The Agenda

Guest Post: Oren Cass on Energy Innovation Policy

Editor’s note: Oren Cass, who served as Governor Mitt Romney’s Domestic Policy Director in the 2012 presidential campaign, recently shared his thoughts on Cass Sunstein’s recent op-ed on U.S. climate policy. In this post, he elaborates on the theme of how energy policymakers can spur innovation in low-carbon energy.


Last week Cass Sunstein addressed the “Sophisticated Objection” to unilateral U.S. action on climate change: that even if one believes carbon emissions pose a serious threat, such action would impose enormous costs on our economy while doing virtually nothing to address a problem that requires global action. Sunstein made three arguments for unilateral action: (1) U.S. leadership will spur global action, (2) regulation will accelerate innovation, and (3) we have quantified the benefit of carbon reductions and can act where costs will be exceeded by benefits. Earlier this week I addressed the third argument and explained why traditional cost-benefit analysis is inappropriate in this context. Reihan asked me to write a follow-up post addressing the innovation issue as well.

Should the U.S. take unilateral action to accelerate innovation in low-carbon technologies? The short answer is yes. The longer answer is “yes, but not the kind Sunstein seems to have in mind.”

Sunstein is right that policy to spur innovation can overcome the so-called Sophisticated Objection if the resulting low-carbon energy sources are more economically attractive than fossil fuels, such that other nations want to adopt them. But there is good innovation policy and bad innovation policy.

Good policy emphasizes basic and applied research at the pre-commercial stages, perhaps up to the point of demonstration projects. Such government funding is worthwhile across a range of industries because returns from early-stage research are often too speculative and long-term to attract private investment, and because the knowledge created by breakthroughs is spread widely instead of being captured by the inventor. It is doubly worthwhile in the context of climate change, where the societal benefits of success would far exceed the private gains.

Our government has a strong track record of effectively funding this type of research. It can typically be done apolitically, and relatively small sums of money go a very long way. Perhaps unsurprisingly, there is bipartisan support for this approach. For instance, ARPA-E is a DARPA-like program focused on energy technologies that President Bush created, President Obama funded, and Governor Romney supported during the 2012 campaign.

Then there are, unfortunately, a wide range of bad innovation policies. The worst, and (perhaps also unsurprisingly) the most prominent part of President Obama’s agenda, is for the government to play the role of venture capitalist and direct large sums of money to specific companies. Government is extraordinarily ill-suited to play this role, doing so crowds out private investment in an industry, and truly promising commercial-stage technologies should not need public assistance.

Next up are approaches like the CAFE standards for automotive fuel efficiency that simply mandate new technology. Such policies rely on one of two conditions. Either we trust that the government can figure out which new technologies with which characteristics in which markets could come online if only the government so commanded (seems unlikely), or else we only set standards for which we know technology exists. But if the policy is based on existing technology, it cannot possibly claim to be spurring important technological breakthroughs. The CAFE standards are a classic example: even the very aggressive targets for the year 2025 are not that far above where Europe and Japan are today. There is a broader debate to be had about CAFE standards, but pushing toward European/Japanese level efficiency hardly seems likely to produce new and exciting climate-change mitigating innovation.

Finally, there is the wide range of tools that policymakers have proposed for altering market incentives to make new technologies more attractive. Carbon pricing, either via a carbon tax or cap-and-trade system, is one such approach. Subsidization of new technologies is another. Direct mandates like “renewable portfolio standards,” which require utilities to use a specific share of renewable power regardless of cost, are yet another. Within this range are some policies that might have a positive effect at a reasonable cost if used properly – for instance, a promise of limited-term subsidies for emerging technologies at the cusp of commercialization.

But when deployed broadly in an effort to alter the broader market – i.e., carbon pricing or long-term subsidies – these tools encounter a strange problem. The goal, recall, is to incentivize technological breakthroughs that will make low-carbon technologies more economically attractive than fossil fuels. Artificially raising the price of fossil fuels, or artificially reducing the cost of the new technologies, does not do this. To the contrary, it encourages massive investment in uneconomic approaches that are only competitive thanks to regulation, and it moves entire industries (see: wind, solar) into commercialization long before they have achieved the technological breakthroughs that would allow them to compete on a level playing field.

Proponents of this approach typically argue that these policies are all about scale – just get the technology into the market and its cost will start plummeting in no time. True, cost will come down over time. But we are not looking for slow and incremental cost reduction in uncompetitive technologies, we are looking for new and better ideas. And after watching the wind and solar industries fail to achieve their promise despite decades of subsidies, instead becoming major special interests whose business relies more on lobbying than on R&D, the burden of proof should be on the pro-regulation side to explain why even more of the same will be better instead of just more expensive.

Sunstein never says what sort of innovation policy he has in mind, using only the word “regulation.” Presumably by “regulation” he does not mean basic research. I also doubt he means deregulation to remove the red tape that stands in the way of not only fossil fuel development, but also renewable energy projects and, oh yes, that neat little technology called “nuclear” that can apparently generate a good deal of emissions-free power. If he means another loan guarantee program, or CAFE standards, or wind subsidies (i.e., the policies of his former boss, President Obama), then he will encounter the rather unsophisticated objection that they just won’t work. 


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