Friday, October 27, 2006

The Right Incentives

In between editing yesterday's posting on California's Proposition 87, I ran across an article reporting on the outcome of this year's Wirefly X-Prize Cup, an annual two-day space technology fair that is a spinoff of the X-Prize sub-orbital-flight contest won by SpaceShipOne two years ago. I couldn't help comparing these very different approaches to stimulating technological innovation, one through incentives and research funded by a tax on conventional energy producers, the other a set of contests with a juicy prize for the team that meets the specific performance objectives set by the organizers, but nothing for the losers. I'm not suggesting that we should replace our entire present approach to alternative energy R&D with a contest, but it's worth considering what even a small fraction of Prop 87's $4 billion pot could generate if it were devoted to various X-Prizes for energy milestones. Something like this is already in the works in the Congress for hydrogen energy, and the X-Prize Foundation is working on an Automotive X-Prize, so there's ample precedent.

While I admit that I've always been fascinated by space, going back to a childhood spent glued to TV coverage of Gemini, Apollo and Skylab missions, I don't think it's a stretch to compare the challenges of space and energy innovation. Both involve the development of new--and sometimes radically new--technology for which the market and existing infrastructure might not be ready. Both present innovators with tough competition from entrenched incumbent players. The biggest differences relate to the size of the potential market and the relative urgency involved.

The other appeal of this approach lies in its focus on delivering a pre-determined level of performance, rather than funding research that might go anywhere or nowhere, or generally fall short of commerciality. Even without the winner-take-all reward--which isn't so different from the way the market has been rewarding companies, lately--this rigid focus on results is a nice match with the big problems that our energy policies ought to be targeting. What ultimately counts in climate change isn't clever concepts, but tons of emissions avoided. Likewise for energy security, the currency is BTUs produced or saved at a price that beats conventional sources, after factoring in externalities. These issues lend themselves to performance-based technology objectives, along the lines of sequestering carbon dioxide at a total cost below $20/ton, or producing biofuels for less than $1.00/gasoline-equivalent gallon, before taxes and subsidies.

If California's Proposition 87 loses on November 7, I hope its sponsors will regroup and try again. Their next attempt, though, should avoid pitting alternative energy against conventional energy sources--both of which we will need for the foreseeable future. And they should certainly consider incorporating the ideas of the X-Prize, with its specific R&D targets and highly-leveraged incentives for demonstrated results.

By the way, I'd like to address a little housekeeping matter. The number of comments I've been receiving has fallen off significantly in the last month or so, apparently going back to my intervention in a couple of comments I thought were off base. One was a blatant commercial, and the other was an ad hominem response to another commenter, using a euphemism for a portion of anatomy. I erased most of the former and modified the latter, ultimately blanking out the offending term. If this violated some unspoken rule of the blogosphere, I apologize. I never edit comments unless they are profane or obscene, or constitute commercial spam, and I will hold to that standard in the future. On the other hand, if anyone has tried to post a comment and not seen it appear, I would like to know about it. Please email me using the link on this page to inform me of such a sitatuation.

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