Reconsidering Public-Sector Energy R&D Investment Trends in the Industrialized World

Transcription

1 Reconsidering Public-Sector Energy R&D Investment Trends in the Industrialized World Paul Runci, Leon Clarke, and James Dooley Joint Global Change Research Institute College Park, MD March 17, 2006 Introduction Since the early 1970s, industrialized countries government investments in energy R&D have varied widely, making energy R&D one of the least stable areas of public sector investment. Investments rose sharply to historic heights during the 1970s before falling just as rapidly to historic lows in the 1980s. Since the mid-1990s, energy R&D investment has been in a period of relative stability, albeit at levels far below the historical peak. As the data presented here show, the industrialized countries (with the possible exception of Japan) have followed remarkably similar energy R&D investment paths over the past 30 years. This paper presents and analyzes energy R&D investment data gathered annually by the International Energy Agency (IEA). These data represent the best and most comprehensive energy R&D data set currently available. The analysis uses data on fourteen industrialized countries collectively representing more than 95% of total public sector energy R&D investment in IEA countries. IEA countries whose public energy R&D investments represent less than 1% of current total investment were not included here. 1 Private sector energy R&D investment data have not been included here since reliable and consistent longitudinal data sets are not available; in many cases, private firms consider R&D investment data to be business sensitive and, consequently, do not disclose them publicly. However, previous analyses of existing data on private sector energy R&D investment suggest that the deregulation of the energy industries in the 1990s has had a major negative impact. 2 Recent work has also indicated that there may be a positive spillover effect from the public to the private sector with regard to R&D investment. This research suggest that when governments decide to invest in key technology areas, the private sector often follows suit, and vice versa. By inference, the 1 Unless otherwise noted, data presented in this paper are from the International Energy Agency s International Energy R&D Statistics Database, available from 2 See for example, J.J. Dooley, Unintended Consequences: Unintended Consequences: Energy R&D in Deregulated Market, Energy Policy (June 1998), ; and Robert M. Margolis and Daniel M. Kamen, Underinvestment: The Energy Technology and R&D Policy Challenge, Science 285 (30 July 1999),

2 long-term decline in public energy R&D investment, in conjunction with other events such as energy deregulation, may have intensified private sector disincentives for energy R&D investments. 3 The first section of the paper discusses aggregate national trends in public energy R&D investment in industrialized countries between 1974 and 2004, highlighting the explosive growth of the 1970s, the precipitous decline of the 1980s, and the stabilization period beginning in the mid-1990s. Section two delves deeper into energy R&D investment trends, revealing major changes in the composition of energy R&D portfolios beneath the quiet surface of the aggregate investment levels in recent years. The reordering of R&D program areas shows that even within energy R&D budgets, policymakers perceptions of value have changed continually and their investment preferences give some indication of expectations regarding the global energy future. Finally, the concluding section addresses the question of current perceptions of energy R&D as a policy tool and a public good, and offers observations regarding the future. Aggregate Energy R&D Trends in Industrialized Countries, The long-term data on public energy R&D investment tell a complex story. In the aggregate, funding levels have been relatively stable across the OECD since the mid- 1990s, after a period of protracted decline from a historical peak level in1980. Since the mid-1990s, aggregate government funding for energy R&D in industrialized countries, as reported to the International Energy Agency, has stabilized at a level of roughly $8 billion in real 2004 U.S. dollars, a level that is more consistent with funding levels in the years prior to the energy crisis of Public sector energy R&D funding has deviated by less than 10% from that aggregate level in any given year since 1994, as Figure 1 shows. The stabilization of U.S. government support for energy R&D and consistent support on the part of the Japanese government are largely responsible for the broader stabilization trend throughout the OECD, as Figure 1 shows. 3 Jyrki Ali-Yrkko, Impact of Public R&D Financing on Private R&D: Does Financial Constraint Matter?, European Network of Economic Policy Research Institutes Working Paper No. 30 (February 2005), available from

3 Figure 1. Public Sector Energy R&D Investment in Selected Industrialized Countries, millions, $ US (2004) Canada Denmark Finland France Germany Italy Japan Netherlands Norway Spain Sweden Switzerland UK US Total Energy R&D investments in several other industrialized countries have followed a longterm trajectory similar to that of the U.S. For example, support for public sector programs in France, Italy, and Canada all fell by more than 50% in the decade prior to 1994, while those in the U.K. fell by more than 90% before stabilizing. Thus, even though the governments of the U.S. and Japan are the global leaders in public sector energy R&D funding, the IEA data show that the trend of sharp investment decline followed by stabilization was common to many OECD countries, as Figure 2 shows.

4 Figure 2. Public Sector Energy R&D Investment in Selected OECD Countries (excluding the U.S. and Japan) millions, $US PPP (2004) Canada Denmark Finland France Germany Italy Netherlands Norway Spain Sweden Switzerland UK TOTAL While several research papers have emphasized the precipitous decline of public energy R&D funding from their peak levels, the longitudinal data set from 1974 to 2004 suggests that the high funding levels of the late 1970s rather than the lower levels of recent years constitute a historical anomaly. The R&D response to the oil supply shock of 1974 was unprecedented and has not been replicated in the aftermath of any subsequent energy crisis, including the more acute oil shock associated with the Iranian Revolution of A variety of non-r&d responses may be counted among the factors contributing to the steady readjustment of government energy R&D budgets to lower aggregate levels after Non-R&D responses include the formation of new institutions such as energy futures markets, the creation of strategic petroleum reserves and international energy sharing regimes such as the International Energy Agency, energy deregulation in many countries, and the discovery of major new oil and gas reserves in non-opec countries. Collectively, these changes to the global energy landscape altered the logic of, and perceived returns on, energy R&D investment.

5 Program-Level Trends in Energy R&D Funding Aggregate trends can be deceiving. Although the sum total of public energy R&D funded by major industrialized countries may have declined to reach the ambient levels of the past decade, energy R&D funding at the program level has been highly dynamic and sensitive to evolving national and international policy priorities. For example, as Figure 4 shows, nuclear energy R&D programs have declined steadily since the early 1980s in most countries except Japan, a particularly energy resource-poor country that by itself accounts for more than 70% of nuclear R&D funding in IEA countries. Outside of Japan, most of the resources devoted to nuclear energy R&D are directed toward nuclear safety, waste management, and decommissioning rather than reactor design, since political and economic factors continue to favor other electric power generation options. This trend has been especially pronounced in the U.S. and in Europe, where several countries, including Germany, the United Kingdom, and Italy, have announced plans to phase out nuclear power altogether in the coming years. Figure 3. Nuclear Energy R&D in Selected IEA Countries, millions $ US 2004 Canada Denmark Finland France Germany Italy Japan Netherlands Norway Spain Sweden Switzerland UK US Total Nuclear

6 In each of the remaining program areas tracked by the IEA (conservation, fossil, renewables, and power & storage technologies) government investment has either stabilized or grown since 1994, as Figure 4 shows. In this regard, a notable trend reversal has occurred in the fossil energy R&D program area. Fossil programs had declined continually in most IEA countries throughout the 1990s, before rebounding after in response to rising petroleum prices and tighter oil and gas markets. Within fossil energy R&D programs, fuel cell and carbon capture programs represent a growing share of overall investment, as climate change and energy security become higher priorities concerns on many countries policy agendas. Figure 4. Aggregate Energy R&D Investment by Program Area, Selected IEA Countries millions, $US (2004) Total Conservation Total Fossil Total Renewables Total Nuclear Total Power & Storage Energy conservation R&D has nearly tripled from its 1989 nadir, led by major new investments by the U.S., Japan, and Canada over the past decade. Several European countries, including Germany, Switzerland, Spain, the Netherlands and Italy have substantially reduced their investments in conservation and efficiency in the years since, despite rising energy prices. Declining conservation budgets suggest that the

7 stabilization of energy R&D appears to be forcing difficult budget allocation decisions and direct tradeoffs between program areas in many countries. Renewable energy programs have also grown strongly over the past decade in European countries with relatively small energy R&D programs, including Sweden, Italy, Spain, the Netherlands, and the United Kingdom. The growth in renewables R&D is attributable in part to the publication of the European Union s (EU) 1997 White Paper on Energy, which called for a doubling (to 12%) of renewable energy s contribution to electricity generation by Most EU countries have subsequently adopted their own renewables deployment goals and augmented their renewable energy R&D investments at the same time. Public sector investments in power and storage technology R&D have been more stable than investments in any other technology area, having remained at or near the current aggregate level of $420 million since the early 1980s. While the private sector has historically been the major source of funding for research on electric power conversion, transmission and distribution, and power storage technologies, it is likely, as available data suggest, that private funding for power and storage R&D has fallen with the overall decline of private energy R&D after deregulation. 4 Another discernable trend in IEA countries with smaller energy R&D budgets is specialization in niche technology areas. Rather than attempt to cover the full spectrum of energy R&D with their limited resources, several countries have chosen to concentrate in specific program or sub-program areas. Key R&D sub-areas in this regard include solar photovoltaics and solar thermal energy (France, Italy, and Japan), wind (Denmark), and biomass (Finland, Sweden) and carbon capture and storage technologies (Norway). Niche players in renewable energy R&D often have strong export-oriented technology policies that aim to assist domestic industries in becoming world market leaders in their technology areas. Aggressive wind and solar deployment policies in key European countries including Germany, Spain, and Italy use electricity feed-in tariffs, portfolio standards, and direct subsidies to shore up the position of domestic renewable technology vendors. 5 The United States and Japan stand alone as supporters of large, comprehensive government energy R&D programs, with major ongoing support for all four primary program areas: conservation, fossil, renewables, and nuclear energy. Even these comprehensive programs incorporate a strong measure of specialization, with roughly half of the U.S. public energy R&D budget allocated to basic energy sciences, and twothirds of the Japanese energy R&D resources devoted to nuclear research. The broad science and technology foundation laid by the R&D programs of these two countries facilitates the specialization of other countries energy R&D programs. 4 See Dooley, Unintended Consequences. 5 See Kornelis Blok, Renewable Energy Policies in the European Union, Energy Policy 34 (2006), ; International Energy Agency, IEA Energy Statistics available from

8 Energy R&D in Comparative Context To complete the picture of public energy R&D investment trends, it is useful to look at energy R&D in comparison with other areas of R&D investment. As Figures 5 and 6 show, energy R&D, as a percentage of gross domestic product (GDP) has continued to lose ground relative to other major research areas. While overall government R&D investments have risen steadily, energy R&D s share of GDP has declined continuously since The comparative context shows that despite the stabilization of public energy R&D budgets, energy R&D remains a relatively low policy priority. Figure 5. Gross R&D Investment as % GDP, Selected OECD Countries % GDP United States EU15 Japan Canada OECD total Organization for Economic Cooperation and Development (OECD), Main Science and Technology Indicators, Volume 2005 Issue 2 (2005), available from

9 Figure 6. Public Energy R&D Investment as a Percentage of Gross Domestic Product in Industrialized Countries (by Region) % 0.30% 0.25% Energy R&D as % GDP 0.20% 0.15% 0.10% North America Japan Europe 0.05% 0.00% Analysis of Findings Investors seek returns on their investments. While these returns may be measured easily in many cases, as in the stock and bond markets, there are other cases in which common economic metrics fall short. Here, the stream of benefits from an investment may include significant non-economic elements (e.g., public or social goods), may accrue over a longer time period than markets would bear, or both. A central and enduring role of government is to ensure the adequate provision of such goods in these cases by correcting market signals or providing the goods outright when they are deemed necessary to societal wellbeing. In part because of the inherent difficulties in measuring benefits from investment in public goods, the public (i.e., government) investment in them changes continually in response to changing perceptions of value on the part of policy makers and their constituents. Also, since there are limited resources available for allocation among a broad portfolio of necessary public goods, competition necessarily arises as policy 7 Organization for Economic Cooperation and Development (OECD), OECD Factbook 2005, available from and IEA, International Energy R&D Statistics Database, available from

10 makers struggle to distribute funds among societal objectives. This distribution of resources constitutes a de facto prioritizing of policy objectives and an expression of relative societal benefit streams expected to flow from investments in each area. While some public goods investment areas, notably defense, are insulated better than others by virtue of their centrality to societal survival and welfare, others are subject to large fluctuations in response to changing perceptions of social value. Government investments in any of a number of research areas, including space, health, and agriculture, have risen and fallen over time in response to crises and to less acute factors driving changes in perceptions of priority. The data and analysis presented in this paper show that most major industrialized countries have followed a common pattern of energy R&D investment since the mid- 1970s, suggesting that key factors determining perceptions of energy R&D s value are found at the international or global level. For example, public energy R&D investment across the industrialized countries rose several fold between 1973 and 1980 in response to the initial world oil supply shock of During the 1980s however, and into the 1990s, support for energy R&D fell just as sharply, in some cases to historical low levels. A number of factors, including the deregulation of the energy industries, the creation of energy futures markets and international energy sharing regimes, and the diversification of global petroleum supplies have been implicated as factors contributing to a discounting of public sector energy R&D after Several recent papers have called attention to the sharp decline in energy R&D funding from peak levels, and argued for redoubled public funding for energy R&D in response to mounting evidence of global climate change, energy security concerns, and high energy prices. 8 This paper finds, however, that public energy R&D investments in major industrialized countries have actually stabilized since the mid-1990s, albeit at levels well below the historic highs. Yet the message with regard to energy R&D is a mixed one. On the one hand the stabilization and, in some cases, recovery of energy R&D investments in real terms suggests a potential awakening on the part of policy makers regarding its potential value. On the other hand, the fact that energy R&D has steadily lost ground as a share of GDP, both in absolute terms and relative to other R&D areas, suggests that perceptions of energy R&D s value may be lower than ever and falling still. Under the assumption that public energy R&D will be an indispensable tool in developing technologies needed to address future energy and environmental problems, then a strategic recasting of its value and importance is necessary. From this vantage point, the challenge is not so much that of reinvigorating energy R&D budgets, but of strengthening or re-establishing, in the minds of key decision makers, understanding of 8 For example, in 1999 the President s Committee of Advisors on Science and Technology issued its report Powerful Partnerships: The Federal Role in International Cooperation on Energy Innovation, calling for major increases in long-term funding for R&D to develop cleaner and more efficient energy technologies. More recently, the bipartisan National Commission on Energy Policy s 2004 report Ending the Energy Stalemate recommended a doubling of federal investment in energy R&D between 2005 and 2010 and new incentives for private sector investment in energy technology innovation.

11 the connections between specific policy tools and policy ends. If current funding levels reflect policy makers perceived value of energy R&D as a tool to address energy policy problems, there must be enduring changes in the perceived value of energy R&D as an instrument of essential technological changes and, by extension, improved societal wellbeing. While energy R&D funding may be a proximate challenge, the underlying problem is one of perceptions of value in the light of the hard choices policy makers must make in allocating limited resources.