Clean Tech Support Is About to Fall Off a Cliff. Here’s One Way to Save It

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Debt-ridden and sclerotic Japan hasn’t been the go-to example of smart foreign governments since about 1991—that slot is now occupied by China—but there’s one program from Tokyo that the U.S. would be wise to copy. It’s called Top Runner, and it helps explain why Japanese appliances perennially top the table when it comes to energy efficiency. Government officials in Tokyo periodically survey energy performance among top appliance manufacturers, then base the new standard off the top performer. The Top Runner program creates energy efficiency standards that are realistic—at least one company must have already achieved them—but also ambitious, all without being arbitrary.

A Top Runner-style program for the U.S. is one of the recommendations made in a vital new report on government clean tech funding released yesterday by the Breakthrough Institute, the Brookings Institution and the World Resources Institute. “Beyond Boom and Bust”—download the PDF here—documents how generous levels of government funding for clean tech have helped the sector blossom in recent years, with wind, solar and other clean energy sources growing rapidly. The report estimates that more than $150 billion will have been spent by the federal government on clean tech between 2009 and 2014, a three-fold expansion of the total funding from 2002 to 2008. But with stimulus funding drying up and many renewable energy tax credits set to expire soon, that funding could disappear—falling 75% between 2009 to 2014. “Clean tech government support is in real danger,” says Letha Tawney, a senior associate at the World Resources Institute and one of the co-authors of the report. “Without that support, the U.S. risks losing a major industry for the 21st century.”

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The last few years have been very good to the clean tech industry as a whole—and the clean tech industry has been pretty good to America as well. The report notes that clean tech firms were among the few to actually add jobs during the recession, expanding employment in the sector 12% between 2007 and 2010. Wind turbine prices have improved by 27% between 2008 and 2011, and renewable electricity generation doubled between 2006 and 2011. Meaningful government support from the federal level on down, along with high prices for fossil fuels (at least until the recent shale gas boom) and a growing concern over climate change helped transform renewable energy from a side show to a real global business. It’s important enough that the U.S. and China are engaged in a trade skirmish over subsidies for solar panels.

But that support—both in the U.S. and internationally—is at an inflection point. Absent Congressional action, annual clean tech support will be cut nearly in half between 2011 and 2012. By 2014 it would fall to $11 billion, far less than the $44.3 billion that was spent in 2009. Annual funding for clean energy deployment—subsidies and credits that go directly to encouraging the construction of solar and wind power—will fall by nearly 80% between 2009 and 2014, which would be disastrous for a still young industry. European countries like Germany and Spain that have led the way on subsidizing renewable power are cutting back on government support, concerned about the cost of continuing to subsidize a ballooning solar market.

That cut in government support isn’t a sign of clean tech failure, but one of success, as Jesse Jenkins of the Breakthrough Institute points out. Prices for wind and solar have fallen significantly, which has encouraged more deployment—but the more renewable energy that gets deployed, the more expensive those subsidies become. As governments around the world tighten their belts, clean tech is getting squeezed out. The boom becomes a bust. “When the tax credits and other incentives expire suddenly, it makes it hard for that industry to continue its drive to market competitiveness,” says Jenkins, a co-author on the paper.

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We might never return to the giant gift bag of funding that was 2009, at least in part because those numbers were heavily juiced by temporary stimulus spending. Fiscal hawks in Congress will fight against nearly any form of clean tech subsidy or incentive. That means every remaining dollar of government support needs to work that much harder—which is why Jenkins and his co-authors believes the focus needs to be on programs that encourage costs improvements in renewable energy, not just the deployment of existing technologies.

That means more funding for energy research and development, which has always been a relatively small part of overall clean tech support (just 18% of federal clean tech spending between 2009 and 2014). Subsidies that currently are geared towards straight deployment—think the investment tax credit much beloved of the wind industry—should be rejiggered so that they reward improvements in performances, with the goal of moving renewable energy to straight-up cost competitiveness with fossil fuels. Think Japan’s Top Runner program, only for solar or wind instead of just refrigerators and washing machines. The kind of feed-in tarrifs used by Germany—where support declines over time as solar becomes cheaper—fit the bill. “You want incentives to drive performance towards the lowest cost and highest performance,” says Jenkins.

Of course, any form of subsidy reform is easier said than done, especially with this Congress. But the report is right to argue that we can’t afford to subsidize non-cost competitive technologies forever—even Germany, far greener than the U.S., has learned that. Look at how difficult it’s been to amend subsidies for oil and gas, despite the fact that those industries have no trouble competing in the marketplace. (Exxon 2011 profits: $41.1 billion.) But when I talk to conservatives interested in clean tech—like James Nelson, the CEO of Solar 3D and a former Bain consultant close to Mitt Romney, they usually rally behind R&D programs like the Department of Energy’s Advanced Research Projects Agency (ARPA-E), even if they hate anything that smacks of the government directly funding clean tech startups a la Solyndra. “Research and development is the right role for government support on energy,” Nelson told me recently.

The structure of clean tech support is going to have to change—simple economics dictate that. The smart recommendations in “From Boom to Bust” show that those changes don’t have to destroy the clean tech industry—and could even help it grow faster.

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