Atkinson: Investment in Innovation and Manufacturing Critical to US Clean Energy Competitiveness

Testifying before the Senate Finance Subcommittee on Energy, Natural Resources and Infrastructure, ITIF President and "Rising Tigers, Sleeping Giant" co-author Rob Atkinson spoke in support of incentives for US clean energy manufacturing as part of a comprehensive strategy for clean energy competitiveness. Building on Breakthrough's work with him on "Rising Tigers," Atkinson warned that a carbon price, and other demand side policies, are not enough to spur the kind of innovation necessary to ensure clean energy competitiveness.

Below are some highlights from his testimony. You can read the full testimony here.

The principal focus of climate change policy to date has been on boosting demand for clean energy technologies (and thereby reducing demand for "dirty" energy technologies), either by requiring reductions in carbon emissions (carbon caps or other regulations limiting energy use) or by increasing the price of carbon (carbon taxes or cap and trade). While such a demand side strategy is a key component of addressing climate change, it alone is insufficient to produce the kinds of changes needed.

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...supporting clean technology research and production is a necessary component of any clean energy policy. Such subsidies need not distort what economists term "allocation efficiency." Economists from a wide array of political orientations have long argued that "bads" (activities with negative externalities) [like] carbon should be taxed, since the consumption of carbon creates costs to society that are not borne by the consumer (e.g., an organization or individual), and thus will be higher than what is optimal for society. Raising the price of carbon is one way to address this market failure, but as we have seen doing so has proven politically unpopular. The alternative is to subsidize non- or low-carbon alternatives in order to reduce their price. A principal advantage of the latter approach is that it addresses two issues at once: lowering the relative price of clean technology while at the same time increasing the likelihood that the demand for clean technology will be met in the United States, thereby creating jobs and reducing the trade deficit.

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The U.S. should not assume that the clean energy industry is ours for the taking. Nations like China, Japan, South Korea, Spain and Germany are already outcompeting U.S. manufacturers, not through some inherent comparative advantage, but through direct public investment in clean energy research and development, manufacturing, and market creation. As ITIF and The Breakthrough Institute documented in "Rising Tigers, Sleeping Giant," Asia's clean tech tigers are already on the cusp of establishing a first-mover advantage over the United States in the global clean tech industry...Overall, the report found the United States lagging far behind its economic competitors in the production of virtually all clean energy technologies. According to the New America Foundation, the U.S. balance of trade in renewable energy has moved from a trade deficit of nearly $300 million in 1997 to a deficit of $6.4 billion in 2008. Should this gap continue to grow, the United States risks importing the majority of the clean energy technologies necessary to meet growing domestic demand.

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One reason we are lagging behind is that other nations have put in place aggressive clean tech investment strategies. According to a recent study by Deutsche Bank, "generous and well-targeted [clean energy] incentives" in China and Japan will create a low-risk environment for investors and stimulate high levels of private investment in clean energy. These nations rely on a comprehensive and integrated government plan, supported by strong incentives. In contrast, the investment firm notes, the United States is a "moderate-risk" country since it relies on "a more volatile market incentive approach and has suffered from a start-stop approach in some areas."

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Public investment helps bridge the initial price differential between clean energy technologies and their incumbent competitors. Unlike economy-wide carbon prices or market mechanisms, these public investments and incentives can be targeted to address the varying price differentials for a full suite of clean technologies at various stages of maturity and development. These investments in turn accelerate reductions in the real, unsubsidized cost of emerging clean technologies over time. New technologies routinely become less expensive with increasing experience and scale, as supply chain and production efficiencies are captured and economy of scale effects are realized. This "learning-by-doing" effect, brought about through operational market experience, also feeds back into the research process to guide future research and improvements in product performance and price. It is in this context that the Section 48c [tax credit for advanced energy manufacturing investments] plays an important role.

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While the 48c program is an important tool towards both increasing clean energy jobs in the United States and addressing global climate change, it is not enough. Ultimately, developing a globally competitive clean energy industry will require not only support for clean energy manufacturers, including but not limited to incentive programs like 48c, but also a comprehensive efforts to spur innovation and collaboration throughout the clean energy sector, from research to technology commercialization and production.

Therefore, tax credits for advanced clean energy manufacturing are one piece of what must be a larger public strategy to build a robust clean energy economy. The federal government must also ensure adequate investment in clean energy research and development to advance next- generation energy technologies to improve their performance and make them cheaper, and accelerate the opportunities to manufacture and commercialize new technologies by providing stable and long-term demand. In this regard, ITIF believes that any climate change legislation considered by Congress should invest much more in research, innovation and advanced production, even if it has to reduce the tax on greenhouse gases emissions (for example, by a less aggressive carbon cap).

New institutional models are also needed to coordinate investments in R&D, manufacturing, and technology commercialization and spur public-private collaboration to accelerate the pace of innovation throughout the technology value chain. A large body of scholarship has identified regions as the most effective delivery mechanisms for such coordination, and we have proposed that the federal government offer grants to create regional clean energy innovation clusters to link federal and non-federal investment in clean energy and maximize the economic impact of our federal dollars.

Finally, we need to supplement domestic clean energy policies with a trade policy that challenges clean technology protectionist policies in other nations.