TODAY’S STUDY: THE U.S. MUST SPEND FOR NEW ENERGY INNOVATATION, SAY BIPARTISAN THINKERS

Post-Partisan Power; How a Limited and Direct Approach to Energy Innovation Can Deliver Clean, Cheap Energy, Economic Productivity and National Prosperity
Steven Hayward, Mark Muro, Ted Nordhaus and Michael Shellenberger, October 2010 (American Enterprise Institute, Brookings Institution and Breakthrough Institute)

New, ostentatious displays of bipartisan, hail-fellow-well-met sentiments in the nation's capital are reminiscent of Hollywood morality codes in the 1930s.

Throughout the roaring 20s, Hollywood creatives took more and more liberties and a partying nation was titillated. With the 1929 crash, the mood of the nation turned serious. Hollywood moguls feared for their box office and the Wall Street backing that came with it. They decided they must impose a morality code on themselves or economics would impose something more severe.

November 2, 2010, announced the nation's electorate will no longer tolerate the politics of bickering. Forward thinkers in Washington, D.C., are looking for cooperative ways to express a spirit of compromise and get legislation done. That the President gets the message is clear is his landmark tax package compromise and his call for bipartisan tax code reform.

Conversations with staffers on the hill this week reveal that those who have been in the halls of power through the recent partisan battles still feel the pangs of past political wars and are deeply suspicious of compromise. But the joint think tank report outlined below from the very left-oriented Brookings Institution and the very right-oriented American Enterprise Institute demonstrates that energy policy is an area where the parties may find, in the words of the new House Speaker, "common ground."

The 112th Congress promises to be interesting. Whether it will be productive hinges largely on whether it imposes a new code of compromise on itself or goes on bickering until the electorate imposes something more severe in 2012.

Introduction

If ever there were a time to hit the reset button on energy policy, it is today. Congress is set to adjourn without taking substantive, long-term action on either climate or energy. While conservatives may be celebrating the death of cap and trade, the truth is that the right's longstanding hopes for the expansion of nuclear power and oil production have also run aground, foundering on the high cost of constructing new nuclear plants and the impacts of the devastating oil spill in the Gulf of Mexico. As a result, energy policy is at
a standstill, despite overwhelming public support for accelerating the move to clean, affordable energy sources and tapping fast-growing clean energy industries to create jobs and wealth in the United States.

Today, few issues in American political life are as polarized as energy policy, with both left and right entrenched in old worldviews that no longer make sense. For the better part of two decades, much of the right has speculated darkly about global warming as a United Nations-inspired conspiracy to destroy American sovereignty, all while passing off chants of “drill, baby, drill” as real energy policy. During the same period much of the left has oscillated incoherently between exhortations that avoiding the end of the world demands shared sacrifice, and contradictory assertions that today's renewable energy and efficiency technologies can eliminate fossil fuels at no significant cost. All the while, America’s dependence on fossil fuels continues unabated and political gridlock deepens, preventing real progress towards a safer, cleaner, more secure energy system.

The extremes have so dominated mainstream thinking on energy that it is easy to forget how much reasonable liberals and conservatives can actually agree on. Fossil fuels have undeniably been critical to American prosperity and development, but we can gradually move toward cleaner, healthier, and safer energy sources. Indeed, throughout history, as we have become a more prosperous nation, we have steadily moved to cleaner energy sources, from wood and dung to coal to oil to natural gas, hydropower, and nuclear energy. Our goal today should be to make new clean energy sources much cheaper so they can steadily displace fossil fuels, continuing this ongoing process. If we structure this transition correctly, new energy industries could be an important driver of long-term economic growth.

Arriving at a new post-partisan consensus will require liberals and conservatives, alike, to take a renewed look at key facts, which challenge some long-standing assumptions about energy.

For liberals this means acknowledging that today's renewable energy technologies are, by and large, too expensive and difficult to scale to meet the energy needs of the nation, much less a rapidly growing global population. New mandates, carbon pricing systems such as cap and trade, and today's mess of subsidies are not going to deliver the kind of clean energy innovation required. And nuclear power, long reviled by many on the left, is far cleaner and safer than most liberals imagine, and holds enormous potential to displace low-cost but high-polluting coal power.

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For conservatives this means acknowledging that fossil fuels have serious health, safety, and security consequences aside from any risks global warming might pose. The biggest obstacle facing nuclear power is not environmental policy but rather public opposition, high construction costs, and associated financial risks. And while many faults can be found with ethanol and synfuels investments, the bulk of historic federal investments in energy technology — from hydro and nuclear to solar, wind, and electric vehicles — have been an overwhelming success.

This white paper is the product of a more than yearlong dialogue between scholars from three diverse think tanks. Drawing on America’s bipartisan history of successful federal investment to catalyze technology innovation by the U.S. military, universities, private corporations, and entrepreneurs, the heart of this proposal is a $25 billion per year investment channeled through a reformed energy innovation system.

This new system is built on a four-part energy framework:

1. Invest in Energy Science and Education
2. Overhaul the Energy Innovation System
3. Reform Energy Subsidies and Use Military Procurement and Competitive Deployment to Drive Innovation and Price Declines
4. Internalize the Cost of Energy Modernization and Ensure Investments Do Not Add to the National Debt

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To accelerate energy innovation and modernization, we propose a role for government that is both limited and direct. It is limited because 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. Instead of subsidizing existing technologies hoping that as they scale up, costs will decline, or providing tax credits to indirectly incentivize research at private firms, this framework is direct because 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, microchips, and many other technologies.

Time and again, when confronted with compelling national innovation priorities, the United States has summoned the resources necessary to secure American technological leadership by investing in breakthrough science and world-class education. The United States responded vigorously to the Soviet launch of Sputnik by investing the resources necessary to ensure American innovators, entrepreneurs, and firms would lead the world in aerospace, IT, and computing technologies, igniting prosperous new industries in the process. Today, we invest $30 billion annually in pursuit of new cures to deadly diseases and new biomedical innovations that can extend the lives and welfare of Americans. We similarly devote more than $80 billion annually to military innovations that can help secure our borders. We propose a similar national commitment to energy sciences and education, which have languished without the funding deserving of a national innovation priority. At the same, this proposal is based on what we know about successful public-private partnerships to build and strengthen regional hubs of innovation, such as the one that evolved into Silicon Valley. Therefore, we propose investment in a national network of regional clusters of universities, entrepreneurs, private investors, and technology companies.

While the left wants to cut fossil fuel and nuclear subsidies and the right wants to cut renewable energy subsidies, we propose across-the-board energy subsidy reform, disciplining all incentives for technology deployment and adoption to a new framework that rewards innovation — as measured through real declines in the cost of generating energy — not simply producing more of the same. Today's federal investments — whether for solar and wind or ethanol and nuclear — are structured around scale and quantity, not innovation. The innovation system we propose builds on the successes of military procurement to purchase and prove advanced energy systems while providing competitive markets for emerging energy technologies, which can facilitate mass manufacture, demand progressive innovation, and bring down the real, unsubsidized cost of clean and secure energy alternatives.

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These productive investments have the potential to raise America's economic growth over the long term and thus help reduce the budget deficit. America’s $1.3 trillion budget deficit is largely a consequence of low growth and the increasing cost of structural entitlement programs, but it can be overcome by a combination of higher growth, responsible entitlement reform, and targeted spending cuts. Achieving higher growth will require continued federal investments in productive enterprises, including health, information technology, and energy. Furthermore, fear of technology failure should not paralyze strategic investments in innovation, since some amount of failure is inevitable and essential to such a disruptive and non-linear process.

To ensure that these limited, targeted new investments do not add to the federal deficit, we propose a suite of options that Congress and the President can use to finance energy innovation. These include cutting existing energy subsidies, charging new royalties for oil drilling, small surcharges on oil imports or electricity sales, and a very low carbon price. While each of these mechanisms may bother some on both the left and right, all should agree that exacerbating the national debt is unwise. Revenues must be found in order to make these productive investments, which have long-term potential to revitalize the economy.

Increasing investment in energy technology and innovation, as we advocate, remains exceedingly popular with Americans of all political stripes. Of all energy policy proposals, from carbon pricing and cap and trade to new oil and gas drilling, expanding production and lowering the price of clean, innovative energy technologies is the most popular approach, regularly receiving support from 65 to 90 percent of Americans in independent news polls, Gallup surveys, and other opinion research. This public support is consistent over time, and reflects the historical willingness of publics to pay slightly more for cleaner and safer energy sources.

In the pages that follow, we aim to present a practical and bipartisan approach to American energy policy. The time has come for a fresh start that can bring our nation into the future through a pragmatic drive to make clean energy cheap and abundant.

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Summary of Recommendations

1. Invest in Energy Science and Education

--> Secure funding necessary to complete the doubling of Department of Energy (DOE) Office of Science budgets. Direct a significant portion of new funds to programs related to energy sciences, including roughly $300 million in annual funding to scale up the Energy Frontier Research Centers (EFRC) program over the coming years.

--> Invest roughly $500 million annually to support K-12 curriculum and teacher training, energy education scholarships, post-doctoral fellowships, and graduate research grants. Just as the United States rose to the Cold War challenge by enacting the National Defense Education Act and leveling critical investments in science, technology, engineering, and mathematics education, a new national commitment is needed today to train, educate, and inspire a generation of energy innovators, engineers, and entrepreneurs.

2. Overhaul the Energy Innovation System

--> Help reform the U.S. energy innovation system by investing up to $5 billion annually to establish a robust national network of regional energy innovation institutes bringing together private sector, university, and government researchers alongside investors and private sector customers. Funded at $50-300 million annually, each institute will foster competitive centers of clean energy innovation and entrepreneurship while accelerating the translation of research insights into commercial products.

--> Bring the Advanced Research Projects Agency for Energy (ARPA-E) to scale by providing $1.5 billion annually, while dedicating a significant portion of new funding to dual-use energy technology innovations with the potential to enhance energy security and strengthen the U.S. military. The Department of Defense (DOD) should work actively with ARPA-E to determine and select dual-use breakthrough energy innovations for funding through the ARPA-E program and potential adoption and procurement by the DOD.

3. Reform Energy Subsidies and Use Military Procurement and Competitive Deployment Incentives to Drive Price Declines

--> Reform the nation’s morass of energy subsidies. Instead of open-ended subsidies that reward firms for producing more of the same product, employ a new strategy of competitive deployment incentives, disciplined by cost reductions and optimized to drive steady improvements in the price and performance of a suite of emerging energy technologies. Create incentives for various classes of energy technologies to ensure that each has a chance to mature. Decrease incentive levels until emerging technologies become competitive with mature, entrenched competitors to avoid creating permanently subsidized industries or picking winners and losers, a priori.

--> Expand DOD efforts to procure, demonstrate, test, validate, and improve a suite of cutting-edge energy technologies. New, innovative energy alternatives are necessary to secure the national defense, enhance energy security, and improve the operational capabilities of the U.S. military. Provide up to $5 billion annually in new appropriations to ensure the Pentagon has the resources to pursue this critical effort without infringing on funds required for current military operations.

--> Recognize the potential for nuclear power — particularly innovative, smaller reactor designs — to enhance American energy security, reduce pollution, and supply affordable power. America cannot afford to bank on one technology alone, however, and must pursue all paths to clean, affordable energy, supporting all innovative, emerging clean energy sources, from advanced wind, geothermal, and solar to electric vehicles and advanced batteries, allowing winners to emerge over time.

4. Internalize the Cost of Energy Modernization and Ensure Investments Do Not Add to the Deficit
--> Secure revenues to ensure these productive new investments do not exacerbate the national debt, through one or a combination of the following means: phase out unproductive energy subsidies, which have not sufficiently driven innovation; direct revenues from oil and gas leasing to energy innovation; implement a small fee on imported oil to drive energy innovation and enhance American energy security; establish a small surcharge on electricity sales to fund energy modernization, similar to the Highway Trust Fund; and/or dedicate revenues from a very small carbon price to finance necessary investments in clean energy technology.

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The Bipartisan History of American Prosperity

Throughout American history, strategic government investments in areas like education, technology, infrastructure, and energy catalyzed the entrepreneurship and innovation that has paved the way for so many of the great American technological and economic successes of the 20th century. In the words of conservative New York Times columnist David Brooks, the American story is one of “limited but energetic governments that used aggressive federal power to promote growth.”

Federal investment led to the development of the railroads under Abraham Lincoln and the federal highway system under Dwight D. Eisenhower. Technologies leading to the wide-scale use of nuclear power were developed in government labs and initially deployed under the auspices of the U.S. Navy and Atomic Energy Commission, after active support from Presidents Roosevelt, Truman, and Eisenhower.

Early, sustained investments in R&D, education, computer science, and infrastructure through programs like the GI Bill, National Defense Education Act, and Apollo space program laid the foundation for the emergence of the aerospace, computing, and information technology industries. The United States Department of Defense (DOD) has long acted as an initial funder and early adopter of key technologies like radios, semiconductors, computers, software, and the Internet. And federal investments in health
research through the National Institutes of Health have enabled scientists to map the entire human genome, making way for path-breaking advances in biotechnology.

In education and technology, federal investments have repaid themselves many times over in the form of greater economic growth, increased tax revenues, and high-paying domestic jobs. Every dollar invested in education by the GI Bill following World War II returned just over $5 in greater economic growth and $1.83 in greater tax revenues over the following 35 years, according to a Congressional report. Likewise, federal investment in R&D is a key driver of productivity gains and economic growth, and studies routinely conclude that there is a significant rate of return on such investments to the national economy and the tax base.

Economist Robert Solow received a Nobel Prize in economics in part for demonstrating that over 80 percent of economic growth in the first half of the 20th century was driven by advances in technology, and later economists confirmed that technology innovation played a similarly outsized role in economic progress in the later half of the century. Just as federal investment has driven innovation in countless industries over the last century, so too will federal investment in energy technology be central to catalyzing private sector innovation and entrepreneurship in the 21st century energy sector, creating new industries and jobs.

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In an era of fiscal constraint, it is important to distinguish between government spending, some of which is clearly unproductive and wasteful, and dynamic public investments that yield long-term economic returns. Fiscal deficits are an increasing concern, particularly as the federal bureaucracy has grown to record levels in recent years. Certainly, at least some government expansions are unnecessary or duplicative, and discontinuing ineffective and wasteful programs can help restore some fiscal balance. But not all federal programs should be painted with a broad, deficit-cutting brush. Indeed, federal investments in areas like science and technology have been a long-term driver of national prosperity under presidents both Democrat and Republican.

Far from being an unnecessary strain on the federal budget, federal investments in energy technology innovation are thus a critical component of an effective and responsible strategy to reduce the national debt and generate a new era of sustained economic prosperity.

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Conclusion

America is once again at an energy crossroads, but the choices it faces are not those that many aligned with either the right or the left have imagined. The choice is not, as liberals often maintain, between global warming apocalypse or mandating the widespread adoption of today’s solar, wind, and electric car technologies. Nor is the choice, as conservatives have argued, between an economy wrecked by liberal global warming policies or expanding oil drilling and nuclear power. The choice is whether America will focus on what really matters when it comes to energy technology and on what the vast majority of Americans want: innovation.

Though Washington and policy elites were polarized by the ‘climate wars’ of the last decade, Americans as a whole remain largely united in their attitudes toward energy policy. They are grateful for cheap fossil energy and are willing to pay modestly more for affordable, cleaner energy sources. The most popular and effective energy policy is technology innovation aimed at making clean energy sources better and cheaper. This white paper is our contribution to advancing a new public policy consensus that starts from this place of post-partisan agreement.