pageok
pageok
pageok
Energy Prizes Instead of Subsidies:

It is "energy week" at NRO. My first contribution to this series of articles on energy policy is this article arguing that government-sponsored prizes for energy innovation would be more effective than traditional subsidies at encouraging the development of low-carbon-emission energy technologies.

Direct government subsidies are a particularly poor way to encourage innovation. Perhaps it should be possible to direct research and development funds toward the most promising and valuable technological endeavors, but this rarely happens in practice. Government subsidies tend to be dispersed on political criteria, rewarding large, politically connected incumbent firms, rather than innovative upstarts. Failing industrial dinosaurs with lobbyists on the payroll are in much better position to snatch up government goodies than revolutionary thinkers toiling in garages or private labs.

Offering substantial financial rewards for those who develop particular innovations or solve specific problems is a far better way to spur technological innovation and practical scientific research. As the patent system demonstrates, the hope of a large financial windfall is a powerful inducement for innovation, and can encourage many different people with different strategies or insights to tackle a given problem. If climate change is an urgent threat, and the private sector underfunds climate-related research and development, government funding of prizes along the Virgin Earth model could yield substantial returns.

Over at The Corner, Iain Murray makes the point that it is no accident politicians prefer subsidies to prizes, as subsidies facilitate patronage in a fashion that prizes do not. This is one reason that government-sponsored prizes are relatively rare, and a reason why replacing existing subsidies is politically difficult.

Elmer (mail):
I agree that prizes, such as the automotive X-prize, can accomplish things that grants cannot, but there is a scale factor that is important. Prizes are usually awarded only to winners, so capital must come from other sources, and most contenders will lose. That works for fun projects within the means of an individual or small group, but some projects cannot be successful at that scale. The Wright brothers succeeded where others with far greater support failed, but the Apollo missions did not have to worry about amateur competition, including my own. I was 5 when several of us began building a spaceship by nailing boards together, pretty much at random as I recall. I had complete faith in the project, but within an hour we lost interest and went on to other things.
9.24.2007 7:21pm
Dick King:
How will it be judged whether the technology is "commercially viable"? Al Gore is one of five judges ... sigh. When will he drop his objections to nuclear power?

I have an idea. Why don't we see whether technologies are commercially by letting the inventors build the implementation and sell the results to customers?

-dk
9.24.2007 7:22pm
Fub:
Elmer wrote 9.24.2007 6:21pm:
The Wright brothers succeeded where others with far greater support failed, but the Apollo missions did not have to worry about amateur competition, including my own. I was 5 when several of us began building a spaceship by nailing boards together, pretty much at random as I recall. I had complete faith in the project, but within an hour we lost interest and went on to other things.
I'm impressed by the advanced technology, but your experience does show that technology isn't everything. When I was that age, early in the halcyon decade before Sputnik, my friends and I built an entire fleet of spaceships from low-tech cardboard boxes. We even had interstellar communications among our fleet spread out across several vacant lots, with paper cups and strings. Never could get them to do video though. We tried with an old Kodak box camera and string, but we were a bit short on theory so we never could build a receiver.
9.24.2007 7:47pm
Toby:
40% of US electricty is used in the home. Most people who have looked at it hard think we could save 30-50% there by applying what we already know, and making energy use transparent to the user, and under the user's control. THis approach, though, is contrary to the ren-seeking sunk-cost supporting, usually uninformed Utilities/Utilities Commissioner model for making energy technology investments.

More efficient use of the power grid, in particular, demand smoothing it is estimated will save up to half the power a third of the power on the grid as a first generation effect. This can only happen by using the techniques of IT to re-engineer the grid as a transactive system with true time of day and load based pricing. While the Utilities commissions know that consumers can never be in charge of their own energy use, the Olympic Penninsula Project proved that, given accurate live pricing pricing, not only can they, but the result will have better / smoother grid loads than central demand response.

Prizes can shake participants out of their incrementalist approaches, and free people up to try radically new things. The market would do that on its own if electricty markets freed from the state-managed collectivist model that still persists today in even "de-regulated" markets.

The worst of the "de-regulated" markets create so many gray markets that they make matters worse (See California).

We know how to do this. Its called "Markets"

Can I get the prize?
9.24.2007 8:54pm
Smokey:
In the 1800's, the federal government wanted railroads to be built faster than the market was ready for them. So the federal government gave huge land grants, and financial subsidies, to the Atlantic & Pacific railroad, the Southern Railway, the Central Pacific RR, the Southern Pacific RR, the Union Pacific, the Denver & Rio Grande, the Northern Pacific, the Texas Pacific, and others. There was only one railroad that never received any land grants or subsidies from the federal government: James Hill's Great Northern railroad.

Every transcontinental railroad subsidized by the government and given land grants subsequently went bankrupt. Every one of them.

Guess which railroad thrived, and never declared bankruptcy?

This country has plenty of James Hills'. But once the government starts manipulating private commerce with subsidies and prizes, it's all downhill from there.
9.24.2007 10:50pm
J. F. Thomas (mail):
In the 1800's, the federal government wanted railroads to be built faster than the market was ready for them.

So when exactly would the transcontinental railroad have been built (or the railroads or the civil aviation system)?
9.24.2007 11:36pm
Smokey:
Folks, be gentle with J.F. Thomas. He has a comprehension problem.
"So when exactly would the transcontinental railroad have been built (or the railroads or the civil aviation system)?"
OK, J.F. I'll go easy here. Answer: when the market is ready. As noted, the Great Northern railroad was built by James Hill without any government subsidy and without any land grants. Proving, of course, that government intervention is not only unnecessary, but that government intervention distorts the market and brings about massive bankruptcies and other problems -- not the least of which is an unaccountable, permanent, and ever growing new bureaucracy. [Federal oversight of civil aviation is regulatory in nature -- it doesn't disrupt the market with prizes and such, so that argument doesn't apply to this issue.]

The Great Northern transcontinental RR had already been built without any gov't help; obviously other RR's would have been built, with or without the government. Did Apple or Google throw up their hands and quit, after Microsoft appeared? Nope. The market is big enough for everyone. And it doesn't require government prizes or subsidies.

The Founders explicitly wanted limited government. Because, you see, big government screwes up everything it touches.
9.24.2007 11:56pm
Eli Rabett (www):
Actually, I prefer regulations that set goals, but the principle is the same. The government sets goals, the market meets them.
9.25.2007 12:10am
J. F. Thomas (mail):
the Great Northern railroad was built by James Hill without any government subsidy and without any land grants.

Except of course the Great Northern was rather late to the game and didn't complete its transcontinental tracks until 1889. Now if the population, which of course was only there because of the other railroads that had already arrived before it, it would not have thrived.

And of course commercial aviation would not exist without massive government subsidies. Government heavily subsidizes the only two manufacturers of large commercial airliners in the world, pays for the air traffic control system and builds the vast majority of the infrastructure. Also, commercial aviation, almost eighty years after its advent still hasn't turned a profit.

For all this nonsense about prizes and holding out the X-prize as a shining example. Remember, the winning (and the losing teams for that matter), spent more than three times the prize amount to achieve what the U.S. government achieved repeatedly in the early 1960's.
9.25.2007 12:14am
J. F. Thomas (mail):
And what the hell was wrong with Bell Labs or the National Lab system for that matter?

Focusing on prizes will necessarily shortchange basic research which the market is very bad indeed at funding.
9.25.2007 12:19am
Elmer (mail):

Focusing on prizes will necessarily shortchange basic research which the market is very bad indeed at funding.
I doubt Mr. Adler is proposing an exclusively prize-based system for all research. In the area of energy efficiency, his actual topic, I suspect that individuals and small groups will make large contributions, in part because so much of the research money is spent on dead ends such as the hydrogen car.

When I think about all of the world's problems, a lack of tourists just outside the atmosphere is not high on my list, so I personally didn't care about the X prize. Obviously, those who made the prize had other ideas. As with most such prizes, the cash was far less than the sums expended by the participants, but as is also typical, someone took the trouble to win it.
9.25.2007 1:52am
David M. Nieporent (www):
Focusing on prizes will necessarily shortchange basic research which the market is very bad indeed at funding.
Religious faith is so quaint.
9.25.2007 5:57am
Jonathan H. Adler (mail) (www):
Rabett --

Actually, the principle is not the same. Prizes (like patents) are designed to ensure that the winner receives super-competitive returns for his or her innovation. Regulations do not necessarily offer this sort of incentive (and if they do, it is typically for rent-seeking, rather than for entrepreneurial innovation).

Toby --

For the same reason, markets do not necessarily produce the same result as prizes. Competitive markets should yield competitive returns for innovation, but the point of prizes is to provide super-competitive rewards. Of course, in economic sectors where markets either absent or non-competitive, prizes can be used in an effort to replicate market incentives for innovation. In the latter context, my argument is that prizes are preferable to other forms of government intervention to spur innovation.

JHA
9.25.2007 9:03am
J. F. Thomas (mail):
Religious faith is so quaint.

What is this crack supposed to mean. The statement is true. Basic research is the building block upon which commercially viable products are created. However, basic research, in and of itself, has a very low, if any return on on investment (e.g., how long did it take from Curie's discovery of radiation in the late 1800's before anything useful came of it). Look at modern basic physics research, which is fantastically expensive and important. But really, what are the immediate commercial implications of the charge of the quark or how many gluons there are in a proton?
9.25.2007 10:25am
J. F. Thomas (mail):
I noticed this in Jonathon's article

Whereas direct government subsidies often yield a zero, if not negative, return, prizes tend to unleash research investment and returns far greater than the amount of the actual award. the X-Prize Foundation created the "Ansari X-Prize," an award of $10 million for the private development of a reusable, manned spacecraft. In 2004, a team bankrolled by Microsoft co-founder Paul Allen claimed the prize for their SpaceShipOne, which managed to make two suborbital flights in less than two weeks. Although only $10 million was awarded, the prize spurred over $100 million in privately funded research.


In what bizarro world is a -$90 million return on investment not a negative return? Or am I missing some important libertarian economic principle here? Especially in light of the fact that what the X prize winners did has been achieved by various governments hundreds of times going back almost 50 years (by the U.S. government alone 199 times with the X-15 starting in 1959).
9.25.2007 10:47am
c.f.w. (mail):
Prize for exactly what? Prize for art - gates to the Baptistry in Florence, Brunelleschi's Dome etc. - easy to accept.

If there is no consensus on what is good (Nobel prize for literature, Nobel Peace prize), then utility of prizes is not as evident.

Prize for best 1000 MW power plant with small carbon footprint - hard to see $10 million in prize money doing much to motivate Hitachi, GE, Constellation, Areva, TVA, Exelon, Westinghouse. They spend $10 million opening up the project files for a 1000 MW nuke plant.

The nuclear incentive should be tied to taxes (or tax relief) - to balance the tax incentives given to oil and gas, as well as wind and solar. Say, $10 million per month in tax relief as key milestones are reached, until the plant is up and running at 90% capacity. No over-incentivizing, but one must recognize the externalities from carbon-based plants (global warming), plus the billions spent in Iraq to (clumsily) support big oil.
9.25.2007 10:55am
Eli Rabett (www):
Adler, regulations offer significant benefits to those who invent better ways of reaching the goals. True they can be watered down, but the lesson of the clean air and water regulations is that regulations that set goals work.

BTW, did you see that NRG something or other is applying for new nuclear plant licenses. Even the anticipation of regulation works.
9.25.2007 12:08pm
Jonathan H. Adler (mail) (www):
Rabett --

Your initial claim was that, with respect to regulations and prizes, "the principle is the same." I explained how they are not the same. Your rejoinder that regulations may produce some environmental quality gains is non-responsive, and says nothing about the effects of regulation on technological innovation. Further, the rent-seeking point is not that regulations get "watered down," but that reuglatory standards get written so as to privilege particular firms within an industry and provide super-competitive returns. This phenomenon is quite common in environmental regulation, as in other types of regulation, but does not support the claim that regulations achieve public goals in a cost-effective or efficient manner. I would also note that the initial post and article are about prizes versus subsidies, not prizes versus regulations, and no one would claim that regulations and subsidies are perfect substitutes for each other.

Mr. Thomas --

I was talking about the return on the government's investment of tax dollars. Subsidies often produce no positive return on the government's investment of tax dollars, as subsidies often produce little of value. Prizes, on the other hand, often produce substantial positive returns. This is true because a) the prize is only paid if someone actually produces a qualifying innovation, b) the potential for the prize often spurs investments in innovation greater than the amount of the prize, and c) even the money spent by the "losers" among those pursuing the prize may still yield worthwhile innovation.

JHA
9.25.2007 12:17pm
J. F. Thomas (mail):
This is true because a) the prize is only paid if someone actually produces a qualifying innovation, b) the potential for the prize often spurs investments in innovation greater than the amount of the prize, and c) even the money spent by the "losers" among those pursuing the prize may still yield worthwhile innovation.

All the X prize proved is that people with way too much money can achieve juvenile fantasies if they put their minds to it. Prizes are wasteful because they will necessarily be geared towards simplistic, thrill-seeking goals, that are not necessarily the best for society. Space tourism is hardly our most pressing problem.

Basic research, which is often mundane, very often frustrating, and often full of dead ends, will be given the short shrift. That is where government dollars are best spent, because that is where the market fails. Your fascination with prizes fails to address this. In 1880 nobody was going to offer a prize for the first person to discover ionizing radiation or the discovery of a wavelength of light that would photograph bones through skin.
9.25.2007 12:50pm
Jonathan H. Adler (mail) (www):
Mr. Thomas --

The X-prize was but one example. My article has others. More importantly, your argument is beside the point of my original article. The article focused on existing energy subsidies, not funding for "basic research," so my proposal does not give anything "short shrift."

JHA
9.25.2007 2:00pm
J. F. Thomas (mail):
But you claim that "direct government subsidies are a particularly poor way to encourage innovation". So I assume you include basic research funding in your broad condemnation. Of course without direct government subsidies we wouldn't have split the atom or the atomic bomb, invented transitors, the laser, broken the sound barrier, reached the moon, done much of the early in research and developed the first commercial computers (and continue with much of the theoretical work), discovered superconductors, done almost all the research in subatomic physics. The list goes on and on. Shall I continue?

Your assertion is is patently false and frankly an insult to thousands of hardworking scientists and researchers who work at our national and other government labs, research universities, and receive government grants.
9.25.2007 2:19pm
Jonathan H. Adler (mail) (www):
Mr. Thomas --

Two points. First, innovation and discovery are not the same thing. My argument applied to "applied" research, not basic research. Second, your assumption that useful innovation must come from government-funded research is simply false, but not the subject of my article or post. On this point, I would refer you to the work of Edwin Mansfield and Terrence Kealey, among others.

JHA
9.25.2007 2:32pm
Smokey:
JHA to JFT:
...your assumption that useful innovation must come from government-funded research is simply false...
True dat -- as Microsoft, Genentec, and their myriad of profitable, innovative competitors will attest. Biotech and computer companies thrive despite, not because of, government interference in the market.

Framing regulations that provide an equal playing field for all competitors is a legitimate function of government. Market distorting government subsidies are not.
9.25.2007 3:11pm
J. F. Thomas (mail):
My argument applied to "applied" research, not basic research. Second, your assumption that useful innovation must come from government-funded research is simply false

First off, if you are saying your argument is applicable to applied research, you should say so instead of making blanket unqualified statements. Nevertheless, it is still a demonstrably untrue argument (e.g., the atomic bomb, the aforementioned transistor, semiconductors, COBOL--which was written by the government to encourage businesses to use computers more).

Perhaps if we are ever in Chicago at the same time I could arrange a tour of Argonne National Lab and you can see how much government money is "wasted" on applied research there.

Secondly, when did I ever say that useful innovation only or "must" come from government-funded research? I am just objecting to your rather insulting (to thousands of scientists and researchers) notion that government subsidies are always a waste of money.
9.25.2007 3:38pm
David M. Nieporent (www):
But you claim that "direct government subsidies are a particularly poor way to encourage innovation". So I assume you include basic research funding in your broad condemnation. Of course without direct government subsidies we wouldn't have split the atom or the atomic bomb, invented transitors, the laser, broken the sound barrier, reached the moon, done much of the early in research and developed the first commercial computers (and continue with much of the theoretical work), discovered superconductors, done almost all the research in subatomic physics. The list goes on and on. Shall I continue?
No, because your premise is not only wrong, but illogical. The fact that the government spent money on X is not evidence for the claim that "without" the government's money, X wouldn't have been done.

If the U.S. government had given Henry Ford billions of dollars, today you'd be claiming that the Edsel we'd still be stuck with is the highest innovation in automotive technology, and that this proves that cars can't be produced without government funding.

What is this crack supposed to mean. The statement is true.
The statement that the market is "bad at funding" basic research isn't "true." It's "bad at funding" things with low ROI, yes; those aren't the same thing.

I am just objecting to your rather insulting (to thousands of scientists and researchers) notion that government subsidies are always a waste of money.
Er, that's your premise, too. See where you said that "basic research, in and of itself, has a very low, if any return on on investment"?
9.26.2007 6:47pm