CHAPTER FIVE
Fostering Technological Innovations

Any successful strategy to significantly reduce greenhouse gas (GHG) emissions will require actions not only to deploy low-emission technologies that are available now but also to foster innovations on new technologies, many of which have not yet been invented, commercially developed, or adopted at a significant commercial scale. Indeed, a study by the Pew Center on Global Climate Change (Alic et al., 2003) concluded that “large-scale reductions in the GHGs that contribute to global climate change can only be achieved through widespread development and adoption of new technologies.” Accordingly, much interest in recent years has focused on ways to foster innovation and, in particular, on the role that governments can and should play in that process.


Although research and development (R&D) is a major element of the innovation process, there is growing recognition that technological change requires more than just R&D. Rather, “technological innovation is a complex process involving invention, development, adoption, learning and diffusion of technology into the marketplace. Gains from new technologies are realized only with widespread adoptions, a process that takes considerable time and typically depends on a lengthy sequence of incremental improvements that enhance performance and reduce costs” (Alic et al., 2003).


What strategies and policies can most effectively foster technological innovations that help reduce future GHG emissions, both domestically and globally? To answer this question, this chapter explores the ways in which technological innovations can affect future GHG emissions, the nature of the technology innovation process and the factors that influence it, and the roles of government and the private sector in bringing about desired innovations and changes in technological systems.

THE ROLE OF TECHNOLOGICAL INNOVATION

As discussed in Chapters 2 and 3, GHG emissions depend strongly on the types of energy sources and technologies that are used to provide the goods and services that society seeks. Technological innovations can thus affect GHG emissions in many different ways. For example, new or improved technologies can



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CHAPTER FivE Fostering Technological Innovations A ny successful strategy to significantly reduce greenhouse gas (GHG) emissions will require actions not only to deploy low-emission technologies that are avail- able now but also to foster innovations on new technologies, many of which have not yet been invented, commercially developed, or adopted at a significant commercial scale. Indeed, a study by the Pew Center on Global Climate Change (Alic et al., 2003) concluded that “large-scale reductions in the GHGs that contribute to global climate change can only be achieved through widespread development and adoption of new technologies.” Accordingly, much interest in recent years has focused on ways to foster innovation and, in particular, on the role that governments can and should play in that process. Although research and development (R&D) is a major element of the innovation pro- cess, there is growing recognition that technological change requires more than just R&D. Rather, “technological innovation is a complex process involving invention, devel- opment, adoption, learning and diffusion of technology into the marketplace. Gains from new technologies are realized only with widespread adoptions, a process that takes considerable time and typically depends on a lengthy sequence of incremental improvements that enhance performance and reduce costs” (Alic et al., 2003). What strategies and policies can most effectively foster technological innovations that help reduce future GHG emissions, both domestically and globally? To answer this question, this chapter explores the ways in which technological innovations can affect future GHG emissions, the nature of the technology innovation process and the factors that influence it, and the roles of government and the private sector in bringing about desired innovations and changes in technological systems. THE ROLE OF TECHNOLOGICAL INNOVATION As discussed in Chapters 2 and 3, GHG emissions depend strongly on the types of energy sources and technologies that are used to provide the goods and services that society seeks. Technological innovations can thus affect GHG emissions in many differ- ent ways. For example, new or improved technologies can 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E 400 350 Reference 300 Advanced 250 $/ton CO2 200 150 100 50 0 2020 2035 2050 Year FIGURE 5.1 A model projection of the future price of CO2 emissions under two scenarios: a “reference” case that assumes continuation of historical rates of technological improvements, and an “advanced” case with more rapid technological change. The absolute costs are highly uncertain, but studies clearly indicate that costs are reduced dramatically when advanced technologies are available. SOURCE: Adapted from Kyle et al. (2009). Figure 5.1 and Summary 3, editble • enable a device—whether a vehicle, machine, or appliance—to use energy more efficiently, thereby reducing its energy use and GHG emissions per unit of useful product or service (such as a vehicle mile of travel). • create or utilize alternative energy carriers and chemicals that emit fewer GHGs per unit of useful product or service (e.g., renewable energy or new fertilizers). • create alternative means of meeting needs, in ways that are less GHG-in- tensive, for instance, by using substitute products or materials, by changing agricultural practices, or by making broader systems-level changes such as replacing vehicle and air travel with teleconferencing, or using Internet-based delivery services in lieu of traveling to a store. Efforts to stimulate technological innovation must be broad enough to affect this full range of possibilities and may also encompass innovations in social and institutional 

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Fostering Technological Innovations systems that help reduce energy demand and GHG emissions (for instance, through innovations in urban planning and development). Figure 5.1 shows one estimate of how technological innovations can reduce the future cost of GHG emissions reduc- tion. In this modeling study, a “business as usual” case—which assumes a continuation of historical rates of technological improvements—is compared to a case with more rapid technological change. The cost of meeting a stringent emissions-reduction re- quirement is reduced dramatically when “advanced technologies” are available. THE PROCESS OF TECHNOLOGICAL CHANGE Technological innovation is a component of the broader process of technological change, which involves a number of stages (Figure 5.2). Different terms are used in the literature to describe these stages, but four commonly used descriptors are Invention: Discovery; creation of knowledge; new prototypes. Innovation: Creation of a commercial product or process. Adoption: Deployment and initial use of the new technology. Diffusion: Increasing adoption and use of the technology. The first stage is driven by R&D, including both basic and applied research. The second stage—innovation—is the term often used colloquially to describe the overall process of technological change. But, as used here, innovation refers only to the creation of a commercially offered product or process; it does not mean the product will be ad- opted or become widely used. That requires the product to pass successfully through the last two stages—adoption and diffusion. Those two stages are inevitably the most critical to reducing GHG emissions. Large-scale change also must be considered from a “systems” perspective, because the success of any new technology is often dependent upon many other technological and nontechnological factors. Rather than being a simple linear process, the different stages of technological change are highly interactive, as depicted in Figure 5.2. Technological innovation is stimulated not only by support for R&D but also by the needs and opportunities that emerge from the experience of early adopters, and from the knowledge and experience gained as a technology diffuses into the marketplace. Thus, “learning by doing” is often critical to the adoption and diffusion of new technologies by helping to improve their performance and/or reduce their cost (a process commonly characterized as a learn- ing curve). 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E Diffusion Adoption Innovation Invention (improved (early users; (new or better technology) product) niche markets) Learning Learning R&D By Doing By Using FIGURE 5.2 Stages of technological change and their interactions. The processes of adoption and dif- fusion typically involve a continuing series of inventions and innovations that require new research and development. SOURCE: Rubin (2005). Each stage of the process requires different types of incentives to promote the overall goal of technological change. An incentive that works well at one stage of the process may be ineffective—or even counterproductive—at another. In particular, the wide- spread adoption and diffusion of a new technology may require addressing social and institutional issues that affect the nature and pace of technological change (see earlier discussion of this topic in Chapter 3). Figure 5-2, editable The Essential Role of Markets In the U.S. economy, most production is by private firms and most output is sold to purchasers in the private sector. The existence of a market is thus critical to the adop- tion and diffusion of a new technology—and thus to the process of technological innovation. This is true even in cases where the government is the primary customer— for instance, in the procurement of military technology. Indeed, government procure- ment has been a critical tool for enabling new technologies to enter the market (jet aircraft and electronic computers are two prominent examples). Some technologi- cal innovations create new markets or expand existing ones, as exemplified by cell 0

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Fostering Technological Innovations phones and other electronic devices. While R&D may play a critical role in the develop- ment of such innovations, R&D alone is not sufficient; there must also be a market for the technology. A major challenge in reducing GHG emissions is that few if any markets exist for many of the needed low-emissions technologies. What utility company, for example, would want to spend money on carbon capture and storage if there is no requirement or incentive to reduce emissions? How many individuals would willingly buy a more fuel- efficient automobile costing far more than a conventional vehicle in order to reduce their carbon footprint? Costly actions by firms or individuals to reduce GHG emissions provide little or no tangible value to that firm or person. Only government action that requires or makes it financially worthwhile to reduce GHG emissions can create sizeable markets for the products and services that enable such emissions reductions. Government actions to create or enhance markets for GHG emissions-reducing tech- nologies are thus a critical element of the technological innovation process. The Influence of Government Policies Different policy measures influence technological innovation in different ways. Table 5.1 shows a set of commonly employed technology policy options (includ- ing several that were discussed in Chapter 4) that help create markets by providing voluntary incentives for technology development, deployment, and diffusion. It also lists policy options to impose mandatory regulatory requirements, which may be economy-wide or targeted to certain sectors. Studies have documented the ability of regulatory policies to stimulate innovations that reduce GHG emissions; for instance, energy-efficiency standards for appliances such as refrigerators (Rosenfeld and Akbari, 2008), emissions and fuel economy standards for automobiles (Lee et al., 2010), and new source performance standards for power plants (Taylor et al., 2005). These policies create or expand markets for lower-emission technologies by imposing requirements on manufacturers and industrial operations. The policy options outlined in Table 5.1 are revisited later in the chapter in considering current needs for fostering technologi- cal innovation. Major technological changes in the U.S. energy system and other sectors will be needed to reduce GHG emissions significantly, and this will require an infusion of financial and human resources to support each phase of the process depicted in Figure 5.2. Resources that are critical for technology innovation include money for R&D and people with the requisite training, skills, and creativity to innovate. Below we review current U.S. resources in these areas and estimate the magnitude of new 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E TABLE 5.1 Policy Options That Can Influence Technology Innovation “Technology Policy” Optionsa Regulatory Policy Options Direct Government Direct or Indirect Economy-wide Measures Funding of Support for Knowledge and Sector or Technology- Knowledge Commercialization Diffusion and Specific Regulations and Generation and Production Learning Standards • &D contract • R&D tax credits • ducation • Emissions tax R E • Patents • ap-and-trade with private and training C • Production • odification firms (fully C program • erformance funded or cost subsidies or tax and diffusion P shared) credits for firms of technical standards (for • &D contracts R bringing new knowledge emission rates, and grants with technologies to (e.g, via efficiency, or nonprofits market interpretation other measures of • ntramural R&D • ax credits, I T and validation performance) • Fuels tax in government rebates, or of R&D results; • Portfolio standards laboratories payments for screening; • &D contracts R purchasers and support for with consortia or users of new databases) • echnical collaborations technologies T • overnment G standards • echnology/ procurement of T new or advanced industry technologies extension • emonstration D programs • ublicity, projects P • Loan guarantees persuasion, • Monetary prizes and consumer information a Based on CSPO and CATF (2009). financial and “human capital” resources needed to support a major initiative on GHG- related technological innovation. In addition, accelerating technological innovations that reduce GHG emissions will require a variety of policy drivers—to promote R&D, to help commercialize and bring new technologies to the marketplace, and to establish and expand markets for low-GHG technologies. Thus, we also review below current U.S. policies available to support these objectives. Based on the findings from this review, we suggest additional policy measures that are most needed. 

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Fostering Technological Innovations RESOURCES CURRENTLY AVAILABLE FOR TECHNOLOGY INNOVATION This section presents current and historical data on funding for R&D in the United States, especially energy-related R&D, and examines trends in workforce training and employment data related to R&D. Where appropriate, comparisons are drawn with other (nonenergy) industries, and with other industrialized countries, to provide ad- ditional perspectives on resources currently devoted to or needed to support techno- logical innovations that reduce GHG emissions. Federal Funding for Energy-Related R&D According to the National Science Foundation (NSF), federal spending for nondefense R&D in fiscal year (FY) 2008 totaled $55.9 billion (equivalent to $46.2 billion in FY 2000 dollars, the base year used by NSF to report historical trends) (NSF, 2008). Of this, en- ergy R&D accounted for $1.2 billion (FY 2000 dollars), or 2.6 percent of the total. This is a sharp decline from FY 1980, when the budget authority for energy R&D totaled $6.8 billion—approximately 25 percent of all federal (nondefense) R&D spending that year (Figure 5.3). Contrast this to the trend in federal R&D devoted to health over the same period of time (FY 1980 to FY 2008), which grew from $7.0 to $24.2 billion (from about 25 percent to 52 percent of all federal nondefense R&D spending). The decline in federal energy R&D spending—both in absolute terms and as a per- centage of all federal nondefense R&D—reflects the decline in energy as a national priority after the 1970s. In large part this reflects the sharp drop in world oil prices and the increased availability of natural gas supplies in the 1980s and 1990s. During this period, the U.S. economy also underwent structural shifts away from energy-in- tensive heavy industries toward light industries and service sectors that reduced the national energy needs for economic growth. However, the reemergence of energy as a national priority in recent years has not yet been reflected in a rebalancing of federal R&D spending. By way of illustration, it would require a 20-fold increase in the FY 2008 level of federal energy R&D spending to equal federal health R&D spending, a sixfold increase to equal federal space R&D spending, and a fivefold increase to equal federal “general science” R&D spending. Recently there has been some increase in energy-related funding. Figure 5.4 shows Department of Energy (DOE) budget authority for R&D (excluding support for basic energy sciences) from FY 1980 through the FY 2010 budget request (Gallagher and Anadon, 2009). The column labeled “ARRA” shows the funding appropriated in the 2009 American Recovery and Reinvestment Act, which (unlike the annual budget fig- 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E 30 .0 Health 25 .0 Space Energy General science F undin g ( bi llions ) 20 .0 Other 15 .0 10 .0 5.0 0.0 19 80 19 85 199 0 1995 20 00 2 005 F is c al Y e a FIGURE 5.3 Federal R&D budget authority by budget function: 1980-2008 (in billions of year 2000 dol- lars). Over the past decade or so, expenditures for energy R&D have dropped, and they are much lower than for other key areas of science and technology. SOURCE: NSF (2008). ures in the other columns) appropriated funds to be spent over the next 2 to 5 years. Indeed, the FY 2010 budget request (last column) was devised to complement funds provided by ARRA. Note too that the ARRA provides funding for a new programmatic initiative, ARPA-E (Advanced Research Projects–Energy), as well as $3.4 billion for vari- ous clean coal projects. Figure 5.4 shows that, on an annual basis, total federal energy R&D spending has begun to grow in the past few years, but it is still well below (roughly half ) its 1980 level. The figure also illustrates the shifting of priorities within the federal energy R&D budget over time. For example, funding for research on nuclear fission fell from about $1.5 billion (FY 2000 dollars) in 1980 to nearly zero in 1998, before beginning to rise again in 2002. Other categories of spending also experienced wide fluctuations during this 30-year period. It is also instructive to benchmark U.S. government spending on energy R&D against that of other industrialized countries. To account for the different sizes of national economies, Figure 5.5 (developed from data published by the International Energy 

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Fostering Technological Innovations 7000 RE -E NERGYSE AR PA-E 6000 El ec tricity T &D Fossil including CCS demo 5000 Renewables Hydrogen EE RE 4000 Effi ciency Mill io ns Fusion 3000 Fission 2000 1000 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2009 ARRA Year FIGURE 5.4 DOE budget authority for energy R&D: FY 1980 to FY 2010 request (in millions of year 2000 dollars). Although annual federal R&D spending for energy has begun to grow in the past few years, it is still well below its 1980 level. SOURCE: Gallagher and Anadon (2009). Agency [IEA]) shows government energy R&D spending as a share of gross domestic product (GDP), comparing the United States and Japan from 1974 through 2008 (IEA, Figure 5.4 editable 2009a). Both countries increased federal energy R&D spending in response to the oil shocks of the 1970s, then decreased funding in the 1980s when the crisis subsided. The reduction in U.S. spending, however, came earlier and was larger and more pro- longed than in Japan. Since around 1990, Japan’s energy R&D spending as a share of its GDP has remained at about 0.08 to 0.10 percent. In contrast, U.S. spending as a share of GDP continued to fall until about 1997, eventually leveling off at between 0.02 and 0.03 percent. It is noteworthy that, from 1992 to 2007, Japanese government spending on energy R&D also exceeded U.S. federal spending on an absolute basis (measured in 2008 prices and exchange rates), even though the GDP of Japan is about a third that of the United States. Other governments that spend a larger share of their GDP on energy R&D than 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E 0.0016 0.0014 0.0012 0.001 0.0008 0.0006 0.0004 Japan US 0.0002 0 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 FIGURE 5.5 U.S. and Japanese government energy R&D spending as a percent of GDP: 1974-2008. For the past three decades, the U.S. percentage spending has been considerably lower than that of Japan. SOURCE: IEA (2009a). the United States include (for the period 2005-2008) Finland, Korea, France, Canada, Denmark, Norway, and Sweden (IEA, 2009a). These data suggest that energy R&D is less of a national priority in the United States than in many other industrialized nations. Private-Sector Funding of Energy-Related R&D Figure 5.5 editable The level of private-sector funding of energy-related R&D is much more difficult to determine. The IEA estimates the total worldwide spending on energy-related R&D by private firms at between $40 and $60 billion per year, although it notes that this spending is “only partly related to clean energy” (IEA, 2009b). Although firms report R&D spending for tax purposes, they are not required to report the purpose of such spending. However, some insights are available from surveys conducted periodically by the NSF, which reports that in 2007 energy-related R&D funding by U.S. industry totaled approximately $5.3 billion. A widely used indicator of the intensity of R&D spending by industry is the ratio of R&D spending to sales. In 2006-2007, the average ratio for all U.S.-based companies (in the top 1,400 global R&D performers) was 4.5 percent, while firms in 11 research- 

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Fostering Technological Innovations intensive U.S. industries spent an average of 6.5 percent (Table 5.2). Four industries showed especially high percentages: pharmaceuticals and biotechnology (16.7 percent), software and computer services (10.6 percent), technology hardware and equipment (9.6 percent), and heath care equipment and services (7.8 percent).1 For in- dustries where R&D spending has a high probability of being energy-related—oil/gas production and oil equipment, services, and distribution—the ratio of R&D spending to sales was in the range of only 0.2 to 2.2 percent (Table 5.3). R&D spending by the top firms identified as utilities (among the top 1,400 global R&D performers) averages ~0.7 percent of sales. Note that no U.S.-based firms in the electricity production indus- try are included among this list (Table 5.4). How does this compare to R&D spending by the U.S. electricity industry? The most recent information we were able to locate was from the Government Accountability Office (GAO, 1996). This study showed that, based on data collected from 80 compa- nies of the 112 largest operating utilities, their spending for R&D was reduced from about $708 million in 1993 to about $476 million in 1996.2 (Spending had been level in real dollars for the previous 10 years.) In 1994, utilities on average devoted about 0.3 percent of their revenues to R&D. The GAO interviewed utility R&D managers who reported that, due to deregulation, utilities were shifting the focus of their R&D from collaborative projects benefiting all utilities to proprietary R&D, and that companies were shifting from long-term advanced technology R&D (e.g., advanced gas turbine and new fuel cells) to short-term projects that would be profitable and provide a near- term competitive edge. In fact, the R&D managers at the nation’s two largest utilities, Pacific Gas & Electric and Southern California Edison, said that their advanced technol- ogy R&D programs had been eliminated. Of course, not all energy-related R&D undertaken by private industry occurs just within the energy-producing industries; indeed, U.S. utilities have historically relied upon the companies from which they purchased equipment to undertake R&D. For ex- ample, General Electric, a major supplier to the utility industry, spent $3 billion on R&D in 2007-2008, which represents 2 percent of its sales and 12 percent of its profits. The company was ranked 17th in the United States and 43rd in the world in terms of R&D spending. However, because of the complexity of corporate structures and business 1 These figures are based on data for total R&D spending by the top 1,400 firms in the world, of which 536 firms were based in the United States (DIUS, 2009). To be included in this list, a firm had to spend at least $36 million in R&D. To avoid distortion due to a small number of firms in an industry, the data in Table 5.2 include only industries in which there are 10 or more U.S.-based firms included in the list. 2 The 112 largest investor-owned public utilities accounted for over 93 percent of all nonfederal utility R&D spending and were responsible for about three-quarters of all electricity sales. 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E FIGURE 5.6 Trend in U.S. undergraduate (B.S.) and graduate (M.S. plus Ph.D.) degrees granted as a per- centage of the total population. The science and engineering (S&E) fields include biological and agri- cultural sciences; earth, atmospheric, and ocean sciences; mathematics and computer sciences; physical sciences; and engineering. Non-S&E includes all other degrees. The trend in total graduate and under- graduate degrees in S&E as a percentage of the U.S. population has been roughly constant since 1970. SOURCES: Based on data from NSF (2008); U.S. population data from U.S. Census Bureau (2000, 2007). Federal Support for Energy-Related R&D Federal funding for energy-related R&D has declined dramatically over the past several decades, both in absolute terms and relative to other national R&D priorities such as health and space exploration. The United States also lags behind other lead- ing countries in the fraction of national resources devoted to energy-related R&D. To achieve parity with health-related federal R&D spending (as was the case in 1980), en- ergy-related R&D would have to be increased 20-fold over recent (FY 2008) levels—an increase of $23 billion per year (in constant FY 2000 dollars). To achieve parity with 

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Fostering Technological Innovations FIGURE 5.7 Breakdown of S&E trend in U.S. undergraduate (B.S.) and graduate (M.S. plus Ph.D.) degrees granted as a percentage of the total population, showing the separate trends for science fields and engineering fields. The trend in undergraduate science degrees as a percentage of the U.S. population has been rising over the past two decades but the percentage for undergraduate engineering degrees has fallen significantly since the 1980s. SOURCE: Based on data from NSF (2008). federal funding for space-related R&D would require a sixfold increase—roughly an added $7 billion per year. Even a return to 1980 levels of energy-related R&D would require an additional $5 billion per year in federal funding relative to FY 2008 levels. Although such increases are large relative to recent budgets, they are likely to rep- resent only a portion of the total (government plus private sector) R&D investment needed in the decades ahead. It is important to keep in mind, however, that the poten- tial returns from R&D are very large. For example, Figure 5.1 suggests that having more advanced technology choices available to control GHG emissions could greatly reduce the carbon price needed to control emissions. If the United States is to reduce its GHG 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E emissions to attain the budget targets discussed in Chapter 2, even a small reduction in future carbon prices as a result of R&D investments would significantly reduce the total cost of achieving these targets. This report does not attempt to recommend the structure or priorities of a federally supported R&D agenda to limit the magnitude of climate change, because detailed assessments of such R&D needs have been developed in many other recent studies by the National Research Council and other organizations (e.g., American Physical Society, 2008; DOE, 2009; NRC, 2009a; PCAST, 2008; IEA Technology Roadmaps5). Those efforts represent a strong starting point for further deliberations and planning. What is emphasized in this report is the urgent requirement for substantially increased federal resources for R&D to reduce GHG emissions. Substantial additional R&D funding from the private sector also is critical, and federal policies will be needed to bring this about. Although federal R&D funding cannot by itself ensure that energy-saving and GHG- reducing technologies will achieve widespread use in an economy, it nonetheless plays a critical role in the overall process of technological change. Federally funded basic R&D provides the starting point for many (if not most) significant energy-related innovations, and federally funded assistance for technology development often is the catalyst for turning technological innovations into practical products that are sought in the marketplace (NRC, 2001). And while the level of federally funded R&D is ex- tremely important, it is also important that funding be relatively stable over time—not only to attract and retain a high-quality R&D workforce but also to avoid the disrup- tive “boom and bust” patterns of past federal energy R&D spending, which causes the private sector to question the long-term market potential and value of pursuing new product development. Private-Sector Support for Energy-Related R&D Private-sector funding of energy-related R&D is also critical for achieving the innova- tions needed to reduce GHG emissions on a large scale. Here too, however, the current picture for U.S. industries appears rather bleak. A widely used indicator of innovative activity is the ratio of R&D spending to industry-wide sales. For U.S.-based energy companies, this ratio is far below that of other leading technology-based industries, suggesting a major shortfall in the ability of the U.S. energy industry to bring about the technological innovations that are needed. Transforming the U.S. energy industry 5 For instance, see http://www.iea.org/subjectqueries/keyresult.asp?KEYWORD_ID=4156. 

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Fostering Technological Innovations in a carbon-constrained world will clearly demand a significant increase in private-sec- tor R&D. Workforce to Support Technological Innovation Achieving major innovations to reduce GHG emissions will require a workforce with a broad range of skills. The ability to innovate will especially require increasing num- bers of engineers and scientists in a variety of disciplines. As a percentage of the total workforce, however, limited data suggest that U.S. energy industries currently have far fewer R&D workers than the average for all U.S. industries. The percentage of U.S. graduates in engineering also has declined significantly in the past two decades. Ac- tions by both private and public sectors will be needed to reverse these trends. ASSESSMENT OF CURRENT U.S. INNOVATION POLICIES As noted earlier, achieving and accelerating technological changes that reduce GHG emissions on a significant scale will require policies not only to promote and sustain a vigorous program of R&D but also to establish and expand markets for low-GHG tech- nologies and to help commercialize and bring new technologies to the marketplace. Table 5.1 listed some of the “technology policy” options available, along with regula- tory policies, to help achieve these ends. This section briefly assesses the actual state of current U.S. policies related to these objectives to identify any major deficiencies or limitations that must be addressed to foster needed technological innovations. Overview of Current Policies The federal government has many programs, policies, and measures aimed at en- couraging the commercialization and deployment of technologies that reduce, avoid, or capture and sequester emissions of GHGs. A recent report by the Committee on Climate Change Science and Technology Integration (CCCSTI) (DOE, 2009) identified more than 300 such policies and measures, which it grouped into nine categories of “deployment activities”: tax policy and other financial incentives; technology dem- onstrations; codes and standards; coalitions and partnerships; international coopera- tion; market conditioning including government procurement; education, labeling, and information dissemination; legislative acts of regulation; and risk mitigation.6 The 6 The CCCSTI was a cabinet-level committee created in February 2002 to coordinate climate change science and technology research. At the time the above report was released, the Secretary of Energy was 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E comprehensive taxonomy and lists developed in the CCCSTI report underscore just how many different federal policies can impact innovation related to the reduction of GHGs, and the importance of choosing policies that will have the intended impacts. Current U.S. policies that directly or indirectly support technological innovation have contributed to the progress made to date in decreasing the demand for some types of energy services (such as lighting and refrigeration) and in enabling increased use of some low-carbon energy supplies (such as wind and solar power). However, there are critical areas in which current policies and actions are inadequate or absent. Limitations of Current U.S. Policies As catalogued in detail in the CCCSTI report, current U.S. policies have gaps in certain technology areas or market sectors that are important to reducing GHG emissions. Many of these policy gaps result in a lack of clear market signals regarding commercial opportunities for companies to invest in new technologies and related R&D to en- hance their competitive advantage. Table 5.6 summarizes an array of policies deemed by Brown and Chandler (2008) as unfavorable (those that place clean energy tech- nologies at a competitive disadvantage) or as ineffective (those with design flaws that undermine their intended outcomes). At present, market incentives for low-GHG technologies are driven primarily by state- or regional-level policies, such as renewable-energy portfolio standards, with federal R&D assistance at the earlier stages of development, as previously discussed. Without such regulatory requirements or an explicit price on GHG emissions, however, low- GHG technologies must compete in markets that do not value low emissions. Thus, the most critical need at this time is for federal policies that create or expand markets for low-GHG emissions technologies on a level playing field. As discussed in Chapter 4, we suggest that a portfolio of strategies, including an appropriate price on GHG emissions together with strategically targeted complementary policies, is the most effective way to foster innovation and markets for new technologies.7 The existence of policies does not imply or guarantee their effectiveness. For example, Chair of the CCCSTI, the Secretary of Commerce was Vice Chair, and the Director of the White House Office of Science and Technology Policy was the Executive Director. 7 We note that market dynamics may not prove effective in certain cases. For example, the regulated power supply industry faces limited opportunities to garner returns on R&D investments because public utility commissions rule on rate cases and set prices and returns on investments that are generally less than the profits sought in competitive industries. Thus, additional incentives or mechanisms may be needed to achieve the desired outcomes. 

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Fostering Technological Innovations TABLE 5.6 Examples of Policy Impediments to Clean Energy Technologies Unfavorable Fiscal Tax subsidies Oil and gas depletion allowances allow owners to Policies claim a depletion deduction for loss of their reserves. The link between federal transportation funding and vehicle miles traveled rewards the growth of transportation energy use. Unequal taxation of The federal tax code discourages capital investments capital and operating in general, as opposed to direct expensing of energy costs.a expenses Unfavorable tariffs Utilities impose tariffs (e.g., standby charges, buyback rates, and uplift fees) on small generators seeking to connect to the grid.b Utility pricing policies Unfavorable electricity pricing policies present obstacles for an array of clean energy technologies; these include the regulated rate structure, lack of real- time pricing, and imbalance penalties. In traditionally regulated electricity markets, electric utilities face little incentive to promote energy efficiency or distributed generation, because utility company profits are a function of sales. California and a few other states have decoupled utility profits from energy sales. Fourteen states have enacted decoupling in natural gas markets and six states have in electricity markets. Ineffective Fiscal Examples The Internal Revenue Service has yet to establish Policies guidelines that clarify the eligibility criteria and spell out procedures for claiming tax credit for fuel cells authorized in the Energy Policy Act of 2005. Tax credits intended to promote the purchase of hybrid electric vehicles and residential photovoltaic systems have limited value because of the Alternative Minimum Tax, which sets a floor for tax liability. Many states have property tax laws that provide incentives for landowners to develop their forestland for higher use rather than leave the forest standing or continue timber production. Continued 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E TABLE 5.6 Continued Fiscal Uncertainty Fiscal incentives Limited-duration tax policies such as production or investment tax credits. Fiscal penalties Utilities may be penalized for promoting energy efficiency due to reduced sales, if the energy efficiency program and impacts are not accounted for in rate rulings or other fiscal measures (e.g., return on assets vs. sales). Unfavorable Performance standards Exempting existing facilities from strict emissions Regulatory Policies requirements placed on new plants discourages technological progress and capital stock turnover. Emissions standards that are input based rather than output based discourage process improvements that would result in lower emissions. Connection standards The ban on private electric wires crossing public streets penalizes local generation of electricity, which could reduce transmission losses and increase overall efficiency.c Ineffective Regulatory loopholes Federal Corporate Average Fuel Economy standards Regulations credit vehicles for flexible fuel (E-85 capability) regardless of how they are fueled after purchase or their fuel mileage. Zoning for low-density urban development contributes to sprawl and locks in dependence on cars rather than multiuser transit. Several clean energy technologies, such as carbon capture and hydrogen, are challenged by inadequate regulatory frameworks. Burdensome Regulatory uncertainty—regarding whether or not permitting processes GHG will be regulated or how current technologies will fare under new regulatory processes—impedes rational investment decisions. Multiple agency reviews and approvals required for most energy facilities slow down the process and place an undue burden on the developer. 0

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Fostering Technological Innovations TABLE 5.6 Continued Regulatory Lack of modern and Building codes that are not enforced are based on Uncertainty enforceable building outdated technology or allow trade-offs that mitigate codes use of existing technology discourage adoption of clean energy technologies. Unfavorable State procurement When state agencies cannot contract over more than Statutes policies one fiscal year, they are unable to take on capital improvements that are cost-effective in the long run.d Uncertain property Property rights for subsurface and above-surface rights areas are unclear. In some cases, particularly coalbed methane, geologic storage of carbon dioxide, and wind energy, property rights for these areas must be defined to provide investment certainty. a U.S. tax rules require capital costs for commercial buildings and other investments to be depreciated over many years, whereas operating costs can be fully deducted from taxable income (26 USC § 168). Since efficient technologies typically cost more than standard equipment, this tax code penalizes efficiency. b For example, small generators hoping to connect to the grid in the mid-Atlantic area must undergo a review at a cost of $10,000 to the generator before being allowed to tap into the PJM (Pennsylvania, New Jersey, Maryland) grid interconnection (Sovacool and Hirsch, 2007) c Bans on private wires and metering rules have historically inhibited the installation of distributed gen- eration (DG) systems in the United States (Alderfer et al., 2000; Mueller, 2006; Sovacool and Hirsh, 2007). d Energy service companies deliver energy-efficiency upgrades to industrial, commercial, and government facilities through energy-saving performance contracts with an energy service company—a business that develops, installs, and finances projects to improve the energy efficiency and maintenance costs of facilities. Increasingly, this contracting mechanism is being used by government agencies to upgrade the efficiency of government-owned buildings. But many state constitutions prohibit the obligation of funds in advance of their being appropriated, which can prohibit multiyear contracting with energy services companies. SOURCE: Based on Brown and Chandler (2008). the production tax credit is often cited as a key policy instrument for stimulating investments in clean energy technologies, such as wind turbines. However, in the United States there is a history of enacting such policies for relatively short durations, followed by reauthorization after the policy has expired. This “on again, off again” behavior creates strong market uncertainty and causes abrupt changes in business investments and R&D (Wiser et al., 2007). Thus, stability in the policy environment is an important factor in sustaining a climate of technology innovation. This is essential to encourage consistent corporate investments over the long lead times needed for commercial success. 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E As noted earlier, U.S. government investments in energy-related R&D programs have been very low compared to R&D in other areas such as health and space. Private-sec- tor R&D in energy industries also is extremely low compared to the national average for all industries, and especially low compared to innovative industries such as infor- mation technologies or biotechnology. Expanding direct R&D programs for low-emis- sions energy production and utilization, as well as other areas related to GHG emis- sions reductions, is also a critical element of a comprehensive policy. As seen earlier, current levels of R&D workers in energy industries also are significantly below industry-wide averages, and the downward trend in percentages of U.S. gradu- ates in key professional fields such as engineering is not encouraging. Thus, expanded education and workforce development efforts are likewise crucial elements of any innovation strategy. There is a need for increased financial support across the educa- tional spectrum. Alignment of program strategies in research organizations and gov- ernment agencies that support education and workforce development—including but not limited to NSF, the U.S. Department of Agriculture, DOE, and the Departments of Interior, State, and Defense—may offer significant synergies and leverage in this regard. Greater efforts to not only attract but also retain innovation scientists would help address the trend of foreign nationals obtaining advanced degrees in the United States and then emigrating for future employment. Even with new innovations, the pace of technological change can be slowed by the prevalence of long-lived assets (especially in the energy sector) and the potential for technology lock-in (Grübler, 2004). Policy approaches necessary to transform the landscape of long-lived assets at the appropriate speed and scale are discussed in Chapter 4. As described earlier, residential and commercial buildings represent one of the key sectors with major opportunities for innovations that help limit GHG emissions. Insti- tutional barriers such as the “principal agent” problem have been reported in detail (Popp et al., 2009) and were discussed in Chapter 4 of this report. Alignment of incen- tives to support technology innovation, together with improved community develop- ment planning in general, would enable significant reductions in U.S. energy demand and associated GHG emissions, with high effective returns (e.g., low abatement costs). Policies to support early commercialization and large-scale adoption are also lacking in a number of critical areas, such as carbon sequestration and non-CO2 GHG reduc- tions. These deficiencies must be dealt with effectively through the range of policy measures outlined above and elaborated earlier in Chapter 4. The items highlighted above are not intended to be a comprehensive list of the limita- tions in current U.S. policies affecting technological innovation. They do, however, 

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Fostering Technological Innovations represent what we believe are some of the most crucial issues that must be addressed to create an effective policy environment for innovations needed to reduce GHG emis- sions. Many of these items also have been identified in other recent studies (e.g., NSB, 2009). The following section presents a number of recommendations based on the findings and conclusions of this chapter. KEY CONCLUSIONS AND RECOMMENDATIONS A critical component of any climate change limiting policy is technological change that replaces current GHG-intensive technologies with low-GHG technologies. In many cases this requires advanced technologies that have not yet been invented, commer- cially developed, or adopted at a significant commercial scale. Given the magnitude and rate of technological changes needed to limit future climate change, there is an immediate need to adopt policies to accelerate technological innovation through- out the U.S. economy. Such policies also will enhance the competitive position of the United States as a developer and marketer of technologies to address climate change. The process of technological change involves the stages of invention, innovation, adoption, and diffusion. The first two stages encompass the traditional domain of R&D, while the latter stages require markets for new or advanced technologies. Because these stages are highly interdependent, policies to promote technological innovation need to be comprehensive and not focused solely in one area. Direct federal support for R&D and the training of a skilled R&D workforce are espe- cially critical for fostering technological innovation. The Federal Budget is a powerful and tangible statement of the nation’s priorities. Comparing across different policy areas, we find that federal R&D spending on energy in FY 2008 was approximately one-twentieth of federal R&D spending on health, one-sixth of federal R&D spending on space, and one-fifth of federal R&D spending on general science. Comparing across time, we find that energy R&D spending in FY 2008 accounted for approximately 2.6 percent of total federal (nondefense) R&D spending, a 10-fold decline from its peak of approximately 25 percent in FY 1980. Comparing internationally, we find that U.S. spending on energy R&D as a share of GDP is considerably lower than that of several other leading industrialized countries. The 2009 American Recovery and Reinvestment Act provided a significant one-time increase in federal energy R&D expenditures, but we have not yet seen the type of sustained changes in federal R&D spending that would indicate energy to be a high national priority. While recommendations for desired levels and priorities for federal energy R&D spending are outside the scope of this study, we do find that the level and 

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L I M I T I N G T H E M A G N I T U D E O F F U T U R E C L I M AT E C H A N G E stability of current spending do not appear to be consistent with the magnitude of R&D resources needed to address the challenges of limiting climate change. In regard to the private sector, compared to other U.S. industries, the U.S. energy sector currently spends very little on R&D relative to income from sales and employs very few R&D workers. Substantial increases in private-sector investments in R&D will be needed to foster innovation and technological change. Creating and expanding markets for low-GHG-emissions technologies are also critical to spur innovation. Table 5.1 identifies a wide range of policy options, in addition to traditional R&D spending, that the federal government can use to help spur techno- logical innovation and expand markets for low-GHG-emissions technologies. Creating some form of substantial and sustained carbon-pricing system (discussed in Chapter 4) is likely to be of the utmost importance in stimulating the development and de- ployment of new technologies and approaches to reducing GHG emissions.