Beyond boom and bust: putting clean tech on a path to subsidy independence

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Source: GLOBE Foundation

In the absence of significant and timely energy policy reform, the recent boom in US clean tech sectors could falter. This is the principal conclusion of a new report from the Brookings Institute that examines faltering federal government support for clean energy technology.

Mark Muro, one of the principal authors of the paper, Beyond Boom & Bust, is a senior fellow and policy director at the Metropolitan Policy Program at Brookings.

He argues that driven by private innovation and entrepreneurship as well as critical public sector support in the form of tax credits, grants, and loan guarantees, several clean energy technology (or 'clean tech') segments have grown robustly in recent years while making progress on cost and performance.

Despite this recent success, however, nearly all clean tech segments in the United States remain reliant on production and deployment subsidies and other supportive policies to gain an expanding foothold in today's energy markets. Now, many of these subsidies and policies are poised to expire-with substantial implications for the clean tech industry.

The report takes stock of the coming changes to federal clean tech subsidies and programs and examines their likely impact on key clean tech market segments. It also seeks to chart a course of policy reform that can advance the US clean tech industry beyond today's cycle of boom and bust.

As this analysis illustrates, an era of heightened clean energy spending supported by the American Recovery and Reinvestment Act of 2009 (ARRA) is now coming to an end, coinciding with the expiration of several additional time-delimited tax credits and programs. As a result, key portions of the clean tech industry can now anticipate substantially reduced federal support.

At the same time, market subsidies are being cut in several European markets, reducing export opportunities for US clean tech manufacturers and leading to oversupply and declining margins, even as pressure mounts from both low-cost natural gas at home and foreign clean tech manufacturers abroad.

US clean tech sectors therefore face a combination of new challenges. Without timely and targeted policy reform, several sectors are likely to experience more bankruptcies, consolidations, and market contraction ahead.

Yet the demise of the current clean tech subsidy system need not be disastrous, the report suggests. In fact, it may provide an opportunity for needed reform and further industry growth, albeit one that must be carefully approached by both policy makers and business leaders.

Many of today's existing subsidies and clean energy programs, after all, are poorly optimized, characterized by a boom and bust cycle of aid and withdrawal, or in need of thorough revision thanks to either recent progress in the price and performance of subsidized technologies or the mounting fiscal burden imposed by some programs.

The end of the present policy regime therefore offers the opportunity to implement smart reforms that not only avoid a potential 'clean tech crash' but also accelerate technological progress and more effectively utilize taxpayer resources.

Well-designed policies that successfully drive innovation and industry maturation could provide US clean energy sectors a more stable framework within which to advance towards both subsidy independence and long-term international competitiveness.

Key Recommendations for a New Era of Clean Energy Policy

As to how, specifically, the nation might move toward a new era of clean energy policy, the report concludes that the United States should now build on its historic strengths as a leader in innovation, entrepreneurship, and advanced manufacturing by accelerating the development, adoption, and improvement of cost-effective clean energy technologies.

It argues that policy makers and business leaders alike should pursue reform on two fronts that will put clean tech on a path to subsidy independence and secure US leadership in clean energy markets:

In terms of reforming energy deployment subsidies and policies, the report recommends a suite of measures designed to reward technology improvement and cost declines. In particular, clean tech deployment policies should create market opportunities for advanced clean energy technologies while fostering competition between technology firms. They should also create market incentives and structures that demand and reward continual improvement in technology performance and cost.

Deployment incentives should be structured to create market opportunities for energy technologies at different levels of maturity, including new market entrants, to ensure that each has a chance to mature while allowing technologies of similar maturity levels to compete amongst themselves.

Most importantly deployment policies must not operate in perpetuity, but rather should be terminated if technology segments either fail to improve in price and performance or become competitive without subsidy. Incentives should decline as technologies improve in price and performance to both conserve limited taxpayer and consumer resources and provide clear incentives for continued technology improvement.

While deployment incentives should be temporary, they must still provide sufficient certainty to support key business decisions by private firms and investors. That is, incentives should be designed to avoid creating unnecessarily high transaction costs while opening up clean tech investment to broader private capital markets.

Finally, the report concludes that many of today's clean tech deployment subsidies and policies should be reformed with these criteria in mind. Examples of possible policies that could meet these criteria include competitive deployment incentives, steadily-improving performance-based standards, 'top-runner' standards or incentives, demanding government procurement opportunities, and reverse auction programs.

If structured to adhere to these criteria, the report's authors conclude a new era of clean tech deployment policies would neither select 'winners and losers'a priori, nor create permanently subsidized industries.

Rather, these policies would  provide opportunity for all emerging clean energy technologies to demonstrate progress in price and performance, foster competitive markets within a diverse energy portfolio, and put clean tech segments on track to full subsidy independence.

The call for responsible incentives for clean energy technology deployment, and for the elimination of subidies to conventional fossil fuels is a key recommendation of the recently published West Coast Clean Economy report prepared by GLOBE Advisors, in partnership with the Center for Climate Strategies.

The full Brookings report is available for download here.

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