The National Journal Experts Blog: Averting the Coming Clean Energy Cliff

The following is one of two cross-posted contributions by ITIF to the National Journal Energy and Environment Experts Blog Discussion on How Can Washington Green America’s Economy?

In a recent Foreign Affairs piece, University of California, San Diego Professor David Victor and Tana Energy Capital’s Founder Kassia Yanosek warns of a coming crisis in the clean energy industry. The culprit and one of our biggest obstacles to creating a green economy: the boom-and-bust cycle of short-sighted energy policies that prop up mature, lowest-common denominator technologies, but do little to support clean energy innovation.

To be specific, in many cases, our current policy approach is misguided and counterproductive. The reason is simple: the policies assume we have all the clean energy technologies we need. But this is far from true. Mature vehicle batteries, solar panels, wind turbines, and big-box nuclear energy cost more than their fossil fuel alternatives, say nothing of often being less reliable. So the policy response has been for government to subsidize the cost difference, but at the least the current budget austerity debate shows this to be economically unsustainable as many incentives come to an end or are eliminated. And at worse the boom-and-bust cycle of policy intervention has drawn private sector investment into quick and easy clean energy projects that provide a short-term profit during boom periods, but little long-term competitiveness without subsidies, thus making clean energy growth – and the hundreds of thousand green jobs that came with it - tenuous at best.

And we’ve seen this movie play out before in the early 1980’s and President Reagan’s near elimination of federal renewable energy policy. So at the end of the day if policymakers want to halt the nascent green economy from falling off a cliff they need to make two key decisions. First, policymakers at both the state and federal level should reorient the goal of their energy policies to making the unsubsidized cost of clean technologies cheaper than fossil fuels. Second, policymakers should make green innovation the core driver of energy policy decisions.

But how does this play out in policymaking? A good first step is to do what Mark Muro, and many leading energy thinkers, describes below – the federal government should take their increasingly scarce resources and invest it in the public-private energy innovation ecosystem. This means having a more nuanced and rational budget cutting debate in Congress that transfers spending on counterproductive programs to high-impact, innovative programs which would reverse cuts and boost budgets to programs like ARPA-E and the Innovation Hubs.

If this isn’t possible – and there is little indication that it is – it’s worth taking a deep look at the current energy innovation ecosystem and target ways that institutions can be reformed to maximize their innovative capacity. For instance, DOE should apply elements of the effective ARPA model more broadly, as a high-level White House panel on science and technology has recommended. Policymakers should also reform our energy incentive system to reward performance improvements and cost reductions rather than quantity of production which locks in ineffective energy sources like ethanol (counter to Tom Buis below) and inefficient solar cells.

And even then, greater attention to state energy policies is absolutely necessary. Like Lew Milford argues below, in absence of federal energy policies, states could represent our last chance at spurring green energy innovation and building a robust green economy. But states should take great care to not make the same mistakes federal clean energy policy has made by supporting mature, limited clean technologies and instead ensure that their energy policies spur innovation and drive real cost reductions.

So the answer to whether it’s possible for Washington to support the green economy is yes and in fact it must if we are to benefit from clean energy. It’s just a matter of learning from our past mistakes, getting our goals right and targeting policies at spurring energy innovation.