American energy policy is at a standstill. A new approach is needed that focuses on energy innovation as a key driver of American economic growth, national security, and health and safety benefits. This joint paper by Mark Muro of the Brookings Institution, Steven F. Hayward of the American Enterprise Institute, and Michael Shellenberger and Ted Nordhaus of the Breakthrough Institute argues that the federal government should invest roughly $25 billion per year in military procurement, R&D, and a new network of university-private sector innovation hubs to create an energy revolution. The program should be financed through several mechanisms, including a low price on carbon.
We begin with two premises. First, we will make little progress transforming our energy economy until the alternatives to conventional fossil fuels become much cheaper. Second, the only path to accomplishing this is vastly expanded research, development, and early stage commercialization and deployment of clean energy technology.
The price superiority of fossil fuels over today's clean energy technologies has resulted in very little private sector investment in new energy technology. U.S. energy firms reinvest well below one percent of their revenues on R&D, chiefly on improving current technologies instead of developing new ones. This stands in stark contrast to the 15 to 20 percent that innovation-intensive industries such as information technology, semiconductors, and pharmaceuticals routinely invest.
This private sector investment gap is due in part to the public sector one. While we invest $30 billion a year into research through the National Institutes of Health, federal R&D spending on energy, which rose modestly under stimulus investments in 2009 and 2010, will drop to less than $5 billion in 2011. Meanwhile, we invest little in energy sciences and engineering scholarships and fellowships, thus failing to recruit the best and the brightest to solve specific scientific and engineering challenges.
When it comes to deployment, today's energy policies remain disconnected from both research activities and the marketplace and provide weak incentives for commercialization because they are focused on increasing production instead of reducing price. Beyond the array of subsidies that support fossil fuel production, current federal tax incentives for wind and solar power, for example, are primarily focused on supporting the deployment of existing energy technologies at current prices, rather than on driving technology improvement to reduce their unsubsidized price. Renewable portfolio standards, which require that utilities purchase a certain percentage of electricity generation from renewable sources, encourage deployment of the lowest-cost renewable energy technology available--generally wind power--while doing little to drive down the price of other, higher-cost clean energy technologies, such as solar panels, that may have the potential to become much cheaper in the long-term. For that matter too many regulatory and other hurdles impede large-scale deployment.
The Solution: The Limited and Direct Approach
Government policies work best not when they attempt to reorient the whole economy whether through pricing and regulation, but rather when they are narrowly targeted to specific outcomes, such as developing computers to allow for rocket systems, building a communications network to survive a nuclear attack, or creating increasingly efficient and powerful jet engines. These public investments and supporting regulatory changes paid off handsomely in personal computers, the Internet, and both commercial air travel and the gas turbines used in modern natural gas power plants.
We propose, therefore, a new, four-part energy framework that is both limited and direct. It is limited in that it is focused not on reorganizing our entire highly complex energy economy but rather on specific strategies to drive down the real cost of clean energy technologies. It is direct in that rather than simply subsidizing existing technologies in the hope that as they scale up their cost will decline, or providing tax credits to private firms for research, the federal government would directly drive innovation and adoption through basic research, development, and procurement in the same way it did with computers, pharmaceutical drugs, radios, and countless other technologies.
1. Increase Energy Science Funding
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.
The nation also must train and retain a new generation of energy scientists and engineers. We propose a national commitment to spend $500 million annually on energy education scholarships, post-doctoral fellowships, and graduate research grants to create a cadre of "energy engineers" similar to the way in which we created aerospace & computer engineers after Sputnik.
2. Overhaul Energy Innovation System
Second, we need to transform the way that energy innovation is carried out. Not only does the nation conduct too little energy research , but it conducts what work it does 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, investors and associated regional innovation clusters.
The need to transform America's energy innovation system has been broadly recognized in a slew of recent studies. While the details may vary--and whether we call them Energy Discovery Innovation Institutes or the National Institutes of Energy or something else--the expert consensus is clear: America needs to create a national network of decentralized energy innovation institutes that can bring corporate, university, and government scientists together to tackle big energy problems, while strengthening diverse, regional clean tech clusters. Modeled after sustained federal investments made in the 1940's, 50's and 60's that led to the rise of Silicon Valley, this critical effort would cost about $5 billion annually and will be necessary if the nation is serious about inventing and commercializing new energy technologies that are clean, cheap, and abundant.
3. Use Military Procurement to Drive Innovation and Price Declines
Driving innovation and price declines also 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, not innovation that results in lower prices. This framework should be turned on its head. Energy technologies should only receive federal deployment funding 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.
The Department of the Defense has a long track record using the power of procurement to successfully drive the commercialization and improvement of everything from radios and microchips to camera lenses and lasers. In contrast, the Department of Energy has never really played this role. Energy Secretary Steven Chu should be applauded for his efforts to make the Department a more effective funder of breakthrough research, but the agency has no way to either procure or use energy technologies at commercial scale. The DoD should help fill this void, once again using procurement advance a range of potential dual-use energy innovations.
There are good national security reasons for the DoD to play an expanded role in securing America's new energy future. The U.S. military uses more oil than Sweden and more electricity than Denmark, and every $10 increase in the price of oil costs the DoD more than $1 billion dollars, sapping money that should be used to equip our troops for their critical missions at home and abroad. With fuel convoys costing both lives and money every day in Iraq and Afghanistan, questions of energy are understandably high on the list of the Pentagon's priorities.
Finally, the DoD should help establish closer linkages between research and procurement. This close connection was key to the successful history of the Defense Advanced Research Projects Agency, famous for having invented the Internet, GPS and countless other spin-off technologies we now take for granted. Congress made the right move in funding an ARPA-E program for energy. But while DOE is not set up to be a major user of energy technologies, DoD has both the opportunity and the urgent need to use these technologies. The Defense Department can play a greater role in administering ARPA-E and making sure that breakthrough energy discoveries become real-world technologies.
Recognize the Potential of Nuclear--But Pursue Multiple Technologies
The DoD is already looking at the potential of next generation nuclear reactors. For decades small reactors between one-tenth to one-twentieth the size of existing power plants have been used in U.S. aircraft carriers and submarine fleets. New modular reactor designs are smaller, safer, and cheaper than older designs and have the potential to be affordably mass-manufactured. We should not bank everything on a single technology or design; the DoD should have the budget to do the same for other promising energy technologies, from advanced solar and geothermal to biofuels and batteries. But long-time opponents of nuclear power must rethink their opposition given the potential of new nuclear plants to solve several energy problems--economic, environmental, health and safety--at once.
4. Internalize Cost of Program in Several Ways Including Low Price on Carbon
All told, this framework would cost between $15 and $25 billion per year, less than one-third what we spend on defense research alone. While defense and health research are paid for through general revenues, the cost of a major national commitment to energy innovation ought to be internalized within America's energy economy. This could be accomplished in any number of ways:
Phase out current subsidies for wind, solar, and fossil fuels alike, which have not created sufficiently strong incentives for innovation and price declines.
Increase the royalties we charge oil and gas companies.
Dedicate revenues from a modest carbon price to finance the necessary investments in clean energy technology. A $5 per ton tax on carbon, about a third of what recent proposed cap and trade legislation would have cost consumers and businesses, would be more than sufficient to pay for an ambitious federal clean energy research, development, and procurement program.
Tailor different approaches to different sectors of America's energy economy rather than seeking a one-size-fits all approach.
Steven F. Hayward is a resident scholar at AEI. Mark Muro is a senior fellow and the policy director of the Metropolitan Policy Program at the Brookings Institution. Ted Nordhaus and Michael Shellenberger are cofounders of the Breakthrough Institute.