Harnessing International Cooperation to Advance Energy Innovation

On March 29 and 30, the Council on Foreign Relations convened a workshop in New York to explore how international cooperation can accelerate energy innovation. The workshop, hosted by Douglas Dillon Fellow and Acting Director of the Energy Security and Climate Change Program Varun Sivaram, was made possible by the support of the Alfred P. Sloan Foundation. The views described here are those of workshop participants only and are not CFR or Sloan Foundation positions. CFR takes no institutional positions on policy issues and has no affiliation with the U.S. government.

Introduction

New and improved clean energy technologies to confront climate change can help countries set ambitious targets to reduce their carbon emissions. Whereas countries have long participated in formal negotiations convened by the United Nations to curb emissions, it was not until the 2015 Paris Climate Change Conference that momentum grew for international cooperation on advancing energy innovation. The election of U.S. President Donald J. Trump threatens to undermine that progress.

To take stock of recent events and discuss prospects for the future, CFR convened a workshop, gathering nearly forty current and former government officials, entrepreneurs, scientists, investors, executives, philanthropists, and policy researchers. Participants explored how international cooperation can accelerate energy innovation, which lessons from other sectors are applicable to the energy sector, and what policy options are available to spur cooperation in light of political realities.

Mission Impossible

The Paris Agreement on climate change was a major breakthrough because nearly every country around the world committed to reducing its carbon emissions. But these individual commitments do not add up to the reductions needed to limit global warming to 2 degrees Celsius or less, the agreement’s stated goal.

Fortunately, on the sidelines of the Paris summit, twenty world leaders announced Mission Innovation (MI), a pledge to double public funding for energy research and development (R&D) within five years. At the same time, Bill Gates and twenty-eight other billionaires collectively announced that they would also invest in the next generation of energy technologies, highlighting the importance of the private sector in bringing new technologies to market. These public and private leaders argued that better and cheaper energy technologies could enable even deeper cuts to carbon emissions than countries were initially willing to commit to.

Workshop participants expressed concern that the Trump administration would ignore the MI pledge, which had been brokered by the Barack Obama administration. Such a move would be unfortunate, participants noted, because MI, for the first time, focused high-level political attention on the urgent challenge of advancing energy innovation. Already, energy ministers had convened in 2016 in San Francisco and concluded how their countries would cooperate: for example, by sharing data about public and private R&D investment. And MI’s second ministerial summit is slated to convene in Beijing in June 2017, when countries will determine its future.

MI’s original target—doubling global public R&D funding from $15 billion to $30 billion by 2021—cannot be met if the United States does not live up to its commitment to boost funding from $6.4 billion to $12.8 billion. Trump’s budget proposal slashes R&D funding by over $3 billion, which affects renewable energy technology in particular. Congress is unlikely to approve such a sharp reduction, but the president’s proposal reduces the likelihood that the United States will increase its R&D funding as previously committed. One participant speculated that the best-case scenario would be if the United States boosted funding only for those technologies favored by the Trump administration, such as advanced nuclear reactors or equipment to capture and store carbon emissions from fossil fuel power plants.

At least for now, other countries remain committed. One participant noted that countries as diverse as Indonesia, Saudi Arabia, Canada, and various European Union members are all committed to ramping up public R&D spending. And these investment flows will likely be overshadowed by a tidal wave of funding from China, which has pledged to spend $8 billion per year by 2021 and will thus overtake the United States as the largest funder of energy R&D.

However, without U.S. financial support, the global MI funding goal would be out of reach. In fact, it is even uncertain whether the Trump administration will continue to host MI’s small staff at the U.S. Department of Energy (DOE). Summing up these developments, one participant lamented, “This is a disappointing, chastening time for clean energy innovation.”

Quality Over Quantity

There might, however, be a silver lining, some participants noted. Now that doubling global public R&D funding appears improbable, countries could focus on improving the quality of their innovation efforts. Many participants agreed that although the quantity of R&D funding is woefully inadequate today, simply doubling it could be wasteful. For example, one participant noted that India cannot double its public R&D funding because it lacks the institutional capacity to spend that money effectively.

Many participants argued that a more promising function for MI could therefore be in enabling countries to share lessons about designing public institutions to fund innovation. The United States, for example, has the Advanced Research Projects Agency-Energy (ARPA-E)—modeled after the military’s funding body for emerging technologies—which funds potentially transformative technologies but cuts off grants to projects that miss their milestones. Though ARPA-E has existed for less than a decade, one participant noted that teams funded by ARPA-E are more likely to obtain patents and private funding than those funded by other arms of the DOE.

Another participant proposed Germany’s Fraunhofer Institutes as an important model of “translational infrastructure to bridge the gap between great science and engineering at universities and commercial products produced by industry.” Yet another cited the Low Carbon Trust, which was created by the British government but enjoyed political autonomy to make investments in promising technologies alongside the private sector. Although that institution’s budget was sharply curtailed in 2009 as a result of the financial crisis, participants agreed that it offered valuable lessons for funding innovation.

Still, participants noted that institutions “can’t be dropped from a helicopter” into one country from another because of differing national contexts. U.S. universities, federal laboratories, and private firms generate enough good ideas for an institution like ARPA-E to assemble a diverse portfolio of technology bets, but countries that have no such research backing would have no practical or political value for a (low) carbon copy of ARPA-E. For that reason, participants concluded, information-sharing on institutional design and performance would help countries try out elements best suited to their national contexts. Countries could also evaluate and help improve one another’s innovation. This approach has a precedent: Group of Twenty countries have exchanged reviews to help members identify wasteful fossil fuel subsidies to eliminate.

Participants concluded that MI should reorient its focus toward enhancing the quality, rather than the quantity, of its members’ innovation efforts (see figure 1). Recognizing that MI might need an alternative home to the U.S. Department of Energy, participants debated whether MI should be subsumed within an existing international institution, such as the International Energy Agency or the International Renewable Energy Agency. Although some supported that route to ensure MI’s survival, others doubted that countries would pay leader-level attention to MI if it were part of a large institution. Either way, most participants agreed, MI should not become a large, bureaucratic institution; it should remain a nimble, bottom-up coalition of countries whose leaders are willing to work together to advance energy innovation.

Figure 1. Experts' Assessments of the Future of Mission Innovation

Other Opportunities for Cooperation

Participants stressed that MI is not the only venue for countries to cooperate on energy innovation. Two other modes offer important benefits as well.

Bilateral Research Collaborations

In some cases, bilateral collaborations have achieved a similarly high political profile to that of MI. One participant cited the U.S.-China Clean Energy Research Center (CERC), which U.S. President Barack Obama and Chinese President Xi Jinping discussed on several occasions. CERC’s priorities include developing technologies to reduce energy use in buildings, to capture and store emissions from coal plants, and to design cleaner vehicles.

The participant conceded that U.S. and Chinese research teams have not yet obtained joint patents. One possible reason is that theft of intellectual property (IP) remains a concern for U.S. researchers and companies. But CERC has clear IP rules, and as teams get more comfortable designing joint research projects, joint IP ownership will likely follow.

Participants cited CERC’s ability to attract private-sector firms to work alongside academic researchers as an important strength. Participants also noted that the United States would benefit from continued participation in CERC, because U.S. firms can demonstrate their technologies in China and thus gain access to a massive and growing market for advanced energy products.

Other participants cited the U.S. research partnership with India as a successful example of collaboration that combines the research expertise of industrialized countries with the technology needs of developing ones. For example, one participant noted that developing energy-efficient ceiling fans is an important priority for India, even if it is not one for the U.S. market. The United States stands to benefit from such partnerships if its firms can design better products for fast-growing emerging economies.

International Technology Standards

Given that almost six hundred standards apply worldwide to renewable energy technologies, and more apply regionally or domestically, countries could collaboratively develop future standards for shared benefits. Participants did not see the need for new international institutions to develop and help implement standards across borders. However, some argued, existing institutions could take a systemic approach to setting standards. Such an approach would mean, for example, setting standards for not only how well a solar panel should work in isolation but also how it should interact with the power grid.

“Standards play a critical role for technology markets, as they contain technical specifications or other precise criteria designed to be used consistently as rules, guidelines, or definitions,” one participant noted. Participants explained that standards matter for three reasons. One, they increase the size of the market for energy products by, for example, making it possible to use the same energy-efficient lightbulbs all over the world. Two, they help customers and investors trust that new technologies will work as advertised. And three, standards can improve the performance of energy products. A participant noted that the first two advantages arise from scalar standards that simply standardize product specifications; the third advantage arises from vector standards that impose a directional requirement that products get better over time.

Another participant offered an example of how standards could popularize cleaner energy technologies. In colder parts of North America, Europe, and China, the burning of fuel oil or coal to heat homes and businesses is a major source of emissions. Electric heat pumps offer a much cleaner alternative. Developing standards on equipment performance and installation practices could make it attractive for customers to use heat pumps. The participant noted further that Canada and the United States had already started to cooperate on setting such standards.

Working With the Private Sector

Several participants stressed that successfully bringing new energy technologies into the marketplace will require far greater investment in innovation by the private sector. Therefore, a primary objective of international cooperation should be to catalyze private investment flows. Other sectors offer important examples of how to accomplish this goal.

Participants noted that the semiconductor industry, in which private R&D investment far outstrips public R&D funding, offers an aspirational example for the energy sector. One expert from that industry explained that corporations, rather than governments, drive international cooperation, often joining forces with international rivals on research and manufacturing ventures. The expert noted that nonprofit standards-setting bodies play an important role in coordinating the global industry and pushing firms to innovate rapidly. And when governments enact strict IP protections, remove trade and capital barriers, and invite talent from abroad, firms cooperate across borders and invest heavily in innovation.

Another participant shared lessons from the global health sector, in which pharmaceutical companies invest heavily in R&D for new drugs. Some drugs, particularly vaccines that target tropical diseases such as malaria that are endemic to lower-income countries, are not lucrative to develop. For some such cases, governments around the world pool funds to purchase large quantities of vaccines and create markets for otherwise unprofitable drugs. Participants reasoned that this strategy could apply to the energy sector, in which some clean energy products for developing countries would be profitable for the private sector to develop only if governments were to create the right incentives.

A participant noted that universities could also play an important role in spurring private sector investment; they could tailor programs for corporations to invest in breakthrough energy research on campus.

Finally, although participants generally agreed on the need for far greater private investment in energy innovation, some energy entrepreneurs and venture capital investors reported on exciting examples of ongoing breakthroughs in developing the vehicles of the future, designing cleaner power grids, and bringing electricity to millions who lack it. Innovation is inevitable, they argued; the challenge is to accelerate it.