With the collapse of cap and trade in the Senate and the prospects dim for a measly renewable-energy mandate for electric utilities in a lame duck session, the dreams and schemes of the climate campaign and energy reformers have hit the wall.
As long as oil prices remain moderate and gasoline prices continue to ease, energy policy is on the back burner again, and the burner has been turned off. The House Republicans’ recent “Pledge to America” makes only passing mention of energy, which is unlikely to be a priority in the next Congress unless it repeals the imminent ban on incandescent light bulbs.
The problem with seeing a way forward is that existing alternative energy sources such as wind, solar, and biofuels are not only much more expensive than fossil fuels, but also not scalable to meet the energy needs of this country or any other.
Is there a way for government to adopt an energy policy that avoids wasting money on inferior energy sources and unproductive laboratory research and that could gain bipartisan support in today’s bitterly polarized climate? There just might be.
For more than a year, an informal working group of conservatives, centrists and liberals has been meeting regularly in Washington with a view to seeing whether a fresh start can be made on energy innovation.
The core group included several of us from the American Enterprise Institute, Mark Muro of the Brookings Institution, and Michael Shellenberger and Ted Nordhaus of the left-leaning Breakthrough Institute, though a wider circle of people from right, left and center also participated in the process.
The group came together initially because of a broad agreement about three points: that cap and trade was a defective idea and unlikely to generate serious energy innovation even if it passed; that the business-as-usual approach of subsidizing existing alternative energy sources was unpromising and wasteful; and that the nation was under-investing in energy innovation.
Start with the last point. America’s energy sector invests comparatively little in basic research on energy innovation, and most research investment is directed toward improving existing production technologies for fossil fuels (such as the directional drilling that has unlocked shale gas), or increasing electric generation efficiency, rather than developing next-generation technology.
The energy industry invests only about 1 percent of revenues on R&D, a small fraction of the 15 percent or 20 percent that innovation-intensive industries such as semiconductors and pharmaceuticals typically invest.
Even with ramped-up energy research spending under the stimulus, the government still spends five times more on medical research through the National Institutes of Health, and more than 10 times more on defense research.
Shellenberger and Nordhaus broke with environmental orthodoxy with a blindingly simple insight that became the touchstone for our working group: The path to a green or clean energy future lies not in making fossil fuels artificially more expensive but in making new energy sources cheaper than fossil fuels, and on a large scale.
» The first step is a long-overdue increase in energy science funding, something that liberals and conservatives have long agreed is necessary. This should be targeted to solve the well-known obstacles to improving the performance of energy technologies.
Advances in materials sciences could result in future generations of far more efficient solar panels and more powerful batteries. Genetic engineering and advances in biology are required to manufacture clean-burning biofuels more cheaply.
» Second, we should transform the way energy innovation is carried out. Currently, most energy research is pursued in settings and through programs that keep it divorced from the demands of the private sector.
Universities and national laboratories need to work much more closely with private firms, entrepreneurs and investors. The need to transform America’s energy innovation system has been broadly recognized in a slew of recent studies.
While the details may vary, the consensus is clear: America should create a national network of decentralized energy innovation institutes — whether we call them Energy Discovery Innovation Institutes or the National Institutes of Energy or something else. Modeled after sustained federal investments made in the ’40s, ’50s, and ’60s that assisted the rise of Silicon Valley, this effort would cost about $5 billion annually.
» Third, driving innovation and price declines requires that the government act directly as a demanding customer to spur the early commercialization and large-scale deployment of cutting-edge technologies.
Today, firms get subsidies that reward production of more of the same product, instead of innovation that results in lower prices. This framework should be turned on its head. Energy technologies should receive federal deployment funding only to the extent they are becoming cheaper in unsubsidized terms. Either technologies continue to come down in price or they are cut off from future public investment.
All told, this framework would cost between $15 billion and $25 billion per year, less than one-third what we spend on defense research. In today’s fiscal climate, any new spending should be paid for and should be linked to the affected sector.
This could be done through several mechanisms, starting with a phaseout of subsidies for wind, solar and fossil fuels alike, an increase in the royalties charged to oil and gas companies for production on public leases, or a $5-per-ton carbon tax.
But with China committing as much as $740 billion to basic energy research over the next decade and South Korea dedicating 1 percent of its GDP for the same purpose, the United States risks being a laggard in the energy sector. And that’s more than just an economic risk.
Steven F. Hayward is a resident scholar at the American Enterprise Institute and author of the forthcoming Almanac of Environmental Trends. This article is condensed from the Weekly Standard.
