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.