Energy Innovation Post-Cap-and-Trade—Now What?

Mark Muro and Kenan Fikri

So, the flickering chimera of a climate bill centered on a cap-and-trade system finally flickered out last week—perhaps for a long while.

Which is really troubling. Instead of an economy-wide carbon pricing system or even a utility sector-only one, the nation will be lucky to obtain from Congress some modest oil-spill response measures, some oil industry regulatory responses, and some incentives for home energy efficiency retrofits and natural gas vehicles. No major energy efficiency standards seem in the offing. No new renewable energy standard seems on the docket. And as to any other of the dozens of powerful ways to begin accelerating the transition to a clean energy economy in which clean energy becomes cheap, well they are not here or at all forthcoming.

Meanwhile, competitors forge ahead with regulations, incentives, creative financing tools, and strategic investments designed to capture the Silicon Valley of the next, low-carbon economy.

So where do we go from here? Some alternative ways forward remain, but none with such broadly catalytic potential to change habits and investment calculi across the economy, and none alone likely to win the United States the clean tech race.

Stronger federal and state regulatory efforts will be one way forward. Here the EPA looks poised to play a significant role at the national level, but piecemeal regulations and patchwork of state efforts won’t create the sort of stable investment environment that the transition to a clean energy economy requires. Using government and especially Department of Defense procurement more strategically to increase demand for low-carbon solutions and accelerate deployment could serve as another lever too.

And now more than ever the federal government must pile onto clean tech innovation with large R&D investments. The nation badly needs a new push for energy system innovation that seeks countless efficiencies but also triples to quintuples today’s anemic baseline level of federal energy innovation R&D. Expert consensus suggests that federal government should invest at least $15 billion a year in federal energy R&D. Cap-and-trade was never going to solve the nation’s and the world’s energy challenges alone. The federal government still needs to ramp up support for investment and research in new, breakthrough technologies that can radically reduce the carbon-intensiveness of the economy and make clean energy cost-competitive.

However, it bears saying right now that the demise of cap-and-trade only underscores the urgency of locating the significant, dedicated revenue streams needed for clean energy investments, research, deployment, and transition costs if the U.S. is not to miss out on the clean energy economy entirely.


Some will most regret the loss of the best chance we may have had for several years to raise the price of carbon emissions and so stimulate new and cleaner behavior across the economy. However, at least equal to that disappointment is the loss of a top candidate for generating the needed innovation revenue—tens of billions of necessary investment money. And the longer term costs to national prosperity of this dithering on climate, energy, and innovation matters—while other countries rack up first-mover advantages in technology after technology—are likely as grave as yet unknown.