Energy R&D: Public funding vs markets

How much public funding is required to foster the level of energy innovation needed to make low-carbon energy competitive with fossil fuels?

Opinions vary on the role public funding should play in making clean energy cheaper. Entrepreneur Vinod Khosla, co-founder of Sun Microsystems and an investor in corn and cellulosic ethanol and other energy ventures, says there is ‘not enough [public] money in the world’ to achieve it.

Creating private sector incentives, for example through cap and trade schemes, helps – but many argue that large scale public investment is needed.

Nicholas Stern has called for worldwide public spending on energy research and development to double from $10bn per year and grow to $50bn in the medium term. Stephen Chu early this year called for a ‘second industrial revolution’.

So why is a carbon price not enough to encourage the necessary innovation?

The Brookings Institution has come down firmly on the side of more public funding. In a new paper they propose a network of ‘energy innovation institutes’ with annual budgets ranging from $10m to $200m.

The argument is partly based on the premise that carbon prices will not be raised high enough, out of political sensibility, to encourage the level of investment needed to make big breakthroughs.

But they also argue that, regardless, pricing signals alone are not enough:

Nowhere is this clearer than in the innovation game. Private energy firms chronically under-invest in energy R&D because they cannot fully capture the future returns of their innovations, which spill over to their competitors. And in contrast to the consumer electronics, pharmaceutical, and computer industries, too few early adopters in the energy-sector are willing to pay five times more to own the latest, greatest gadget, which means that emerging energy technologies must become competitive much more quickly to survive. That makes private companies reluctant to make bets on new clean energy technologies. The energy industry remains one of the least research-intensive industries in the economy. The upshot: private-sector investment in energy R&D will almost certainly proceed more slowly than the climate challenge demands.

To make clean energy cheaper, US needs bold research push (Brookings)

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