Speaking Monday at Fresno State University in California, Sen. John McCain put forward what may be the most promising and important energy-policy proposal of the campaign: a $300 million prize for the development of advanced battery technology. “In the quest for alternatives to oil, our government has thrown around enough money subsidizing special interests and excusing failure,” he noted. Yet rather than have Washington pick winners and losers from within the energy industry, McCain suggested that the government should reward innovation and actual achievement. “From now on, we will encourage heroic efforts in engineering, and we will reward the greatest success.”
As outlined by McCain, the prize would be paid the first innovator to develop a battery technology that “leapfrogs” existing electric car and plug-in hybrid technology, in terms of size, capacity, power, and cost. The aim is a battery technology that capable of powering motor vehicles at 30 percent of current costs. This would be a significant technical breakthrough, greatly enhancing the ability of battery-powered vehicles to compete in the marketplace.
Government-sponsored prizes for innovation are based upon the same principle as the patent system: Encourage innovation by rewarding inventors and entrepreneurs with the promise of super-competitive returns. A patent provides such a reward by giving the innovator a temporary monopoly for his invention. A prize goes one step further by placing a bounty on a particular type of innovation, increasing incentives for potential investors.
Another virtue of government prizes is that tax-payer dollars only get spent if the prize goals are met. Traditional subsidies, on the other hand, are paid out up front. Doled out in accord with politically determined criteria, and often awarded to the most politically connected firms, traditional subsidies often fail to generate anything approaching a positive economic return.
Past and present experience shows that prizes are a powerful way to encourage investment in technological innovation. The British empire used prizes to spur innovation in navigation. While governments rarely use prizes anymore (because politicians prefer to give out goodies themselves), private foundations have gotten into the act. The X-Prize Foundation offered the “Ansari X-Prize,” a $10 million reward for the development of a reusable, manned spacecraft, which was awarded in 2004. The winning inventors fulfilled the X-Prize qualifications and proved spaceflight can be more economical than NASA. The $10 million prize also spurred an estimated $100 million in private research on spaceflight technologies. Just imagine how much private research a $300 million prize could unleash.
The proposal of prize for battery innovation is a welcome departure from the traditional stale roster of energy policy measures. Sen. Obama has proposed more aggressive regulatory measures on climate change, but he’s also a big booster of corn-based ethanol. There is a consensus among energy and environmental experts against the broader use of corn-based ethanol, but Obama seems committed to it. The Illinois senator and his campaign have strong ties the corn-based ethanol lobby, as reported in the New York Times. Subsidizing the fuel “ultimately helps our national security,” Obama implausibly claimed in a recent speech. McCain, in contrast, has criticized ethanol subsidies and tariffs on ethanol imports.
While McCain’s prize proposal and hostility to corn-based is important, his energy policy is hardly perfect. In addition to the inconsistencies I noted last week, McCain is urging stricter enforcement of federal automobile fuel-economy standards and continued (albeit less corn-friendly) subsidies for alcohol-based fuels. He lambastes existing subsidies and tax credits as “the handiwork of lobbyists,” but is proposing a new “zero-emission” vehicle tax credit of its own. Despite these flaws, the Arizona senator deserves credit for embracing an energy prize. Promising a direct reward for innovation is the most innovative energy idea to come from a politician in quite some time.
— Contributing Editor Jonathan H. Adler is Professor of Law and Director of the Center for Business Law & Regulation at the Case Western Reserve University School of Law.