Energy Innovation and Policy
Authors: Alic John A. 
Published: May 2016

Stabilizing atmospheric greenhouse gases will require very large reductions in energy-related carbon dioxide emissions. This can be achieved only through continuous innovation, aggressive and ongoing. Fast-paced innovation, in turn, depends on rapid and widespread diffusion, adoption, adaptation—in short, on technological learning. These processes are integrally linked, as virtuous circles, through feedback loops embedded in economic markets. The overall dynamics are fundamentally incremental.

Pundits and policymakers, nonetheless, sometimes seem to hope that “breakthroughs” will emerge to sweep existing energy technologies aside. Such hopes are misplaced, for two reasons. If breakthroughs are construed as something “new under the sun,” they are rare and unpredictable, and policymakers have few tools to foster them. Energy technologies, after all, have been intensively explored over the past two centuries: the physical constraints are well understood and there are few reasons to expect research to lead to anything fundamentally new. Infant technologies, second, tend to perform poorly, and to be quite costly. Improvements come over time though technological learning. Inputs to this sort of learning range from field service experience to “just-in-time” research. Economic competition provides much of the driving force.

The dynamics just sketched are broadly representative of the evolutionary paths traced by past energy technologies—wind and steam power, gas turbines, nuclear power, and solar photovoltaic (PV) cells and systems. Similar paths will be followed if prospective innovations such as carbon capture and storage, small nuclear reactors, or schemes for tapping the energy of the world’s oceans begin to mature and diffuse. Over the next several decades, the world should expect to work with existing technologies in various stages of maturation that can and will—because this is inherent in the process of innovation—advance on technical measures of performance (e.g., energy conversion efficiency) and come down in costs (in most cases) through continuous improvement.

This sort of innovation is first and foremost the work of profit-seeking businesses, enterprises that conceive, develop, introduce, and market new technologies. These firms exploit publically funded R&D; just as important historically, government procurements have created initial markets, including the first PV cells and also the gas turbines that many utilities now buy for electric power generation, the early versions of which were based on designs for military aircraft. A major task for energy-climate policy is to create similarly viable market segments in which new and emerging technologies can gain a foothold, as a number of governments have done for battery-electric vehicles. Direct and indirect subsidies—financial preferences as provided in some countries for battery-electric vehicles, and market set-asides, as for biofuels in Europe, Brazil, and the United States—insulate firms from potential competition, creating opportunities to push forward technologically, overcoming early handicaps, such as high costs and poor performance, associated with emerging technologies. The implication: Effective innovation policies must provide powerful incentives for profit-seeking businesses. This is true worldwide, although mechanisms will differ from country to country.