Disrupting the Carbon Quo

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Disrupting the Carbon Quo

A Case for Applied Innovation Economics

Directed Research for Professor Robert FichmanCarroll Graduate School of Management

Boston CollegeMatt Marino - Spring 2010

.................................................................................................Overview ! 3

........................................................................................................Assumptions ! 3

.............................................................................Carbon Quo: Dened ! 4

...................................................................................................Too Big To Fail? ! 4

..........................................................................................Carbon Infrastructure ! 5

.............................................................................Why Carbon Energy Sticks ! 6

.............................................................................The Cost and Price of Carbon ! 7

................................................................................................................The Cost ! 7

...............................................................................................................The Price !

8 .............................................................................New Energy: Dened ! 9

..................................................................................................New Energy 1.0 ! 10

........................................................................................Abatement Strategies ! 10

.........................................................................Innovation Economics ! 11

...................................................................................Evolutionary Economics ! 13

....................................................................................Not Just Industry, Ideas ! 13

...................................................................................................Hurdle Periods ! 15

...................................................................................In the Wake of Creativity ! 16

..........................................................Innovation Economics: Applied ! 16

Disrupting the Carbon Quo - 1


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..............................................................................................The Perfect Storm ! 16

......................................................................................A Wager for Innovation ! 17

1. Meeting Energy Demand ! 17

2. Economic Growth ! 18

3. The Right Kind of Feedback Loop ! 19

..............................................................................Accelerating the Disruption ! 19

1. Global Carbon Price ! 19

2. Appoint a New Energy Czar ! 20

3. Incubate Innovation Organically ! 20

4. Government Support for Mega Projects ! 21



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In spite of advancements of exponential consequence throughout history, recent eventsdemonstrate that mans struggle with the discovery, conversion and distribution of naturalresources will not cease - rather, the struggle only changes form

On April 5, 2010, an explosion at the Massey Coal Mine in West Virgina killed 29 miners.

This brings the total fatalities in U.S. mine disasters to 65 since the year 2000;

On April 20, 2010, the Deepwater Horizon Oil Rig, leased for oil well drilling by BP, explodedand eventually sank, killing 11 oil rig workers. The resulting oil well eruption is estimated to

be leaking up to 5,000 barrels per day or more into the Gulf of Mexico, for more than 28 daysstraight (to date);

On May 1, 2010, the failure of a MWRA water main that feeds the Boston metro area gave 2million Bostonians a sense of the desperation that accompanies the search for potable water,when it doesnt run from the tap.

Overview

"Change is hard. Change is hardest on those caught by surprise. Change is hardeston those who have difficulty changing too. But change is natural; change is notnew; change is important...It's time to think about the opportunity as well as the

pain."-David Schlesinger 1

This research program will explore the concept of Innovation Economics as a framework for

understanding the emergence and potential for success of mainstream renewable, clean andefficient energy infrastructure, systems and technologies ("New Energy), specifically within theUnited States.

Assumptions

Economic analysis is inherently grounded in assumptions about human behavior and the purposeof social (and therefore, economic) organization. Because this report will reflect concepts andtheories from a range of sources - from Keynes to Kauffman - it is important to explicitly definetheoretical "common denominators" which warrant their synthesis. For this analysis, thefollowing assumptions accomplish this:

1. Economic health stable and sustainable growth is a desired outcome of social,commercial and political organizations;

2. Effective energy conversion systems are a requirement for economic health;


1 Friedman, Thomas. The World Is Flat, p20-21


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3. Environmental health sustainable resource management and avoiding irreparable climatedamage is crucial for human health, established civil settlements and their continued development, and geopolitical stability;

4. Energy conversion systems have varying degrees of environmental impacts.

Carbon Quo: Defined

For many years the knot stymied all who attempted to untie it. Then, one day,rather than trying to untie the knot, the young Alexander simply cut the rope withhis sword.

-Shellenberger et al 2

Too Big To Fail?

The U.S. has been criticized for its disproportionate share of greenhouse gas (GHG) emissionsrelative to the global population: Developed countries consume the lions share of fossil fuels.The United States, for example, contains just five percent of world population, yet contributes aquarter [actually, 20%] of total CO 2 output. 3

Technically, this is true: the U.S. contributed roughly 5.7 billion metric tons of the 28 billionmetric tons of CO 2 emitted globally in 2008; that is, roughly 20%. But this statistic does notreveal the true nature and complexity of this emerging drama, in which Economics, Energy, andthe Environment all play major roles...

U.S. GHG emissions are the direct result of energy use (and generation and conversion mix); in

turn, energy use is correlated very closely with GDP. Generating about $14 trillion of theworld's $69 trillion (in YEAR), the U.S. accounts for 20% of global economic activity - nearlythe exact same fraction as the U.S. share of global GHG emissions. 4

So reducing the U.S. GHG emissions is not as simple as switching off carbon-intensive power plants: those power plants drive the consumption and production supply chains and behaviors not just of U.S. markets, but of sovereign and commercial relationships throughout the world. Whilethe climates health demands immediate action, global economic health requires a stable supplyof scaled energy - a modern and tightly wound Gordian Knot. 5 Indeed, the relationships betweenEconomics, Energy, and the Environment are highly complex.


2 Shellenberger et al. Harvard Law and Policy Review, Fast, Clean and Cheap, p93

3 NHPR. EarthTalk, How does population growth contribute to climate change? Transcript retrieved from:http://www.nhpr.org/node/26007

4 This correlation was the focus of a class session by Cutler Cleveland, Ph.D., Energy, the Society, and the Environment, Fall 2009

5 This clever analogy and reference can be credited to Shellenberger et al.


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Carbon Infrastructure

The phrase, Carbon Quo, in the title of this report, alludes to both the prevalence of andreliance on fossil fuel dependent energy infrastructure, systems and technologies, specificallywithin the United States. These include:

Coal fired power plants, for electricity (~1450 U.S. generators) Natural gas fired power plants, for electricity (~5500 U.S. generators) 6 Petroleum-based fuels, predominantly for transportation (~7,300,000,000 barrels/year) 7

Of course, fossil fuels are really carbon fuels - the deeply buried and highly compressedfossilized remains of organic materials, aged for millions of years within the Earths crusts, andextracted by means of drilling, pumping and mining. The 2008 analysis of energy flows in theUnited States by the Energy Information Administration (EIA), a department of the Departmentof Energy (DOE), found that 83% of U.S. energy consumption was dependent on fossil fuels.The fuel input(s) that represents the greatest share of the energy mix is petroleum (or itsderivatives), at 37% of total energy consumption. 8 The Transportation sectors 28% share of energy end usage reflects petroleums dominant role in energy consumption; Commercial,Industrial and Residential usage sum to the remaining 72%. Notably, despite being the worldsthird largest producer of crude oil, the United States imported roughly 70% of its petroleumenergy supply. 9

Throughout the Commercial, Industrial, and Residential sectors, much of U.S. energyconsumption - 40% - is utilized for electricity. Coal is the primary fuel source for electricityconversion, at 51% of the electricity generation mix. 10

The same report shows that clean resources provided nearly 16% of energy requirements; withnuclear contributing about 9%, and renewable energy sources contributing about 7%. 11


6 Energy Information Administration. Existing Capacity by Energy Source, Retrieved 15 May 2010 from:http://www.eia.doe.gov/cneaf/electricity/epa/epat1p2.html

7 Energy Information Administration. Petroleum Basic Statistics, Retrieved 15 May 2010 from:http://www.eia.doe.gov/basics/quickoil.html

8 Energy Information Administration. Energy Flow 2008, Retrieved 26 April 2010 from:http://www.eia.doe.gov/emeu/aer/overview.html

9 Ibid, and: Energy Administration. United States Energy Prole, Retrieved 26 April 2010 from:http://tonto.eia.doe.gov/country/country_energy_data.cfm?ps=US

10 Energy Information Administration. U.S. Primary Energy Consumption by Source and Sector, 2008, Retrieved 15 May 2010from: http://www.eia.doe.gov/emeu/aer/pecss_diagram.html

11 For the purposes of this report: Alternative energy resources = non-fossil fuel based; Clean = low or zero CO2 emissions;Renewable or Sustainable are both Clean and non-depleting of natural resources


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Exhibit 1 - Reproduced from Source: EIA

Why Carbon Energy Sticks

One reason technology changes in these waves, is because the prior technologysystem establishes firmly committed ways of doing things which are not easilydisrupted.

-Robert Atkinson 12

There are reasonable explanations for how carbon-intensive energy infrastructure and systemshave such a firm grip on commercial, economic and social life. Some factors for carbon-

stickiness include:

1. Delivery to and consumption by end users seems relatively cheap. Statistics fromthe EIA indicate that the average cost of electricity across the U.S. is 5.7 cents per kilowatt-hour (wholesale). 13 Although this figure is up roughly 10% since 2001,industrial and commercial ecosystems have evolved to perform very efficiently from amarket perspective, making the U.S. retail electricity prices among the lowest in theworld.

2. At the same time, infrastructure is capital intensive and virtually semi-permanent. Shellenberger et al emphasize that contemporary energy systems aretailored for large, centralized plants and have been in use for over 100 years; factors


12 Atkinson, Robert. The Past and Future of America s Economy, p21

13 Energy Information Administration. Wholesale Market Data, Retrieved 15 May 2010 from:http://www.eia.doe.gov/cneaf/electricity/wholesale/wholesale.html


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which lead them to argue that, Energy is arguably the least innovative sector of theeconomy. 14

3. Government support in many forms. 15 Furthermore, lobbyists for the fossil fuelssectors actively manage subsidies, policies and legislation that support or prevent the

erosion of their clients business practices and markets. This is what Robert Atkinsonmeans when he says, Some do not just passively wait, many actively resist the changeas it threatens entrenched ways of doing and established economic positions.

In aggregate, these factors have led to a culture of limited invesement in innovation within thefossil fuels sectors. BusinessWeek columnist Michael Mandel points to the discrepancy betweenR&D spending in energy versus other large, industrial sectors: Change has been far more rapidin information processing and health care than in energy, transportation, and manufacturing[which] depend on older technologies that date back to the 19th and early 20th centuries. 16 Andcommentator David Brooks latches on to the same point: Technology companies spend 5

percent to 15 percent of revenue on research and development. Energy companies, on the other hand, spend only one-quarter of 1 percent. 17

The Cost and Price of Carbon

The Cost

Currently, carbon energy is energy - few viable and scalable alternatives offer a perfectalternative. Although other pollutants comprise the full spectrum of greenhouse gases, CO 2 - anobvious byproduct of fossil fuel combustion - is the primary and predominant offender.

Describing the 2009 calendar year, the EPA reported that the largest source of CO 2, and overallgreenhouse gas emissions, was fossil fuel combustion. 18 The result of the continued combustionof fossil fuels in all its forms is a rate of carbon emissions that accumulates in the atmospherefaster than can be absorbed by natural carbon cycles. This is, in a highly simplified sense, whatis meant by the phrase greenhouse gas effect .

Most environmental and climate scientists agree that CO 2 accumulation in the atmosphere atcurrent rates will lead to concentrations which raise global temperatures and upset many



15 Shellenberger et al, p13: As the Stern Review makes clear, the annual investment of $33 billion in clean energy technologies(which includes nuclear energy) is dwarfed by the existing subsidies for fossil fuels worldwide that are estimated at $150 billion to$250 billion each year.

16 Mandel, Michael. BusinessWeek, This Way to the Future, 11 October 2004, Retrieved from:http://www.businessweek.com/magazine/content/04_41/b3903402.htm

17 Brooks, David. NYT, American Power Act, 29 April 2010, Retrieved from:http://www.nytimes.com/2010/04/30/opinion/30brooks.html

18 Environmental Protection Agency Report. U.S. GHG Emissions 2010, p5, Retrieved 26 April 2010 from:http://www.epa.gov/climatechange/emissions/usinventoryreport.html


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biological and ecological cycles. Worse yet, environmental economist William Nordhaus warnsthat warming effects are indirectly amplified through feedback effects in the atmosphere, oceansand land; meaning there is a snowball effect if CO 2 emissions are left unchecked. 19 Environmental activist Bill McKibben advocates that carbon levels be stabilized at 350 parts per million (ppm) to avoid the most drastic effects of climate warming; some authorities, including

reports by Princeton, McKinsey and Company, and the International Energy Association, assert alevel of 450 ppm. In either case, the fact is that carbon concentration levels are approaching390 ppm, and rising about 2 ppm per year.

Exhibit 2 - Reproduced from Source: 350.org

The Price

Despite the escalating effects and possibilities of climate change, there is presently no universalmarket mechanism to capture the costs of carbon pollution - a measure that would likely create

pressure to begin limiting emissions. Presently, carbon pollution is an externality: individuals,companies, industries and countries impose the costs on the planet and others without paying for the right to do so.

In economic analysis, it is common to overlook externalities due to ambiguity: their true effectsand boundaries are not easily aligned with their source. However, carbon emissions are bothtraceable and their cost is economically quantifiable. Nordhaus estimates the true cost of carbonemissions to be approximately $30 per ton. 20 His estimate is at the higher end of the range of the$12 - $25 carbon collar recently introduced as part of the American Power Act, an energy and


19 Nordhaus, William. A Question of Balance, p2

20 Ibid., p11


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climate bill intended to come before Congress in 2010. 21 Under these proposed pricingschemes, heavy emitters, have measurable economic interest in maintaining the current (non-existent) pricing scheme.

New Energy: Defined

Of course, there is nothing new about New Energy. 22 Moreover, nearly all energy capturedand utilized by civilization is in fact some form of solar energy, even fossil fuels.

What is new is a resurgence of alternative energy conversion systems and technologies which aregradually becoming cost competitive with conventional (i.e. carbon-intensive) generationinfrastructure. Such systems are, depending on the precise nature of energy inputs and outputs,described as: Renewable, Alternative, Clean, Efficient or Sustainable. DOEs Office of EnergyEfficiency and Renewable Energy (EERE) classifies New Energy systems and technologies inthe following manner:

Table 1 - Categories of New Energy

Energy Efficiency Systems Renewable Energy Systems

For Homes Solar For Buildings WindFor Industry Water (Hydro, Wave, Tidal)For Vehicles Biomass

For Government Geothermal

Hydrogen, Fuel cells

New Energy systems and technologies achieve GHG emissions reductions by means of Avoidance ; that is, the systems accomplish the same or similar levels of energy output asconventional carbon-intensive systems with little or none of the associated carbon emissions.

New Energy infrastructure is important for slowing the rate of aggregate GHG emissions, whichmight halt the climate feedback cycles that are thought to accelerate climate warming.Avoidance is one of two major strategies that will be discussed for minimizing further climatedamage.


21 Kerry, John. The American Power Act, Retrieved from:http://kerry.senate.gov/americanpoweract/intro.cfm

22 See: Second Law of Thermodynamics


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New Energy 1.0

"Civilization has been slow to give up our myth of the Earth's infinite generosity."-Barbara Kingsolver

In the later part of the 20th century, new energy systems were developed and promoted assolutions to natural resource depletion and other environmental issues. When Marion Hubbertfirst proposed the concept of Peak Oil in 1956, government, industry and environmentalleaders began to consider seriously the prospect of energy after fossil fuels. However,mainstream adoption of early alternative energy technologies languished, mostly as a function of their high cost and scalability, relative to the abundance, technology infrastructure and cost of fossil fuel systems.

Despite the inertia of the Carbon Quo, major energy transitions have been fairly common in themodern era, not unlike the techno-economic transitions that Atkinson describes. From humanand draft animal-powered agriculture, to early water and wind wheels, to modern internalcombustion engines and gas turbines; evolutions in energy systems have brought new waves of economic growth and productivity, and have enabled the lifestyles and standard of living that iscustomary in the developed world.

Abatement Strategies

In the report Pathways to a Low-Carbon Economy , analysts at McKinsey and Companyidentified four major categories of abatement techniques: energy efficiency, low-carbon energysupply, terrestrial carbon and behavioral change. 23 For the purposes of this report, abatementstrategies are categorized by means of abatement . For example, New Energy systems andtechnologies can avoid GHG emissions by replacing carbon-intensive energy generationinfrastructure. Other Avoidance measures include:

Optimizing conversion and transmission of current energy infrastructure (i.e. efficiencymeasures)

Mitigating and minimizing emissions from conventional generation sources that remainin the energy mix (i.e. CCS)

Preventing deforestation: See below

Another set of strategies for reducing GHG concentrations might be called Combative . These aremeasures which directly capture or eliminate atmospheric CO 2. Such tactics include:

Reforestation: Forests and soil act as natural carbon sinks that enhance natural processing of CO 2 from the atmosphere; while deforestation prevents the sink fromshrinking, reforestation projects attempt to make the sink bigger.


23 McKinsey and Company Report, Pathways to a Low-Carbon Economy, 2009


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Geoengineering: That is, large scale manipulation of earth-climate phenomena thataddress global warming in both cause and effect manners: 24

o For the former, some techniques would reduce CO 2 concentrations, therebyslowing warming effects

o For the latter, geoengineering cooling strategies deal only with combatting the

warming effects

Abatement strategies have not yet been adopted on a mass scale for a number of factors,including:

High initial investments and unknown payback periods: The McKinsey and Companyanalysis estimates nearly a half-trillion dollar investment annually to reach a 35%reduction in GHG emissions (baseline - 1990). 25

Technology integration, intermittence and storage: Many current investments are focusedon clean energy generation, but transmission and delivery of renewable energy - such as

the delivery of power from a solar thermal plant at night or when the sun isnt shining - presents its own set of complex issues. 26

An international penguin dance: Being a first-mover to a low-carbon economy couldrestrict economic growth in the short term. Describing the American Power Act draftlegislation, environmental commentator Andrew Revkin of the New York Times remarksthat Its hard to see how such a bill will magically prod China, particularly, to blunt itscoal burning. 27

Innovation Economics

The key to [Schumpeters] analysis was the insight that innovation is not aregular process bringing steady incremental improvements but rather adiscontinuous process that occurs in waves.

-Robert Atkinson

At times, economics seems abstract and merely descriptive. Alchian and Allen begin their classic economic text, Exchange and Production , Societies have progressed despite almostuniversal ignorance of economic principles. However, the intention of any economicframework is for practitioners - not economists per se, but rather legislators, commercialexecutives and other market participants - to understand the fundamental drivers in the economic

system. Such an understanding is important so that the drivers can be manipulated - by means of


24 Biello, David. Scientic American, What is Geoengineering and Why is it a Climate Change Solution? 6 April 2010


26 Woody, Todd. Grist.com, Feds Push Solar Solutions, 14 May 2010; Retrieved from:http://www.grist.org/article/2010-05-14-solar-power-storage-schemes-get-a-boost-and-a-few-questions/

27 Revkin, Andrew. NYT, American Power Act, 12 May 2010; Retrieved from:http://dotearth.blogs.nytimes.com/2010/05/12/the-american-power-act/


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mechanisms such as taxes, tariffs, and subsidies, to name a few - to the benefit of enterprise andsociety ( See: Assumption 1 ).

Throughout the modern era of economic thought (Adam Smith Present), economic theorieshave emphasized different drivers and forces, each with their respective mechanisms for market

manipulation. Atkinson points to the case of Herbert Hoovers response to the Depression usinga Classical economic approach: the President waited for prices and wages to fallThey fellenough for voters to elect Franklin Roosevelt. 28 Therefore, how (and if) economic mechanismsare levered is the direct result of the predominant economic paradigm.

Table 2 - Contemporary Economic Systems

Economic System Emphasis and Drivers

Classical Land, labor, capital and free marketsKeynesian Government intervention of supply and demand

to manage the interplay of inflation andunemployment

Austrian The price mechanism

Chicago The individual, self interest, rational expectationsand free markets

Innovation The entrepreneur, ideas, competition

The economic drivers emphasized by proponents of Innovation Economics, a framework oftentraced to the work of Austrian-born turned Harvard economist, Joseph Schumpeter, deviate fromthose of previous systems. The innovation or growth-focused economic paradigm is concernedwith the ideation, creation and subsequent productivity gains of new entrants and businesses,which, collectively and over time, gain enough momentum to transform entire techno-economicecosystems in 50-year waves. 29 Schumpeter described each long wave economic cycle as itsown industrial revolution and the absorption of its effects. The nature of InnovationEconomics not only illuminates an understanding of energy and technology transitions of past,

but also what is required to Disrupt the Carbon Quo at present.





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Evolutionary Economics

The essential point to grasp is that in dealing with capitalism we are dealing withan evolutionary process.

-Joseph Schumpeter 30

Two analogies from evolutionary biology can shed light on the nature of Innovation Economics:

1. Survival of the Fittest. The analogies between Darwinism and Capitalism were made longago. But Schumpeter was the first to see how the decay and growth of whole sectors of theeconomy rested in the minds of the agents of change: the entrepreneurs. He takes aim atthe nature of competition within the Austrian economic paradigm when he states that,Economists are at long last emerging from the stage in which price competition was all theysaw. He proceeds to describe a new form of competition for consideration: that from thenew commodity, the new technology, the new type of organization which strikes not at themargins of the existing firms but at their foundations and very lives. 31 Atkinson elaborateson this concept, saying that the survivors of techno-economic transitions drive new waves of economic growth and productivity gains. 32

2. Punctuated Equilibrium. Paleontologists Niles Eldridge and Stephen Gould were the firstto defend the notion that significant gaps in the fossil record were not the result of theincompleteness of the record, but rather by accelerated advancements from stray populations;the gaps were real, as they say. 33 A similar notion has been identified in the study of

business and marketing; the idea captured with phrases like breakthrough, game-changing, or disruptive technologies. The point, as Schumpeter made, is not that its

possible to miss some marginal degree of improvement by failing to evolve and innovate, butthat the new system may not be a logical extension of the old one.

Not Just Industry, Ideas

Having an innovative society may be more important for growth than having ahigh rate of capital investment.

-Michael Mandel

The theory of Innovation Economics is fundamentally about ideas, the subsequent creation andimplementation of new market players, and the practices and policies that support those

processes. In The World Is Flat , Thomas Friedman goes to considerable length to demonstratethat in a global commercial environment dominated by technical specialization, liberal arts and


30 Schumpeter, Joseph. Capitalism, Socialism and Democracy, p82

31 Ibid., p84


33 Eldredge, N.; Gould, S.J., Models in Palaeobiology, Punctuated Equilibria: an Alternative to Phyletic Gradualism., 1972, p84


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integrative thinking still have a major role to play in the future of the U.S. education system. Hequotes Marc Tucker, who says that market leadership amid globalization will require a deepvein of creativity that is constantly renewing itself, and comfort with ideas and abstraction to

bring innovative products and services to market. 34 In a report advising California state leadersabout economic development, analysts from the research firm Collaborative Economics remark,

The global innovation economy is primarily driven by ideas, and is different than the industrialeconomy of the past. 35

Exhibit 3 - Reproduced from Source: Collaborative Economics

But how does one quantify the impact of a concept inherently as ethereal as an idea? Stanfordeconomists Charles Jones and Paul Romer have begun to do just that, preparing readers of their essay, Ideas, Institutions, Population and Human Capital , with the statement that moderngrowth theory has added a stock of ideas and human capital to the familiar inputs of physical

capital and workers. The stock Jones and Romer proceed to describe include population andits growth function, differences in cross country per capita GDP, and human capital as measured

by education level. 36 Additionally, the fraction of corporate revenues (re)invested in R&D, aswell as federal or state funded research programs, are commonly tracked to measure investmentsin ideas.

Amid the current recession, R&D is a tempting line item targeted for cost-cutting. 37 Aninnovation economist might argue innovation practices like those of R&D form the back boneof long-run market leadership, and that cuts can have exponential effects on the time horizon of

bringing new products to market. Speaking specifically about clean energy breakthroughs,

MacArthur Fellow, Saul Griffith, was quoted saying, Even if I came to you tomorrow with the


34 Friedman, Thomas. The World Is Flat, p319

35 Collaborative Economics. The Innovation Driven Economic Model, p4

36 Jones, Charles and Romer, Paul. NBER Working Paper No. 15094, The New Kaldor Facts: Ideas, Institutions, Population, andHuman Capital, 2009

37 Mandel, Michael. BusinessWeek, The GDP Mirage, 9 November 2010, p35


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perfect energy idea, the reality is that to go from that idea to doing utility-scale generation would be a minimum entry of $100 million and a minimum lead time of five to ten years. 38

Hurdle Periods

Things dont happen, they are made to happen.-John F. Kennedy

Gaps in the fossil record led Eldridge and Gould to theorize that moments of punctuatedequilibrium were the result of a segment of a (species) population straying from the naturalgeography of their ancestors. Is there an analogous confluence of factors that lead to HurdlePeriods in the understanding of innovation economics and the adoption of technologytransitions? This report refers to such potential confluences as Hurdle Periods.

Like an economic archaeologist, Atkinson demonstrates an innovation record for the U.S.economy, each period a crest of the 50-year long wave economic cycles he prescribes. The

waves he describes are 1) the Mercantile economy of the mid-19th century; 2) Factory-basedeconomy of the turn of the 20th century; 3) the Corporate mass production economy of themid-20th century; and 4) the Entrepreneurial, knowledge-based economy of the contemporaryera. Each transition, he theorizes, was based in underlying technology and resulting businessmodel shifts which enabled productivity gains. For example, the emergence of electro-mechanical and chemical technologies, the mainstream application of mass productiontechniques, and the new ranks of professional management in the Corporate era of the 1940s and1950s all helped drive a 25-year post War economic boom and the development of aconsumption economy and middle-class. 39

An appreciation for the power of ideas and developing systems to deploy them is not thecornerstone of all economic frameworks. Mandel says that in the past, technological progress -the discovery of penicillin or the invention of the laser - was viewed mainly as the product of science and serendipity, and therefore not very responsive to economic forces. 40 An historical

perspective is important for understanding how to actively manage innovation for economicgrowth.

Hurdle Periods are perhaps best explained by Plato, who, when describing the creation of theAthens state, said that: Necessity is the Mother of Invention. Innovation, too, is the result of tension within the static regime. It is an attempt at a solution to a problem, or the result of new

knowledge or resources, and often, it is a combination of both scenarios. Ideas spring forth notto maintain, but to improve commercial activities, striving to make products and servicescheaper, better, and faster.


38 Owen, David. The New Yorker, Inventors Dilemna, 17 May 2010, p46-8

39 Atkinson, Robert. The Past and Future of America s Economy, p29, 56-64

40 Mandel, Michael. BusinessWeek, Can America Invent Its Way Back? 11 September 2008, p2, Retrieved from:http://www.businessweek.com/magazine/content/08_38/b4100052741280_page_2.htm


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A Wager for Innovation

Many experts agree that the costs and consequences of inaction in dealing with climate changefar exceed the investment required to slow or reverse it. In the words of the Stern Review; the

benefits of strong, early action considerably outweigh the costs. 43 Make no mistake, the fullcost of abatement could approach nearly a quarter-trillion dollars per year; however, all estimatesin McKinsey and Company projections correspond to less than one percent of forecasted globalGDP in 2030. Additionally, implementing the full range of abatement measures would likely

pale in comparison to Adaptive costs; that is, the expenditures necessary for adapting civilizationto a climate roughly 4 degrees Celcius warmer than present. 44

Raising the Hurdle is the fact that the shift to a low-carbon global economy will take placeagainst the background of an abundant supply of fossil fuels. 45 To fund the necessaryinnovation in New Energy will require consensus building that can overcome both the crutchof Carbon Energy, and the campaigns of climate change skeptics - who either dispute climatechange wholly, or its anthropomorphic element. The uncertainty around climate change, its

possible effects, and the costs and benefits of different abatement approaches is reminiscent of Pascals Wager.

Proponents for New Energy must move their arguments for investment beyond theenvironmental attributes of the resulting infrastructure. Climate change represents only one way- the Environmental one - by which innovation can be leveraged to make energy innovationinvestments the basis for the next long wave growth cycle in the U.S. This Hurdle period is not

just one for the climate and lifestyles developed and developing economies have come to enjoyand aspire to, but also one that can drive the U.S. economic engine through its next long wavecycle of growth.

Specifically, Innovation Economics applied to New Energy can work on three levels:

1. Meeting Energy Demand

The EIA projects energy demand in the U.S. to grow 14% between 2008 and 2035. 46 Whereas previous solutions for meeting new demand called for new Carbon energy generation sources;future demand can be met through innovations in energy efficiency and the energy intensity of current generation sources, as well as generation from clean, renewable and sustainable energysources that reach grid price parity and displace conventional generation.


43 Ibid.


45 Stern Review on the Economics of Climate Change, Executive Summary

46 Energy Information Administration. Annual Energy Outlook 2010, Retrieved from:http://www.eia.doe.gov/oiaf/aeo/index.html?featureclicked=1&


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Government funded innovation can help nascent technologies achieve the market characteristicsnecessary for commercial viability. For example, DOE recently announced $62 million infunding for research and development for solar thermal technologies that will extend operationsto 18 hours per day, giving the plants load-following capability. 47

2. Economic Growth

As innovations in New Energy become commercially viable, sourcing energy will become morecompetitive - just as it did after the passage of Public Utilities Regulatory Policy Act (PURPA) in1978. Atkinson contends, Only when the new technology system becomes cheap enough and

pervasive enough is it able to revitalize the engine of productivity. 48 The resulting reactionfrom and destruction of Carbon energy providers represents the economic churn necessary for fundamental techno-economic transitions.

Within the New Energy economy, the nature of S- or experience curves has the potential to take

new energy generation not just to grid price parity, but beyond. This is the message from theBreakthrough Institute: Environmentalists have been so focused on making clean energyrelatively cheaper that they overlook the possibility of making clean energy absolutely cheaper through major investments in technology innovation and infrastructure. 49 This is a lessonlearned and demonstrated by the experience curve and resulting market penetration of utilityscale wind energy:

M. Junginger et al issued a report describing the factors for recent improvements in the progressratio for wind energy generation, at both the turbine technology and plant development levels.Specifically, they cite: the upscaling of both turbine size and kilowatt capacity, the resulting

lower specific costs per kilowatt installed and higher yeild per unit of swept area, and the mass production capabilities employed by major turbine manufacturers. 50 The combination of theseimprovements led the National Renewable Energy Laboratory (NREL) to accurately plot andforecast the cost curve for energy derived from wind farms, from nearly $.30/kWh in 1980 toroughly $.05/kWh in 2010. 51

M. Junginers analysis presents an average progress ratio of 81% for the wind energy industry, inline with other industrial sectors. The DOEs 20% Wind Energy by 2030 analysis reports a morerecent and slightly higher progress ratio of 90%. Still, cumulative price reductions of 35% are


47 DOE Press Release. Secretary Chu Announces up to $62 Million... 7 May 2010, Retrieved from:http://www.energy.gov/news/8958.htm

48 Atkinson, Robert. The Past and Future of America s Economy, p141-2


50 M. Junginger, et al. Energy Policy 33, Global experience curves for wind farms, 2005

51 NREL. Cost Curves, 2002, Retrieved from:www.nrel.gov/analysis/docs/cost_curves_2002.ppt


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achievable by 2030. At that rate, the additional cost of wind generated energy to end users bythat time is projected to be only 50 cents per month, per U.S. household. 52

Of course, the projections of organizations like the DOE assume that the low-hanging fruit of cost reductions [have] alrady been harvested, which accounts for modest progress ratios at this

stage. 53 Their analysis does not take into account disruptive wind energy technologies, such asthose being developed by Makani Power. Makani, a firm in which Google invested $10 million,

plans to jump the Hurdle of diminishing returns of turbine tower height and blade load capacity by capturing high altitude winds ( > 2000 ft.) with kite-like structures mounted to fixed wing,remotely controlled aircraft. 54 Such breakthroughs represent the potential of InnovationEconomics.

3. The Right Kind of Feedback Loop

Energy is the basis for both the economic growth and lifestyle improvements which the

developed world has become accustomed to, and which (much of) the developing world aspiresto. This is demonstrated by a proven correlation between energy intensity and GDP. As theinput for productivity and GDP becomes more efficient, more reliable and more robust, industrialcapital and innovation can begin preparing for the next techno-economic transition.

Accelerating the Disruption

New Energy innovation may be the answer; but as previously stated, it is also an investment - bywhom, how and when should the investment be made?

1. Global Carbon Price

The externality of carbon emissions must be internalized through economic means. A price oncarbon puts some of the burden on heavy emitters (and via pass-through tactics, consumers), whootherwise can free-ride the climate solutions delivered by government and environmentalcapitalists. To avoid the financial destruction that Schumpeter describes, heavy emitters mustinnovate their business models and energy generation (and consumption) systems to avoidfinancial ruin.

The American Power Act proposes a carbon price collar ranging from $12 - $25. Although amodest effort according to climate and environmental commentators, even with todays

technologies, this makes wind, biomass and geothermal sustainable generation systemsimmediately price competitive with electricity generation from coal. 55


52 Department of Energy Report. 20% Wind Energy by 2030, July 2008

53 Ibid.

54 Owen, David. The New Yorker, Inventors Dilemna, 17 May 2010, p46-8

55 Ibid., p99


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2. Appoint a New Energy Czar

The U.S. government created the U.S. Global Change Research Program (USGCRP) in responseto the Global Change Research Act of 1990. The concept for the agency is right - it is multi-

disciplinary and integrates the capabilities of 13 federal agencies, including DOE, EPA, and theDepartment of the Interior - but its charter must be updated to include the power and budget tointegrate New Energy innovation activities. The new agency: the U.S. Global Change Action

Agency . Specific directives for this agency must include:

Recommendations and thresholds for R&D tax credits for the energy industry (Atkinsonrecommends 40%)

Creation of and thresholds for Gigaton tax credits - made available to organizations or consortiums which invest in or provide carbon emissions offsets equivalent to one gigaton

Administration of New Energy innovation grants and guarantees, such as those made possible

by the American Recovery and Reinvestment Act

The DOEs Office for Energy Efficiency and Renewable Energy cannot achieve the level of multi-disciplinary integration and authority necessary for this role. As it does now for DOE, itwould remain primarily a research asset for the new agency.

3. Incubate Innovation Organically

Innovation might happen in a vacuum (sometimes), but it does not disrupt the status quo there.Innovation must be proactively incubated and nurtured to bring ideas to market. This happens

naturally in innovation Clusters such as Boston-Cambridge, Silicon Valley, and Austin; wherethere is a healthy interplay between companies, academia and government programs.

Clustering often occurs at a grassroots level. In Boston, reporter Scott Kirsner, through hisInnovation Economy column and Open Innovation events, accomplishes one of the central

prerequisites for innovation: uniting perhaps otherwise disparate entities. Creating a culture of and opportunities for collaboration is how the basement investor meets the environmentalcapitalist.

In the spirit of the incentives offered by X-prizes, this report suggests a formal GigatonScoreboard website which tracks the carbon offset contributions of academic institutions,companies and government programs within the confines of Boston-Cambridge, Silicon Valley,and Austin (to kick off the concept).

Additionally, new venture formation policies should support the work of academic andindependent labs; in return for venture capital and equity, innovator-entrepreneurs can be re-granted equity stakes only upon emissions thresholds reached through commercialization of their



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technologies, allowing them to tinker and move on, but with a vested stake in the eventualcommercial success of the technology.

4. Government Support for Mega Projects

Besides serving their specific purpose, Mega Projects analogous to the Manhattan Project or moon landing inspire innovation to overcome Hurdle Periods, with new technologies ripplingthroughout the economy for purposes and time well beyond the project itself. Currently,ambitious renewable energy Mega Projects include the Titan Wind Farm in South Dakota (Wind,5 GW), the Tres Amigas transmission project in the U.S. Southwest, and the DeserTec Initiativein Northern Africa and Europe (Solar, 100 GW). DeserTec is notable for the consensus buildingthe project has achieved between dozens of countries, corporations and governments.

Although every electron counts, achieving New Energy efficiency, generation and integration atscale is the only way that competition from New Energy will begin challenging the Carbon Quo.

Government support can include grants for visionary and feasibility studies, and loan guaranteesfor portions of Mega Projects in stages beyond prospecting.

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In a world of finite resources, growing geo-political stress, and one stumbling from a globalrecession, there is a growing focus on how energy is both the cause of and solution for manyconcerns in both the developed and developing world.

The problem with the invisible hand is, sometimes its invisible. Government intervention - not in

the Keynesian sense - is necessary in the form of extensive support for research, developmentand innovation in New Energy to overcome a techno-economic Hurdle Period. At the peak of the Hurdle, the nature of technology scaling and experience curves have the potential totransform the energy sectors, the heart and lungs of the U.S. techno-economic system. Such atransformation comes at a time when the U.S. is searching for the next crest of technology andinnovation leadership.

Disrupting the Carbon Quo

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