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A Clarion Call for Innovation Policy
The transition from an energy system dominated by unabated fossil fuels to one with net-zero emissions is critical for mitigating climate change, protecting human health, and revitalizing the U.S. economy. The problem is that net-zero alternatives haven’t yet been commercialized for some of the sectors that produce large amounts greenhouse emissions, including aviation, shipping, steel, cement, and chemicals manufacturing. Meanwhile, many of the clean technologies that already have been commercialized—such as electric vehicles—are still more expensive than the emitting technologies they would replace. Those costs must continue to fall for these clean technologies to be adopted on a wider scale.
The solution to both of those problems, as ITIF has long argued, is to accelerate innovation. That is the first reason to applaud a landmark report released today by the National Academies of Sciences, Engineering, and Medicine (NASEM): It issues a clarion call for more clean energy innovation, finding that “deep decarbonization is technically feasible, but proactive innovation is essential.”
But the report also recognizes that innovation won’t happen without an assertive federal policy that involves more than basic research funding. An innovation policy that will achieve deep decarbonization requires “both proactive public investment in research, development, and demonstration (RD&D) and the creation of markets to hasten early adoption and ignite private sector innovation and competition.” This is the practical backdrop for the report’s most substantive contributions: It identifies critical polices for the United States to implement in the next 10 years in order to reach net-zero carbon dioxide emissions by 2050.
I was honored to serve on the committee that produced this report, and I am particularly pleased with its key innovation findings and recommendations.
Key Finding: Innovation Should Be an Engine for Economic Growth
Innovation is fundamental to long-term job creation in the U.S. economy and the resilience of the economy to disruptions. Technology discovery and development create opportunities for new jobs, and innovation in established technologies drives long-term cost reductions and improvements in quality. Innovation is also an important engine for entrepreneurship, especially in tech-heavy sectors. Finally, innovation is a necessary condition, albeit not sufficient, for U.S. competitiveness in a global economy in which innovation is now understood as the foundation for long-term economic security and in which all countries now invest heavily.
The United States has long been the world’s leading technological innovator, but it hasn’t always effectively used this advantage to sustain domestic manufacturing. This is as true in low-carbon energy technology as it is in other fields such as information technology and artificial intelligence, where firms in Europe and Asia now dominate.
For example, the United States was the original leader of the solar energy revolution. Scientists at Bell Labs in New Jersey created the first solar cell, and strong and steady procurement from the Navy and NASA allowed American solar companies to serve the market in its early days. Since the turn of the century, however, the United States has ceded much of its original leadership. Only one of the top 10 solar PV manufacturers, First Solar, is an American firm (eight are Chinese, one is South Korean), and U.S. companies’ share of the global solar market has dropped below 10 percent.
These trends are disturbing. The decline of the U.S. manufacturing sector has cost the economy high-quality jobs, increased income inequality, and contributed to public dissatisfaction. The Academies’ report argues that the United States should attempt to claw these industrial sectors and markets back, so that it leads the world both in innovation and in the manufacturing and marketing of advanced clean energy technologies.
One cause for optimism is that the United States is the best-resourced nation in the world for a transition to net-zero emissions. It has abundant solar and wind resources both onshore and offshore. Additionally, 40 million acres already are devoted to producing biofuels. The country has plentiful and economically accessible natural gas, and enormous geologic and terrestrial reservoirs for CO2 sequestration. A transformation to a net-zero economy could combine these natural assets with the nation’s culture of innovation to regain global leadership and competitiveness in clean energy technology, modernize and transform the U.S. manufacturing base, and create a new generation of clean energy jobs.
Key Finding: Achieving Net-Zero Emissions Is Technically Feasible, But Proactive Innovation Is Essential
The National Academies’ committee’s review of deep decarbonization studies finds that reaching net-zero emissions is technically feasible, provided that significant proactive effort is invested over the next decade to drive the maturation and improvement of a range of more nascent technologies and solutions needed to reach net-zero emissions. The report cites the International Energy Agency (IEA), which finds that nearly half of the global annual emissions reductions necessary to achieve a net-zero energy system by 2050 will likely have to come from technologies that are currently at the prototype or demonstration stage of development but are not yet commercially available.
Bringing new energy technologies to market can take 20-70 years from the first prototype, and driving maturation and cost declines for nascent industries proceeds over a decade or longer time scales. Therefore, proactive RD&D and market creation efforts are needed in the 2020s to develop, improve, and scale-up nascent, low-carbon energy technologies, including:
- Clean firm electricity resources, including advanced nuclear; carbon capture and storage (CCS); enhanced geothermal systems; hydrogen combustion turbines and fuel cells.
- Processes for using low-carbon energy carriers such as hydrogen, both as reductants (e.g. for steel) and as precursors and products (e.g. ammonia, methanol, ethylene); process heat solutions across all temperature ranges; and advanced electrolyzers
- Batteries and other energy storage technologies for both vehicle and grid applications
- Low- and Zero-carbon fuels, including hydrogen production from electrolysis, biomass gasification, and methane reforming with CCS, as well as synthetic drop-in fuels and advanced biofuels
- Carbon capture, utilization, and storage (CCUS) for applications across the industry and power sectors
Supercharging Innovation: Recommendations From the NASEM Report
The committee recommends a suite of policies to directly enhance and expand the energy innovation toolkit. “Technology-push” policies, most notably tripling the Department of Energy’s (DOE) funding in low- or zero-carbon research, development, and demonstration (RD&D) over the next ten years, are needed to create potential solutions, especially for the hardest-to-abate sectors. In addition, “market pull” policies such as carbon pricing, tax incentives, and clean energy standards, align private-sector investments with net zero goals, which is necessary to bring technologies further down the cost curve to spur widespread adoption.
Key innovation policies include:
- Tripling investment in clean energy RD&D at DOE, including faster growth in funding for large-scale demonstration projects,
- Adopting an economy-wide carbon price, and
- Implementing market-expanding standards and incentives
Triple Investment in Clean Energy RD&D at the Department of Energy
The committee proposes a tripling of federal investment in clean energy RD&D to provide new technology options and reduce the costs of existing options. Investments that would fundamentally enhance the net-zero transition include: next generation energy systems for buildings, industry, and transport; improved energy storage and firm low-carbon electricity generation options to complement variable renewable electricity; low-cost zero-carbon fuels including hydrogen from electrolysis of water or biomass gasification; lower-cost carbon capture and use technologies; and lower-cost direct air capture. Progress is needed in particular on net zero options for aviation, marine transport, and the product of steel, cement, and bulk chemicals.
U.S. leadership in clean energy RD&D is now being challenged by China and Europe. China doubled investment in clean energy RD&D between 2015–2020 to $8 billion annually, putting it ahead of the United States for the first time. The tripling goal is intended to restore U.S. leadership in clean energy technology RD&D investment. Many of the Academies’ committee’s recommendations are similar to those of Energizing America, ITIF’s work in partnership with the Columbia Center on Global Energy Policy, which provides a roadmap to launch a national energy innovation mission. A similar target has been endorsed by the American Energy Innovation Council and the President’s Council of Advisors on Science and Technology.
The committee highlights the “critical gap in government funding between basic research and commercialization,” noting that the demonstration stage is particularly underfunded, another emphasis of recent ITIF research. Congress has repeatedly affirmed its support for later-stage R&D and demonstration activities. The Energy Act of 2020, passed in December, requires DOE to conduct seventeen demonstration projects across four technology areas: energy storage, carbon capture, enhanced geothermal systems, and advanced nuclear. But the NASEM report finds that demonstrations across an even broader range of technologies will be necessary to address the full range of innovation needs.
The committee also recommends that the DOE establish regional energy innovation hubs where they do not exist; expand support for public-private partnerships for RD&D on advanced manufacturing in clean energy; and address the non-hardware “soft costs” (e.g. siting, permitting, interconnection) of clean energy, which remain higher in the United States than in other countries.
Adopt an Economy-Wide Carbon Price
The committee recommends an economy-wide carbon price starting at $40 per ton of carbon dioxide (tCO2) and rising 5 percent annually. “Carbon pricing” the report notes, “is widely acknowledged by economists to be a key ingredient to achieve cost-effectiveness based on its ability to create consistent incentives throughout the economy to reduce emissions.” Additionally, the committee finds that:
“an economy-wide price on carbon would unlock innovation in every corner of the energy economy, send appropriate signals to myriad public and private decision makers, and encourage a cost-effective route to net-zero.”
The NASEM report does not delve into the mechanisms by which a carbon price would induce innovation. However, ITIF and other organizations have written extensively on this topic. A carbon price would incentive businesses to align private R&D budgets with net zero goals, and shift their R&D investments away from emitting technologies and towards clean energy. The private sector accounts for nearly 70 percent of total research and development (R&D) spending across all industries, more than twice what the federal government invests. So a carbon price is an important tool to encourage private industry to marshal its innovation resources for the net zero goal.
Additionally, a carbon price generates market pull for clean technologies that are already competitive or nearly competitive with incumbent fossil technologies. For example, a 2018 study from the University of Texas at Austin found that wind or solar is already the cheapest source of new electricity in 34 percent of U.S. counties. These counties are located in the windy Midwestern states or sunny Southwest states that have the best renewable energy resources. Adding a $40/t price on carbon would dramatically expand the geographic regions where wind and solar are competitive. A 2017 DOE reportfound that combining increased RD&D with a carbon price would enable greater emissions reductions than either approach in isolation, while also lowering energy costs.
Implement Market-Expanding Standards and Incentives
The committee recommends a suite of targeted standards and incentives that address specific sectors, such as a clean energy standard for electricity (similar to state-level renewable portfolio standards), zero-emissions vehicle and building standards, and federal procurement standards, all of which would expand the market for emerging clean technologies. For example, in the electricity sector, the committee recommends a federal clean energy standard (CES) that requires sellers of retail electricity to rely on an increasing share of zero-carbon sources, similar to the renewable portfolio standards (RPS) that have been adopted by 30 states and the District of Columbia. The committee finds that “This approach would help to pull zero-carbon resources into the system while increasingly restricting fossil generation that does not include carbon capture.” Additionally, the committee recommends using “Buy Clean” government procurement policy to drive demand and encourage innovation in clean technologies, including building materials such as steel and cement.
ITIF analysis has found that under certain conditions, standards and environmental regulations can stimulate technological innovation. For example, the Clean Air Act of 1970, which required electric utilities to install scrubbers to remove pollutants from power plant smokestacks, prompted innovation in scrubbers which dramatically reduced their costs.
Recent ITIF work highlights the potential of government procurement to drive innovation in the vehicles and buildings sectors. President Biden’s January 27 Executive Order notes that federal procurement policies can “help to catalyze private sector investment” in domestic clean energy technologies by providing a stable source of demand. For example, the federal government buys about 50,000 new vehicles a year, most of which are domestically manufactured in the United States. By supporting a multi-year scale up of electric vehicle (EV) production, large federal orders would give stakeholders throughout the supply chain the long-term stability needed to invest in labor and equipment, stimulating technological advancement and cost reduction in components such as batteries and electric motors.
The NASEM report provides a policy blueprint for catalyzing the innovation needed to decarbonize the U.S. energy system. More investment in research, development, and demonstration (RD&D) is essential to create new clean options and improve the performance of existing clean technologies. A carbon price would provide market pull for emerging cleantech and aligns industry investments with the net-zero goal. Clean energy standards and federal procurement standards would expand markets and induce private-sector innovation. All of these policies must work in tandem if the United States is to reap the full benefits of its investments and regain global leadership and competitiveness in clean energy.