Want more stringent EPA carbon caps? We need innovation policy

The Environmental Protection Agency's (EPA) proposed carbon regulation on existing power plants is the biggest climate victory since the Recovery Act's investments in clean energy, and advocates are hopeful it will deliver on many fronts — as EPA Administrator Gina McCarthy declared, "our action will sharpen America's competitive edge, spur innovation, and create jobs." But supporters should not oversell EPA regulations as something they are not. Climate advocates should consider the benefits of coordinating an innovation strategy with the new regulations to ensure their near-term success and to enable EPA to implement more stringent targets in the future.

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Since taking office in 2009, President Obama has implemented a three-part attack on climate change: regulations on vehicle emissions, renewable deployment subsidies and innovation investments. Unfortunately, the impact of this strategy on U.S. carbon emissions has been minor at best. Emissions temporarily dropped because of the economic recession and the natural gas boom, but are on the rise again. Implementing more aggressive climate action has been impeded by a perfect storm of political gridlock and the higher cost of clean energy compared to fossil fuels outside of niche markets.

The new EPA regulations change this status quo by subverting political gridlock. The regulations set a modest goal of reducing existing power-plant carbon emissions by 30 percent below 2005 levels by 2030. Recognizing regional economic and energy differences around the country, the EPA has tailored specific carbon cuts for each state, providing significant flexibility to customize policy strategies that reflect local advantages and needs.

But in order to cut carbon emissions without significantly increasing the cost of electricity, clean energy costs must decline. Although U.S. emissions are already 15 percent below 2005 levels — essentially halfway to meeting the reduction targets — most analysts think that the "low-hanging fruit" energy efficiency and renewable energy projects have already been deployed and reducing emissions further will be expensive unless low-carbon technologies themselves become more affordable.

This is the central barrier to a clean energy revolution in the United States. It is well known that reducing carbon emissions in the United States by 30 percent by 2030 is not nearly enough to mitigate climate change. We need to do more, and faster. Yet, dialing up the regulations requires removing political economy barriers, and that will only happen when clean energy becomes much cheaper.

The principal way to accomplish this is through innovation. Environmental Protection Agency regulations will likely pull existing technologies into markets, namely natural gas, but also some subsidized solar and wind power. This market pull will also drive some incremental innovation by expanding the clean tech market and generating economies-of-scale, like the SO2 regulations of the 1990s did for coal scrubber technologies.

However, the new EPA regulations by themselves will not spur major breakthrough innovations that can significantly reduce clean energy costs. For instance, EPA regulations shouldn't be expected to incent the development of new utility-scale energy storage ideas, but it would certainly pull more commercially available lithium-ion batteries into the market.

Even with EPA carbon regulations, advocates and policymakers remain caught in a cruel dichotomy between economic cost and climate. But the reality is that EPA regulations should not be seen as an endgame, but as an opportunity. More clean energy innovation will make meeting 30 percent cuts economically easier, which will make increasing the cuts over time easier for the country to stomach.

Unfortunately, the state of energy innovation policy in the United States is far from optimal. The federal clean-energy research, development, and demonstration (RD&D) budget has been stagnant at $5 billion per year since the stimulus. Most experts agree energy RD&D investment should be at least $15 billion to foster the breakthroughs required in energy storage and next-generation solar, nuclear and carbon capture and sequestration technologies, among others. The state of U.S. energy innovation becomes grimmer as Congress continues to propose deep budget cuts when we need to be quickly ramping up investment.

In addition to greater public support, an effective innovation strategy requires better institutional linkages between research centers, like the National Labs, and the market, as well as a clean energy tax structure that rewards continual improvements in technology cost and performance.

It's time to start dialing up America's climate policies. Conservatives can't do much to stop EPA's carbon regulations. Liberals can't do much to make them more aggressive. But both sides of the political divide would welcome cheap clean energy. For conservatives, it means we can drive change without paying more for energy and the heavy hand of government. For liberals, it means we can finally make real progress in addressing global climate change. But the only way to reconcile these differences is through innovation, and that won't happen without more federal support for clean energy RD&D and better innovation policy.

Stepp is executive director of the Center for Clean Energy Innovation.

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