Next on Climate: Improve Waxman-Markey Innovation Provisions in Senate

June 29, 2009

Few aspects of the Waxman-Markey cap-and-trade bill matter more than the insufficient degree to which it applies future revenue to clean energy innovation. Quite simply, the American Clean Energy and Security Act (ACES) makes only a modest start toward promoting the technology breakthroughs that will make clean energy cheap, reduce carbon emissions, and create thousands of cleantech jobs. Correcting that shortcoming must become a top priority of lawmakers in the coming months as action moves to the Senate.

The challenge is clear now that ACES has passed the House. As a recent report issued by my group at the Brookings Institution argues, pricing and regulatory responses won’t by themselves get America where its needs to go when it comes to decarbonizing the world economy. In addition, America and the world need to catalyze—with large government research interventions—radical scientific and technological breakthroughs and their commercialization.

How big do those interventions need to be? According to our analysis, the federal government needs to invest as much as $20 to $30 billion per year in energy R&D alone simply to approach the federal R&D engagement level in, say, the health care sector. Look at the pharmaceuticals or IT industries and you reach far higher benchmarks. All of which means that America must move aggressively to develop and harness a portfolio of truly scalable clean energy sources—many of which we do not now have—and ensure that they are affordable enough to deploy throughout the world. Consequently, it matters hugely whether America’s climate response channels enough investment into clean energy technology research, development, and deployment.

The problem with Waxman-Markey is that, while the legislation provides important placeholder provisions on R&D investment, the revenue applied remains paltry.

On the positive side, Reps. Waxman and Markey deserve credit, given the circumstances, for setting aside slivers of the 40-year revenue stream of their cap-and-trade system for energy R&D and related activities. It is also good to see the bill embrace new formats for that R&D, most notably the novel model of ARPA-E (Subtitle H, section 172)—and the start-up of eight “Energy Innovation Hubs” (Subtitle H, section 171)—regional R&D centers reminiscent of Brookings’ proposal for a network of energy discovery-innovation institutes (e-DIIs) designed to leverage the expertise of universities, national laboratories, industry, venture capital, and others in the transfer of clean energy technologies into the marketplace.

At the same time, though, the commitment falls far short of the needed targets. While a $20 to $30 billion a year R&D outlay would be optimal, Waxman-Markey would invest just 1.5 percent of the 40-year revenue stream of the cap-and-trade system in the R&D efforts of ARPA-E and the innovation hubs—which comes to just $1.4 billion a year or so at accepted permit price forecasts. That’s an important increase from the current $5 billion or so U.S. energy R&D level but still not enough. And the same goes for the bill’s total investments in clean energy which, defined more broadly, are likely to approach no more than $9 billion annually between 2012–2025. The bottom line: Reps. Waxman and Markey did well to install several crucial innovation provisions in the House bill, but the political trades that were required to pass it have left far too little revenue behind for the most crucial use of cap-trade money—investments to catalyze a radically cleaner energy future.

All of which defines the major task before the Senate. By applying to the cause a long-term revenue stream, the Senate should significantly strengthen Waxman-Markey’s clean energy R&D provisions, principally by investing significantly more in them. To be sure nothing will be easy here. Not only is the Senate far less “fired up” on balance to act aggressively on climate. Also, the Senate is addressing climate and energy in a more fragmented way, with Sen. Boxer’s liberal-leaning Environment and Public Works Committee developing a greenhouse gas and cap-and-trade regime while Sen. Bingaman’s more centrist Energy and Natural Resources Committee advances renewable energy, efficiency standards, and smart grid proposals in a regular bill.

In that splintered context, it’s going to require difficult negotiations to get a Senate bill and then to reconcile it with ACES. And yet, it does not seem fanciful to suggest that heavy investment in energy innovation and economic transformation could offer the best route forward. Such investments need to emerge as the needed point of consensus between the greenest of the greens and stalwart defenders of the nation’s economic competitiveness, first in the Senate and then in both Houses. Only through that convergence will the nation gain a truly transformative energy and climate bill that moves the nation soundly toward clean energy economy.