Policy Initiatives

ENERGY POLICY

The use of energy is deeply embedded in the economy and society of the United States. The country spends about a trillion dollars a year on energy, according to Lane, and another trillion dollars on devices that use energy. “It is a big business, possibly the biggest.”

The United States is currently locked in a competitive battle with other countries for leadership in the energy business of the 21st century. Over the next five years, said Lane, the United States will be making decisions that will determine its world standing in the energy industry, and those decisions will have effects lasting for decades.

Over the next five years the United States will be making decisions that will determine its world standing in the energy industry.


Ray Lane

The United States is clearly not winning the competition today. At present, our policy, as Al Gore has put it, is to borrow money from China, buy oil from the Middle East, and burn it here. China, meanwhile, understands that it must control its energy future and that the future will not be the same as the past. Government policies in China have established fuel economy standards for vehicles that are well above standards in the United States. By 2020, China is slated to be generating five times as much wind energy as the United States, creating 120,000 jobs in that country.

The largest Internet companies today, including Amazon, E-Bay, Microsoft, and Yahoo, were all created in the United States, Lane pointed out. But of the world’s largest wind energy companies, only one, General Electric, is an American company. The United States has just one of the



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Policy Initiatives ENERgy POLICy The use of energy is deeply embedded in the economy and society of the United States. The country spends about a trillion dollars a year on energy, according to Lane, and another trillion dollars on devices that use energy. “It is a big business, possibly the biggest.” The United States is currently locked in a competitive battle with other countries for leadership in the energy business of the 21st cen- tury. Over the next five years, said Lane, the United States will be mak- Over the next five years ing decisions that will determine its the United States will be world standing in the energy indus- making decisions that will try, and those decisions will have determine its world standing in the energy industry. effects lasting for decades. The United States is clearly not Ray Lane winning the competition today. At present, our policy, as Al Gore has put it, is to borrow money from China, buy oil from the Middle East, and burn it here. China, meanwhile, understands that it must control its energy future and that the future will not be the same as the past. Government policies in China have established fuel economy standards for vehicles that are well above standards in the United States. By 2020, China is slated to be generating five times as much wind energy as the United States, creating 120,000 jobs in that country. The largest Internet companies today, including Amazon, E-Bay, Microsoft, and Yahoo, were all created in the United States, Lane pointed out. But of the world’s largest wind energy companies, only one, General Electric, is an American company. The United States has just one of the 

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 REBUILDING A REAL ECONOMY Wind farm in Palm Springs, California. top ten solar companies in the world, one of the world’s top ten wind turbine companies, and two of the top ten advanced battery companies. The United States “led the development of not only the steel industry and other industries in the 1900s but [also] the electronics industry, the biotech industry, and the Internet. In clean energy, we are clearly behind the rest of the world.” Innovation is the way to catch up, said Lane. His company has funded approximately 50 energy companies based on high-risk ideas. “I’m not in the subprime business, I’m in the sub-subprime busi- ness, because we loan money to people who have taken the ultimate risk.” Lane listed five ways government could boost the competitiveness of the U.S. energy industry. First, government should establish a long-term price on carbon and cap carbon dioxide emissions worldwide. Without this price signal, it is difficult for private industry to know how the market is going to react or when an economic return will be possible. Second, new policies should be adapted to encourage utilities to drive efficiency, develop and use renewable sources of energy, and build a standardized, unified, smart electricity grid.

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 POLICY INITIATIVES Third, stricter fuel economy standards for cars should be adopted. “Let’s get aggressive. We don’t have to sit with the [standards] that have been adopted.” Fourth, R&D on energy production, distribution, storage, and use should be increased. Even with the increases promoted by the Obama administration, energy R&D is still just a quarter of one percent of the national energy bill. Fifth, the government should change trade laws so that the United States becomes a leading exporter of energy technologies. “The Chinese should be buying our technology, not us buying their technology,” Lane said. Negotiations on reducing worldwide emissions “must be looked at as a commercial opportunity for us to lead global industries.” Negotiations on reducing Koonin agreed that “many worldwide emissions energy technologies developed in “must be looked at as a the U.S. are now dominated by commercial opportunity for us to lead global industries.” other countries,” including photo- voltaics, automobile efficiency, Ray Lane batteries, electricity transmission, power electronics, and nuclear power. Furthermore, because the energy infrastructure is so longlasting, competitive advantages can be locked into place for long periods. Unlike electronic technologies, such as personal audio and video, the energy system changes on a decadal timescale. “Power plants last 50 years. Automobiles last 15 years. There is also the ubiquity of energy, meaning that many people have interests in it, and those interests don’t always align.” Finally, the current energy system offers good ways of produc- ing heat, light, and mobility, “so new technologies have to meet those benchmarks of cost and availability if they are to be successful.” Koonin reiterated the need for many of the policies advocated by Lane, including significant and consistent carbon prices, renewable or low-carbon power portfolio standards, efficiency standards, energy R&D, and the development of human capital. He noted that the Depart- ment of Energy is pursuing a variety of programs to stimulate energy innovation. Energy frontier research centers are focused on basic sci- ence and technology. The Advanced Research Projects Agency-Energy (ARPA-E) has begun to fund high-risk, high-reward concepts. Stimulus funds and ongoing support are being applied to innovation in vehicle technologies and manufacturing, carbon capture and storage, renew- ables, and grid modernization. “We are making tangible progress toward making a difference in energy innovation.”

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 REBUILDING A REAL ECONOMY It is important to move quickly, said Koonin, because “the atmo- sphere is filling up with carbon dioxide.” The levels of carbon diox- ide projected for the middle of this century under a business as usual model will endanger the climate. Yet the infrastructure that is being built today will still be functioning 50 years from now. Many steps can be taken immediately that would have long-term positive effects, such as improving the efficiency of the internal combustion engine, gradual electrification of the automobile fleet from hybrids to plug-in hybrids to full batteries, development of advanced biofuels, greater efficiency of energy use, nuclear power, wind power, carbon capture and storage, “To capture the jobs stemming and building efficiency. from energy innovation, we An additional challenge in the have to reverse the U.S. energy industry is to generate jobs decline in manufacturing and in the United States rather than in make the country again a favored venue for production.” other countries. “To capture the jobs stemming from energy inno- Steven Koonin vation, we have to reverse the U.S. decline in manufacturing and make the country again a favored venue for production,” Koonin said. Doing so requires addressing many nontechnical issues that are outside the scope of the Energy Department, such as labor costs, health care, and tax regimes. “Without addressing those, the U.S. will not realize the full benefits of our technical achievements.” INCENTIvE PRIzES Diamandis described an innovative approach to driving innovation: offering large monetary prizes for clearly defined technological achieve- ments. The X PRIZE Foundation that he heads develops prizes in four broad areas: energy and the environment, exploration, education and global development, and the life sciences. “Humans love a challenge,” said Diamandis. “We are genetically evolved to compete. That’s what we do best, in our sports, in our lives, whatever it might be. We do our best thinking in a race, whether it’s to build the atom bomb, to get to the Moon, or to build private spaceships.” The approach taken by the foundation has a number of benefits, Diamandis said. If prizes are structured properly, they can generate 10 to 40 times the amount of the prize money in investments. They also are very efficient, because “you only pay the winner.” They attract small,

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 POLICY INITIATIVES Peter Diamandis, chairman and CEO, X Prize Foundation. Photo by Tom Sullivan. young, and sometimes naive teams, many of which include mavericks who bring new ways of thinking to a field. They encourage risk taking and bring new sources of capital to important problems, including prob- lems in industries that are in need of revitalization. Ultimately, they can change what people think is possible, “because if you think something is impossible, it is,” Diamandis said. The Ansari X PRIZE is an “We are genetically evolved excellent example. It offered a to compete. That’s what we $10 million prize to the first pri- do best, in our sports, in our vate team to build and launch a lives, whatever it might be. We spacecraft capable of carrying three do our best thinking in a race, whether it’s to build the atom people to an altitude of 100 kilo- bomb, to get to the Moon, or meters twice within two weeks. to build private spaceships.” The prize was won on October 4, 2004, after generating expenditures Peter Diamandis of $100 million by 26 teams from seven nations. Another example is a prize offered by the Defense Advanced Research Projects Agency (DARPA). For 20 years people had spent hundreds of millions of dollars trying to develop an autonomous vehicle, but little progress was made.

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0 REBUILDING A REAL ECONOMY When DARPA established a $2 million prize for an autonomous car, a team of graduate students at Stanford University built one in less than a year for half a million dollars. Diamandis continued: That, for me, is the vibrancy and excitement that we need to be generating. The day before something is a breakthrough, it’s a crazy idea. If it weren’t a crazy idea, it wouldn’t be a breakthrough; it would be an incremental improve- ment. So where in our large corporations and our government agencies do we embrace and allow for crazy ideas to materialize? Where do we fund, tolerate, and encourage failure, and not only failure but serial failure? Breakthroughs require a great deal of risk and a tolerance for risk. Worse yet, true innovations are often a radical departure from accepted theories, modes of business, and beliefs and as such are heretical to the experts until ultimately they are proven true. So how do we ultimately balance the desire for breakthroughs with the inherent institutional inertia of large corporations and governments? THE ExAMPLE OF SINgAPORE Changing the production system of a country in relatively short order is far from impossible, said Tony Tan Keng Yam, chairman of the National Research Foundation and former deputy prime minister of Singapore. In fact, Singapore has transformed its economy several times since gaining independence from Great Britain in 1965. First it transi- tioned from labor-intensive industries to skill-intensive industries. Then the country moved into technology-intensive industries. And currently it is pursuing knowledge-based, innovation-driven industries. “Transform- ing our economy has been a way of life in Singapore,” said Tan. In the process, Singapore has greatly increased the incomes of its citizens. Desperately poor upon independence, the country now has the second highest per capita income in Asia after Japan. The achieve- ment is even more remarkable given that Singapore, a small country of just 5 million people living on 700 square kilometers, has no natural resources and imports all of its food and half of its water. The key to Singapore’s The key to Singapore’s success success has been its ability to has been its ability to anticipate anticipate future developments and to take risks. future developments and to take risks. When the country became Tony Tan independent, the conventional wis- dom was to erect trade barriers to protect local industries. Instead, Singapore lowered trade barriers, and today it is host to almost 7,000 companies from the United States,

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 POLICY INITIATIVES Singapore harbor. Europe, and Japan, more than 3,000 companies from China and India, and more than 2,500 companies from Australia and New Zealand, Tan said. A second example is that Singapore converted its port operations to emphasize container shipping at a time when the world marine industry was still debating whether containers were the future of shipping. Today Singapore’s port is connected to more than 600 ports in more than 100 countries around the world and handles some 20 million containers annually. Tan cited a third example, the water industry in Singapore. With few water resources, the country has invested heavily in water research, tech- nology, and management since the 1970s. In the process, it has trans- formed an inherent resource constraint into a new economic growth sector as the world deals with the problem of supplying growing popula- tions with adequate water. In 2007, Singapore’s water industry won the Stockholm Industry Water Award. The government of Singapore has shaped the continual transfor- mation of industry through guidance and funding and by “providing a mechanism within the government for public officers to help them

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 REBUILDING A REAL ECONOMY think out of the box and bring about new developments and new ways of delivering public service,” said Tan. The government is in the process of raising its spending on R&D from under 2.5 percent of the country’s gross domestic product to 3 percent. Every government ministry in Singapore devotes a percentage of its budget to innovation. In addition, the National Research Foundation of Singapore has created a campus for research excellence and technological enterprise that houses research centers established by world-class universities. In broad terms, Singa- pore has established a national framework for innovation and enterprise that integrates the chain of knowledge creation, knowledge diffusion, and knowledge use to create a vibrant innovation ecosystem. Most important, said Tan, Singapore has emphasized the education of its citizens. “Education has always been given the highest priority in Singapore since our independence in 1965,” said Tan. “Rightly so, If you look at the history of because with no natural resources, discoveries in this country our people are the only strength since World War II, it is that Singapore has.” The country always related to a relatively has built technical institutes of edu- small number of individuals. cation and research universities that We should not worry only about the numbers [of can serve as engines of growth. It science and engineering also has emphasized the translation students] but about identifying of ideas and innovations from the and nurturing those who university to the marketplace, which can make a difference. has helped generate new industries, new companies, and new business Jean-Lou Chameau models. EDUCATION Education will be just as critical a determinant of the United States’ future economic success as it has been in Singapore. To succeed in innovation, students must be trained to be innovators, said Chameau. In universities, faculty should support students’ work on ideas that they initiate. “If you look at surveys of freshmen conducted every year, they love that approach,” he said. “They want to develop a meaningful philosophy of life, they want to get engaged, and we need to find ways to do that.” Students are particularly drawn to grand challenges, such as those awarded by the X PRIZE Foundation or those issued by the National Academy of Engineering in 2008.

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 POLICY INITIATIVES Jean-Lou Chameau, president, California Institute of Technology. Photo by Tom Sullivan. For innovation to become a more prominent feature of American society, science and technology must be more integrated into a liberal education. “Are graduates of history or philosophy well-rounded if, in the 21st century, they are limited in their knowledge of science and technology?” Chameau asked. “I think this is an important issue for the country.” To achieve this goal, science and engineering faculty in universities will have to devote more time to teaching classes for non- specialists and revisiting curricula and courses. Chameau cautioned against focusing too intently on the immediate needs of the marketplace. As a dean of engineering in the 1990s, he was under pressure to produce more software engineers and computer scien- tists, just as the rush today is for people to become energy scientists and technologists. “At the same time, we have to remember . . . to educate people who are going to be active over 20 or 30 years, to make sure that we pay attention to the fundamental disciplines. We don’t really know what will be the next big thing.” Science and engineering faculty will also have to direct particular attention to the relatively small numbers of prospective scientists and

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 REBUILDING A REAL ECONOMY engineers who will make a real difference in their fields. “If you look at the history of discoveries in this country since World War II, it is always related to a relatively small number of individuals,” Chameau said. “We should not worry only about the numbers [of science and engineer- “In today’s world, success ing students] but about identifying will come from having the and nurturing those who can make largest possible educated a difference.” population and providing As Diamandis said, “For the those hundreds of millions of creative individuals with leadership of modern nations, suc- the freedom and the capital cess will not come from having the to create and be brilliant. “ largest defense industry. Nor the most natural resources. Nor even Peter Diamandis the most advanced technologies. In today’s world, success will come from having the largest possible educated population and providing those hundreds of millions of creative individuals with the freedom and the capital to create and be brilliant.”