Friday, April 23, 2010

Eating the Seed Corn

Some days it's hard to find a salient topic on which to blog. Today I'm spoiled for choice but wish I weren't, at least in the case of one of the three I considered. The full implications of the Deepwater Horizon disaster won't be known until rescue efforts end, the well is brought under control, and the resulting oil spill contained. That doesn't prevent speculation and knee-jerk responses, but I'll reserve my analysis until the facts are clearer. Meanwhile, the EU has been forced to release yet another study finding that many biofuels could be worse for the environment than the petroleum products they are intended to replace. I'll say more about the issues that raises, soon. For today, I want to focus on the challenge that Bill Gates highlighted in an op-ed published in today's Washington Post, concerning the need for significantly more energy R&D spending by the US government.

Since recently turning his attention to energy, Bill Gates has made some astute observations about it, while falling into few of the traps that await those attempting to transfer their high-tech experience to this much larger, more basic industry. Past remarks suggest he grasps the scale of the problem. His recommendation for more innovation and explanation for why energy R&D has been underfunded by the public and private sectors are apt, though I'm less sure that the R&D investment rates of firms whose business is selling technology provide quite the right basis of comparison for an industry that produces vast quantities of interchangeable commodities. Nevertheless, he's right that discovering and developing revolutionary energy technologies is beyond the scope of most companies that operate on a scale to be able to afford the sums required. Most R&D by major oil & gas or power generation companies is devoted to improving what they're already doing, for good reasons. Things that don't deliver prompt results inflate costs without providing immediately-offsetting benefits, making companies pursuing such efforts less competitive in the market and often less attractive to investors.

Government doesn't have these constraints, and historically it has been a relatively uncontroversial role of government, even in the US, to devote significant resources to long-term projects. (The old Bell Labs looks like an exception, until you consider that most of its truly ground-breaking work in basic science was undertaken when its corporate parent functioned as a tightly-regulated monopoly--effectively an extension of government.) Mr. Gates suggests that spending less than $3 billion per year on clean energy research is inadequate, and I must agree. However, Gates stops short of explaining that the federal government already spends much more than that on clean energy, but that most of it is focused on the deployment of current technologies. As of its most recent update, the US Treasury had issued more than $3 billion in Renewable Energy Grants to wind, solar, biomass and geothermal project developers under the stimulus, and this is just a fraction of what the government is now spending on direct and indirect subsidies, tax incentives, loans and loan guarantees to support the deployment of corn ethanol and advanced biofuels; wind turbines, solar panels and the factories to make them; factories to build electric vehicles and the advanced batteries to power them; as well as new nuclear power plants, to name a few.

The innovation imperative articulated by Bill Gates thus stands in tension with a range of policies focused on overcoming the market barriers that current alternative energy technologies face. For some of these technologies, the case for providing temporary subsidies to enable them to become sufficiently established to benefit from economies of scale and experience-curve effects is solid. The same can be said for assisting a new generation of nuclear power plants that are so expensive that no company can risk its entire future to build the first one. This logic is much less compelling for conventional biofuels that are still not competitive without subsidies that are now in their fourth decade, or federal loans to finance EV factories for companies that have made just a handful of hand-built cars in their entire existence.

Without a major new funding source dedicated to long-term federal energy R&D, and in an era of increasingly-unsustainable budget deficits, the choice between energy R&D and the deployment of existing energy technologies becomes a zero-sum game. Eating the seed corn in this manner is indefensible, particularly when we realize that deploying today's technologies is very unlikely to yield a technology breakthrough of the kind that real energy transformation will ultimately require. While hardly simple or easy, the remedy is relatively obvious. If we agree that we need more federal research on new energy technologies that could supplant conventional energy sources on the basis of superior performance, and not just lower emissions, then we must wean current alternative energy technologies off massive subsidies as quickly as possible--in a few years at most, except for those that have been feeding at the federal trough for decades. Those should begin to be phased out at once. And if we agree that climate change is a serious risk that we must address urgently, then putting a price on the emissions contributing to it would ensure that the companies making and installing today's wind turbines, solar panels, and other technologies would have a decent chance of surviving the elimination of the direct subsidies upon which they depend, but that will eventually squeeze out R&D spending.

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