Over the last decade, big green groups in Washington DC have lobbied hard for a carbon tax or an equivalent carbon cap, but they have never made federal support for innovation a priority. We think that advocacy for innovation should be at the heart of the drive to get atmospheric CO2 to 350 parts per million (ppm). Without significant technical progress—without the development of “renewable energy cheaper than coal,” as Google frames it1—efforts to contain the climate crisis are unlikely to succeed.
Over the next decade, the prospects for dramatic innovation in clean energy are excellent. Hundreds of “clean tech” start-ups are pushing hard to develop new technologies, and nearly every major energy company is experimenting with alternatives: investments in clean tech from venture capital, private equity, and corporate research and development (R & D) hit $200 billion in 2008 and are predicted to surpass that in 2011 as the global economy recovers.2 The green groups and their business allies are certainly right: putting a price on carbon via a tax or a cap will accelerate this trend. But doing so will be significantly more effective if the United States also dramatically upgrades its energy innovation system.
The case for promoting a carbon price and energy innovation as complementary solutions begins by recognizing the cheapness of fossil fuels in today’s markets, as illustrated by the market for electricity (which accounts for one-third of U.S. greenhouse gas emissions).3 The relative price for new central-station electricity generation is about $2,078 per kilowatt (kW) for a new coal plant, compared to $5,879/kW for solar photovoltaics, $4,798/kW for solar thermal, $3,414/kW for biomass, $3,308/kW for nuclear, and $1,837/kW for wind.4 (While the number for wind looks encouraging, wind cannot be used as base-load power without major breakthroughs in storage.) And while significant reductions in energy demand—through aggressive conservation and efficiency measures and the promotion of denser settlement patterns—are critically important, they are nowhere near enough to get us to 100 percent clean energy. In part, the scope of demand-side policies is limited by the problem of “supply response”: if we significantly reduced energy demand, energy prices from all sources would fall, making it that much harder to end up with a market where renewables are cheaper than fossil fuels.
How likely is a low-carbon future without a big push for innovation? In 2006, energy expenditures in the United States were about 8.8 percent of our gross domestic product (GDP).5 Switching entirely to carbon-free energy with today’s technology could increase energy costs by another 50 percent, or more. Furthermore, increasing the price of energy is regressive, since energy costs are a much higher share of total household budget for the poor. If leaders were somehow able to harness the political will to increase the price of power by 50 percent, it is doubtful that they could carry the ongoing political costs of doing so for long. The economic and political realities of the energy status quo are stark.
The good news is that if we can accelerate the rate of innovation, energy costs are likely to fall dramatically. For example, there is considerable evidence that with effective policies in place, photovoltaic technologies could be competitive with more traditional sources of electricity by 2020 in many regions of the world.6 Moreover, we have done this before. In the nineteenth century, the vast majority of Americans worked on the land. Today, agriculture employs less than 2 percent of the population. A significant part of this shift was driven by mechanization, but innovation in agricultural techniques was also a critical driver. Public funding in the agricultural sector helped to solve the classic problem of “externalities” in R & D—the fact that no single firm has the incentive to invest in research that will benefit everyone in the industry. The estimated rate of return to public spending on agricultural research has been between 45 and 60 percent.7
We have not seen the same rates of technological progress in the clean-energy sector, in part, because we have not been investing in clean-energy R & D. The Breakthrough Institute, a forceful advocate for “making clean energy cheap,” recommends R & D investments in the United States of at least $15 billion annually. Echoing Energy Secretary Steven Chu, the group claims that likely candidates for major R & D breakthroughs include next-generation solar panel materials, electric-vehicle batteries, and biofuel production methods.8
In this policy arena, it is important to remain humble: no one can definitively identify the “right” amount of public investment or which technologies will leapfrog others. But overall, we need to greatly increase funds allocated to federal support of energy research, so that we can support scientists who are most likely to create the breakthroughs we need. This probably means funneling the money through universities as well as through local and global institutions that are embedded in “innovation ecosystems,” through which innovation can be quickly transferred to practice.9 Passage in the U.S. Senate of the America Competes Reauthorization Act, which authorizes $84 billion for research, education, and other programs over the next five years at the National Science Foundation, the Department of Energy, and the National Institute of Standards and Technology, would be a vital first step on this road.
Yet R & D funding on its own is not sufficient. History teaches us that lively customer demand is a critical ingredient in accelerating innovation. The development of the Internet was spectacularly successful, in part, because the scientists building it were using it as they progressed.10 The development of real demand is critical to kick-starting a virtuous cycle of accelerated innovation, in which real use in the marketplace attracts private-sector innovation and suggests profitable problems to solve, both of which in turn improve the technology so that demand increases. Getting this cycle going in energy is difficult because carbon-free energy looks, tastes, and smells exactly like “ordinary” energy—except that it is more expensive. So until there has been enough innovation to drive costs down below the alternatives, no private firm has the incentive to invest in it. Thus the need for policies that create demand for low-carbon and carbon-free energy. The most effective way to create this demand, as economists have advocated for decades, is to put a price on carbon—a price that reflects its estimated social cost, including all current and future damages to human well-being and ecosystem services.
The push for clean-energy innovation policy is too often interpreted by sustainability advocates as being bland, obvious, or both. This view is way off-base: the magnitude and scope for what is required, despite recent advocacy by the Breakthrough Institute and others, is still vastly underappreciated. Our own experiences, including advising members of the Fortune 100 and founding a technology-orientated startup, leave no doubt that innovation policy must be a critical component in a portfolio of “getting to 350” solutions. Other major components should include a progressive carbon-price policy (as found, for example, in the cap-and-dividend approach),11 targeted national and regional policies to phase out coal, global agreements to reduce subsidies for carbon-intensive forms of energy, investments in national and regional smart grids, large-scale efficiency programs and other forms of demand-side management, and deliberative democracy–style decision-making processes (all of which are featured in this and previous issues of Solutions). By embracing the need for innovation, climate activists can partner with forward-thinking venture capitalists and utility companies to build solutions that everyone can embrace.