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3 A FRAMEWORK FOR P=NNING AND IMPLEMENTING ENERGY R&D In this chapter the status of energy research and development (R&D) in the United States is examined briefly, and insights drawn from past U.S. experience are considered for planning and implementing energy R&D strategies to reduce greenhouse gas (GHG] emissions., Concepts are then outlined to set the framework for the sector-specific analysis and the R&D recommendations presented in Chapter 4. R&D AT THE IJ. 8. DEPARTMENT OF ENERGY Funding for energy R&D decreased substantially during the 1980s, from a peak of nearly $5 billion (in constant 1988 dollars) in FY 1979 to about $2.2 billion in FY 1989. 2-4 The cutbacks have been unevenly distributed, as shown in Table 3-1.s Research on energy from renewable sources (solar, geothermal, wind) has declined 89 percent since 1979. Nuclear fission, conservation, and fossil energy research have also been cut drastically. A deliberate effort has been made to provide for steady annual increases in the resources devoted to the Basic Energy Sciences program, supporting research and technical analysis. Cutbacks in many of the applied R&D programs have been justified by intentions to reallocate R&D funding In an "upstream" direction-toward the basic research end of the spectrum. The rationale for this reallocation is that government support is most needed for long-term, high-risk Projects that are unlikely to be undertaken by the private sector. Within most programs there has been movement away from advanced development activities and demonstration projects toward exploratory and early-stage applied research. The shift in emphasis from commercialization during the Carter administration to a long-term, high-risk focus of R&D in the Reagan years has caused an erosion in the Department of Energy's (DOE) ability to influence the deployment of new energy technologies in the marketplace. While the basic issues of supply disruptions, rising oil prices, and U.S. energy security continued to persist through the late 1970s into the early 1980s, the energy policies of the Carter and Reagan administrations reflected different perceptions regarding the potential impact of those issues and hence fundamentally different approaches to their resolution. In programs retaining significant amounts of "downstream" activity, industry cofunding has become the norm. An exception to the general emphasis on moving federally funded R&D efforts upstream is nuclear fission research, where part of the effort remains concentrated on downstream activities such as supporting private sector efforts to meet regulatory burdens. 25

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TABLE 3-1 Budget Authority for DOE Civilian Energy R&D Programs5 Program Budget (millions of constant 1988 dollars) FY1979 FY1989 tChange Solar and other renewabl: Nuclear fission Electric energy Conservation Fossil energy Uranium enrichment Biological and environmental research Magnetic fusion Basic and supporting research Energy Information Administration Total 929 1,356 147 350 1,035 203 302 327 297 61 5,007 105 293 36 135 528 115 217 305 438 63 2235 Note: Excluded are activities in general science programs and superconducting supercollider project. 26 human genome project,

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ENERGY R&D OUTSIDE THE DOB Other Federal Agencies During the 1980's other federally funded energy R&D programs were scaled back along with those of DOE. From its peak in FY 1981, the Nuclear Regulatory Commission's budget authority for research on nuclear reactor safety and waste disposal declined 64 percent, from $294 million (in 1988 dollars) to $107 million. Since 1979 the U.S. Environmental Protection Agency has cut its funding of energy-related research by 70 percent in real terms, from $175 million to $53 million. 5 Other federal agencies such as Tennessee Valley Authority, Bonneville Power Administration, National Institute for Standards and Technology, the Bureau of Reclamation, U.S. Department of Defense, U.S. Department of Transportation, and the National Aeronautics and Space Administration also engage In energy-related R&D, but they are lesser players. The Private Bector Company funds for energy R&D also declined during the past decade but less dramatically than federal ef forts . In constant 1988 dollars, company-funded energy R&D fell 30 percent, from $3.46 billion in 1979 to $2 .42 billion in 1987, the most recent year for which company data are available.7 Thus, by 1987, company and federal efforts were of roughly equal magnitude, whereas in }979 federal funding was 50 percent greater than company funding. Cutbacks in company-funded R&D, like those of the federal government, have been unevenly distributed across f ields of application. Constant dollar company funds for conservation and renewable energy technologies declined 83 percent from $~.6 billion in 1979 to $284 million in 1987. Company funds for nuclear energy R&D fell by 66 percent over the same period, from $2 62 million to $88 million. Company-funded R&D on fossil fuel technology, however, increased 24 percent from $1. 2 billion to $1. 5 billion. Thus, in recent years federal and company efforts in conservation and renewables have been of roughly the same scale. Federal resources devoted to nuclear energy have been an order of magnitude larger than company resources, while company spending on fossil fuel technology has been three to five times greater than federal spending. Industrial consortia, other than the Gas Research Institute (GRI) and Electric Power Research Institute (EPRI), have not been major sources of funding for energy R&D even though legislation has reduced the barriers to collaborative projects among companies in the private sector. 27

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GRI and EPRI Of particular importance within the private sector are the research efforts of two large private consortia, the GRI and the EPRI. GRI's R&D programs (planned and executed under the jurisdiction of the Federal Energy Regulatory Commission) have involved an average expenditure of approximately $150 million per year in recent years . The GRI programs have essentially replaced federal programs in the aria of natural gas production, delivery, and end-use conservation. Thus, GRI's and DOE's efforts are complementary. EPRI (which, unlike GRT, operates outside FERC jurisdiction) funds a variety of R&D programs pertinent to the electric utility industry as well as generic fundamental research. EPRI's annual expenditure for R&D is now around $300 million, of which about $60 million and $3S million are targeted, respectively, at fossil and nuclear power plants. Other major R&D targets include environmental health, safety, and control ($80 million); end-use technologies ($40 million); electricity transmission, distribution, and deliv9ery ( $4 0 million); renewables and energy storage ~ $15 million) . LESSONS FROM R&D PROG~S ~ UNSTRAPS The committee conducted a limited assessment of the federal energy R&D programs to gather information that could guide the design of future efforts targeted at reducing emissions of GHGs. The assessment excluded DOE's activities under the general science and basic sciences areas. Several structural impediments to effective federal energy R&D management were identified. A common difficulty is political intervention with the specifics of program design and implementation. In one sense, of course, it would be not just surprising but alarming if elected government officials had no say in government programs. On a deeper level, however, the critique holds that government oversight is unnecessarily compromising the quality of work in energy R&D. Regional interests often intrude to boost or restrain decisions. For example, the Clinch River Breeder Reactor was funded for many years after a long series of studies, including those of the National Academy of Sciences, found it to be uneconomical. CRBR's longevity was helped significantly by its location. Congress has increasingly viewed the development of energy technologies as publ ic works programs . Sometimes regional interests become so powerful that congress directs DOE not to consider state and local cost-sharing incentives because this might disadvantage certain states unable to offer them. Changes in the presidency often lead to major redirection in federal energy programs. In 1977 the Carter administration 28

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attempted to dismantle many advanced nuclear projects; four years later the Reagan administration attempted to reinvigorate the same nuclear projects and to terminate the Carter coal and synfuels program. Frequent changes in priorities led to uneconomical, erratic program support as particular issues were of more or less concern to pal icymakers in the executive or legislative branch. Indeed, the present study is an example of how congressional concern about greenhouse warming and climate change is an attempt to shift energy R&D priorities yet again. The sensitivity of executive branch programs to changes in the presidency is sometimes countered by congressional attempts at stabilization. An example of this is in the fossil energy program, where 80 percent of projects have been subjected to 1'ne-item legislation. Technical management of energy R&D programs could be improved significantly if elected officials in both the executive and legislative branches exercised restraint. It is axiomatic for good management of large programs that clear and relevant objectives be established before the program is begun and that the program be periodically reviewed relative to its objectives. Many federal energy R&D programs appeared to the committee to lack any clear economic rationale. For example, economic analyses supporting the level of funding or the direction of the fission and magnetic fusion programs were not clearly discernible. In terms of monitoring progress, very little effort appeared to be devoted to understanding whether programs were meeting goals (when goals were specified) or to reallocating funds on the basis of the most promising lines of research. Almost all the federal energy R&D success stories were from programs that had clear objectives. The lack of clear and defensible objectives and careful monitoring tends to invite politicization, contributes to inertia in R&D programs, and leads to low success rates. As a result, federal energy R&D funds are not being invested as fruitfully as they should be. Today's structure of federal energy R&D in the DOE has its roots in the nuclear weapons industry, and in many ways the national defense continues to dominate federal energy decisions. This arises in part from DOE's budget. In FY 1989 the total department budget was about $14 billion, of which about $8.8 billion was related to defense and weapons and only about $2 billion was directly related to civilian energy R&D. In addition, the importance of defense issues in national debates has tended to dominate the attention of the top administrator, in turn, of the Atomic Energy Commission, the Energy Research and Development Administration, and the DOE. Currently, with the massive difficulties of cleaning up the wastes in nuclear weapons plants and in starting tritium production, the secretary of energy has little time to focus on overall civilian energy needs. Budget 29

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authority for fossil energy, renewables, conservation, and nuclear reactor R&D declined from FY 1979 to FY 1989, while the trend in the late 1980s in nuclear energy R&D was to increase the military component. In the end the key question concerning the performance of the federal civilian energy R&D program is whether it has succeeded in producing or assisting a significant number of energy technologies to reach technological maturity and market commercialization. Unfortunately, no comprehensive or well-designed survey of results of federal energy R&D exists, and given the time constraints of this study the committee was unable to undertake such a review. The committee's conclusions, therefore, must necessarily draw on case studies and episodes that may not be representative and on expert opinion that may also be selective. Subject to this reservation, however, DOE's energy R&D programs have shown a low success rate, with few examples of commercialization of technology on a viable long-term basis. However, it should be noted that in the 1980s DOE's criteria and emphasis were increasingly focused on long-term, high-risk R&D with a clear Reemphasis on activity close to commercialization. General lessons from federal energy R&D experience at DOE can be combined with the experiences of programs dedicated to civilian technology development such as at National Advisory Committee on Aeronautics/National Aeronautics and Space Administrations and at the U.S. Department of Agriculture,'~' to provide the following general guidance for the design of GHG reduction R&D strategies: ~ To the extent possible, applied R&D programs can and should involve industry participants in establishing objectives and carrying out the research. Competition among firms should be maintained, however, in the commercial development of technologies based on the results of this research. Federal research programs function most effectively as a complement to vigorous in-house R&D programs within industry. Especially where such in-house research is lacking, additional funding for extension and other forms of adoption assistance may be critical. A decentralized program structure, even though it may be slow to respond to new opportunities or other changes, has important advantages for fragmented industries or for applications that are highly idiosyncratic to varied circumstances. A diversified portfolio of publicly sponsored research projects of modest scale is likely to be more effective than a program that concentrates funding among a relatively small number of technologies. 30

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The committee's specific recommendations for improving the management of civilian energy R&D are presented later in this chapter in the section titled, Management of Federal Energy R&D. TEC]INOI,OGY DEVELOPMENT AND APPI,ICATION8 Ilt OTHER NATIONS The record of publicly funded R&D programs in many Western European nations is mixed. Many of these programs in aerospace, computers, microelectronics, and (in Great Britain) nuclear energy have suffered from efforts to achieve both national security and commercial objectives within a single program. '3 These programs tended to concentrate funding and technology development efforts on a single "national champion" firm, often constructed from forced mergers among several competitors. Competitive pressure was lacking, and the results frequently were h~gh-cost, noncompetitive technologies. The scale of government-funded ~ndustr'a1 R&D within contemporary Japan has been modest for most of the postwar period. Publicly funded R&D programs In Japan emphasize support for domestic diffusion of scienti fic and technical knowledge. Cooperative research programs emphasize interfirm diffusion of know-how and incremental improvements of technologies. Cooperation in research is combined with fierce competition among the participating firms in the application of the results of this research. ]4 In recent years, however, the willingness of Japanese firms to cooperate in these projects has declined somewhat. The committee could not review information on the initiation and nurturing of technology R&D programs and applications in developing countries. Important lessons remain to be learned from that experience and appl fed in future cooperative programs with such countries. TECENOLOGY-ADOPTION PROCESS To achieve successful commercial introduction, R&D programs must frequently be complemented by policies encouraging adoption. Such policies may require the involvement of federal, state, and local governments. Because the transfer and adoption of new technologies are costly knowledge-intensive activities, public R&D programs are unlikely to develop technologies to technical readiness and then let them "sit on the shelf" until needed. Much modification and improvement occur as technologies are moved into the marketplace. Public funds can be used to subsidize this process through demonstration programs, but care must be taken to avoid the mistakes made in earlier energy demonstration projects. Some federal energy demonstration programs of the 1970s (e.g., Clinch River Breeder Reactor) were too ambitious in pursuing commercial- scale installations in unproven technologies, and they relied too 31

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heavily on government management and funding for projects that were heavily oriented toward commercial applications.45 ATTAINING LOWGHG EMI8810NS Two general concepts govern a move from today's h~gh-GHG economy to a future economy with lower GHG emissions. The first is one in which successful R&D leads to future technological developments favorable to low-GHG fuels and activities that are less costly than comparable h~gh-GHG-emitting fuels and technologies, so the economy naturally makes a transition to a technological base with little potential for climatic impact attributable to GHGs. Under the second concept, governments take stringent measures (such as high carbon taxes or regulations) to move the economy of f h~gh-GHG fuels and technologies toward low- GHG ones. As a result, the market price of high-GHG technologies rises relative to those having low GHG emissions. Again, the global economy would tend to shift away from fossil fuels, thereby reducing emissions of GHGs. The point to emphasize about the two concepts is the difference in the nature of the forces acting on the economy: Under the first concept, reduction of GHGs comes in response to the low costs brought about by successful R&D and technology development; under the second, the impediments or subsidies provided by government policy make fossil fuels uneconomical. Investments in R&D, however, can move the economy more quickly toward low emissions of GHGs and can make the move less painful and less expensive. These concepts are further elaborated in a subsequent discussion of strategy options for energy R&D. ROLE OF RED What R&D (and initial implementation) can produce is information. Alternative energy R&D would reduce uncertainty about the cost, performance, environmental side effects, and other impacts of technologies designed to reduce energy-related GHG emissions. This investment in knowledge serves two purposes. First, it provides a basis for continually redirecting the R&D program toward alternatives that are potentially less costly. Second, information about new technologies has insurance value and provides a range of options for future deployment, although such deployment will require additional R&D and could take considerable time. Some new technologies may be worth developing, if new knowledge about global climate leads society to place a higher value on reducing GHG emissions. A worthwhile step, therefore, in the interest of quantifying upper or lower bounds on critical cost and performance characteristics of a new low-GHG technology, might be to develop and deploy it on a limited scale, even if its cost exceeds that of the existing energy technologies it would replace. Furthermore, in context, although cost reduction 32

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is one stated purpose of an energy technology R&D strategy, there is no guarantee that cost reductions will actually be achieved. Nuclear power is a case in point; its costs increased steadily during the decades following its initial deployment' despite the continued existence of a large federal R&D program., ENERGY POLICY AND GuGs In the United States, no fiscal, regulatory, or other incentives are offered to move away from high-GHG to low-GHG fuels and technologies aside from those involving chlorofluorocarbons. Indeed, the economic and energy policies that are in place in most countries, including the United States, tend to be neutral toward, if not in favor of, the continued use of GHG-intensive fuels. Although alternatives to fossil-fuel-based technologies that have lower GHG emissions are available, these are, for the most part, more expensive in the marketplace than high-GHG-emitting fuels and technologies. Given the higher relative cost of low-GHG-emitting technologies in comparison to high-GHG-emitting technologies, and the fact that market prices do not incorporate any cost of future climate change or any benefit from switching to low-GHG fuels, virtually no incentive exists for private firms to invest R&D funds in low-GHG-emitting technologies. The selection of appropriate policy instruments in the United States for reducing GHG emissions will be strongly influenced by our recent energy experience as well as by new considerations. Notwithstanding industry views to the contrary, a variety of policies in the past spurred development and adoption of technologies. These policies included federally mandated performance standards such as those on corporate average automotive fuel economy and large-appliance energy efficiency; taxation policies, including gasoline taxes and investment tax credits for adoption of conservation and renewables technologies; modification of federal, state, and local regulations, such as building codes; and electric utility regulatory policies that affect private payof fs to adoption. High taxes on GHG emissions or large tax credits that encourage widespread adoption of low- or zero-GHG emission technologies throughout the economy could be quite costly to the nation. Energy-intensive industries, in particular, would be severely affected. On a national basis, however, these costs could be partially offset by benefits associated with the production of new information arising from experience with the technology in a variety of market segments. Moreover, some segments of the private sector might invest in more R&D because of the larger market created by the adoption incentives. Also, broadly decentralized incentives such as those provided by a carbon tax could identify the technologies that are least costly to develop and implement and would place a cap on the cost of implementing them. Private R&D could be encouraged with tax credits, but this is a relatively 33

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inefficient incentive, producing far less than a dollar of incremental R&D per dollar of tax expenditure. Technology-specific factors will also be important determinants of policy, and experience suggests that future technology demonstration programs for GHG emission reductions should strive for the following characteristics: sufficient scale for demonstrating performance and reliability, avoiding premature commitments to commercial-scale projects or dramatic scale-ups; substantial industry involvement in project design and management; industry cofinancing; and concern for and mitigation of unexpected environmental effects. The issue of global climate change introduces two relatively new considerations into national energy policymaking: how to deal with pervasive and persistent uncertainties and how to include the fact that certain elements of the U.S. strategy may be determined in international negotiations. Because of the uncertainties, preference should be given to energy R&D strategies that are compatible with other national objectives such as economic efficiency and competitiveness, environmental quality, national security, public health and safety, and maintenance of a healthy and flexible economy. Diversity is also a hedge against uncertainty, so U.S. R&D strategy should encompass a broad range of technologies. The strategy should also be flexible in order to accommodate changes in R&D objectives as key uncertainties are resolved. Nevertheless, major irreducible uncertainties will remain and will limit what science can contribute to a national policy response. At the international level, alternative energy R&D strategies should include policies to assist developing countries in promoting economic growth while minimizing GHG emissions. The global nature of the markets for technologies that produce and consume energy may also create new opportunities for collaborative R&D on alternative energy technologies with other countries. ROLE OF THE PRIVaTE SECTOR Based on lessons learned from R&D experience relevant to civilian technologies, the private sector will play a vital role in achieving significant reductions in GHG emissions. Technological innovation is a continuum of activities from basic research through product or process introduction and improvement. The existing state of knowledge of technology at any given time determines the next activity to be undertaken; the market potential determines whether an action should be taken. In 34

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general, the federal government's role is important in developing, accessing, and communicating the state of technical knowledge. Industry should manage the demonstration of technology and its reduction to commercial products and services. Participation of both the pull ic and private sectors __ i mportant throughout all stages of innovation leading to technologies with which GHG emissions can be significantly reduced. Suggested roles for the government and private sector are highlighted in Table 3-2. TABLE 3-2 Government and Private Sector Roles in Energy R&D and Technology Innovation. Activity U.S. strategy with respect to global warming Energy R&D strategy Basic research Applied R&D Government Role (federal/state/local) L p L A Hard-to-capture benefits ~ Not-hard-to-capture benefits A Technology implementation Private Sector Role (including utilities) A p A L T A L Market stimulation L and intervention aL ~ lead role, P ~ partnership, and A Advisory role in establishing priorities and providing funding for research, development and demonstration. 35

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MANAGEMENT OF FEDERAL ENERGY R&D The committee's review of federal energy and other R&D programs summarized earlier suggests ways that the federal government might improve its management of energy R&~. The goal of these management suggestions is to improve the effectiveness of federal energy R&D programs-that is, reduce their costs and increase their benefits. While there are some notable exceptions, the committee concludes that federal energy R&D programs have often been hampered by conflicting objectives, political interference, inertia in program selection, and preoccupation of top management with defense issues. As a result, the payoff in terms of successful commercialization of civilian energy R&D programs has been modest at best. A clear and more defensible set of project and program management procedures could reduce current temptation for political intervention in program management and project selection. The committee therefore puts forth four recommendations for changes in the management of federal energy R&D that it believes will greatly enhance the social return to federal investments: Federal energy R&D programs should establish clear objectives and should systematically reevaluate the individual projects and general direction of R&D In light of these objectives. The variety of policy instruments used by the federal government to support energy R&D should be increased. Among the options to be considered are an increase in the peer review of proposals and programs and an increase in the portion of the budget that is open to competitive bidding. The management and budget of civil fan energy R&D should be insulated from unnecessary political interference and from other programs, particularly those related to defense. To improve the management of civilian energy R&D, separation of these programs from both defense and fundamental science now performed by DOE may be advisable. The sole-source funding of national laboratories should be examined carefully and managed in such a way as to avoid conflicts with R&D programs that are peer reviewed and competitively bid. Political factors and the defense domination of DOE have tended to reduce the effectiveness of management of civilian energy R&D. While the committee does not recommend removing the energy R&D budget from the normal appropriations process, the selection of projects must be assured on the basis of technical and economic merit rather than political pressure or the existing programs and capabilities of the national laboratories. Stronger DOE evaluation and management procedures could contribute to this goal. 36

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Over two-thirds of the total budget of the DOE is devoted to defense. The high visibility of defense, along with recent difficulties in managing nuclear waste disposal and defense nuclear production facilities, makes it difficult for the top administrators of DOE to give adequate attention to civilian R&D issues. The committee therefore recommends that Congress consider investing DOE's civilian energy functions with accountabilities that are distinct and separate from its defense energy functions. The committee also suggests that Congress consider alternative budget strategies for DOE such as those outlined below. ALTER~ATI=: BUDGET STRATEGIES Appropriate criteria for budgeting, research, development, and demonstration (RD&D) designed to reduce GHG emissions include stable funding over time and focused attention on the technological merits. These GHG-related criteria must compete with other highly desirable objectives. Among these are substantive policy objectives, such as reducing the deficit and maintaining economic competitiveness, and procedural objectives, including facilitating choices among national priorities and making these choices transparent. There Is also an implied objective in maintaining the integrity of the process by revealing all costs on an equal plane. All objectives could be met, given necessary political agreement, by a lump-sum annual appropriation to a lead agency, which would then divide this budget authority among the participating units. The funds would be available; they would be provided in a public and, therefore, accountable manner; and the program would be fiscally responsible. There are other ways of funding programs outside the appropriations process. Private research, for instance, could be funded by tax credits. In this way its funding is automatic, and this tax expenditure is not formally counted toward the deficit, though, of course, it does reduce revenues. Trust funds could be established based on earmarked taxes. The fate of the highway trust fund, however, warns against the premature view that such funding is guaranteed. A multiyear or "no-year" appropriation could be sought. By taking funding out of the appropriations process, instability in funding might be avoided. Yet that stability could be obtained, given the deficit, only at the expense of other programs. In any event, nothing can stop Congress from reconsidering any time it chooses . Tt is the public political support behind the programs that matters. There is no need to rely on a single form of funding. If, say, tax credits were deemed superior for private industry, appropriations could still be used by in-house government and 37

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noncorporate researchers. However, tax credits are difficult to target appropriately. The committee's preference is for a maximally visible fund through the annual appropriations process. LEVERAGING FEDERaL INVESTMENTS GLOBALLY The global character of the GHG issue imposes a special requirement on R&D. Both the advancement of science and the development of alternate "solutions" require an international context. The foreseeable R&D costs to make progress in these two areas will be high; hence, it would be desirable to share these costs as broadly as possible and to seek priority solutions that offer the greatest promise for GHG emission management should they be needed. International cooperation has been an established tradition in the natural sciences. Research on climate has involved major international experiments; these are ongoing programs that will yield important results about climate change. Analogous programs aimed at technology development to respond to GHG management have been discussed in ad hoc forms. Only recently, through the Intergovernmental Panel on Climate Change (IPCC), have talks begun on an international technological response. The IPCC deliberations should generate at least a framework for international RD&D; however, it is unlikely that the IPCC will institutionalize such a program. . Parallel to the IPCC activity, there are ad hoc industry discussions taking place. These are building on informal cooperative relationships developed in the electric utility industry and the petroleum and gas sector. Existing arrangements facilitate a continuing development of non-fossil-fuel electrical generation opportunities as well as transportation options. Examples of such arrangements include the United States-United Kingdom-France-Japan cooperation in developing safe nuclear power and the U.S.-DutCh coal generation demonstrations. A different example is the independent Japan-European R&D leading to improved fuel-efficient internal combustion engines. These focus on the applications and needs of the developed world but not on the needs of developing counties. Industry discussions in the United States concerning R&D on energy use and emissions are also under way but are outside the context of climate change at the present time. Most recently, 14 of the largest oil companies have j oined the three domestic automobile manufacturers in a con laborative R&D effort on alternative transportation fuels for the United States. The results of this collaboration are bound to have international significance. 38

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Analysis of the future energy options for the world indicate that, although considerable gains on GHG emissions are achievable in the developed countries, the greatest leverage on future change is in developing countries. The latter is set in the context of projected increases in population, progress toward economic parity, and greater industrialization. . A major opportunity is at hand for RD&D in cooperation with the developed countries to seek options for energy supply in the developing world. The s must take advantage of resources such as forest management; simple, small-scale, ef f icient electrical generation; efficient public transportation; high end-use efficiency; and emission control schemes that will permit continued exploitation of world coal resources. At present the options are available for technical means to arrest GHG emissions while providing for energy needs. However, the means for demonstrating the feasibility and reliability of alternatives has not been provided for. Demonstration of technology is an expensive and long-term commitment. To enable such demonstration, a cooperative program between government and the private sector would be an important element of U.S. energy strategy. International cooperation in energy RD&D can be encouraged through governmental arrangements or by ad hoc agreements with energy producers. Government commitments have been facilitated by formal programs of the United Nations, by informal arrangements using national laboratories, or by ad hoc organizations such as the International Institute for Applied Systems Analysis or the Center for European Nuclear Research. In the energy sector, commitments have been made through such institutions as the National Academy of Sciences, the GRI, and the EPRI, linked with sister organizations like the foreign academies of sciences and the foreign electric and gas research laboratories. The latter organizations are well suited for and experienced in the development and management of demonstration programs. The strategy choices for a U.S. RD&D effort should take advantage of this experience. 8TRATEGY OPTIONS Two energy R&D strategies together with market intervention policies and actions are available to the United States for achieving reductions in GHG emissions: ~ Focused R&D Strategy. Pursue energy R&D that is aimed at reducing GHG emissions and that would make sense for other reasons even in the absence of concerns about global climate change. Insurance Strategy. Pursue energy R&D that would be viable only in the presence of concerns about global climate change. 39

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Both strategies follow the conventional R&D paradigm of reducing uncertainties about the cost and performance of a technology by producing new knowledge. They address, in general terms, roughly the same set of technologies (encompassing the entire fuel cycle from supply through utilization), and span the full range of activities from fundamental research to technology adoption, but they differ in purpose, cost, and policy instruments. The economic rationale for the Focused R&D Strategy is based on the inability of private firms to capture the benefits of basi c research and the fact that the price of fossil fuels is less than the full social cost associated with their use. The rationale for the Insurance Strategy Is that additional energy R&D is warranted by the conditions that prevention of climate change may assume a high priority in the future and that new technologies would be needed to reduce GHG emissions. The Insurance Strategy is incremental to the Focused R&D Strategy. The fundamental difference between them is the difference in the magnitude, timing, and costs of actions that can be justified on non-GHG grounds and those that need a GHG j ustif ication. The federal R&D program under the Insurance Strategy will be considerably more costly to the government (involving multibillion dollar increments over the Focused R&D Strategy), and a greater fraction of the government's R&D would be directed toward reducing the uncertainties associated with the technology-adoption phase. Through the Insurance Strategy the nation would, over time, invest in the development and demonstration of a variety of "backstop" technologies for their "insurance" or option value. For example, before a new type of nuclear reactor becomes viable, it might have to be sited, licensed, and successfully operated for a number of years in order to convincingly demonstrate that dealing with safety and environmental concerns would not substantially increase the real cost of the technology, as occurred in the case of the light water reactor. Similarly, the government may need to underwrite the costs of demonstrating the economies of mass production of advanced batteries or the biological sustainability and environmental acceptability of large-scale biomass plantations in various regions of the country. Resolving uncertainties associated with the ''infrastructure" for these new technologies may require full-scale testing in certain market niches (e.g., fleets of electric or biomass-fueled delivery vehicles or rental cars) or in government programs (e.g., silviculture for erosion control) where the existence of other benefits may reduce the cost of implementation. The Insurance Strategy need not be directed exclusively on alternative energy technologies aimed at the domestic market. Technologies suitable for use in other countries such as India and China could have leverage for af fecting worldwide GHG emissions. Furthermore, the strategy may include the development and 40

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demonstration of CO2 sequestering technologies that would be of little interest in the absence of concern about GHG-induced climate change. It Is not sufficient to define energy R&D priorities in isolation from the marketplace for which the products of the R&D are intended. Prevailing market forces must be considered and government actions may be required to achieve specific national objectives. In the past, particularly at times of crisis, the government has used intervention mechanisms such as taxes, tax credits, energy efficiency standards, loan guarantees, subsidies, federal procurements, and liability limitations to influence the supply and demand of fuels and energy resources. In the event that the nation makes a commitment to reduce emissions of GHGs significantly, such actions ought to be considered again as a supplement to the Focused R&D and Insurance strategies. This would stimulate energy R&D in the private sector and the adoption of GHG- reducing technologies in the marketplace. In the near term (i.e., from the year 1990 to 2000), such actions could spur the adoption of GHG-reducing technologies that already exist and that can be shown to be economically viable for reasons other than low-GHG emissions but that are not currently being used. For example, policies may be needed to influence the regulatory environment at the state and local levels and facilitate widespread adoption. Tax and regulatory policies may be warranted, because they yield net benefits consistent with reliability of energy supply and other national goals such as security (e.g.' an oil import tariff or automotive fuel economy standards) or economic efficiency (e.g., promote investments In energy-conserving equipment or buildings). Market intervention could also be formulated to shift the entire burden of applied energy RD&D the private sector. For example, a carbon tax could stimulate development of alternative technologies by making fossil-fueled vehicles more costly to operate. It could elicit a diverse R&D response from the private sector and facilitate an efficient transition (e.g., encouraging the use of methanol made from natural gas while biomass plantations were becoming established). A carbon tax could also send clearer signals to the market about the relative costs of electric and biofueled personal transportation systems, as electricity prices began to reflect the costs of generating technologies having low- or zero-GHG emissions. Such actions could enable the private sector to capture the benefits that the nation may attach to reducing GHG emissions. They would, however, still leave the government with its traditional role of performing basic generic research because its benefits cannot be appropriated. A pure market intervention strategy would not change what needs to be done by way of energy R&D but would shift to the private sector the responsibility for its planning and execution. 41

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Chapter 4 draws on the framework presented in this chapter, and defines alternative energy R&D programs and actions to achieve reductions in GHG emissions. The committee's recommendations are not governed by explicit objectives to achieve specific levels of reductions in U.S. GHG emissions over different time horizons. However, the technology-adoption actions identified in the various market sectors relate to existing technologies that can be shown to be reasonably cost-effective (i.e., economically viable aside from their GHG emissions reduction value) and to technologies in R&D once the uncertainties regarding their cost and performance have been reduced to acceptable limits. 42

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NOTES AND REFERENCES For a detailed treatment of federal energy R&D, see R. G. Hewlett and B. J. Dierenfield, The Federal Role and Activities in Energy Research and Development,_1946-1980: An Historical Summary, Oak Ridge National Laboratory, Oak Ridge, Tenn., 1983. 2. Fiscal Year 1990 Budget Highlights, U.S. Department of Energy, Washington, D.C., January 1989, p. 4. 3. Federal R&D Funding by Budget_Function: Fiscal Years 1989- 1990. NSF 89-806: National Science Foundation, Washington, D.C., April 1989. The Advanced Nuclear Systems ($38 millions and the Space and Defense Power Systems programs ($66 million) are directed entirely at NASA and military applications. An unspecified fraction of the expenditures on the Test Facilities ($138 million) program is also directed toward noncivilian applications. See DOE's Fiscal Year 1990 _Budget Highlights, pp. 15-16. 5. Federal R&D Funding by_Budget Function, National Science Foundation, Washington, D.C., various years. 6. Private sector underinvestment in R&D occurs not because projects are long term and high risk but because marginal social returns exceed marginal private returns. Such circumstances arise because (~) the marginal returns to R&D cannot be fully appropriated by the innovator (e.g., there are spillovers to competitors) or (2) the products or services on which R&D Is focused are unpriced or inappropriately priced in the market (e.g., market prices fail to reflect environmental damages or premiums for national security). To the extent that the results of long-term, high-risk projects are less appropriable than the results of short-term "downstream" projects, such projects are prone to underinvestment by the private sector and may warrant government support. Data on company-funded R&D were supplied by the Science Resources Section of the National Science Foundation. Historical Review of Gas Research Institute Research and Development. Gas Research Institute, Chicago, Ill., May 1987. 9. Research and Development Program 1989-1991, Electric Power Research Institute, Palo Alto, Calif., January 1989. 43

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10. The discussion of NASA's research programs draws on D. C. Mowery's paper presented at the NAS workshop on the returns to federally funded R&D, November 1985; and D. C. Mowery and N. Rosenberg, Technology and the Pursuit, of Economic Growth, Cambridge University Press, New York, 1989, Chapter 7. 11. R. E. Evenson, ''Agriculture,'' in R. R. Nelson fed.), Government and Technical Progress, Pergamon Press, New York, 1983, provides the basis for this paragraph. 12. "Overall, the experiment stations have generally moved their work into areas where they have a comparative advantage vis-a-vis the private sector. In direct competition with market-oriented private firms, the public sector does poorly and generally does not invest heavily in research of that type. It tends to be pressed into work of a testing and certifying nature, designed to help farmers make choices among suppliers of inputs. In recent years it has played a major role in facilitating adjustment to regulations both in the chemical inputs fields and in food technology" (Evenson, op. cit., p. 275~. R. R. Nelson, High-Technology Policies: A Five-Nation Comparison, American Enterprise Institute, Washington, D.C., 1984. The French nuclear program, which shares many of the undesirable features of the British nuclear program and both the British and French programs in computers and aircraft, appears to have been relatively successful in producing reactors for extensive domestic use. This success was aided by the existence of a state-owned monopolistic domestic customer for the French reactors, which facilitated design standardization and reduced regulatory obstacles to adoption. Framatome, the major French producer of reactors (also state owned), nevertheless does not appear to be highly successful as an exporter in world markets. 14. See D. Okimoto, "The Japanese Challenge in High Technology," in R. Landau and N. Rosenberg teds. ) , The Positive Sum Strategy, National Academy Press, Washington, D.C., 1986, and Mowery and Rosenberg, op. cit., Chapter 8. 15. J. F. Ahearne, Why Federal Research and Development Fails, Discussion Paper EM 88-02, Resources for the Future, Washington, D.C., July '988. 16. Nuclear Power in an Age of Uncertainty, Report OTA-E-216, U.S. Congress, Office of Technology Assessment, Washington D. C., February 1984. 17. Tax Policy and Administration: The Research Tax Credit Has Stimulated Some Additional Research Spending, U.S. General Accounting Office, Washington, D.C., September, 1989. 44