What Role Should the State's Play in Boosting the Clean Economy?

In a new report released today, Lew Milford, President of the Clean Energy Group and Mark Muro, Policy Director at the Brookings Metropolitan Program discuss an underreported, but key state clean energy policy – public clean energy investment funds.  These funds are investment vehicles for clean energy projects backed by dedicated revenue streams such as ratepayer electricity surcharges, RPS compliance payments, bonds, and other taxes.

And these funds are leveraging a significant amount of public dollars. Combining the 20 state funds on the books today, over $2.7 billion has been invested in the last decade, leveraging an additional $9.7 billion in federal and industry investments.  Of course, this doesn’t compare to the $3 billion to $5 billion the federal government invests in energy innovation annually or the roughly $17 billion invested in renewable and nuclear energy in just FY2010 including innovation investments, tax expenditures, and subsidies.  Even so, in a time of federal budget cuts and policy gridlock, any dedicated investment vehicles for clean energy are important.

But if state clean energy funds are to have a long-term impact, policy changes are needed. As it stands, state funds support a hodgepodge of incentives, rebates, and subsidies aimed largely at individual financing of existing clean technology projects and installations. The thinking goes that by increasing the installed amount of clean energy, the cost of clean energy will drop (through cost curves), leading to greater demand, job creation, and industry growth. As a result, state funds (and state energy policies in general) have supported over 72,000 clean energy projects, largely through the deployment of existing technologies at the expense of developing or scaling emerging, high-reward substitutes.

But as the report discusses (and ITIF and others have highlighted at length), near-term-focused clean energy policies fall well short of spurring the kind of transformative energy technologies we need. To realize drastic carbon emission cuts, we need significantly better clean technologies in energy storage, solar, electric vehicles, critical materials and biofuels that are cheaper than their fossil fuel equivalents without subsidy in addition to the incremental improvements spurred by deployment policies. But getting these transformative technologies takes more than cost-curve policies and instead requires a robust set of policy tools that drive clean energy innovation.

So the report sparks a serious question – what role should the states play in supporting clean energy and clean energy innovation?  This is a larger policy discussion that is needed now more than ever, given the lack of federal policy leadership. In particular, the following points require greater discussion and focus:

Without a national clean energy strategy, state coordination is vital to supporting innovation.  Individually, many states leverage far less public resources than the federal government, but in combination represent a significant investment.  Many advocates and policymakers have called for a significant increase in investments in clean energy on the order of $15 billion more per year.  The states could collectively make up a portion of the shortfall if their investments were geared towards innovation.  But in absence of any overarching federal policy that would help support coordination, state-driven coordination is key.  This is one of many reasons why regional clustering efforts and public-private partnerships are so important and it’s vital for states to tie their clean energy funds and policies into their larger local and regional economic development efforts to focus on long-term industry support. To date, state economic development offices and clean energy funds operate independently.  That has to change.

States must focus on supporting the energy innovation ecosystem, but also leverage their individual strengths. The energy innovation ecosystem includes the entirety of clean technology development – everything from R&D, testing, and pilot projects to demonstration, manufacturing, and commercialization. Public support at each phase is vital for potentially transformative technologies to make it to market and to create a robust green economy.  Some states are capable of investing and supporting the entire ecosystem, such as California (and its great PIER Program), Massachusetts (the Massachusetts Clean Energy Center), and New York (the suite of programs at NYSERDA).  In each case, state resources in addition to a diverse set of institutions such as university networks and business clusters allow for a clean energy innovation ecosystem approach. 

But I’d be naïve to think that every state can mimic an ecosystem approach given limited resources.  Instead, many states should focus on the phases of clean energy innovation that play to their strengths.  For instance, some states could leverage their relationships with utilities to support the demonstration and testing of emerging technologies.  Other states with significant public land could implement programs to create test beds for new clean energy ideas. And many states with active federal lab and university research communities could provide significant clean energy fund investments in research and development.  And in many instances, states could collaborate on a regional level to complement each state’s strengths and investments. In other words, states should move away from a deployment-only approach and instead leverage their strengths to support clean energy innovation.

States should test new ideas and implement best practices. If there is one role the federal government – namely the Department of Energy – could play right now (and spend very little federal dollars) it would be to act as a clearinghouse for best practices in state clean energy innovation policies, especially those that complement federal efforts.  There are 50 states implementing a diverse set of policies each year.  So providing states with guidance on what approaches are working best is a key tool clean energy funds and policymakers can use to ensure that they are effectively supporting innovation.  Without any sort of federal clearinghouse, it’s up to the states to test new ideas and not be afraid to implement best practices used elsewhere. In fact, it’s imperative.  As the report points out, one way the states could do this would be to invest in industry market data to analyze what strengths and weaknesses exist in each state to narrow down where policy support is needed as well as if policies are having a positive impact.  This would drive states to move away from stale and often ineffective subsidy approaches and instead produce fresh new ways of building an environment for energy innovation and long-term industry growth

Transforming the energy system requires significant investment, innovation, and coordination.  A strong federal government role is absolutely necessary to provide the level of investment needed as well as an overarching national energy strategy.  Under ideal circumstances, the states and federal government collaborate and complement each other’s efforts to maximize public investments.  But the federal government is in no hurry to implement a robust national clean energy strategy, making the state’s role that much more important.  In absence of strong federal policymaking, states could potentially wield significant leverage in supporting the long-term growth of the clean economy and capture the potential economic benefits of the new industry.  But doing so requires states to shake off traditional energy policy dogmas and take the long-view by investing in transformative clean technology innovation and economic development.

Image attributable to Lewis Milford et. al., “Leverageing State Clean Energy Funds for Economic Development,” Brookings Institution.