The Future of Clean Energy Technology

Jonathan Ortmans, President, Public Forum Institute

Today I return from MIT where any visitor has to leave reinvigorated and reassured by the curiosity and brilliance of science at work. Present with me were experts from Washington, all anxious to learn about the front line innovations in a sincere effort to make sound decisions for their bosses on the Hill and in the White House as to how to best direct billions of dollars of R&D investment in clean energy in the pipeline. Take the work of Angela Belcher who appears to have worked out how to genetically engineer viruses to build both the positively and negatively charged ends of a Lithium-ion battery that has the same capacity and performance as the state-of-the-art battery that A123 -- an MIT startup -- will start rolling out in plug-in hybrids next year.

While we stood over young, pioneering research students, Washington was hard at work. The American Clean Energy and Security Act of 2009 (ACES) or the Waxman-Markey energy bill attempts to reduce carbon emissions from American cars, power plants and factories by 83 percent over the next 40 years. This pending legislation, which passed the House Energy and Commerce Committee last week in a 33-25 vote, embraces several positive concepts. Most promising is its emphasis on increased funding and infrastructure for clean energy innovation and its rapid commercialization. It is worth exploring these provisions in the bill, as well its flaws.

In terms of innovation, the Waxman-Markey energy bill would allocate one percent of allowances between 2012 and 2050 to fund eight new Clean Energy Innovation Centers around the country to do R&D and accelerate the commercialization of federally-funded clean energy technologies. Creating or building upon existing clean energy regional clusters, the knowledge centers would strengthen the links between public and private research communities, industry, and private sector funds. The Department of Energy (DOE) will choose the centers based on applications from regionally-based consortiums composed of at least two large research universities and at least one additional entity that could be a private corporation or research laboratory, a state institution focused on clean energy development, or a nongovernmental entity specializing in the development and commercialization of clean energy technologies. The increased knowledge, skills and infrastructure sharing would accelerate the clean energy revolution.

Through these innovation centers, the bill embraces the concept of Energy Discovery-Innovation Institutes (e-DIIs) introduced by experts at the Brookings Institution. The concept as applied in the Waxman-Markey bill deserves the commendation of actively seeking to engage several actors into the clean energy innovation process, rather than narrowly focusing on investment flows into specific research labs and projects. Innovative activity will only yield successful outcomes rapidly if we tap into the resources of the various components of the innovation ecosystem (scientists, engineers, universities, entrepreneurs, venture capitalists, private industry, etc). Too often innovation is viewed through a linear model that starts with basic research and ends with products. Accelerating the movement of innovations in the marketplace calls for a more transactional approach early on that includes market factors. This process disciplines scientists to ask themselves early on in the process where and how they should focus their discovery research.

The Clean Energy Innovation Centers are consistent with the President’s plan to increase investment in clean energy development to $15 billion annually and his FY2010 budget request to establish eight new “Energy Innovation Hubs” through DOE. However, the bill’s cap-and-trade provisions fall short of the expectations set by the Administration. President Obama emphasized during his campaign and once in office that the best way to create the incentive structure for climate change is to price carbon emissions through a cap-and-trade system in which tradable permits to emit carbon are auctioned off. The energy bill will enable auctioning only 15% of the emission permits until 2026. The rest of the permits would be given at no charge according to a specified power sector allocation in the bill. Permit holders can sell them if they do not need them and the number of available permits will gradually fall over time. This is the most serious objection to Waxman-Markey because it means that most polluters would not have to pay for their greenhouse gases emissions in the first years of the program’s operation.

Cap-and-trade acts like an implicit tax on carbon. Most economists, including the White House budget director Peter Orszag, argue that auctioning off the permits is the most efficient way to allocate the rights, allowing for government revenues that can be directed to energy R&D and to compensate lower-income households for the resulting higher energy prices. Without the auctions, there will be no such revenue. In terms of the incentive system, it is a much weaker one than envisioned by many.

Would this weak commitment to the “trade” part of cap-and-trade undermine the policy’s effectiveness in unleashing clean technology innovation and addressing climate change? My sense is that we should support the bill and only carefully push for compensation rather than insulation mechanisms for industries and regions most affected by the transition to a new system of environmental responsibility such that we do not kill the bill’s political feasibility. It is not surprising that the Waxman-Markey energy bill embodies a complicated compromise to satisfy diverse constituencies. There is no way around it: effective energy legislation will have a profound effect on the U.S. economy through the changes in the relative prices of energy and thereby in the landscape of energy companies and energy-intensive businesses. Significantly reducing carbon emissions requires economic incentives that will unleash a continuous flow of innovations.

There is also always the risk that the expansion of government intervention and regulation that the bill represents will cause more harm than good. For example, how the emission permits will be distributed and what restrictions DOE will impose on the recipients represent opportunities for complications leading to undesirable or suboptimal outcomes. As I mentioned in a previous post, the risk is that clean energy policies will prove harmful to the clean energy sector’s competitiveness tomorrow, by allowing the government to pick and protect winners and thereby deprive society from the very forces that drive innovation. Such government failure can be avoided if our policies always look to entrepreneurs to lead the way to a greener future while it provides a push to leverage the risk-taking behavior of entrepreneurs and their financiers in the current environment of private under-investment in the clean energy sector.

The Waxman-Markey compromise is certainly not the best energy policy we can design, but it is probably the best the political system can yield. We can not risk having the clean energy sector in a freeze any longer in the face of the energy challenges which have national security, environmental, health and economic implications. We have never been so close to this large a change in energy policy reaching the President’s desk, a change that will imbue the energy sector with an entrepreneurial culture. After witnessing first hand the potential answers from our innovators at MIT in this field, I am guessing this will be money well spent.

Jonathan Ortmans is a senior fellow at the Kauffman Foundation where he focuses on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues.

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