This past February, Richard Branson announced the “Virgin Earth Challenge,” a $25 million prize for the development of “a commercially viable design which results in the removal of anthropogenic, atmospheric greenhouse gases so as to contribute materially to the stability of Earth’s climate.” His aim was to unleash the creative energies of innovators and inventors around the globe with the promise of a substantial economic reward. If past experience with prizes is any guide, this Virgin Earth Challenge could reap great dividends — and even do more to encourage climate-friendly technologies than decades of federally subsidized research.
If federal policymakers are serious about encouraging climate-related technological innovation, they would match or replicate Branson’s efforts. The U.S. government spends several billion dollars every year on direct energy subsidies, the bulk of which goes to renewable energy. Indeed, renewable-energy sources have received over $100 billion since 1950, and yet few are economically viable. Decades of federal energy R&D has produced relatively little of economic or practical value. Initiatives like the Virgin Earth Challenge offer the promise of something different.
Direct government subsidies are a particularly poor way to encourage innovation. Perhaps it should be possible to direct research and development funds toward the most promising and valuable technological endeavors, but this rarely happens in practice. Government subsidies tend to be dispersed on political criteria, rewarding large, politically connected incumbent firms, rather than innovative upstarts. Failing industrial dinosaurs with lobbyists on the payroll are in much better position to snatch up government goodies than revolutionary thinkers toiling in garages or private labs.
Offering substantial financial rewards for those who develop particular innovations or solve specific problems is a far better way to spur technological innovation and practical scientific research. As the patent system demonstrates, the hope of a large financial windfall is a powerful inducement for innovation, and can encourage many different people with different strategies or insights to tackle a given problem. If climate change is an urgent threat, and the private sector underfunds climate-related research and development, government funding of prizes along the Virgin Earth model could yield substantial returns.
Whereas direct government subsidies often yield a zero, if not negative, return, prizes tend to unleash research investment and returns far greater than the amount of the actual award. the X-Prize Foundation created the “Ansari X-Prize,” an award of $10 million for the private development of a reusable, manned spacecraft. In 2004, a team bankrolled by Microsoft co-founder Paul Allen claimed the prize for their SpaceShipOne, which managed to make two suborbital flights in less than two weeks. Although only $10 million was awarded, the prize spurred over $100 million in privately funded research. The X-Prize demonstrated that spaceflight can be far less costly than the typical NASA mission would suggest, and generated a far greater return per dollar spent than the federal space program.
Prizes for scientific and technological innovation used to be common. In 1714 the British Parliament enacted the Longitude Act, establishing a series of prizes up to £20,000 for more accurate ways to measure longitude at sea. For the ocean-dependent British Empire, such innovation was essential, and it worked. France offered prizes as well, for such innovations as a simple and economical way to decompose sea salt for alkali production and food preservation methods that could help feed a roving French military.
Prizes were also essential for the development of air travel. Over $1 million in aviation prizes were awarded in Europe prior to World War I, and significant prizes were offered in the United States as well. Charles Lindbergh’s famous trans-Atlantic flight won the $25,000 Orteig prize in 1927, after several other aviators had failed. According to Lindbergh, there would always be innovators and adventurers ready to pursue prize purses of that sort, as his own exploits showed.
Encouraging needed innovation is not simply a matter of dedicating resources to those endeavors favored by scientists and technologists. Even the most educated and well-intentioned experts may focus their energies in the wrong direction. Indeed, it is the unexpected nature of many innovations that makes them so valuable. When Britain offered its longitude prize, it was assumed the award would go to an astronomical technique. Yet the prize was awarded for a mechanical device that outperformed the alternatives.
The same characteristics that make innovation prizes so effective discourage their use by politicians. No one knows in advance who will win a prize, but subsidy programs allow government officials to dole out goodies to special interests and constituents. Subsidy payments go out whether or not a grant recipient delivers, or a problem is solved. Prize money, on the other hand, is only paid out if someone fulfills the preset conditions. In other words, a prize is only paid out if a contestant can deliver. Subsidies also encourage the politicization of science, exclude potential sources of innovation, and fail to take advantage of dispersed knowledge.
Subsidies are a politically popular way to encourage technological innovation — or at least to allow politicians to pretend to do so. As the demand for “green” energy sources has grown, it’s no wonder that federal handouts for ethanol and other energy boondoggles have grown. But if the climate-change problem is truly urgent, and federal policymakers wish to encourage the development of viable climate-friendly energy sources, they should phase out energy subsidies in favor of various prizes. The federal government should stop rewarding political influence, and instead encourage innovation by paying out for practical results.
– National Review Online Contributing Editor Jonathan H. Adler is professor of law and director of the Center for Business Law & Regulation at Case Western Reserve University School of Law.