At the Center of Crisis: An Energy Policy for America’s Future

by Adam S. Sieff, Policy Fellow

With oil flooding the Gulf, General David Petraeus fainting before Congress as he tries to salvage the war in Afghanistan, and many Americans still out of work, President Obama faces compound crises assailing the United States. But despite the ambiguities of his speech last Tuesday, the President still needs to frame these issues as components of a single problem facing all Americans: dependence on foreign carbon-based energy. The President’s bipartisan meeting with Senators tomorrow provides a second golden opportunity to pitch clean energy legislation to voters.

Clean energy advocates have traditionally been labeled “greens,” their ranks presumably abundant in the hills of Berkeley and on Manhattan’s Upper West Side. Indeed, the most enthusiasm for a new energy economy still comes—for better or worse—from the environmental community. But as the President must communicate, one needn’t wear Birkenstocks or compost in the backyard to understand the critical urgency of developing a clean energy economy. He must demonstrate that there are good reasons for every working American to embrace immediate and transformative energy policy.

First, at the cost of countless good-paying jobs, he must emphasize that the United States stands to lose its competitive edge in the global economy if it fails to stimulate a clean energy sector. The global energy industry is a $5 trillion business and new markets for clean energy firms are expanding more rapidly in Asia than they are here in the United States. In particular, China, Japan and South Korea all stand to surpass the United States in dominance of future clean energy markets due to their substantially larger government investments supporting energy research and innovation. According to statistics published by the International Energy Agency (IEA), for every dollar of U.S. economic output, only 0.03% is currently devoted to clean energy research and development—less than half the rate in South Korea, and barely a third of the rate in Japan. Over the next five years, China alone will invest $209 billion to energy technology research. By contrast, the United States, in even the most generous assessment of the most ambitious proposed legislation, will only invest $92 billion.

If the late twentieth-century saw the United States fade as a global supplier of energy through the gradual exhaustion of its petroleum export capacity and rise as an importer of foreign fuels, the early twenty-first century could see the U.S. importing the majority of its energy producing technologies and relying on foreign innovation to dynamically reformat its decaying infrastructure. As Senator Lindsey Graham said in March, “You don’t have to believe that Iowa is going to become beachfront property to want to clean up carbon. It is not about polar bears to me, it’s about jobs.”

Second, beyond employment levels, he must stress that the costs of limiting our energy options imperil the entire U.S. economy. Without a commitment to developing domestic clean energy sources, the U.S. is exposed to the sort of energy price volatility that has produced devastating recessions in 1973, 2001 and 2008, and which nearly collapsed the state of California in the summers of 2000 and 2001. According to the American Energy Innovation Council (AEIC), the 2008 recession cost the U.S. economy $500 billion in 2008 alone. Constrained energy sources also balloon the trade deficit, and send nearly $1 billion abroad for fuel each day. A clean energy economy will not only usher in a period of economic expansion and hiring, but also insulate American workers from foreign market shocks and help scale one pillar of America’s daunting twin-deficits.

Third, he must explain that there are significant advantages for U.S. national security and foreign policy embedded in the development of a clean energy economy. Recent adventures in the Middle East have made all too clear the barrels of blood and treasure that the United States has spilt and spoiled in distant deserts that happen to teem with oil. Less obvious, however, is the cost of continuous global military deployment to protect shipping lanes, refineries, and oil-bearing allies. The Institute of Policy Studies has estimated that the U.S. spends $250 billion annually for this type of force deployment—the very sort of “hegemonic overstretch” that international relations theorist Robert Gilpin discusses in his treatise on the fall of great powers, and which military expert Andrew Krepinevich has been warning about since Vietnam.

As the AEIC—a group of business leaders including Bill Gates—concludes in its just-released Business Plan for America’s Future, “This is a serious nexus of problems. Each individually should merit national attention; together, they should be at the top of the national agenda.” The President, and Congress, should take heed.

Unfortunately, the energy policy debate in Washington has been mired in the antiquated framework of neo-classical economics and regulatory signaling. Cap-and-trade is a policy that essentially waits for the winds to change. It relies on market mechanisms to make carbon relatively expensive, instead of investing in innovation to make cleaner technologies relatively cheap. This approach is intrinsically flawed.

To make carbon expensive enough to spur investment and growth in alternative technologies, the voting public would need to accept a significant increase in the cost of consumer energy. By all accounts, and given the present political climate, this is not at all likely. As a Senate aide working on energy legislation told Politco’s Mike Allen, “anything that looks like a tax is going to be almost dead on arrival.” Consequently, each and every proposed cap-and-trade policy contains provisions to prevent the price of carbon from floating above $12-$15/ton. But by preventing the price of carbon from rising to the uncomfortably high levels needed for alternative energies to become cost-effective (in excess of $130/ton in some cases) these price “off-ramps,” “safety valves,” “allowance reserves,” and “offsets” defeat the purpose of any cap-and-trade legislation.

Instead, it is time for the President to reiterate the call issued in his inaugural address, and throughout his campaign, for a $15 billion a year direct public investment in energy innovation. To grow the U.S. economy into the new century, the President needs to break with market orthodoxies and embrace the realities of what economist Robert Atkinson calls “innovation economics.” In the words of Stanford’s Paul Romer, whose endogenous growth model gives innovation economics its theoretical basis, “Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable…. Ideas remain to be discovered.” From this perspective, when prominent economists like Michael Mandel report on “the failed promise of American innovation,” and Harvard Business School professors no longer find the U.S. to be a “major player” in certain emerging energy technologies, there is cause for concern.

But there is reason for optimism, as well. We cannot know what technological innovations lie dormant in the minds of Americans unless we provide them with the resources to unleash them.

Though we Americans pride ourselves on being innovative, our cultural narratives dating back to Whitman and Thoreau too often overlook the involvement of federal investment as the key to unlocking that innovation. In Whitman’s time, federal spending championed by Whigs from Henry Clay to a young Abraham Lincoln made the extension of railroads and power lines possible, and the dredging of canals and harbors affordable. More recently, vast federal funding for technological research and development has produced nuclear fission (the Manhattan Project), the aerospace industry (the Saturn and Apollo programs), and the Internet (the ARPANET program)—all technologies that we have exported worldwide to the great benefit of American industrialists and laborers alike.

In the 1950s, America devoted more than 4% of its GDP to various forms of research and development. Today, that number has been halved, and, for the first time since World War II, we are no longer the world’s leader in technological research: Israel, Sweden, Finland, Iceland, South Korea, Japan and Switzerland all spend a higher proportion of their output on various R&D projects than we do.

Much of our once superior innovation investment followed the Soviet launch of Sputnik, when, in 1958, Congress enacted the original National Defense Education Act (NDEA) and ramped up its investments in “critical” technological research. The NDEA inspired generations of U.S. students to pursue fields vital to national security and, in conjunction with federally funded research, aided the nation in establishing its dominance in science and technology for the next half century.

Today, we have a similar opportunity to make similar critical investments in education and research that will meet the major policy challenges of the time. The Deepwater Horizon presents more than a “Sputnik moment.” It is an opportunity to reinvent and redirect the future of this country by investing in the talents and curiosities of its brightest minds and youngest generations. It is an opportunity the President must not neglect, and which Congress must seize upon in the weeks ahead.