Short-Circuiting: Budgeting Instability Reduces Alternative Energy Innovation

In a political climate where federal budgeting has been one of the most contentious government issues in the United States, the consequences of budget cuts, sequestration, and funding through continuing resolutions are still being realized. However, one thing that has been certain is that federal funding to programs has not been consistent, planned in advance, or even guaranteed to exist.

In “The Implications of Policy Stability for Renewable Energy Innovation in the United States, 1974-2009,” Jiaqi Liang and Daniel J. Fiorino examined the effects of instability in federal alternative energy investment on the amount of innovation in the alternative energy sector. They found that while both the size and the short term stability of the alternative energy investment increase the amount of innovation, over a longer time frame the stability of alternative energy investment has the largest positive effects on innovation.

According to the authors, the United States has historically invested significant amounts of money into research and development on energy, but this amount has declined over many decades. Following the oil embargo in 1973, energy research and development expenditures almost tripled in size, but since the Reagan administration this energy investment, particularly in renewable energy technologies, has declined precipitously. Because renewable energy technologies are more expensive and less entrenched as a primary energy source, private investment in research and development is very sensitive to cost and risk fluctuations. Public funds in research and development could theoretically provide stability to innovators in this industry.

To test whether funding instability had negative effects on innovation, Liang and Fiorino examined the effects of the stability and size of public investment in alternative energy research on the number of patents applied for within the alternative energy sector in a given year. Using different moving averages of public investment and annual deviations from those moving averages, the authors measured the effects of both short term and long term policy stability on the level of innovation. They controlled their analysis for public sector investments, electricity costs and consumption and other government policies in order to isolate the effects of investment magnitude and stability.

Liang and Fiorino’s models revealed compelling details about energy investment stability. Their study found that an additional one million of government investment leads to an approximate increase of 0.1 percent in the number of patents filed. In the short term, they found that funding stability had an effect of less than 0.1 percent on energy policy innovation. In the long term, however, the authors found that funding stability increases policy innovation by over 20 percent per year of stability in their chosen time frame. This confirmed their hypothesis that technological innovation is fostered by long term funding stability.

These results suggest that if the government seeks to maximize the amount of innovation, then policymakers should encourage stable long term public investments. This would allow innovators to understand the investment climate that they are operating in. This lesson of stability can be applied to other policies within alternative energy, for example the Wind Energy Tax Credit that expires at the end of 2013 and faces an uncertain future. Applying this lesson more broadly, federal budgeting has operated under short term deals, discretionary spending cuts, and failed bipartisan committees since 2011. Lack of federal funding certainty in many departments and sectors could contribute to a lack of innovation, and a lack of innovation is a missed opportunity for development.

Feature Photo: cc/(Todd Klassy)