U.S. Energy Policy and the Anti-Innovation Bias

More than 30 years ago, the first oil shock seemed to offer an opportunity to the United States to mobilize resources under the banner of energy independence. President-elect Carter proposed the creation of a U.S. Department of Energy toward the end of 1976.

The vision was to reach energy independence through massive investment that would make it possible to reduce consumption and to increase the domestic production of alternatives.

The mission, which constituted “the economic equivalent of war,” failed as soon as oil prices retreated at the end of the decade. Both the programs and their underlying rationale were then comprehensively rolled back by the Reagan Administration.

These days, the legitimizing mission is to respond to climate change by reducing carbon production. However, President Obama’s attempt to catalyze broad investment in the science and engineering has been deferred and marginalized.

President Obama’s invocation of a “Sputnik moment” was certainly well intended, but it met with much more than the imposed criterion of economic efficiency in the context of fiscal austerity. This time, the ideological rejection goes deeper.

One must ask: Do those who block needed state initiatives do so because they are skeptical of the science? Or do they deny the science because acceptance of it would legitimize state action?

Such ideological constructs and distortions notwithstanding, the shape of the next new economy can already be defined in broad strokes. Like the digital one before it, which we are still learning how to exploit and enjoy in full, that low-carbon economy can be built only on a base of substantial state investment and agreed rules of engagement across both public and private sectors.

It is historically inaccurate to believe that the fruits of those digital technologies that are now being harvested were all created by the private sector. Getting there took a great deal of public-sector investments over a sustained period of time.

Why should we expect things would be different when we finally address the requirements for the low-carbon new economy?

To advance the frontier of needed innovation in the energy field, much science remains to be done. A host of technologies — batteries and solar cells and fuel cells, among them — require extended investment to improve both absolute performance and the ratio of performance to cost.

And the protocols for bringing alternative, renewable energy sources online and into the intelligent grid that is yet to be designed, let alone deployed. After that has happened, things will need to be standardized — as was very much the case with the networking and internetworking protocols of the digital economy.

It is equally clear that no significant private-sector investment in that new infrastructure, let alone the speculative funding necessary to finance deployment of new energy technologies at scale, can be expected while the return on that investment remains exposed to the volatile markets of conventional energy sources.

Only collective state action — the prospect for which is not at all visible in the United States of today — can protect the new alternative energy technologies and accelerate the step-function increases in thermal efficiency that is necessary to compete with conventional sources.

In parallel, significant advances in materials and in information technologies to reduce the carbon content of consumer goods and services are similarly required and are equally at risk.

As long political stalemate paralyzes Washington, there is little reason to believe that the next new economy will be made in America. On the contrary, the spectacle of the United States bringing China to the World Trade Organization for allegedly subsidizing clean-tech innovation is as telling as it is humiliating.

To savor the anti-technology, anti-innovation and anti-progress implications of this U.S. diplomatic strategy, imagine first that there had been such a body with similar statutes 50 years ago. European governments would have been in a position to block technological progress the same way the United States is doing now.

Imagine: The Europeans would have been entitled to attack the U.S. government’s commitment to underwriting the technologies that made the digital revolution possible — and conceivably could have stunted it materially.

This country would have been the poorer for it, as well as the entire world. This one example should be clear enough to keep us from moving further down that disastrous path of hindering innovation.

Our concern today should be our failure to act, not the Chinese initiatives. By 2010, China’s investment in clean-energy technologies was estimated to have reached $54.4 billion. That is more than 50% above the U.S. level — in an economy less than half our size.

Our nation’s financial commitment to what ought to be a core initiative in the United States is significant only in symbolic ways.

The first-year funding for the Advanced Research Projects Agency-Energy (ARPA-E) was the $400 million, included in the American Recovery and Reinvestment Act of 2009. That amount was reduced to $180 million in the budget appropriation for fiscal year 2011.

But, even as it seems inevitable that the U.S. federal science budget will be constrained, China’s leadership is pushing national spending on research to and beyond 2% of GDP, about the level achieved in the post-Second World War United States.

The next leader of the innovation economy can learn from the post-Second World War example of the United States — and China is doing just that. The Chinese leadership understands full well that that the leader must begin with the bulwarks of autonomy: cash and control.

Only a state positioned, as China now is, with $3 trillion of foreign exchange reserves can resist the persistent demands that public funds be deployed only on projects that are demonstrably “useful and productive.” In other words, it would only meet the test of static, not dynamic efficiency.

Historically, from the construction of the Erie Canal to the Internet by way of the networks of railways and electricity grids and superhighways, the U.S. economy grew to global leadership through public underwriting of private, risky investment at the frontier of technological innovation.

This is the history we are ignoring, in face of this generation’s existential challenge: to mobilize resources at the scale necessary to create the low carbon economy to our long-term benefit and that of all humanity.

Editor’s note: This article is adapted from Doing Capitalism in the Innovation Economy: Markets, Speculation and the State (Cambridge) by William H. Janeway. Published by arrangement with Cambridge University Press. Copyright © 2012 by William H. Janeway.