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Three Energy Assumptions the FY2012 Budget Resolution Gets Wrong

The House Budget Committee’s proposed FY2012 budget resolution, released today by Committee Chairman Paul Ryan, has already inspired substantial debate and reaction. The Committee is in a tough position—trying to balance the nation’s long-term fiscal stability in the face of huge deficits, interest-driven politics, and a divided Congress—but on the clean energy front, we’re hoping they’ll do better. Otherwise, the current proposal is essentially the same short-sighted approach to policy that has ruled the day for 40 years. That is something we can longer afford. The resolution proposes sharp reductions targeted directly at clean energy technology investment while expanding tens of billions of dollars in oil and gas subsidies and incentives, all of which would do nothing but set the nation back on clean energy competitiveness, gut innovative capacity, and further lock in old, dirty energy industries.

There’s responsible investment and fiscal management, and then there’s throwing the baby out with the bathwater. The trick is to know the difference, and make the kinds of cuts we have to make without also cutting those pieces that are germane to long-term growth, competitiveness, and innovation. This proposal doesn’t make that distinction. Instead, it calls for some truly staggering cuts that, if enacted, would leave investment 63% below the current continuing resolution, 53% less than the House-passed continuing resolution from February, and a 69% below the White House’s FY2012 request.

Since the budget resolution is basically a big-picture framework, it’s worth looking at the base principles underlying it, which naturally inform the proposed spending caps. In that regard, there are really three conceptual problems with the proposed resolution. Any fiscal approach to energy investment that begins with these three assumptions is bound to come up short.

Free market competition is the key to unlocking energy innovation. The plan returns repeatedly to the idea that the market is the lone source of energy innovation, and that market competition is thus what can drive it. It promises “market-based solutions to the goal of sustainable energy,” and would roll back “applied and commercial research or development projects best left to the private sector.”

In fact, reliance on only market function is a counterproductive strategy on innovation. The reasons why are fairly obvious: for one, fossil fuels are cheaper and more reliable than clean energy, so there’s no competitive reason why a utility would choose clean over dirty if they’re trying to keep rates low for consumers. The market in this case would work better if prices included positive and negative external costs, which is why conservative economists like Greg Mankiw have called for a carbon price. And energy is not really free market anyway, due to regulatory barriers and vested interests that only raise the hurdle for new alternatives. Thus, “market” competition does nothing to drive cost reductions through market takeup, experience curves and learning, nor does it lead to the more radical cleantech breakthroughs that are critically important in the long run.

What about private sector investment in activities to drive down the costs of energy technologies? Because there are substantial positive externalities from R&D, private firms tend to underinvest in socially optimal levels of research activities. And deregulation and competition in the energy sector actually destroys the incentives for utilities to invest in R&D, by over 70 percent according to one study. Most inventors and investors in the energy space are also well-acquainted with the valley of death — the point in the innovation cycle where risky new technologies face significant underinvestment as they struggle to attract funding and prove viability. This logic applies not only to cleantech, as even natural gas turbines wouldn’t be what they are today without public investment in advance of and in conjunction with private investment.

All government is doing is picking winners. This is another well-worn accusation from cleantech foes. In this iteration, all investment is just “reckless spending” to benefit political allies. One of the ironies is that, if spending on energy technology development is a measure of picking winners, then the government is picking every energy technology imaginable, including oil, gas, and coal. (It would also include some that aren’t particularly imaginable, like artificial photosynthesis.)

The reality is that investment in energy innovation means not throwing money around at favored technologies, but identifying technical opportunities and private funding gaps, and then actively cultivating dynamic technology competition across a wide spectrum. The ARPA-E model is built around this concept. And other investment is geared towards teams of experts knocking down key hurdles in energy science and technology, straddling the space between fundamental science, applied research, and commercialization, again across a broad array of challenges from nuclear modeling and smart grid to rare earth materials and energy storage. This sets a technical foundation upon which private entities can build.

On the other hand, by tilting the balance in favor of mature, deployed technologies and ignoring all responsibility for developing alternatives, we’d be doing exactly what clean energy advocates are accused of doing: picking winners, only in the form of the oil & gas industry.

This is not to say the Committee’s assertions of “reckless spending” fall on deaf ears. Clean technology development policies are often misdirected towards subsidizing and deploying inferior technology without seeking to actively drive innovation, improvement, and productivity. This gets at the fundamental question of misguided spending versus smart investment, and clean energy advocates fail to make this distinction just as much as clean energy opponents. So, we might be inclined to agree with the Committee on this point in principle – if there were any evidence that the drafters could see the value any investment in clean energy R&D beyond basic science. But the proposal doesn’t put forth a thoughtful approach as to how to invest – it’s simply more of the usual “no-government” rhetoric.

Expanded drilling is the solution for everything, everywhere. We’ve said this before, but it’s worth saying again: this persistent focus on domestic fossil fuel exploration is extremely flawed. Including oil shale, ANWR, and the continental shelf, we could be looking at perhaps an additional 5 million barrels per day of increased production, but not for several years, and it’s still a finite quantity, which means we’re just kicking the can down the road without addressing any of our fundamental challenges.

The problem isn’t that the U.S. has all this excess capacity waiting to be tapped to deliver $40 barrels, because it doesn’t. The problem is that we have such an incredibly limited choice in energy sources. Most of us can choose to fill our gas tanks with either gasoline, or…gasoline. Drill more or don’t, it still means our own long-term energy costs are subject to growth in Asia, OPEC’s remaining capacity, instability in oil-producing regions and the global supply chain, etc.

A serious budgetary approach to meeting our long-term energy challenges would find a way to balance fiscal responsibility and entitlement reform without sacrificing real progress on energy innovation.

Updated April 12, 2011.

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