. So it's just structurally set up to kind of deal with giving people — drawing on a lot of options, not getting stuck in dependence on one fuel source.

David Roberts

Right. So if coal, for whatever reason shot up, you can shift to natural gas, or vice versa, like, you can move around what you're drawing on in order to keep prices stable.

Lauren Melodia

Exactly. Yeah. The other big reason, that we bring up in the paper, is just that the electricity industry is much more regulated than the gasoline industry or utility gas industry. I think part of this is because of the uniqueness of how electricity is generated and transmitted. I mean, I think very early on, as it was being developed into this product for consumers, it was clear that we needed the government to be involved in setting what the prices were going to be, because otherwise the cost of entry into the market is so big that undoubtedly there was going to be one company locally that kind of had a monopoly.

David Roberts

Right, a natural monopoly.

Lauren Melodia

Exactly. Yeah. And so this is something that utilities in general, very early on, as they were being developed, were understood to be a natural monopoly. So we needed there to be government regulation to protect consumers and make sure that they had just and reasonable prices and equal access.

David Roberts

Yeah. And for all the complaints electricity heads have about electricity sector regulation, which are many, it has, sort of at the macro level, kept certain parameters on the whole thing, kept a certain degree of stability around the whole thing.

Lauren Melodia

Absolutely. I mean, our electricity sector today, it's not running exclusively on renewables, like we argue in the report. It should be. It is drawing 60% of power generated through fossil fuels. And yet, even given that you look at volatility, the average price change in electricity compared to utility gas or gasoline over time, and the prices go up and down far less, and they don't swing as widely or as often.

David Roberts

Yeah, it's a very striking graph in the report, if listeners want to go track it down, showing the volatility of oil versus gas versus electricity. And electricity looks practically like a straight line relative to the other two, which fly up and down, all over the place.

Lauren Melodia

Yeah.

David Roberts

So electricity manages to stay relatively stable, even drawing on fossil fuels, which, as we discussed, are volatile, it has this sort of effect of suppressing that volatility and creating stability. So sort of the next piece of the argument is that even beyond that sun and wind, solar and wind power, specifically, are less volatile.

So explain a little bit about that.

Lauren Melodia

Yeah, well, Kris really got into kind of the nitty-gritty of the extraction and the conflict around pulling fossil fuels out of the earth and producing energy sources with them. But wind and solar look almost the opposite to that. They're commonly available everywhere. Sure, there are some areas that might have more sun, more wind, but we're not dealing with geopolitical situation, where there's a handful of countries that have access to this resource that the rest of the world relies on. Now of course, we know there's been a lot of discussion about the minerals needed to produce the technology to access the sun and the wind, but we believe it's possible to figure out how to fairly and justly distribute those minerals.

We're hopeful that we can produce that technology globally and in cooperation. And therefore, once it's set up, you have common, unlimited access to solar and wind. So the thing about the fossil fuel industry is that there's this fuel that constantly needs to be extracted and transported all over the world. And with sun and wind, once you have the technology to capture it, it's just commonly available. You don't have to be transporting it around the globe.

David Roberts

And free.

Lauren Melodia

Yes, absolutely.

David Roberts

I want to dwell just for a second on this supply chain question, because this is a common argument made on behalf of sun and wind. There's no fuel costs. It's all raining down on us for free. You don't have to dig it up. And so once you build the technology, the costs are all technology, not fuel. And so once you build the technology to harvest it, you have basically an eternal, reliable source of free fuel. But there are supply chain issues around the technology. So as you say, there are minerals and metals involved in terms of the sort of chips involved.

China has almost all the rare mineral processing. So in terms of the supply chains for getting that technology, there are currently at least geographical concentrations. There are sort of players that are sitting in a similarly sort of cat-bird seat, as people who are sitting on top of oil and gas. But as you say, that's a solvable problem, right? The fossil fuel volatility is not solvable. Supply chain volatility is, in theory, solvable, right? Like we've built diverse, international supply chains for lots of things in the past and could do so, again, with this.

Lauren Melodia

Absolutely, I mean I think that the dependence on fossil fuels sets you up to have a permanent need to be negotiating global production and distribution, whereas with renewables, there's an upfront investment. I think that there's a lot of government and international coordination that needs to take place but it's not to the same degree that we have with the fossil fuel industry.

David Roberts

Right. More like a constricted passage that we're trying to get through, but there is an other side.

Lauren Melodia

Right.

Kristina Karlsson

Exactly.

Lauren Melodia

There's no other side with fossil fuels.

David Roberts

And worth mentioning, because we mentioned it about fossil fuels, is that insofar as you can prevent climate change, which sun and wind do, you prevent more volatility in your supply chains in that sense, too. Those are both, I guess, long term effects, but worth noting. And also another in terms of mirror, like you talked about how oil price spikes precede recessions because of this — energy is not something you can choose not to buy, so everybody's stuck with the price rises. But you have sort of the mirror effect with renewables, in that they are constantly reducing household energy expenditures, which free up more money to spend on other things, right?

Lauren Melodia

Yeah, absolutely. I mean we don't have the best ... we have a lot of historical data when it comes to fossil fuels, both the production and on the consumer end. We have a lot less of that with renewables. But there are a lot of studies that other people have done, that we highlight here, really looking at, "What does it cost to produce renewables now? What's the impact on it on your electricity bill today?" Really trying to parse those details out. And again and again we see that renewables are trending downward in terms of the cost of producing them.

So that is something ... there's a long-term trend in them going down, whereas with natural gas we see it trending up. So that's something that can be passed on to consumers.

David Roberts

Right. And so I wonder if you think, and this is, I guess, somewhat speculative, but as we become more of a renewables based economy, do you think that will reduce the number of recessions? I mean, do you think that will have the effect of mitigating some recessions?

Lauren Melodia

I think that there's a lot of potential there. I mean, I think that with the recessions we've seen now that have been preceded by oil price spikes, a lot of that has to do with it being produced elsewhere, and so prices go up, and we're paying for gas that is being captured by producers abroad. But the renewable energy landscape is its domestic production, so everyone can produce it technically. Some countries more than others. Some will have an easier time ramping up. The United States, obviously, one of them. But the idea here is that it's something that doesn't have to be transported because it's commonly available everywhere, and so it's going to be domestically produced largely. Which means that even if there is a price increase, the producers of it are getting that price here in this economy.

David Roberts

Right. It's still in the economy.

Lauren Melodia

So it has less of a kind of domino effect, in the sense that it's not just a bunch of money getting sucked out of the US economy to oil producers abroad, but it might be getting sucked out of consumers pockets into their local energy production companies. But those companies, the people that work there and own the business, also live in the United States, and they'll be putting that money back into the economy here.

David Roberts

Right. You're having money circulating the economy, whereas every one of these price spikes of fossil fuels, and I just don't know that people really sort of fully have internalized this, but every single price spike in fossil fuels just has the effect of draining shitloads of money out of the US economy and might as well be lighting it on fire, right? These are just rents we're paying. We're not getting more for our money. We're just getting the same thing for our money. So it's just being drained of blood.

Lauren Melodia

I think the other thing that comes into this is, like, Kris was talking about the speculation kind of betting on prices going up and down. Renewable prices, electricity prices are much more stable. And so you can plan your life around that. You can't have, like, "Oh, the price of gasoline went up. We don't know why. We don't have any control over it." There's a lot less of that dynamic at play. So when you have stable energy prices, it's something that you can plan for. It's not something that's going to catch you off guard, and then you can't pay your rent. You can have long-term contracts, consumers can have that.

There can be much more education and awareness about what to expect.

Kristina Karlsson

Right. And we do argue also that for those in our economy that are the closest to being energy insecure, or who are lower-income — and we found more so Black and Latinx — the volatility from fossil fuels can really put you over the edge, and you can't plan for that. And so we say that this transition could also have the potential to be an improvement in energy equity at least. Obviously, we make some stipulations about how the policy design would have to make sure that those consumers had access to renewables. But if we do this in a public-investment-led way, if we move away from tax credits and more towards subsidies, if we make sure that renters who don't have control over what their landlord does in their building, for example, are able to have access to renewables, then this sort of price stability will have an even greater impact on those who spend the majority of their household budget on energy, not the majority of their whole budget, but who spend more so than other groups of consumers.

David Roberts

So you can enhance the equity effects. But I think it's worth, I think, emphasizing what you said at the beginning, which is insofar as vulnerable populations suffer more from price volatility, they will disproportionately benefit from price stability, right. So there's an inherent equity effect in all this, in shifting from volatile to non-volatile sources of energy. You're going to have a large equity effect, even bracketing everything else.

Lauren Melodia

Right.

David Roberts

So let's then talk about what to do with these insights. So the conventional wisdom is that inflation comes from overheated demand running out ahead of supply, and thus, that government spending, like the initial Recovery Bill that Biden and Congress passed, insofar as it accelerates consumer demand, is just going to exacerbate inflation. Sort of the conventional wisdom is that Biden and Democrats are sort of partially responsible for this because of the big spending they did when they first came in. And I think Jeff Bezos sort of expressed the conventional wisdom the other day, when he said that Manchin saved the Democrats from themselves by preventing them from spending even more.

He literally used the phrase, "Manchin saved them from themselves." It haunts me.

Kristina Karlsson

He cannot pivot into being a pundit now. I cannot take that.

David Roberts

Can just one billionaire not. Just don't.

But the conventionalism is that in times of inflation, the proper government response is austerity — to spend less until supply catches up with demand.

Kristina Karlsson

Right.

David Roberts

But to operationalize what y'all are saying, would require spending a bunch of government money, like accelerating the transition from fossil fuels to renewables. You can just sit back and wait for the market to do it. But if you want it to happen in time to have the effects we want, short-term effects, that is going to require a big, new public spending. So how do we reconcile this intuition that public spending will drive inflation with this counterintuition that the energy transition will suppress inflation?

Kristina Karlsson

Well, I think you picked up on one of the main goals of this paper. This is one of the issues that we're really trying to confront, which is that climate scientists, climate activists, so many people have been calling for a big, public investment in this transition and are being sort of bombarded with inflation hawkery, saying that "We can't afford it right now, it'll drive us over the edge." I mean, I think conventional wisdom is misapplied in this current moment for a few reasons. I think we've already mentioned that the inflation that we're dealing with is coming from several supply chains.

And as we said, our tools for dealing with that type of inflation, instead of overall overheating inflation, are different. But two, it's not just government spending, all inflationary. I think you have to really understand what you're spending your money on. And that's the big argument of this paper is that if you spend your money on building infrastructure that will stabilize energy prices, which as we can see, are a huge driver of the inflation we're seeing right now, then you are actually eliminating a major source of inflation. And the amount of spending that we do in the time period that it would require will be much shorter than the amount of time that we've actually been dealing with fossil fuel-driven inflation and fossil fuel-driven volatility.

So I think our argument is, "Of course it's worth it, and the stabilizing effects of switching to renewables will be able to, I don't even want to say offset, because I don't want to cosign the idea that this will lead to additional inflation.

David Roberts

So a. we have the stabilizing effect of moving off fossil fuels onto renewables, but you don't even think that government spending equals more inflation is true to begin with?

Kristina Karlsson

I'm saying in this current context. I don't know that the conventional wisdom is properly applied to the context we're in right now. There's a lot of debate over whether or not we are truly overheating, or if we're really just dealing with some supply chain blockages that come from recovering from the Pandemic.

David Roberts

Right.

Lauren Melodia

Yeah, I think that if you're studying kind of what's driving inflation, a lot of economists are in agreement: that right now the inflation we're experiencing is much more on the supply side, and therefore, we don't see signs of overheating in the economy.

David Roberts

Right. And so it makes sense that spending on the supply side would ease that, right? I mean, that spending on the supply side would ease rather than exacerbate them.

Kristina Karlsson

Yeah, I think you could think of a clean-energy spending bill as a supply smoothing policy in our energy supply chain.

David Roberts

This all makes intuitive sense, but do we have ... it's one thing to have an intuition, and it's another thing to have some numbers in your back pocket. I'm just wondering how well we're able to model these kind of things. And I wonder to what extent is sort of some of the conventional wisdom, that you guys are disputing, kind of embedded in the models. Do you know what I mean? So, like, modeling itself is misleading us. Do you feel confident enough to be throwing numbers around to policymakers if they ask, like, "How much would this ease inflation?" Do you know?

Lauren Melodia

Well, one of the studies that we highlight in this paper, this is not our own modeling, but looked at what a rapid transition to renewable energy production would look like on overall costs to consumers, not a change in the rate of inflation. And they found that a rapid transition to wind and solar today, along with the technological advancements in subsequent years and the economies of scale of really bringing that online, would save consumers about $2 trillion a year on the price of energy.

David Roberts

That seems like a large number.

Lauren Melodia

So that's not really about inflation per se. It's really just "what are people paying?" But I think it drives home the point that you make this investment now, we have to make this investment now. It is a government-led investment. It is totally different than the idea of just like throwing dollar bills out into the world to get spent in different ways. This is a very coordinated, planned utility grade investment. Switching to solar, switching to wind, building out the EV charging infrastructure, public transportation, relying on electricity. All of that kind of coordinated investment could save consumers $2 trillion a year.

David Roberts

Which they would probably enjoy whether or not there was inflation.

Lauren Melodia

Yes.

Kristina Karlsson

I mean, I would argue also that predicting inflation ten years from now in a renewable universe is probably not the right way to prove this quantifiably. In my opinion. I think we're talking about energy inflation. The inflation that we're likely to see over that year, over the next ten years could come from many different sources. I think, if we wanted to say, "Inflation stemming from energy prices will be reduced," the best way to get at that answer is by displaying stable prices, because inflation shows you the change in prices. So I think by talking about the stability of renewables and the stability of energy prices, we're also really getting at the fact that energy inflation, which tracks price volatility from energy, will be reduced.

I think guaranteeing policymakers that we are going to be in a 2% inflation universe, if we switch to renewables, is probably not the best way to get there.

David Roberts

But I mean, insofar as energy volatility has played a big role in inflation in the past, I mean, like, something close to half of current inflation. If you could promise to take that chunk off the table ...

Kristina Karlsson

We can do that.

David Roberts

That's not a small thing. To wrap up, this makes total sense to me. Looking out, in terms of long-term economic strategy. It's interesting. It's sort of one example of a thing you see a lot in energy discussions around fossil fuels, which is it's only now that alternatives are available, that we're able to sort of turn and clearly see what the choice of fossil fuels is doing to us, right. Because if there's no alternative to fossil fuels, then fossil fuel price volatility is just a feature of the universe, right. It's just a background condition, which is sort of how we've been treating it. As you note, we leave it out of these inflation measures because we've just sort of ...

Kristina Karlsson

Made our peace.

David Roberts

Made our peace with it, right. Like accepted. Like, "This is how it is, we're stuck on this freaking roller coaster, and we have no control over it. Oh well, let's bracket that and look at everything else." But now that fossil fuels are increasingly a choice, we can see, "Oh, like wow, that has really sucked to be stuck on that roller coaster for decades."

Kristina Karlsson

With no seatbelt.

David Roberts

"That's been unpleasant. Let's, let's get off that." So, so anyway, long term, like strategically long term, this makes all the sense in the world to me. But of course, there's strategic long term, and then there's, like, the midterms. So I wonder whether you think that some bold move ... I guess, what I'm asking you is, do you think that a big public spending program on renewable energy would have effects fast enough to materially affect current politics? Or is this kind of a mid- and long-term thing we're talking about?

Lauren Melodia

Well, I think there's a couple of ways to think about that. I mean, on some level, nothing that happens with managing inflation today is going to, overnight, change price volatility between now and the midterms. But what we do have is a really active climate movement that's been demanding change, because we absolutely need it. And they're not getting action, and they're being told it's because there's inflation in the economy. And it's our job, it's our point with this paper to arm activists with the information they need to push past that argument. Because I think one of the ways that we really can affect the political climate, is to see action on this issue in particular, which is so popular.

We want to see change. We have a plan. We're organized. We know what we need. We know how to get there. And inflation is not the excuse to delay it. It is the reason to act now.

Kristina Karlsson

Absolutely. And I think, politically, progressives need to show that we're going to do the thing.

David Roberts

That's not typically been our strong suit.

Kristina Karlsson

I'm hopeful that now would be a good time, and I don't think there should be any tabling this for a little bit later or after the midterms for the sake of political wins, because I think that might actually be harmful. I think pushing on climate investment as soon as possible is probably a political good, also.

Lauren Melodia

Absolutely.

David Roberts

Yeah. I just wonder ... the case, as you lay it out, makes sense, but I wonder about the Democrats ability to sell it, or to tell that story in a way that is meaningful to the public, especially with one of their most prominent members out spewing the dumbest of conventional wisdom on this subject.

Lauren Melodia

Yeah, they might have a hard time doing what they need to do, but it doesn't mean that we shouldn't stop fighting for it.

David Roberts

Right. And so it goes. Well, thank you so much for coming on. And like I said, this is, like, on some level, I feel like I knew this, on some vague level, but it's so nice to just have it put out. And to me, this is, I just think, one of the great underutilized arguments in favor of the energy transition, which is just that being tied to fossil fuels sucks. It's unpleasant.

Kristina Karlsson

We made your hunch citable.

David Roberts

Yes, a citable hunch. This is why I'm in the business, is to have my priors reinforced by experts. Alright, so thanks for doing the report, and thanks for coming on today.

Lauren Melodia

Thank you so much.

Kristina Karlsson

Thanks so much. Bye.

David Roberts

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