No abstract

Technological innovation will continue to be essential in the energy system for both economic and public policy reasons. The process of innovation is typically incremental, cumulative, and assimilative. Innovation may produce revolutionary outcomes through the accumulation of small steps, or because it introduces new performance characteristics that the market values. In some circumstances, public policy intervention to overcome obstacles to innovation may be justified to secure public benefits. One obstacle is that innovators may be unable to capture all of the available economic benefits of innovation. Another is that economic benefits may not be available and the value of the public good has not been internalized in the market. Experience with energy innovation suggests government intervention works best when it is carefully targeted on specific obstacles. Why some government policies have not been successful and suggestions for new policy approaches that might be useful are also discussed.

Although the U.S. energy system seems to resist the changes necessary to meet today's challenges related to energy security and climate change, the system has gone through massive change several times since 1850. A major driver in each of these earlier transitions was an economic value, such as mobility, that markets could capture. Because environmental and security values are public goods, changing today's energy system will require a policy that creates a market signal reflecting these values. However, it is also necessary to craft a policy framework that is both durable over a long time period and able to adapt to new information as it becomes available. This essay examines some of the possible attributes of a durable and adaptable policy. The discussion is necessarily preliminary because relatively little formal research exists on this topic. However, even a preliminary examination suggests that considerations of policy durability could affect the choice between a carbon tax and a cap-and-trade system.

No abstract

No abstract