There are at least three motivations for government intervention in GHG mitigation: (1) inducing the private sector to reduce GHG emissions directly by setting a price on emissions, (2) increasing the amount of innovative activity in GHG mitigation technology development, and (3) educating the public regarding GHG-reducing investment opportunities, allowing consumers to make better private decisions. This paper discusses the pros and cons of policy instruments that might be used to respond to these motivations and makes recommendations for an appropriate mix of policy instruments over time given both economic and policital/instituional considerations.
Recent scientific assessments have heightened concerns about the severity of the climate change impacts from greenhouse gas (GHG) emissions. Despite calls for urgent action, however, international negotiations regarding GHG emissions control policies are moving slowly and may prove totally inadequate over the next several decades.
A large number of analyses, including several in this volume, have shown that the development of lower-cost GHG-free and low-GHG-emitting technologies can significantly reduce the cost of GHG mitigation, reducing the economic losses associated with limiting emissions and making it more likely that policymakers will pursue effective GHG control policies. However, there is a great deal of uncertainty about how an appropriate level of innovation can be achieved and how much progress can be made, how fast, and at what cost.
One approach to stimulating innovation is to rely primarily on use of externality pricing and the market system to induce profit-oriented firms to develop low-carbon technologies. In that framework, innovation is motivated by taxing GHG emissions under conditions where the industries that produce energy and the industries that produce energy-converting and energy-consuming equipment are approximately competitive, and where the requisite “price signal” is politically feasible. Because such externality prices do not currently exist except for a very small fraction of global emissions, and additionally to address sectors not covered by profit-oriented firms, this paper considers non-market-based innovation policies that can complement these market-based policies. Such supplementary policies will be helpful even if markets are perfectly competitive and the price signal is optimally designed.
The power of markets to pull new, cost-competitive products into the economy and to motivate private firms to push technologies that are reasonably close to being competitive through the advanced development and engineering cycles is incredibly strong. Getting the right price signal for GHG emissions should, therefore, be a very high priority for GHG policy. Nonetheless, I believe that complementary, non-market-based technology advancement policies should be an important element of a strategy for GHG abatement. In a nutshell, the benefits of these “nonmarket” policies result from increasing both the stock of new knowledge and the stock of people in the economy who produce and can use new knowledge, beyond the levels that result from the operation of markets even with the appropriate price signals. Public investment in these resources can actually be quite modest, but the leverage and opportunities these investments can provide, in terms of market outcomes and consumer welfare, can be extremely great.
One motivation for nonmarket policies to stimulate innovation is provided by the “valley of death” metaphor,1 which refers to the fact that many, if not most, ideas developed in research laboratories fail to make it all the way to the marketplace. I believe that the nature of the innovation process probably precludes bridging these “knowledge gaps” between laboratory and marketplace as they occur, but that a targeted applied research program in GHG-reducing technology could substantially increase the number of new ideas that are tried, and that well-thought-out consumer education programs can increase the rate of diffusion of developed products that should be economically viable but have not yet been widely adopted. In other words, the problem seems to be one of too few births and too many infants who need help breathing, not one of too many deaths.
The valley of death may be a tough neighborhood, but a well-designed public program of applied energy R&D may be able to increase the flow of new energy technology ideas to the private sector, and a well-designed consumer education program may help lift some already-developed technologies more rapidly into the marketplace. It will not be easy to run an expanded and sustained government program in applied energy R&D, but even an imperfectly implemented program appears to have the potential to substantially change the energy technology – and the energy systems – of tomorrow. No such program will meet everyone's needs or expectations, but perfection should not become the enemy of the good and useful. One significant question now is whether the recent increase in support for energy R&D will be sustainable after today's federal stimulus spending ends. A one-time infusion of funds with no follow-through would be hauntingly similar to the boom-and-bust energy R&D funding cycles of the past. These are serious challenges that require serious research, dedicated long-term commitments of resources, with long-term planning horizons. Can we be patient? Can we commit to the long term? Time will tell, but the circumstances and drivers, as discussed above, are different now than in the past, creating optimism for potential sustainability in view of the looming challenges — and the consequences of inaction.
Finally, we will need to capitalize on what is good and change what is not good in our institutional approaches to delivering the basis for the technology solutions of tomorrow. This means understanding our innovation processes – all the players and connections – and breaking down the barriers to progress. This all requires leadership from the top, and it appears, at least for the moment, we have just that. That does not mean that we abandon scientific plurality. Our country has been well served by a healthy competition of ideas and innovations. Rather, we need to explore ways to accelerate innovation while funding is potentially available, but funding is by no means the only issue. How we spend what resources we have will ultimately be just as important.
