Clean Energy Investment Must Change - Reward Innovation not Production

Over the last five years, the world's largest nations collectively engaged in a massive policy experiment: what happens when governments triple the historic rate of public investment in clean energy?

In the U.S., taxpayers will have spent $150 billion between 2009 and 2014, three times more than we did between 2002 and 2007, according to a comprehensive new report, Beyond Boom and Bust, co-authored by Breakthrough Institute with scholars from World Resources Institute and the Brookings Institution.

The U.S. wasn't alone. China increased its clean tech spending to $80 billion per year. Europe has had high levels of investment in clean energy since before the recession. And rather than crowding out, these public investments attracted a huge amount of private investment -- $774 billion between 2008 and 2011, up from $320 billion between 2004 and 2007.

The two of us have been critical of how some of the green stimulus money was spent. Big investments to weatherize homes ended up creating few jobs and didn't have much impact on the nation's energy demand. Patchwork and overlapping subsidies and regulations allowed some rent-seeking firms to double-dip. Too much was spent on deployment and too little (less than 20 percent) was spent on energy R&D, which at under $5 billion a year is grossly underfunded compared to NIH's $30 billion and DOD's $80 billion R&D budgets.

But as blunt as many of the renewables subsidies were, they still helped cause an astounding 75 percent decline in the price of solar panels, and a 27 percent decline in the price of wind turbines, from 2008-2012. By contrast, from 2002 to 2008, the price of both solar panels and wind turbines was flat.

The progress with renewables was not the first time big increases in public investment for new energy technologies accelerated technological innovations that in turn resulted in steep price declines. From the U.S.-led shale gas revolution beginning in the mid-70s, to France's standardization of nuclear reactors in the '80s, to the deployment of large, off-shore wind turbines by the Danish government in the '90s, history is replete with such examples.

The episode challenges the assumption that pricing carbon is the key to technology innovation. Europe has imposed a carbon price on much of its economy for almost a decade, but Germany's solar boom, and the dramatic declines in the cost of solar panels that it helped cause, was driven by subsidies, not carbon pricing. The carbon price equivalent of Germany's solar feed-in tariff is a whopping $680 per ton, 36 times higher than the EU carbon price.

And had we made coal slightly more expensive through carbon pricing back in the 1970s, it would not have resulted in today's shale gas revolution. Real world barriers, like the need for complicated new mapping and fracking techniques, and the risk of not being able to capture one's investment, would still have existed.

But if some liberals are obsessed with carbon pricing, much of the right has a double standard when it comes to renewables.

Conservatives are correct that some amount of the decline in price of solar and wind is likely due to over-production in China, and that the fundamental obstacles to scaling up renewables remain. While in some sunny and windy places renewables are cost-competitive without subsidies, they still remain more expensive than fossil energy in most places. Their growth is constrained by their intermittency, the cost of new transmission, and other real world barriers. Developing nations in particular still need a lot of new baseload power in order to grow.

Still, it's hard to take House Republican objections to the wind production tax credit very seriously. In the one breath they condemn the wind production tax credit and in another they sing of the gift of today's cheap shale gas -- gas that exists in no small measure due to a federal production tax credit that lasted over two decades.

At the same time, intelligent conservatives do distinguish between what they view as worthwhile government funded research and demonstration projects -- true public goods -- and blanket deployment, which risks supporting rent-seekers and stifling innovation.

Whether or not the wind tax credit is renewed later this year, all governments need to get smarter about how they support clean energy. We need to reward innovation, not production. Energy innovation funding models should borrow more from the military's success in purchasing advanced microchips and jet turbines than from unending agricultural crop supports.

The positive response to Beyond Boom and Bust gives hope that subsidy reform focused on rewarding innovation could be bi-partisan.

"It's clearly against our national interest to engage in long-term subsidies where the moment you pull the subsidy, businesses fail," McKie Campbell, the Republican staff director for the Senate Energy and Natural Resources Committee, told the Wall Street Journal, "You basically have to make things cost competitive or they aren't going to work."

By. Michael Shellenberger and Ted Nordhaus

This article was published with permission from The Breakthrough Institute