Common Tragedies

Thoughts on Environmental Economics

The prize is right?

Posted by Rich Sweeney on October 18, 2007

In my rundown of the the Democratic contenders’ environmental platforms last week I mentioned that I’d have a follow up post on Barack Obama’s idea about using cash prizes to promote energy innovation. This is something I’ve been interested in for a few years now, although mainly in the context of pharmaceutical innovation. Recently, however, I’ve become increasingly convinced that energy markets in the face of global climate change present just the type of problem that prizes might be good at solving.

For a good introduction to prizes for technological innovation, see Thomas Kalil’s recent Hamilton Project discussion paper. Basically, prizes are useful when the end goal is easily defined but the means of achieving that goal are too speculative to be reasonable for a traditional research program or procurement. Prizes can also have the added benefits of raising public awareness of and excitement about an issue, and attracting new teams with fresh ideas to the market in question. Finally, prizes sever the often counterproductive link between R&D and production. This becomes a problem when the the reward (or profit) a firm can extract from selling a new product it develops is lower than the benefit this innovation provides to society. In the pharma example, many drugs that address disproportionately “poor” ailments never come down the pipeline because drug companies know that their target markets won’t be able to afford them. However, politicians in the west might realize positive externalities (security, morality, etc) from avoiding suffering in the developing world, and could commit to purchase a given cure up front to secure their fruition.

Of course prizes also have limitations. First of all, participants are still partially limited by their ability to raise capital to do the research. Second, prizes are more likely to lead to duplication of effort, which could be costly from a societal perspective. Finally, and I believe most importantly, it can be very difficult to define success. Defining success too loosely wastes resources and could limit future innovation by forcing society to commit to a suboptimal solution. On the other hand, defining success to narrowly undermines both the “open-canvass” spirit of the prize as well as the enthusiasm/ interest of possible participants.

Given these very basic pros and cons, can anyone think of any energy/ environment related ends that might be well suited for a governmental prize? I’ve been thinking about the possibility of carbon capture and sequestration (CCS) just because currently there seem to be preverse disinsentives for companies with already built coal plants to do the necessary R&D. Relatedly, one thing that’s come up recently in post-Kyoto talks is the need for the developed world to commit to transfer green technologies to places like China and India. It seems like this would be much easier if said technologies were the results of governmental contests, as the government could then do whatever it wanted with them.

Anyone have any other ideas?

4 Responses to “The prize is right?”

  1. greg claxton said

    I’ve been thinking about the possibility of carbon capture and sequestration (CCS) just because currently there seem to be preverse disinsentives for companies with already built coal plants to do the necessary R&D.

    Really? As the feds come increasingly close to regulating greenhouse gas emissions, CCS seems like a must-have backup strategy for companies with coal plants. Given that they’re a mature industry, it’s never seemed to me that they need assistance or incentives in finding a way for their product to survive.

    I don’t know enough about this side of things, but one area that seems like it might need more and faster improvement than the private sector can do is infrastructure change-over for distributed generation. But that may look a little too much like picking winners (distributed versus centralized generation). On the other hand, better D.G. infrastructure might make better sense in the context of developing countries.

  2. Daniel Hall said

    Following on from Greg’s comment about developing countries, I wonder if there is a place for prizes when we are considering problems that don’t have purely technical components, but also include institutional, cultural, or social aspects. I think it’s clear in this case that there are under-incentives for investment, since you can’t typically patent institutional or cultural solutions to a problem.

    Think of trying to increase electrification in Africa, but doing so in a way that doesn’t exacerbate greenhouse gas emissions. This might have a technical component, but effective solutions involve solving institutional barriers as well (or perhaps even in the main).

    I think initially people thought carbon markets and offset programs — the Clean Development Mechanism, etc. — would create some of this clean technology investment in the poorest parts of the world, but the reality has been that it’s hard to capitalize on investments when there’s no market to start with, and it’s hard to demonstrate that an offset project is “additional” when you’re building entirely new generation. (What’s the relevant baseline?)

    Maybe we could use prizes to create incentives for these multi-disciplinary problems.

  3. Daniel Hall said

    Oh, and this is a side-note, but my impression is that one of the biggest things that needs to be done to encourage CCS is to clarify the rules of the game: establish a stable regulatory framework, define liability, etc. Prizes may have their place, but clear laws are a necessary condition for investment.

  4. I just want to direct people to the Automotive X-Prize, which is still in development. The prize will likely be greater than $10 million (thankfully, that even seems low). The draft guidelines set some criteria for a winning team:

    –Fuel economy (energy efficiency): at least 100 MPGe

    –Total(wells-to-wheels3) Greenhouse Gas (GHG) emissions expressed as equivalent grams of CO2 per mile: no more than 200 g/mi

    –Criteria emissions: no worse than US EPA Tier II, bin 5 standards

    –GHG emissions from vehicle production no worse than typical vehicles in production today.

    I’m not sure if this is really how this issue ought to be handled, but given the long lag time involved in fuel-efficent technology diffusion, it might not be bad. And if it will encourage a few more endeavors like Tesla Motors, then great.

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