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Overselling Energy Innovation

by Michael Levi
October 13, 2010

David Leonhardt has a column in today’s New York Times which looks at at the potential for government-sponsored innovation to drive U.S. climate policy. I’m sympathetic to the argument that carbon pricing (and other demand-side policy) isn’t enough alone to transform how we produce and consume energy. But Leonhardt indulges in some bad logic that’s common enough to deserve rebutting:

“History shows that government-directed research can work. The Defense Department created the Internet, as part of a project to build a communications system safe from nuclear attack. The military helped make possible radar, microchips and modern aviation, too. The National Institutes of Health spawned the biotechnology industry. All those investments have turned into engines of job creation, even without any new tax on the technologies they replaced.”

Here’s the thing: the Internet delivers benefits to every person who uses it. Radar is a boon for the military. Microchips help businesses operate more efficiently. Modern aviation is great for travelers everywhere. Biotechnology improves the health of those who exploit its fruits. Government support hasn’t made airplanes cheaper than cars, high-end drugs less expensive than Tylenol, or microchips a better deal than the abacus. (Well, maybe not the last — I haven’t checked abacus prices recently.) What it’s done is help make them affordable. And once government investment in innovation makes initial commercial adoption feasible, market forces (i.e. individual demand) take these technologies the rest of the way.

But clean energy? Not so much. I get zero benefit by choosing to buy energy produced by a wind farm. (It actually costs me more.) My utility doesn’t get any either, unless its regulator lets it pass on the cost, which it won’t absent government policy. There are big social benefits to clean energy, most prominently through reductions in both greenhouse gas and particulate emissions. But neither individuals nor companies have any significant reason to shift to clean energy, even if innovation closes the cost gap considerably. (There may be small exceptions for things like rooftop solar PV in limited areas, but these don’t upend the general point.) For the foreseeable future, government will still need to cover the remaining gap, either through subsidies for clean energy or by making dirty energy more expensive.

Here’s a challenge to readers: None of the examples that Leonhardt cites (or that others have offered) are cases where a technology that offers no benefits to the individuals that adopt it has been pushed into the mainstream through government-supported innovation (and without any mandates or other incentives). I can’t think of any myself. But maybe there are cases that I and others are missing. Can anyone suggest one?

Post a Comment 12 Comments

  • Posted by Christopher Brownfield

    Well, said, Michael. Until the environmental shadow price is reflected in the market price of energy, then there can be no advantage of such policies… unless of course some amazing new game-changer (like the chimera of cold fusion) makes electricity too cheap to meter, in which case consumers won’t even pay for carbon-based fuels. That’s a long shot.

  • Posted by Gernot Wagner

    One oft-cited example of a technology that just took off all by itself and solved a big environmental problem along the way is the discovery and commercialization of oil.

    But that’s a classic fallacy. Whale oil production peaked several years before the first rock oil was found in Pennsylvania. The reason: we started running out of easily hunted sperm and right whales.

    Oil didn’t save the whales. Running out of whales caused us to move away from hunting them.

    We’d be in the same situation now if we ran out of fossil fuels before running out of atmosphere. Sadly, that’s clearly not the case.

    In the end, we need both cap and trade and a significant R&D push, not least because we are dealing with two market failures: the negative environmental externality, and a positive one associated with research. Of course, if we can’t get a cap soon, let’s at least start with R&D. But it’s not either-or. It’s both.

  • Posted by Roger Pielke Jr.

    Michael-

    Here are four counterpoints to your argument.

    First, the goal of making clean energy cheaper is not so much for it to displace existing fossil energy, but to become increasingly preferred as new infrastructure in the future. As Ken Caldeira and colleagues recently argued in Science, it is future infrastructure that matters most.

    Second, while it is true that you don’t much care about clean energy, there are 1.5 billion people who lack access to electricity world wide, and a big reason for that is that energy presently costs too much. These folks have a big stake in making clean energy cheaper.

    Third, a related point is that by making fossil fuels more expensive you would be making energy access to those 1.5 billion more distant. There is an iron law of climate policy that says that while people will accept some price for environmental objectives, that willingness only goes so far. The key to putting a price on carbon is through the availability of cheaper clean alternatives.

    Finally, there is evidence that several countries are already investing in clean energy based on pricing fossil fuels, most notably India. They are doing this not out of environmental concerns but to secure more energy at a low cost for the future. Energy demand is going to increase dramatically in coming decades, and someone is going to provide the technology and infrastructure. The US can be part of that economy or not, and investments in clean energy are a good way to make that more likely.

    [ML: Roger - I'm with you on all these points, but I don't see how they contradict my argument, which was simply that all the examples given -- the internet, radar, etc -- are fundamentally different from clean energy, and hence don't make the intended point. I'm not sure how point #1 contradicts what I wrote -- it still leaves you with the question of whether government support for innovation can do the whole job by itself. Re point #2, you'd have to argue not only that clean energy is good for those without electricity, but that early adoption in that market is what's going to take over where government support for innovation ends (until the technology gets even cheaper and is able to displace fossil fuels among those who already have access without any extra support). That would be interesting if true, but I haven't seen analysis that comes anywhere close to making that case. Re #3, that's only true if you insist on pricing carbon universally, which is a silly thing to do. I don't see why you need to price carbon for those without (or with little) modern energy -- it's not necessarily environmentally, and it's cruel. Re #4, that's an argument for investing in innovation, but it's not an argument for why such a policy alone is enough to deal with climate change. P.S.: You'll be seeing a major article from me and several colleague that strongly supports government investment in innovation very soon.]

  • Posted by Roger Pielke Jr.
  • Posted by Sam Weaver

    Roger Pielke, Jr. is advocating a silver bullet approach to decarbonization (more clean energy R&D). This approach probably won’t work alone without other policies. Michael Levi, while acknowledging that supporting clean energy R&D is very important for future decarbonization, simply also advocates for pricing GHG emissions as well. Not everywhere, and specifically not for countries where energy consumption per capita is below an impoverished threshold. That last is important, because it directly addresses (and defangs) the one argument that many (including Pielke, Jr.) fall back on. That argument is: pricing carbon condemns the world’s poor to unaffordable energy. That argument is a red herring as I demonstrated in a comment to one of Pielke’s posts: providing energy to the world’s poor would not significantly slow decarbonization (http://rogerpielkejr.blogspot.com/2010/09/access-to-energy-poverty-alleviation.html#comments). Pricing carbon in the world’s advanced economies would support decarbonization, is not in conflict with supporting clean energy R&D, and does not need to be implemented via cap and trade to be effective. In fact, as the EU experiment effectively shows, cap and trade can be gamed in a way that does not lead to decarbonization. And as I write in the comments here (http://thebreakthrough.org/blog/2010/10/the_technologyfirst_climate_fi.shtml),I think the Iron Law formulation Pielke Jr. uses to characterize the tradeoff between the economy and decarbonization is flawed.

  • Posted by Andrew

    I think one thing that’s being overlooked a bit in this debate is that you need R&D into clean energy, whether it comes from the private sector or the public sector. Putting a price on carbon has the effect of incentivizing both R&D and deployment of clean technology by the private sector. And, it has the benefit of using the profit motive to direct that research funding to the most promising places. Now, however, with the defeat of any attempts to place a price on carbon, we’re left without that incentive.

    Therefor, this is a move to a second-best alternative. Publicly funded R&D may not be allocated to the most efficient areas, but at least its more R&D than the private sector can be expected to do. It does nothing for deployment of clean technology, but new government regulations (like the EPA’s upcoming tailoring rule) could fill that gap.

    So, government R&D, paired with new regulations, is a second best alternative to market-driven efforts like cap and trade. Its interesting that Republican opposition to climate action has driven policy away from the market revolutions of the 80s and 90s and back to the government-directed spending and regulation of the 70s.

    [ML: I'm not as convinced that it's second best, rather that an important complement. Carbon pricing doesn't correct for the failure of markets to adequately invest in R&D (a phenomenon that extends well beyond energy.]

  • Posted by Mark Bahner

    “But clean energy? Not so much. I get zero benefit by choosing to buy energy produced by a wind farm. (It actually costs me more.)”

    That’s why the key is to getting the cost of clean electricity sources (e.g., off-shore wind, liquid fluoride thorium nuclear reactors) down below the costs of electricity from coal.

    The key is not to raise the cost of electricity from coal up to other sources. For one thing, it’s not politically feasible to do so.

    But much more important, even if it WAS politcally feasible in the U.S.–which again it is not–it would NOT be politically feasible in China. So it would be worthless from a climate standpoint to reduce U.S. emissions of CO2 from coal if China continued to increase its use of coal.

    [ML: Sure. But this still ain't the airplanes or the Internet. Government investment didn't make airplanes cheaper than cars -- it made them cheap enough to be worthwhile for initial adopters, who also got some benefit. The clean energy case is all about the cost side, with nothing on the benefit side, unless the government changes that through subsidies or taxes.]

  • Posted by Hal

    Sounds like everyone is in violent agreement. What the world needs is not clean energy, what we need is cheap energy. Given that credible estimates put Peak Oil less than ten years away, it is likely that the most cost effective path to large scale cheap energy will be via renewable sources. The point is that cheap energy is clean energy, going forward.

  • Posted by Mark Bahner

    “Government investment didn’t make airplanes cheaper than cars — it made them cheap enough to be worthwhile for initial adopters, who also got some benefit.”

    Investment (government and private) made airplanes worthwhile for initial adopters. The profit made for those initial adopters is how the money was obtained to make investments in better/less expensive airplanes, which encouraged more customers.

    The absolute same thing is already happening with photovoltaics and wind. Photovoltaics make sense right now for only a very few people (e.g. people far away from the grid in sunny climates). The money obtained from those customers allows less expensive photovoltaics to be made.

    And the investments in wind allow wind turbines to be made larger (and possibly now to be put offshore) so more customers will come.

    The same thing could happen for something like liquid fluoride thorium nuclear reactors. If a few get built and the kinks worked out, they could easily end up the least expensive form of electricity.

    “The clean energy case is all about the cost side…”

    OK, and Roger Pielke Jr. is right when he says that the solution is to make clean energy cheaper than coal and oil are at present…NOT to make coal and oil more expensive.

    You still haven’t said why he’s wrong, there. If clean energy can be made less expensive than coal and oil, then the whole world will convert over to clean energy volutarily. It will not benefit climate at all even if coal and oil as expensive–or more expensive–in the United States as they are in Europe. China, India, and other developing countries aren’t going to change away from coal and oil unless there is something less expensive. And without them switching, there will be no real climate impact.

  • Posted by Mark Bahner

    “Sounds like everyone is in violent agreement.”

    No, Michael Levi wants to raise the price of coal and oil. A better way is to lower the price of cleaner alternatives below the present price of coal and oil. (Although removing *subsidies* for coal and oil probably isn’t a bad thing.)

    [ML: I can't say I see the fundamental difference: removing subsidies for coal and oil raises their price. But there is a fundamental difference between the main two options you cite: raising the price of coal and oil is a specific policy (though one that may be difficult to move politically), while "lowering the price of cleaner alternatives below the present price of coal and oil" isn't a policy -- it's an aspiration. We would have a more productive debate if we focused on the policy tools, not the hopes of what they'll produce. Among other things, that lets us have a serious debate over the costs and the political plausibility of the alternatives.]

  • Posted by John Bennetts

    Mark and Michael,

    There is certainly a case that can be made for more expensive fossil fuels. The damage being done to the commons (Definition? See Wikipedia “Tragedy of the Commons” or any basic economics text book)is not easily priced, but it is capable of evaluation partially quantitatively and partially qualitatively. Issues such as climate change, rising ocean levels and species loss are not inconsiderable costs which our globe incurs due to consumption of FF and deforestation: ie relese of CO2-e.

    To the extent that these costs are measurable, it is not only reasonable but, frm an ethical perspective, essential, for them to be recouped centrally via a pricing mechanism. On a national basis, that becomes either a cap-and-trade market or a straight tax. The end uses of the pricing mechanism should logically and ethically be to ameliorate the damage already done and the economic commons via support of adoption of clean power, clean agriculture, clean transport and clean forestry technologies. If and when available, CO2 sequestration technologies also ethically fall under this same umbrella.

    In summary: (1)There is a very strong case for putting a cost on polluters appropriate to at least counteract in the environment and socially for their polluting activities. (2) Assuming that such a charge has been levied, it is appropriate that portion of the funds thus raised should be directed specifically to those members of society who have been disadvantaged by the results of either the levy or by the actual pollution – typically the poor of our western societies and the members of the non-western, less developed nations. (3) Carbon sequestration is a valid use for these funds in the same way as is support of non-carbon energy sources.

    Think this through and you may well end up on the same side of the debate. The only questions still relevant relate to the levels of charges for pollution and the most effective directions for the resulting funds to be directed, how and by whom.

    Remember, this is not an academic exercise or an effort to be artistic, seeking out a “beautiful” solution. It is our little blue planet which is fighting to avoid its death. This should be managed somewhat akin to a war effort – assemble the resources and deploy them where they will do the most good. Prettines of no value for those who lose and at this stage we are all on the losing side.

    Lastly, put your best efforts into those areas where you can influence the outcome of this war. I am Australian; readers may well be American. There is no point in us putting effort into trying to tell totalitarian states how they should behave. Improvement in our respective countries is much more achievable and thus individual effort should primarily be directed to change actions within our own communities.

  • Posted by Alex Trembath

    Stumbled across this old blog post from a newly posted link. Michael, are you willing to comment on the case of hydraulic fracturing for shale gas, an ostensibly clean(er) form of energy now replacing coal-fired power plants more rapidly than anyone anticipated. Shale fracking relied on extensive government support for its development over 30 years. Breakthrough Institute documents the history here:

    http://thebreakthrough.org/blog/2012/05/where_the_shale_gas_revolution.shtml

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