Priority Innovation Policies

Public Sector R&D

Today’s technologies have the potential to bend the carbon-emissions curve—but new, better, and cheaper innovations are a key component of any achievable plan for reaching a net-zero emissions economy by 2050.

Government investment in clean energy research, development, and demonstration (RD&D) can accelerate this innovation and catalyze greater private-sector investment. But current levels of public sector RD&D funding are not enough to put the United States and the world on a path to net-zero emissions. The federal government should both increase funding to its energy-RD&D agencies and reorganize them to more effectively address the climate crisis.

The federal government should be set up to make the best use of its resources, with a centralized office that is responsible for inventing, piloting, and commercializing clean energy technologies. To reduce duplication, focus the government’s efforts, and get the most innovation out of every dollar of funding, the federal government should establish a National Institutes of Energy Innovation (NIEI) modeled on the National Institutes of Health.

An NIEI would have a clear mission to support the world’s best scientists and entrepreneurs as they develop the critical technologies and solutions needed to address the climate crisis. The institutes would focus on advancements in cross-cutting technologies, end-use sectors, and clean electricity and fuel sources, reducing costs and spurring large-scale deployment. They would closely integrate breakthroughs in fundamental science with subsequent stages of product development, production, and deployment to achieve successful commercialization pathways for technologies.

In the near term, there are other important actions the federal government can take to improve the focus of its R&D efforts. The recommendations below focus on these actions.

Policy interventions include:

1. Increasing federal funding for clean energy–innovation investments at the Department of Energy (DOE) and other federal agencies by a factor of five over the next ten years.
2. Updating DOE’s mission and goals to meet the critical challenges facing the nation’s energy systems.
3. Balancing DOE’s innovation portfolio so that it covers all sources of emissions and all sectors of the economy.
4. Performing agency-wide, multi-year innovation-portfolio planning that connects RD&D needs and funding to national energy and climate goals.
5. Transforming DOE’s organizational structure to better connect basic and applied energy research, rebalance the innovation portfolio, and depoliticize research programs.
6. Stabilizing funding for federal innovation programs.

Reforming the National Laboratory System

Clean energy technologies must be developed, commercialized, and tested before they can be deployed on a large scale. However, when it comes to energy innovation, this process often stalls. The commodity nature of electricity and other forms of energy, the expensive and long-lived capital assets this kind of innovation requires, and the structure of electricity-market regulation all reduce research and development (R&D) spending from industry and other private sources. That means the government has a major role to play in promoting and developing energy innovation—and the Department of Energy’s (DOE’s) National Laboratory system is a critical component of a federal approach to commercializing clean energy technologies.

The 17 National Laboratories owned by DOE are sometimes called the crown jewels of the U.S. innovation system. Over 100 Nobel Laureates have been affiliated with DOE and its labs, which employ more than 20,000 scientists and perform about $14 billion of R&D each year.¹ Today, the National Laboratory system makes essential contributions to the national defense, advances fundamental science, and—crucially—plays a large role in promoting energy innovation. This track record means the labs can play a significant role in mitigating climate change.²

However, Labs were not specifically designed to work on commercializing energy innovations, so there will need to be significant policy reform to help them accomplish these goals.³ In fact, there is broad acknowledgment from DOE leadership that while the Labs have had notable successes, the system can do far more to help commercialize technologies that can contribute to decarbonizing the energy system.⁴ This assessment has been echoed in a series of high-profile examinations of the Lab system. These assessments have found that, while the Labs offer the nation “inestimable value” as an executor of R&D, there are “significant opportunities” to create more value in partnership with the private sector.⁵

Policy interventions include:

1. Encouraging public-private collaboration within the National Laboratory system.
2. Using incentives and assessment to focus research in the National Laboratory system on technology transfer and the development of commercial products.
3. Aligning incentives and funding to improve the quality and quantity of technology transfer between the National Laboratory system and outside partners.
4. Focusing DOE funding on commercializing energy technologies.
5. Changing the research culture at National Laboratories to boost technology-transfer outcomes.
6. Encouraging entrepreneurial culture among individual scientists at National Laboratories.

Stimulating Entrepreneurship

In the United States, the federal government provides over $7 billion for clean energy research and development (R&D) each year. At the same time, capital markets provide some $60 billion to deploy mature technologies. In between, however, is a remarkably underfunded pathway for clean energy innovations to move from bench science to commercial production.

To capitalize fully on the economic and climate benefits of publicly funded scientific discoveries, the federal government must take a comprehensive approach to stimulating clean energy entrepreneurship. Among its goals should be recruiting talented teams to choose the tough and risky path of clean energy entrepreneurship over other career options, directing more public funding to pre-venture startups, designing effective incentives for venture capital and later-stage investment, and creating large demand-side market signals that reward greater entrepreneurship and investment.

Policy interventions include:

1. Recruiting talented scientists to clean energy entrepreneurship, prioritizing Black, Indigenous, and Latino communities, as well as low-income and disabled populations.
2. Increasing the scale and impact of pre-venture funding.
3. Providing incentives for equity investors in clean energy technologies.
4. Guaranteeing demand for clean energy technologies.
5. Maximizing the climate impact of federal funding.

Demonstrating and Validating New Technologies

Before we can deploy promising clean energy technologies at scale, we must demonstrate and validate their cost and performance in real-world conditions for potential adopters.

Many demonstration and validation projects are too risky and capital-intensive for the private sector to take on alone, but sound public policy can facilitate them. A strong innovation system around demonstration will allow both the federal government and the private sector to pursue multiple promising technologies while tolerating an appropriate degree of failure.  

Policy interventions include:

1. Developing a robust portfolio of demonstration projects for complex, capital-intensive technologies that can promote deep decarbonization.
2. Expanding federally managed, market-driven testbed resources to accelerate the commercialization of clean energy technologies, prioritizing deployment in low-income and historically disadvantaged communities.
3. Encouraging vigorous information sharing among all partners in demonstration and validation activities.
4. Negotiating flexible cost-sharing agreements between public and private funders of demonstration projects.
5. Centralizing the Department of Energy’s (DOE’s) system of managing large-scale demonstration projects to promote best practices and isolate projects from political influence.
6. Linking demonstration and validation activities to upstream research and development (R&D) and downstream deployment programs so that promising technologies move as rapidly as possible through the full innovation cycle.
7. Fostering international efforts to share knowledge gained from demonstration and validation activities.

Early-Stage Tax Credits for R&D and Innovation

The success of an innovation strategy depends on policies that incentivize research & development (R&D) and encourage the deployment of emerging technologies.

The U.S. research and experimentation tax credit (the R&D tax credit) is the main federal research-tax incentive. It allows companies to claim credit on their federal taxes for a portion of what they spend on experimental research. (It does not apply to spending on non-technical research, machinery, or equipment.) To spur more clean energy innovation and boost U.S. international competitiveness, Congress should expand and reform the credit to reduce the after-tax cost of investing in R&D.

Tax policies that encourage early deployment for emerging technologies are also critical to long-term GHG reductions. Policymakers designing innovation tax credits should identify the critical applications of low-carbon energy systems and develop subsidies that harness market competition to support promising solutions for each application. The policies should be stable, avoiding capricious changes that chill the climate for private investment. Eligibility should decline as market adoption for a given technology increases.

Policy interventions include:

For R&D Tax Credits:

1. Expanding the federal Alternative Simplified Credit for research.
2. Broadening the tax code’s definition of basic research.
3. Expanding federal tax credits for collaborative energy research.
4. Making it easier for research-based startups, including clean energy startups, to use the R&D tax credit.

For Technology-Neutral Innovation Tax Credits:

1. Tailoring tax incentives to encourage the development of critical applications for a decarbonized energy system.
2. Making sure that only new, low-carbon, and effective technologies quality for tax incentives.
3. Rewarding technologies based on their performance to keep government spending aligned with its objectives.
4. Phasing out eligibility for tax incentives as qualifying technologies mature.
5. Making tax credits refundable so developers do not need to have tax liability in order to receive them.
6. Enhance stability and boost investor confidence by leaving innovation tax credits in place permanently.

Project Financing

Financing is a major barrier for low-carbon energy or industrial projects. The very industries in which carbon-emission reductions are most important—because of large volumes, scale economies, and high concentrations of CO₂—are also highly cost sensitive, risk averse, competitive, and capital-intensive. Beyond establishing a robust portfolio of first-of-a-kind projects under Demonstrating and Validating New Technologies, we need policies to support commercial readiness (the 2nd- through 5th-of-a-kind projects) and full market penetration. The private sector is often unwilling to provide the capital these critical steps require.

Once early engineering and operational obstacles have been overcome, new decarbonized technology needs to be implemented enough times so that manufacturing scale and experience can drive costs down enough to successfully compete with incumbent higher-emitting technologies.

Policy interventions include:

1. Extending cost-sharing grant programs beyond first-of-a-kind projects and allowing such projects to access publicly subsidized or guaranteed loan programs as well.
2. Prioritizing projects in low-income and historically disadvantaged communities.
3. Giving decarbonized-energy projects access to the tax-exempt private activity bond market.
4. Giving decarbonized-energy projects better access to equity markets.
5. Changing the tax code to broaden the investor base for decarbonized-energy technologies.
6. Establishing a Clean Energy Deployment Administration (CEDA) with the authority and funding to mix grants, loans, and other tools to promote full successful commercial deployment of decarbonization technologies.

Carbon Pricing

Putting a price on greenhouse gas (GHG) emissions that reflects their true economic and environmental costs is a critical piece of a climate policy strategy. A carbon price makes carbon-intensive goods and services more expensive, providing a financial incentive to use fewer of these products and shift to lower-carbon alternatives.

Carbon pricing should cover as many GHG emissions as administratively feasible, including virtually all emissions from the energy system, and should be set at levels that put the nation on a pathway to net-zero emissions. Trade-exposed industries may require some additional protections to maintain U.S. competitiveness and avoid encouraging them to move overseas, where they may continue to emit CO₂. Advocates for environmental justice have expressed concern that these policies do not directly benefit historically disadvantaged communities located near polluting facilities. Carbon-pricing policies must address these concerns by, for example, requiring on-site GHG reductions and reductions in local air pollution and ensuring that low-carbon goods remain affordable, especially for those who live in close proximity to polluting power plants. Revenue from a carbon tax should be used to offset its adverse impacts on vulnerable communities.

Policy interventions include:

1. Establishing an economy-wide price on carbon.
2. Linking carbon prices to national emissions targets and outcomes.
3. Applying carbon pricing to as many sources of emissions as possible.
4. Providing direct economic and environmental benefit to low-income and historically disadvantaged communities.
5. Minimizing the number of entities that pay a carbon price.
6. Adopting measures to keep domestic industries on a level playing field with foreign competitors.
7. Using revenue from a carbon fee to protect those who cannot afford price increases and to improve economic opportunity in fossil-dependent communities.
8. Surrounding a carbon fee with other policies for achieving emissions reductions quickly and cheaply.
9. Encouraging increased sequestration of carbon dioxide emissions.

International Investment and Trade

The United States cannot fight climate change alone, because more than 85 percent of global carbon dioxide emissions are emitted outside the United States.⁶ Achieving global net-zero emissions will require a coordinated push for clean energy transitions around the world. Efforts to date have not made much progress. For nearly three decades, countries have negotiated with each other through the United Nations Framework Convention on Climate Change (UNFCCC) but have failed to chart a global path to net-zero emissions. The pledges that countries made under the 2015 Paris Agreement are not sufficient to restrain global warming below 2°C.⁷

Still, even though U.S. emissions are small compared with global levels, the United States has great leverage to spearhead a global push for net-zero emissions. U.S. investments in innovative clean energy technologies can lower the cost of clean energy transitions around the world. And if the United States can develop, produce, and export innovative technologies to countries around the world, it will not only speed the global push for deep decarbonization but also reap domestic economic rewards.

Domestic policy alone will not suffice. U.S. foreign policy is critical to bridge the gap between domestic innovation and global clean energy transitions—and to cultivate globally competitive U.S. clean energy industries. Historically, U.S. policymakers have focused their international climate efforts on the UNFCCC process. This remains an important venue in which the United States should not only participate but also demonstrate leadership, for example by submitting a new pledge to achieve net-zero domestic emissions. But beyond rejoining the Paris Agreement, policymakers should design and execute a foreign-policy strategy to boost global clean energy innovation, foster the uptake of U.S. clean energy technologies, and speed clean energy transitions.

Policy interventions include:

1. Leading international collaborations to invest in clean energy technology innovation, including both bilateral and multilateral approaches to boost global public funding and coordination for clean energy research, development, and demonstration.
2. Coordinating global policies to build market demand to scale up emerging technologies, including through regulatory coordination, public procurement, and harmonized technical standards.
3. Promoting exports of U.S. clean energy technologies through higher and more targeted export finance and investments across the innovation pipeline.
4. Advancing a trade agenda that supports clean energy innovation and exports by reducing barriers to cross-border clean energy trade while supporting countries’ ability to invest in cultivating innovative domestic industries.
5. Mobilizing global investment for clean energy transitions in emerging economies by leveraging international financial institutions to use innovative tools for mitigating risks in those markets.
6. Coordinating domestic and foreign policy to best enable U.S. clean energy innovations to be adopted around the world.

¹ Department of Energy (2017). Annual report on the state of the DOE National Laboratories. U.S. Department of Energy.
² Westwick, P. J. (2003). The National Labs. Harvard University Press.
³ Anadon, L. D., Chan, G., Bin-Nun, A. Y., & Narayanamurti, V. (2016). The pressing energy innovation challenge of the US National Laboratories. Nature Energy, 1(10), 1-8.
⁴ Department of Energy (2016). “Departmental Response to the Final Report of the Commission to Review the Effectiveness of the National Energy Laboratories.” U.S. Department of Energy. Available at: https://www.energy.gov/sites/prod/files/2016/02/f29/CRENEL%20Response%20-%20FINAL%20COMBINED_0.pdf
⁵ Glauthier, T.J. et al. (2015). Securing America’s Future: Realizing the Potential of the Department of Energy’s National Laboratories. Office of Scientific and Technical Information (OSTI), Oak Ridge, TN (United States).
⁶ Union of Concerned Scientists, “Each Country’s Share of CO₂ Emissions,” May 11, 2020, https://www.ucsusa.org/resources/each-countrys-share-co2-emissions.
⁷ T. Vandyck, K. Keramidas, B. Saveyn, A. Kitous, and Z. Vrontisi, “A global stocktake of the Paris pledges: Implications for energy systems and economy,” Global Environmental Change 41 (2016) 46-63, https://www.sciencedirect.com/science/article/pii/S095937801630142X.