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Energy R&D Faces a Cliff

Obama is calling for a doubling of energy R&D funding, but where will he find the money?
February 20, 2013

Last week, President Obama spoke during his State of the Union about the need to address climate change and proposed doubling federal R&D spending, including funding for clean energy. This week he faces a more pressing issue—the automatic spending cuts scheduled to go into effect on March 1 that would cut defense-related energy R&D spending by 7.6 percent and other energy R&D by 5.1 percent.

President Obama
Big plans: Obama (shown here delivering the State of the Union address this year) wants to double energy R&D funding. Where will he get the money?

The president has several options for preserving or even significantly increasing clean-energy funding, including reallocating funding from existing energy programs.

In last week’s speech, Obama called for returning R&D levels to what they were during the space race, which would double spending from current levels, adding $5 billion to energy-related R&D, says Matthew Stepp, senior policy analyst at the Information Technology and Innovation Foundation. Obama also proposed an energy security trust fund that would allot $2 billion from oil and gas leases and fees that would be dedicated to replacing oil in transportation.

Although it will be hard to double energy funding in the midst of spending cuts, Obama could achieve a similar scale of funding by reallocating some of the money from the production tax credit, a subsidy for wind power. Congress acted earlier this year to extend the tax credit by one year at an estimated cost of $12 billion. The credit serves mainly to promote the installation of existing technology, not new technology (see “Will Federal Policy Help Wind Compete with Fossil Fuels?”). “The PTC is primarily about job creation, not innovation,” Stepp says. “Right now we’re investing billions of dollars a year in deploying the same old technology over and over again. It allows the wind industry to perpetuate itself, but there’s no built-in mechanism to support innovation.”

Despite its flaws, the Obama administration seems intent on maintaining the PTC. In White House fact sheets released in conjunction with the State of the Union address, Obama  proposed making the production tax credit permanent, which would guarantee the industry a steady stream of income. Greg Nemet, a professor of public affairs and environmental studies at the University of Wisconsin, recommends phasing out the credit on a predictable schedule to encourage companies to make the innovations needed to survive without it. Stepp would go further. He says some of the money should be reallocated to other R&D, or designated to subsidize next-generation wind technology.

Obama’s proposal to create an energy security trust fund to develop alternatives to oil for transportation could bring in even more than the $2 billion he called for, especially if it’s tied to the expansion of oil and gas leasing. Stepp suggests that energy R&D funding could be doubled in this way alone. A trust fund would create a dedicated stream of revenue and thus could rescue energy development from the boom and bust cycle it’s experienced over the years. That stability could be key for producing the kind of innovation needed for low-carbon technologies to compete with fossil fuels.

Although long-term, steady funding for clean energy will require the help of Congress, Obama can also act alone. He has repeatedly said that if Congress failed to approve climate legislation, he would take executive action. One option, enforcing strict regulations on coal plants, could speed the transition to natural gas, but would probably do little to spur innovation. Alternatively, Obama could order the military to expand its current efforts to adopt alternative energy sources, with a focus on testing new technologies that have been demonstrated at a small scale.

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