The Energy Innovation Imperative
Addressing Oil Dependence, Climate Change, and Other 21st Century Energy Challenges
Innovations: Technology, Governance, Globalization | Spring 2006
Society faces many energy challenges in this century, but "running out" of energy resources in a global or absolute sense is not one of them. The world may be running out of cheaply extractable and reliably deliverable conventional oil and natural gas, insofar as (a) these energy forms may continue (with some ups and downs) to get more costly and less reliable over time and (b) it is unclear for how much longer the rate at which they are extracted can be increased to meet rising global demand. But energy resources of other types are immensely larger and capable in principle of being expanded to multiples of today's use rates of oil and gas combined: there is 5 to 10 times as much coal as conventional oil and gas; there is 5 to 10 times as much oil shale and unconventional gas as coal; the energy potential of uranium and thorium resources is larger still; and harnessing even a small percentage of the solar energy flow reaching Earth's land surface could meet multiples of today's world energy demand.
The energy issue is difficult not because of any impending exhaustion of global resources, then, but for more complicated reasons.
The first of these is the multiplicity and diversity of the economic, environmental, and security aims that energy strategy must serve, many of them in tension with each other (see inset). The desire to limit costs is often at odds with the aims of increasing reliability, reducing vulnerability, and improving environmental performance. The historically low costs of oil, natural gas, and many hydropower projects are not likely to be matched by the more abundant fossil, nuclear, and renewable alternatives. Expanding domestic oil production in order to limit imports eventually encounters not only rising marginal costs but also rising opposition when the remaining domestic resources lie under fragile or particularly highly prized environments. Replacing conventional oil and gas with synthetic liquids and gases made from tar sands, oil shales, and coal will sharply increase the emissions of climate-altering carbon dioxide unless costly carbon capture and sequestration accompany these conversions. Rapid expansion of nuclear energy may risk outrunning the capabilities of national and international organizations to manage its risks. And so on.
The second reason the energy issue is so challenging is the fact that no known energy source is free of significant limitations, liabilities, or uncertainties in relation to one or more of the important aims. That is, there is no technological "silver bullet".
Beyond competing goals and the lack of a silver bullet, the third major reason the energy issue is so challenging is the large embodied capital investment and long turnover times of the world's energy-supply and end-use systems, which create large hurdles to transforming those systems as rapidly as the determinants of what is desirable and necessary are changing. The replacement cost of today's global energy-supply system—all of the power plants, transmission lines, drilling rigs, pipelines, refineries, coal mines, and so on—is in the range of $12 trillion, and this immense capital investment turns over with a characteristic time of 30-40 years, the average operating lifetime of the facilities involved. The stock of energy-using artifacts—buildings, appliances, cars and trucks, airplanes, industrial machinery—represents an even larger investment, with turnover times ranging from somewhat shorter (cars, appliances) than that of energy-supply facilities to considerably longer (buildings). Adding to the inertia created by these huge investments and long time scales is the entrenched economic and political power of the organizations—public as well as private—that achieved their powerful positions by creating and sustaining the historical and current patterns of energy supply and demand and are understandably interested in preserving that status quo.
The energy-system inertia that results from these circumstances, combined with the typical multi-decade time scale for research, development, and demonstration to bring a new energy option even to the threshold of competitiveness with the entrenched approaches, means that it is possible and even likely for problems with the status quo to materialize more rapidly than the energy system can adjust to address them. When this timing mismatch is compounded by additional time lags in developing a scientific consensus about the harmful phenomena (as in the case of understanding both the health and the climate impacts of the emissions from fossil-fuel burning), the chances of being "locked in" to energy-system characteristics that impose higher than expected costs and risks for decades only increases.
The multiplicity of challenges at the intersection of energy with the economy, the environment, and international security—led by the oil-dependence and climate-change challenges—add up to a need for policies designed for two ends:
- to help society find and implement a satisfactory compromise among competing economic, environmental and security objectives—which includes trying to leave the biggest margins of safety against the biggest dangers—given the resources and technologies available at any given time, and
- to accelerate the processes of energy-technology innovation that, over time, can reduce the limitations of existing energy options, can bring new options to fruition, and thereby can reduce the tensions among energy-policy objectives and enable faster progress on the most critical ones.
These ends cannot be achieved by markets alone, without supplementary policies, because many of the goals relate to public goods (such as national security and meeting the basic energy needs of society's poorest members) and externalities (such as air pollution and greenhouse gases) that are not priced in markets unless policies achieve this.
A further implication of the characteristics of today's energy challenges is that society will do better to pursue a broad portfolio of improved energy-supply and end-use options, rather than putting its eggs in too few baskets. The merits of such diversity are manifold: it provides flexibility to respond to changing conditions and new information (an "insurance policy" for an uncertain world), including providing the possibility of discarding options that ultimately prove unsuitable; it takes into account that, even after all plausible technological improvements, there comes a point in the expansion of any energy option where rising marginal costs and/or risks make further expansion unattractive (meaning a broad portfolio is likely to have lower costs and risks overall than a narrower set of options wherein each has to bear too much of the load); and by combining the growth of multiple new or improved options—each drawing on different types of material resources, skills, and firms—it can replace status quo technologies more rapidly than would be possible by one or two new options alone.
The need for deployment of technologies of energy supply and end-use better than those that now dominate the energy system is acute. Without an accelerated transition to improved technologies, societies will find it increasingly difficult—and in the end probably impossible—either to limit oil imports and oil dependence overall without incurring excessive economic and environmental costs or to provide the affordable energy needed for sustainable prosperity everywhere without intolerably disrupting the Earth's climate. They will not be able to improve urban air quality while meeting growing demands for personal transportation; not be able to use their abundant coal resources without intolerable impacts on regional air quality and acid rain; not be able to expand the use of nuclear energy enough to make a difference for climate change and oil and gas dependence while still reducing the risks of accidents, nuclear terrorism, and nuclear-weapon proliferation.
In this context, the needed process of innovation in energy technology must be understood as not consisting only of research and development (R&D), but also of at least equal emphasis and resources devoted to demonstration at commercial scale and in diverse contexts of the technological improvements that R&D have made possible and to mechanisms to promote accelerated deployment of those demonstrated options that offer the greatest leverage for reducing important externalities and enhancing important public goods. The energy-technology-innovation "pipeline" is full of potentially valuable—even potentially crucial—technologies at every stage of development, and it is no less important to push along toward full commercialization those that are already close to that threshold than to be doing the applied research and early development needed to move forward the more "far out" possibilities. Indeed, the need for rapid response to the linked oil-dependence and climate-change challenges means that the world cannot afford to wait for such long-term possibilities as fuel-cell-powered vehicles and fusion to come to fruition. This is not to say that that investment in such long-term options is not essential, for it is; but it should not replace or come at the expense of the needed efforts to move nearer-term, oil-sparing, climate-friendly options into the marketplace.
Current efforts in energy-technology research, development, and demonstration (RD&D)—and in accelerated deployment of the best options that such RD&D produces—are woefully inadequate in relation to the scale of the challenge and the size of the opportunities. U.S. public and private spending on energy-technology RD&D totals only $5-6 billion per year, less than one percent of what this country spends for electricity and fuels. The situation in other industrialized countries (with the conspicuous exception of Japan) is no better, and in developing countries it is worse.
Around the world, the energy sector's ratio of RD&D investments to total revenues is well below that for any other high-tech sector of the economy. In a $45 trillion world economy (calculated using purchasing power parities), fueled by circa $3 trillion worth of energy, total public and private investments in energy RD&D appear to be in the range of $15-20 billion, hence something like half a percent of energy expenditures and 0.03 percent of world GDP. These investments will need to be boosted at least 2-3-fold if the world is to meet the energy challenges it faces in the decades immediately ahead.
In principle, such an increase should not be difficult to achieve, given the modest sums involved in relation to the scale of the energy enterprise. In the United States, for example, a tripling of the federal government's expenditures on energy technology RD&D could be financed with a increase of about 2 cents per gallon in the federal tax on gasoline. In practice, however, governments have proven extremely reluctant to increase energy RD&D expenditures, even when their rhetoric would appear to call for such increases. Again the case of the United States provides an instructive example: despite the Bush Administration's consistent rhetoric (including very conspicuously in President Bush's January 2006 State of the Union address) to the effect that advances in energy technology will hold the key to addressing the oil-dependence and climate-change challenges, the appropriations for energy RD&D have been essentially level in real terms since Fiscal Year 2001, and the President's FY2007 budget request is for less money for this purpose than the Congress appropriated for FY2006.
Private-sector expenditures for energy RD&D are more difficult to track in detail because of lack of comprehensive and consistent data, but such analyses as are available for the case of the United States suggest that these investments have been falling overall. The reasons usually adduced for such a decline include generally low oil and gas prices (until recently) and a corporate financial environment that has placed particular emphasis on short-term rates of return (to which R&D investments contribute little). Government tax incentives for corporations to undertake more R&D are mostly modest, and the incentive of recent higher oil and gas prices for RD&D on alternatives is weakened by industry uncertainty about whether these recent prices will persist. Perhaps most importantly in the context of the character of energy challenges as elaborated in this article, companies are likely to continue to under-invest in developing and deploying low- and no-carbon energy options until there is a stronger marketplace incentive for such action, either in the form of a substantial carbon tax or its practical equivalent in the form of economy-wide emissions caps implemented through tradable permits.
Accelerated improvement of the energy-supply and energy-end-use technologies available and propagating in the marketplace will be essential if the suite of energy challenges confronting the world in this century—most compellingly the coupled problems of oil dependence and climate change—are to be successfully addressed. Bringing about the needed pace of energy-technology innovation will require major innovations in policy and management, aimed at
- providing the scale, continuity, and coordination of effort in energy research, development, and demonstration needed to bring an appropriate portfolio of improved options to the threshold of commercialization in a timely way;
- promoting and financing early deployment of the most promising options to emerge from the RD&D process, in order to accelerate their progress down the learning curve toward market competitiveness;
- ensuring that improved energy technologies not only diffuse rapidly through the industrialized countries and the relatively prosperous urban sectors of developing ones, but also reach the least developed countries and sectors;
- devising and implementing an adequate, equitable, and achievable global framework for limiting global emissions of greenhouse gases;
- more effectively mobilizing the power of partnerships—among countries, levels of government, and the public, private, academic, and NGO sectors—in achieving all of the preceding ends; and
- more effectively communicating to the broad public the reasons all this must be done and the benefits to be gained and dangers averted by doing it, in order to develop and sustain the needed political support.
Numerous major, high-level, multi-sectoral studies conducted in the United States over the past decade—and similar efforts internationally—have arrived at more or less the same recommendations and have elaborated what carrying them out would entail. Insights about what to do and how to do it, then, are not lacking. What has been and remains missing is political leadership at the level needed to make it happen. Let us hope this changes soon.
John P. Holdren is Teresa and John Heinz Professor of Environmental Policy and Director of the Program on Science, Technology, and Public Policy at the John F. Kennedy School of Government at Harvard University, Professor of Environmental Science and Policy in Harvard's Department of Earth and Planetary Sciences, and Director of the Woods Hole Research Center. He is also the current President of the American Association for the Advancement of Science and the Chair of the Editorial Advisory Board of Innovations.
Related Letters to the Editors of Innovations
From: Samuel W. Bodman, U.S. Secretary of Energy, Washington, D.C.
In his article, "The Energy Innovation Imperative" (Innovations, spring 2006), Professor John Holdren makes a compelling case for a highly accelerated transition to the widespread use of alternative sources of energy in order to address two of the most fundamental challenges of our time: 1) reducing the geopolitical and economic vulnerabilities that result from the United States' over-dependence on foreign sources of oil; and 2) developing cleaner sources of energy that at the very least do not worsen—and hopefully can improve—the long-term health of our earth's environment, particularly with regard to global climate change.
As the Secretary of Energy, I strongly support Professor Holdren's view that innovation offers our best hope for addressing these twin challenges. Indeed, what is needed is a robust, aggressive national research and development effort (in the public and private sectors) that "over time, can reduce the limitations of existing energy options, can bring new options to fruition, and thereby can reduce the tensions among energy-policy objectives and enable faster progress on the most critical ones." But I would respectfully disagree with Professor Holdren's contention that the political leadership on this issue "remains missing," as well as his suggestion that the Bush Administration's response has amounted to empty rhetoric. I am grateful for this opportunity to provide some additional information and context.
Over the past several decades, a tremendous amount of federally-funded research has been done on countless new energy sources. In part, this is because, as Professor Holdren points out, there is no one solution—no "silver bullet"—that will break our economy's over-reliance on fossil fuels. But, while the possible solutions are many, the time has come to focus on pushing the most promising technologies forward at a more rapid pace. We must move more quickly from research to development to deployment. In short, we have to pick some winners. I'm not suggesting that the United States should pursue only one or two advanced technologies (the so-called "all our eggs in one basket" approach). But, we must focus in on a balanced suite of innovative projects that fulfill the promise of long-term energy security, and as importantly, result in nearer-term solutions to transform the market in the next decade or two. After reading his article, I believe Professor Holdren would agree with this approach.
And, in fact, this is exactly what President Bush's energy-related proposals aim to do. The President's American Competitiveness Initiative proposes, among other things, an increase of half-a-billion dollars for next year for the Department of Energy's research budget, and a doubling over ten years. The complementary Advanced Energy Initiative proposes to increase funding for clean energy technologies by 22% this year. Our goal is to identify the technologies that could have the greatest impact on the marketplace in the relatively near future, and then really go after them with increased resources and aggressive timelines. In my view, such areas include: the development of commercially competitive cellulosic ethanol; advanced hybrid vehicle technologies; hydrogen fuel cells; solar photovoltaics; wind energy; and new technologies to burn coal for electricity production with near-zero emissions. And, to Professor Holdren's point about total budget dollars, this also means discontinuing some research programs that are either mature enough to be handled by the private sector or unlikely to have an impact.
I would also point out that we are wasting no time here. Critically important work is underway, and new projects and partnerships are being forged at present. Let me briefly describe two (of many) very recent examples.
In August 2006, the Department of Energy announced a $250 million Federal-funding opportunity for the establishment of two new Bioenergy Research Centers. Universities, national laboratories, nonprofit organizations and private firms—as well as consortia or partnerships—are all eligible to compete for an award to establish and operate a Center. The Research Centers will focus on high-risk, high-return approaches to developing energy-efficient and cost-effective methods for producing alternative fuels from biomass—including cellulosic ethanol, biodiesel, biofuels for aviation, hydrogen, and methane. Applications are due by February 2007, and additional information is available at: http://genomicsgtl.energy.gov.
In October 2006, the Department announced that it will provide over $450 million to support the deployment of carbon sequestration technologies in North America. The funds, which will span 10 years, will be used to validate that the capture, transportation, injection, and long-term storage of CO2 can be done safely, permanently, and economically to support the reduction of greenhouse gas intensity by 18% by 2012 and ensure that sequestration technologies will be ready for future deployment. Additional information about this and other sequestration projects is available at: http://fossil.energy.gov.
Let me close with this thought: picking winners and losers may not be the usual role for government. But, as Professor Holdren ably describes, the challenges that we face are too large and too important for a "business as usual" approach. What is needed is real leadership. And that means making tough choices, supporting those choices with meaningful funding and the very best scientists and engineers, and demanding results for the American people. This is precisely the type of leadership that President Bush is providing. And we can all look forward to the benefits—to our economy, to our security, and to our environmental health and well-being.
I strongly agree with, and share, John Holdren's intuition that accelerating the incentive for innovation is the most powerful and also politically feasible strategic avenue open [for addressing energy challenges].
That there is little investment in public research may not be altogether such a bad thing. The data I have seen about the efficacy of government research in either the environment or the energy area is quite discouraging—and not in the least bit surprising given the incentive structure prevailing in government laboratories.
You mentioned the leverage of emissions trading in a final sentence of your discussion of innovation. When we were working to create this system in the Carter years and before, in fact it was precisely this end that was my chief motivation and argument. If one can get every plant manager and engineer to have a powerful interest in innovation and in pollution abatement—especially in those elements where results are relatively low cost—one has achieved the best possible result. Once emissions trading is going full blast, every plant manager will have the same incentive (profit maximization) to innovate for the public environmental good as she or he does to increase the production of goods. (A July-August 1981 Harvard Business Review article I authored, titled "Thinking Ahead: Getting Smarter about Regulations," outlines what we had then built. As you'll see if you review the article, the basics today are what they were then!)
In contrast, the existing system gives managers a powerful incentive not to innovate lest that innovation becomes the new "best available technology." Equipment manufacturers, most notably, sell to customers who very definitely do not want them innovating to raise the bar.
Strong incentives to reduce emissions help energy conservation; but, I believe, we need incentive tools that are aimed directly at energy as well.
In this regard, I would draw to Holdren's attention a working paper titled Job Creation Tax Options that Get America Working [an organization of which I am the founder and chair] published several years ago. It outlines 20 natural resource taxes to demonstrate how easy it would be entirely to replace the country's enormously destructive payroll taxes. The energy inefficiency tax, in particular, is politically low cost and would give managers a most powerful incentive continuously to seek out new energy technology "S-curves."
Editors' note: Drayton was Assistant Administrator at the U.S. Environmental Protection Agency from 1977-1981, during which time he led the implementation of the first emissions trading system and the introduction of other mechanisms to sharpen incentives to comply with environmental regulations. Drayton and Holdren are both members of the advisory board of Innovations.
From: Richard A. Meserve, President, Carnegie Institution of Washington, Washington, D.C.
John Holdren's article in the Spring 2006 issue entitled "The Energy Innovation Imperative: Addressing Oil Dependence, Climate Change, and Other 21st Century Energy Challenges" should serve as a clarion call for dramatic action on energy policy. It provides a thoughtful analysis of the interaction of climate change and oil dependency, as well as summary of innovations in policy and management that should be undertaken. We can only hope that Holdren's analysis will stimulate action.
There are a few points, however, that perhaps deserve some additional emphasis. First, Holdren correctly characterizes climate change as the "800-hundred pound gorilla in the process of beating down the door." He notes the predictions of the climate models, as well as the accumulating evidence that many of the predicted effects are now observable. It perhaps bears emphasis that the consequences could be even more rapid and disruptive than Holdren recounts. The historical record shows that climate has changed rapidly in the past and there is the possibility that we may inadvertently cross a tipping point that moves the earth to a radically different climatic regime. The positive feedback effects from the loss of ice cover, the release of methane from tundra, or the disruption of ocean currents could bring about radical and rapid climatic change. In this connection, it is perhaps appropriate to consider that our climate system has not yet reached equilibrium with current atmospheric carbon dioxide concentrations and the evidence from a period with similar carbon dioxide concentrations in the Pliocene suggests that such equilibrium could involve both higher global average temperatures and sea level that is 25 meters higher than today. In short, Holdren's concern about climate change is amply justified.
Second, Holdren emphasizes the economic and international-security dimension of our dependence on foreign oil, focusing on the adverse consequences if the flow of petroleum were disrupted. I agree with his comments, but there is another dimension of that problem that perhaps should also be mentioned. World dependence on oil from the Middle East is large and is growing. Even in the absence of supply disruption, the payments for oil serve to strengthen countries that export terrorism as well as petroleum. It is fundamentally misguided not to take steps to limit the economic subsidization of our enemies.
Third, Holdren appropriately notes the many changes in U.S. policy that should be undertaken to respond to the dual threats of oil dependency and climate change. In this connection, it also deserves emphasis that aggressive efforts to harness change around the world will be essential. These are global problems that exceed the capacity of any one country to solve. The U.S. should be a pathfinder, rather than the laggard on these issues that it has been to date.
Finally, I would reemphasize the underlying theme of Holdren's analysis. The linked problems of climate change and oil dependency do not have easy solutions. But our failure to address them promptly may leave our children and grandchildren a world that is distinctly less pleasant than the one we inherited. Our successors may indeed condemn us for our failure to grapple with these problems in a timely fashion. I can only hope that we listen to Holdren's call to arms.
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