On Making Innovation the Default Energy and Climate Policy Choice

The national energy and climate policy debate is broken. If it doesn’t get fixed, any new policy at the city, state, or national level may very well fail to address America’s energy challenges in any meaningful way.

So it’s time for a recalibration that makes innovation the driving goal of our default energy and climate policy choices.  In doing so, the policy debate would become a more cohesive discussion on what correct, targeted long-term public investments should be made; whether our deployment policies are correctly aligned with our technology development policies, and whether there is synergy among our energy policies that creates a competitive U.S. energy market without long-term policy support.  To be clear, this is not saying R&D is the only policy needed.  Making innovation the default choice ensures that our suite of policy choices – from basic science through market creation – are correctly working together and are receiving the right amount of support to boost innovation, thus affordable clean technologies and economic growth.  But doing do isn’t straightforward.

Part of the problem: in many cases, the failed approaches and ideologies of years past are still limiting or outright stifling progress on climate and energy policy.  Specifically, advocates are relying on misguided default policy choices to inform their arguments to the detriment of supporting the nascent clean economy. And the problem is bipartisan.  On the left, a wide swath of climate advocates still cling to the idea that a price on carbon/cap-and-trade/command-and-control approach is the correct method for driving the adoption of affordable clean technologies and reducing emissions. On the right, a wide swath of advocates still cling to the idea that government has little role in supporting groundbreaking industries like clean technology and doing so is nothing more than “picking winners and losers.”

Take for example the recent and ongoing FY2012 federal budget debate.  Budget austerity is running rampant through Congress and no program – whether it’s vital investments in economic growth or not – is safe.  Key energy innovation programs like ARPA-E, the Office of Science, and R&D programs for advanced nuclear energy, advanced solar, electric vehicles, and the like are threatened with cuts at a time when we should be doubling down on our investments to accelerate development of affordable, breakthrough clean technologies.  But during the amendment process for the House Energy and Water appropriations bill, more time was spent debating the efficacy of a light bulb efficiency standard than trying to find ways to support vital energy innovation programs. And it showed – the final House appropriations bill proposes to cut these programs by 12 percent and if it weren’t for a last minute bipartisan effort to return ARPA-E to FY2011 levels (albeit low levels), the outcome would have been worse. Imagine if the full energy budget appropriations process was about debating targeted investments in energy innovation?  At the end of the day, supporting breakthrough technologies holds more promise for drastically reducing emissions, reducing oil imports, and potentially boosting economic growth than does just efficiency standards, but the budget debate fails to reflect this reality.

Another key example is many climate advocates rigid, myopic focus on putting a price on carbon.  As my colleague Matt Hourihan laid out in detail, you cannot fully solve our energy challenges without a clean energy portfolio approach that includes affordable, breakthrough technologies, yet you don’t get breakthrough technologies from a price on carbon. Yet that hasn’t stopped climate advocates from continuing to put carbon pricing policies front-and-center. Thomas Friedman continues to espouse the need for a carbon price, even though he admits breakthrough technologies are needed (he just doesn’t understand how to spur innovation). The Environmental Defense Fund – a key national climate policy advocate – continues to argue that we won’t drastically limit climate change until we set a carbon price or carbon cap. And national environmental policy leaders like Daniel Esty think all that’s needed to move the country towards a green economy is a carbon tax. Not only would implementing a carbon price alone not work (h/t Tyler Cowen), emphasizing a carbon price alone only hurts addressing our energy challenges by swaying the energy policy debate away from actual methods of spurring affordable energy innovations.

And part of the problem here is a misconception about the readiness of clean technologies. The mantra for many on the left is that the United States has all the clean technologies it needs. Within this framing innovation isn’t necessarily a high priority and all that’s necessary is to push those technologies to market through deployment or leveling the playing field through carbon pricing. But the fact is we simply don’t have the technologies we need and further basic research and RD&D is needed to get us the affordable, high-performance technologies necessary to allow us to meet our energy challenges in the coming decades. This reality is echoed by industry titans like Bill Gates, John Doerr and Ursula Burns.  It’s understood by clean energy leaders like Arun Majumbdar and DOE Secretary Chu. And detailed analyses by organizations like the IEA have explicitly discussed the need for significant technology development to reach deep emission reductions.

Many advocates and policymakers also fail to recognize the vital, but limited role government plays in spurring breakthrough technology development and deployment, shown most clearly in the recent Solyndra-Loan Guarantee Program debate.  On the right, many members actually support government loan guarantees. For instance, Rep. Barton (R-TX) stated so directly during a recent House Energy and Commerce Committee hearing and many members support guarantees for their own state’s clean energy projects. But that support is fleeting as many on the right also negatively equate government support for innovative clean technologies as “picking winners and losers.” Yet government can support clean technologies without actually making micro-economic decisions. Supporting a portfolio of innovative technologies through R&D and valleys-of-death investments (like loan guarantees) isn’t picking winners and losers; it’s ensuring that winners can exist at all. Innovation policy doesn’t choose national champions, but makes targeted, high-risk investment bets the private sector is not willing to make that could help propel an entire new industry. Sometimes those investments fail as any venture capitalist would tell you. So defaulting to old scare-tactics about the heavy-hand of government does nothing but stifle U.S. innovation and competitiveness at a time when we need much more of it to boost economic growth.

And for many more on the right they believe that even if we need clean technologies, the market alone will get us to where we need to be.  As Thomas Friedman and Michael Mandelbaum put it in their new book That Used to Be Us, “[many on the right] assert that the key to our economic future is to close our eyes and click our heels three times,” and miraculously the market creates innovation and economic growth. But what they’re missing is the history of American technology development.  According to University of California, Davis Professor Fred Block and Southern Methodist University Professor Matthew Keller, the United States has traditionally used a “hidden developmental state” to develop innovative new technologies. In other words, the government has always played an active role in technology policy with the private sector, but policymakers never openly advertised it for ideological reasons. America’s energy challenges – and the short time scale allotted to solve them – require this hidden development state to be reinvigorated with significant public investments and reform. The market cannot do large, complex, breakthrough technology development on its own and it never really has.

Simply put, our climate and energy policy priorities and ideologies are out of whack.  So let’s try something new. Let’s make innovation the default policy choice in any and all climate and energy policy debates. To start, let’s ditch the preconceived notion that a carbon price or command-and-control policies are more important to our energy challenges than supporting technology development and ensure that both are working in synergy. So it’s not to say that’s a carbon price and deployment policies don’t have a role in innovation policy – they do and should. It’s to say that these policies should play a well-aligned, complimentary role in supporting innovative technologies and not as the central climate and energy policy. The debate should be about how best to use loan guarantees or tax incentives or regulations to support competitive, innovative technologies and it’s a debate that needs to happen now.

Another place to start is to have an open and honest discussion about the role of government in spurring innovation. Government has a proactive and limited role to play that requires public investments and collaboration with the private sector. The United States has done this before to develop the last century’s worth of breakthrough technologies and we have to do it again. Its fallacy to think the market can do it all on its own. So the debate should be about how best to leverage the public and private sector together to support competitive, innovative technologies and it’s a debate that needs to happen now.

Yet at first glance, advocates on both sides of the political aisle may say, “but we do support innovation!”  And to a very small degree everyone does (unless you’re a Luddite), but that support is shallow. In fact, when push comes to shove, most advocates in the climate and energy space give nothing but lip service to supporting innovation. By default, other policy choices take a much higher priority and it clearly shows in our policy discourse. This needs to change. Innovation must receive greater emphasis in the debate; less the “coming clean energy crisis” that University of California, San Diego Professor David Victor warns of will come true.

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About the author

Matthew Stepp is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF) specializing in climate change and clean energy policy. His research interests include clean energy technology development, climate science policy development, transportation policy, and the role innovation has in economic growth.
  • Sean Pool
  • Colin Murphy

    You make some good points, Matt, but I think that you may have erred too far to the side of a silver bullet approach. I agree that innovation and improving the quality and cost effectiveness of renewable energy technology is important. The problem is that innovation alone is not likely to solve the problem. Unless someone has a “Eureka” moment and suddenly advances the state of technology by several decades, we’re looking at a pattern of continual, incremental improvements in technology. Even if these improvements are sped up by a concerted reinvestment in technology education, R&D, deployment assistance, etc. there’s no way they’re going to start bending the curve for 10-20 years.The advantage to carbon pricing schemes is that they can be brought into effect much quicker than the development/deployment cycle of advanced technology. Fuel taxes cause small, but significant shifts in driving behaviour and preference for small vehicles. Carbon prices can give an immediate cost signal to consumers and begin to internalize the effects of carbon pollution. Carbon prices also provide the sort of incentive for innovation that you seek. Government grants for education, R&D or renewable energy deployment run the risk of being mismanaged, politically motivated, or devoted to dead-end technologies (though I would argue that these risks are low and manageable). A consistent market signal, would likely reduce these risks even farther.Carbon pricing also addresses several significant problems that innovation simply cannot cure. You can’t innovate away people’s preferences for SUV’s, nor their preference for the convenience of discarding, as opposed to recycling or re-using, consumer goods. Carbon pricing at least starts to provide the tangible reminder that such behaviour comes at a price and lets consumers choose accordingly.Ultimately, no single solution is likely to solve the problem of climate change. You eloquently describe why innovation-focused policy needs to be part of the arsenal but I think you’re too quick to discard other tools.

  • Matthew Stepp

    Colin (of RIT?) – You bring up a valid point, but I think there is some nuance here.On your first point, yes there is a temporal issue, but for ALL energy policy choices and not just energy innovation policies. Simply put, if we take climate models at face value, we need to get emissions to near zero in the next 40 years. Those same incremental technology improvements we get through scaling up/learning current clean tech won’t get us near zero emission reductions (or energy security) in the same time either. Only if we spur those cost and performance breakthroughs do we have a chance of drastically cutting emissions (and eliminating fossil fuel consumption) IN ADDITION to incremental cost and performance improvements. Without the innovations, I see little long-term deep emission cuts with current limited technologies (all else equal).On your second point, yes carbon pricing/regulations/other fossil-based taxes can be brought on quickly and with immediate impact – sounds great for our temporal problem discussed previously. But the problem with this approach are its very limited results. My colleague Matt Hourihan wrote a great review of the effect price has on technology change and found that price – especially the small to moderate carbon pricing and fuel taxes talked about within policy circles – will do nothing but drive incremental technology change. And for that matter, without a viable cost effective and performance effective technology substitute, consumers and businesses will never switch over to zero-carbon tech (which is what we need to meet your time constraints). Surely, price has an effect – Europe’s significant gas taxes have been great at causing consumer to drive less and drive smaller cars – but we need the world to drive electric vehicles (connected to zero carbon power sources!) not just drive small. Now this goes without saying, a carbon price or gas tax can and should play a role and I would consider well-aligned carbon pricing to be a vital part of “energy innovation policy.” We just need to recognize prices very real limits and use it to best drive technological change (I proposed earlier last year a carbon tax scheme that funds innovation, for instance).And you’re absolutely right, price can help address consumer preferences (such as going from SUV’s to small cars like the 2008 oil price hike caused to a degree), but only when consumers are given a viable zero-carbon tech substitute will they make the ultimate decisions that lead to drastic emission reductions. So when I say “energy innovation” policies, I’m not talking about a silver bullet, I’m talking about a suite of policies from R&D, demonstration, financing, deployment, and market-based that not only develop the clean tech we need, but creates a competitive market for them, and get those technologies to market quicker than if left alone.My concerns shared in the post are those that ignore the innovation piece and assume, to a point a you do, that price or regs or taxes will have not just an immediate impact but a LARGE impact. In my opinion, they won’t without the innovation piece.

  • Colin Murphy

    Yes, it’s that Colin. I’m glad that we both agree that a combination of policies is probably the best alternative, I still think that you’re selling incrementalism far too short.The key issue is that incremental change now may be more effective than large change later at preventing the worst impacts of climate change. GHG’s continue to accumulate heat in the atmosphere from the time they’re released to the time they get scrubbed out by natural processes. This time dependence of GHGs isn’t fully accounted for in the standard IPCC equivalents, which are probably significant understatements of the total warming effect of a gas, if it’s being emitted in the immediate future. Many of the projects we look at as being carbon-friendly (i.e. construction of a major green energy or clean transport project) are significantly less so since the big burst of carbon from construction, which happens at the start of the project, hangs around for decades accumulating more heat than early LCAs accounted for (an abbreviated treatment of this concept is in Kendall, Chang & Sharpe, Environ. Sci. Technol. 2009, 43, 7142–7147, a more detailed treatment is in review right now, but many other authors have written on the same subject). This also means that behavioural change, which is admittedly very difficult to accomplish, becomes even more important because it doesn’t require infrastructure.This means that innovation comes into the fight with a big strike against it, in that it hasn’t happened yet and will not happen for some indefinite period of time. In the years it takes for the innovative technology to be developed, commercialized and then penetrate the existing vehicle or power generation fleet, all the GHGs we emitted before are still doing their work in the atmosphere. Pricing schemes, which can take effect immediately, don’t have this problem, they can use existing technology. Yes, the change is incremental, and yes it’s difficult to foresee sufficient incremental change to reach a carbon neutral future, but it’s a bigger impact than I think your colleague anticipates (disclosure: I didn’t read his entire report carefully, but I didn’t see anything that looks like a carbon balance or net radiative forcing calculation). I’d also argue that the claim that we can innovate our way to a clean future is just as speculative as the claim that we can incrementally clean our way with existing technology. My gut says neither is actually likely. You and I read many of the same case studies, so we both understand how predictions of future technology are thoroughly unreliable. What if the innovation piece of the puzzle simply never materializes, despite sufficient support? From a principle of harm prevention, shouldn’t the thing that has a guaranteed effect be given top billing? Finally a specific example: How does innovation solve the problem of tar sands oil? If you consider the total energy supplied to the human system, the biggest energy innovation of the last 20 years is probably the ability to economically recover unconventional petroleum sources like tar sands oil and shale gas. How likely is it that we will be able to innovate our way into a clean energy source so good, and so cheap, that it will stop the existing development of these projects? Without fairly immediate action, someone (either the U.S. or China) is going to be burning a lot of tar sands oil in the next 20 years. It’s already cheap enough to be commercially viable and will only get more so as the relevant technologies progress along their own learning curves. A carbon price policy, which reflects the energy needed to recover these sources of petroleum, could stop it. By the time future innovative clean energy sources come on line, those sources will be mature, with low operational costs and paid-off capital costs. Is clean energy really going to be so cheap and abundant, in our lifetime, that people will just walk away from those sources when the time comes? Isn’t it a lot more feasible to put a policy in place now that discourages development of those sources rather than try to put the genie back in the bottle at a future date?