Innovation Economics Can Fight Global Warming

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Keynesians ignore political realities

Yet while the Dutch drive less than Americans and do so in smaller cars, they still drive conventional vehicles. In fact, there are virtually no electric cars in the Netherlands. If a price of $400 per ton doesn't inspire consumers to embrace electric cars, why would a modest U.S. cap-and- trade system produce the kinds of innovation we need? Pricing carbon is not sufficient to change behavior or investments.

There's a fundamental problem with the Keynesian take on carbon reduction, too. Without systemic and radical innovation, meeting emission caps might become extremely costly in later years as limits become tougher. If the cost of regulation jumps, politicians would undoubtedly be pressured to weaken the caps. Any compromise would send the wrong signal to developing nations, which also must lower their output of greenhouse gases to slow or halt climate change.

If we are to halve global carbon emissions by 2050—the minimum reduction needed, according to many scientists—we will need radically cleaner technologies such as fully electric cars, affordable solar cells, and large-scale electricity storage devices.

To make this happen, the federal government should develop a broader approach, including spending more money on clean energy R&D. The government can afford it. In 1980, about 10% of federal research went to energy—down to less than 2% today. Getting back to 1980 levels would lift energy R&D expenditures by $11.4 billion a year.

Needed: Clean energy research funding

To encourage private-sector investment, Congress should also significantly increase the tax credit for R&D related to carbon emissions. Recent energy legislation created a 20% credit for corporate research conducted in collaboration with such public entities as federal labs and universities. That tax break should be 40%, and Congress should raise other energy R&D credits to 30%.

In addition, the government should establish new clean energy research centers that could discover and test new technology. Congress took a step in this direction with the 2007 creation of the Advanced Research Project Agency in the Energy Dept. Now lawmakers need to fully fund it.

The Waxman-Markey bill would establish eight "Clean Energy Innovation Centers" around the country to do R&D and accelerate the commercialization of clean energy technologies. But according to the Breakthrough Institute, the bill would allocate less than $1 billion to clean energy R&D. Much more is needed if we are serious about solving global warming.

In the end, differences over climate change go to the heart of most economic policy debates in Washington. Neoclassicists give short shrift to innovation (and innovation policy), and believe innovation is best left to the invisible hand of the marketplace. Likewise, neo-Keynesians don't give innovation its due, arguing that government can simply mandate the results it needs. In contrast, innovation economists put innovation at the center and argue that advances require bold public-private partnerships. We can't afford to do less.

Rob Atkinson is Founder and President of The Information Technology and Innovation Foundation, a Washington, DC-based think tank.  He is also author of The Past and Future of America's Economy: Long Waves of Innovation that Drive Cycles of Growth.  His focus is on IT and innovation and policy to support them.

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