Common Tragedies

Thoughts on Environmental Economics

Technology Policy: Part 1

Posted by Evan Herrnstadt on October 31, 2007

I attended the Brookings event with Daniel. The panel was quite impressive, as noted in Rich’s earlier post. The first discussion was a quasi-debate between Rob Stavins of the Kennedy School and Gilbert Metcalf of Tufts University as to the merits and deficiencies of permit trading versus a carbon tax. Daniel addressed this issue hours before the event in a recent post. Hence, I will skip ahead to the second panel which dealt with energy technology policy. The presenters were John Deutsch, John Podesta, and Richard Newell.

Deutsch outlined five key initiatives for improving federal energy research, development, and demonstration (RD&D) policy. The efforts would include:

(1) The creation of an Energy Innovation Council.

(2) A significant increase in the federal energy RD&D budget

(3) A sustained effort on base technologies

(4) The establishment of an Energy Technology Corporation

(5) Increased investment in relevant human capital.

All but (4) are pretty straightforward proposals. However, the ETC, which seems to have become Deutsch’s pet project (especially for CCS coal, which he sees as crucial) is less of a sure thing. He pointed out that it will not mirror the structure of the U.S. Synthetic Fuels Corporation (SFC). The SFC was established by the government in 1980 to produce 500,000 barrels/day of synfuel as a backstop technology; it was anticipated that oil would reach $80-100/barrel. Of course, this never happened, and the SFC folded. Deutsch correctly pointed out that the ETC would not work this way.

The ETC has some strengths that would surely spur on success. However, its weaknesses might contort the actual nature of its impact. The ETC would be established by a single Congressional endowment, thus insulating it somewhat from the pressure of annual appropriations. It would be flexible and exempt from civil service requirements, which would allow it to contract with consortia and universities and offer competitive packages to highly-skilled researchers. However, it would still be vulnerable to review and dissolution every few years. At this point, it would probably be under pressure to display high rates of return. Paradoxically, meeting this criterion might indicate that the ETC was straying toward technologies that are already too ready for commercialization.

Podesta discussed the creation of an Advanced Research Projects Agency: Energy, or ARPA-E. ARPA-E has been at times outlined as a haven for transformational innovation (NAS 2005), a place to turn basic research into applied technologies (H.R. 364), and a nebulous entity to overcome innovation risk (S. 761) derided by President Bush as encroaching on the private sector development. In any form, it would likely contract out research and not maintain labs of its own.

If we are concerned about a lack of energy-relevant basic research, then establishing ARPA-E to fill this void casts DARPA as a seemingly obvious analog. DARPA was originally established to create a somewhat independent entity that could work on transformational defense innovations without worrying about impressing Congress come budget time. As the tension between risky, revolutionary research and shorter-term results has grown, DARPA has shifted toward more applied work. Consider that this has occurred even as DARPA has enjoyed the strong support of Congress and the White House, a luxury ARPA-E may not be able to count on. As noted by Lee Lane in Congressional testimony, ARPA-E might be forced to work toward immediate results in the face of a looming energy price and security crisis.

If ARPA-E is intended to fill the so-called “valley of death” between basic research and the development stage, then we might see more success in the DARPA tale. There is a clear private disincentive to performing early-stage applied research; potential end users are tempted to wait on DARPA to do as much risk-minimizing (and spillover-creating) research as possible before taking on the project. This has forced DARPA to incur costs on activities that seem beyond its chartered scope. Hence, a key aspect of DARPA project management has been involving potential end users in the nascent stages of development. In doing this, fundamental concepts are escorted across the “valley” between conception and application. However, DARPA has had the benefit of a network of assured buyers in the U.S. Military. The decentralized nature of energy technology deployment all but ensures that ARPA-E will not find itself in this situation.

I will address Richard Newell’s comments in another post tomorrow.

Update: Part 2 here.

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