Common Tragedies

Thoughts on Environmental Economics

More lessons from health care innovation

Posted by Evan Herrnstadt on November 15, 2007

Update: at the risk of making our comments obsolete, I’ve changed the title of this post to reduce the amount of spam our blog will be receiving in the future.  Ah, blog and learn I suppose.

As I established in my post earlier today, the NIH is clearly effective in spurring basic health research and provides a good example for energy. However, basic research is only part of the story. Tyler Cowen notes in regard to health innovation, that “companies must work very hard to translate basic research into usable applied forms and the U.S. is a clear world leader in this regard.” Apply this to energy. Say we successfully pour a whole ton of money into basic research through the DOE, or “NIE”, or whatever. The esoteric theoretical physics and chemistry underlying many of our favorite energy technologies are not directly sending current into my house. No, the ideas actually have to be developed into commercial technologies, and this needs to happen through some sort of technology transfer.

Enter our nation’s outstanding network of universities (from Jonathan Cohn):

The great breakthroughs in the history of medicine, from the development of the polio vaccine to the identification of cancer-killing agents, did not take place because a for-profit company saw an opportunity and invested heavily in research. They happened because of scientists toiling in academic settings. “The nice thing about people like me in universities is that the great majority are not motivated by profit,” says Cynthia Kenyon, a renowned cancer researcher at the University of California at San Francisco. “If we were, we wouldn’t be here.”

Ummm, right. Tyler knocks Kenyon’s Mother Teresa hat right off of her head, pointing out the numerous arrangements between drug companies and universities. Apparently she forgot about the Bayh-Dole Act. This is not to imply that this sort of thing is bad, especially in the world of energy innovation. Joint research programs mean that we get to combine some of our brightest, most tenured minds with price signals and market incentives. It also means that the private partner is more familiar with the technology when the basic and early applied stages are over. For example, Toyota and the University of California system have embarked on a joint venture to develop and improve a potential factory version of a Prius plug-in hybrid.

In the energy sector, that final step of development and deployment must generally involve the private sector in a significant way. At this point in the innovation process, spillovers are minimal and we are probably best off to letting the markets decide the fates of specific technologies. However, as always, we still have market failures. For instance, information asymmetries in the credit market can deny capital to entrepreneurs with good ideas. The government should address this with instruments like loan guarantees (but not on ethanol plants, John Edwards — I said good ideas).

At the end of the day, I have to reiterate that any energy technology program is going to be most effective when paired with a carbon price. This has an obvious analog in the world of health care. Spending preposterous amounts of money developing drugs for things like high blood pressure or sexual dysfunction is completely economically viable. These are, frankly, drugs designed largely for the rich (not that I’m implying anything about Bill Gates). However, designing drugs for diseases like malaria is considerably less profitable, as the target population is living on two bucks a day. Similarly, a new low-carbon energy technology is obviously more likely to be developed and brought to market if it receives an implicit subsidy relative to coal and natural gas. Although the mechanisms aren’t at all the same, the innovator sees the same type of incentive.

Like all aspects of the future of energy, R&D policy is extremely complex. I hope I’ve been able to shine some light on many of the issues without actually providing any solutions. It’s what I do best.

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7 Responses to “More lessons from health care innovation”

  1. Daniel Hall said

    I’m confused: Are fossil fuels like Viagra, or is it wind power? If Viagra gets developed because of old guys with “preposterous amounts of money” isn’t the analog that wind will get developed if we put a price on carbon, so wind power becomes more profitable?

  2. I meant that currently wind power is like malaria drugs: useful, but not as heavily invested in because the market incentives (cost competitiveness in the energy case, profitability in the drug case) skew toward other technologies. I see a carbon price as analogous to a Gates Foundation grant for cheap malaria or HIV drugs. Poorly worded, I agree.

  3. Rich Sweeney said

    Evan’s title was clearly just a shameless ploy to increase site traffic. As if I don’t already get enough spam.

  4. Daniel Hall said

    I meant that currently wind power is like malaria drugs

    Ok, but this analogy is kinda silly. There are actually different markets for Viagra and malaria drugs, which is why people are paying different things for them. Electricity, on the other hand, is a commodity; it doesn’t matter how it was generated. (Well, I mean, maybe there are people out there whose dicks get hard thinking about their coal-fired power, but I really hope not.)

    The major point, as I see it, is that government needs to subsidize R&D (basic and applied) because of the spillovers. This is like the NIH. Then to get things deployed we need the private investment — they really know, after all, what is going to work in the market. This is a lot more like the drug companies.

    So if we’re talking about wind power, the question is getting the market right — in the sense of correcting the externality of unpriced fossil fuel emissions — so that private investors will have incentives to deploy it.

    But now that I’ve come to the end of my argument, I’m actually going to kind of agree with your analogy about malaria drugs, in this sense: government R&D support would be like research funding to develop the drugs. The carbon price would be more like a “promise to purchase” incentive from the government for the drug. (The deployment incentive.)

    I guess the phrase I really had trouble with in your original post was this: “a new low-carbon energy technology is obviously more likely to be developed and brought to market if it receives an implicit subsidy relative to coal and natural gas.

    You probably didn’t mean it quite the way it sounded, but I wanted to clarify that the correct way to get stuff deployed is not to make the low-carbon technologies cheap by subsidizing their deployment, but by making the carbon-intensive technologies expensive by making them pay the social costs of their use.

  5. Evan Herrnstadt said

    I don’t have to defend myself, Rich. But I will anyway.

    I could have put “lindsay lohan” in there too, but I restrained myself. One of the most valuable things my political science methods prof taught me was that while quality of research is important for publication, having a gimmicky title doesn’t hurt.

    Also, I guess putting lindsay in the comment section is just as good anyway.

  6. Evan Herrnstadt said

    You probably didn’t mean it quite the way it sounded, but I wanted to clarify that the correct way to get stuff deployed is not to make the low-carbon technologies cheap by subsidizing their deployment, but by making the carbon-intensive technologies expensive by making them pay the social costs of their use.

    Precisely. Poor wording on my part. The whole analogy was kind of half-baked I guess, but I saw a (potentially) nice connection between health and energy and unfortunately was doing my job while simultaneously trying to post.

    You guys are so mean. I’m not inviting you to my birthday party now.

    Honestly, I did think about dropping the last paragraph or so, but I just love sex jokes too much. Also, poop jokes, but I’ve got to save something for my next post.

  7. Daniel Hall said

    I just love sex jokes too much. Also, poop jokes

    Do we just need to go ahead and list George Carlin’s 7 words you can’t say and get it out of the way?

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