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Holdren Statement for the Record on S.100825 July 2001 • page 3

technology R&D thirty years earlier, in FY1967, when real GNP was 2.5 times smaller and the reasons for concern about the adequacy of the nation's energy options were far less manifest (8, p 2-8).

Federal applied energy-technology R&D ramped up sharply after the Arab-OPEC oil embargo of 1973-74, reaching a peak of over 6 billion 1997 dollars per year in FY1978 in the process of adding sizable investments in advanced fossil-fuel technologies, renewables, and end-use efficiency to the fission- and fusion-dominated portfolio of the 1960s. After Ronald Reagan assumed the Presidency in 1981, however, with his view that any energy R&D worth doing would be done by the private sector, Federal applied energytechnology R&D spending fell 3-fold in the space of 6 years. A Clean Coal Technology Program that was a joint venture of government and industry brought a brief and modest resurgence from 1988 to 1994, but from then through FY1997 the overall decline continued. Similar declines in government-funded energy R&D were also being experienced in most other industrial nations: the relevant expenditures fell sharply between 1985 and 1995 in all of the other G-7 countries except Japan. Japan's governmental energy R&D budget in 1995 was nearly $5 billion, in an economy only half the size of that of the United States. (Nearly $4 billion of the Japanese total was concentrated in nuclear fission and fusion, however, a pattern similar to that in the United States in the early 1970s.)

Private-sector energy R&D in the United States had been estimated by a 1995 Secretary of Energy Advisory Board study (13) at about $2.5 billion per year at that time. Complete and consistent R&D figures for the private sector are difficult to assemble, but it appears that these expenditures had, like those of the Federal government, been shrinking for some time: the Department of Energy estimated that U.S. industry investments in energy R&D in 1993 were $3.9 billion (1997 dollars), down 33 percent in real terms from 1983's level; a study at Battelle Pacific Northwest Laboratory showed U.S. private-sector energy R&D falling from $4.4 billion (1997 dollars) in 1985 to $2.6 billion in 1994, representing a drop of about 40 percent in this period. Combined public and private investments in applied energy-technology R&D in the mid-1990s, at under $5 billion per year, amounted to less than one percent of the nation's expenditures on fuels and electricity. This meant that the energy business was one of the least research-intensive enterprises in the country measured as the percent of sales expended on R&D. Average industrial R&D expenditures for the whole U.S. economy in 1994 were about 3.5 percent of sales; for software the figure was about 14 percent, for pharmaceuticals about 12 percent, and for semiconductors about 8 percent.

Why had energy R&D investments in the United States fallen so low? On the private-sector side, R&D incentives had been reduced by the rapid fall, since 1981, of the real prices of oil and natural gas (together constituting over 60 percent of U.S. energy supply) and by energy-sector restructuring (resulting in increased pressure on the short-term "bottom line", to the detriment of R&D investments with long time horizons and uncertain returns). Perennial factors limiting energy-industry R&D include the low profit margins that often characterize energy markets, the great difficulty and long time scales associated with developing new energy options and driving down their costs to the point of competitiveness, and the circumstance that much of the incentive for developing new energy technologies lies in externality and public-goods issues (e.g., air pollution, overdependence on oil imports, climate change) not immediately reflected in the balance sheets of energy sellers and buyers.

As for the government side of low propensity to invest in energy R&D, the "let the market do it" philosophy of the Reagan years was certainly important in the steep declines from FY1981 through FY1987. It was augmented by the bad taste left in taxpayers' and policy-makers' mouths by the ill-fated government forays of the late 1970s into very-large-scale energy development and commercialization ventures (notably the Synfuels Corporation and the Clinch River breeder reactor); by the overall Federal budget stringency

Holdren Statement for the Record on S.1008. 25 July 2001 • page 4

management; and by lack of voter interest, in the absence of gasoline lines or soaring energy bills or rolling blackouts, in energy policy.

The 1997 PCAST study (8) conducted a detailed review of the then-existing portfolio of applied energy-technology R&D in the Department of Energy (where about 95% of Federal energy R&D resides). It concluded that these programs "have been well focused and effective within the limits of available funding" but that they were "not commensurate in scope and scale with the energy challenges and opportunities the twenty-first century will present". It noted that "[t]his judgment takes into account the contributions to energy R&D that can reasonably be expected to be made by the private sector under market conditions similar to today's", and it argued that "the inadequacy of current energy R&D is especially acute in relation to the challenge of responding prudently and cost-effectively to the risk of global climate change from society's greenhouse-gas emissions” (8, p ES-1). It recommended ramping up DOE's applied energytechnology R&D spending from the $1.3 billion level of the FY1997 appropriation (and from the $1.4 billion level of the FY1998 request, not yet acted upon by Congress at the time the report was written) to to $2.1 billion in FY2003 (expressed in constant 1997 dollars). The following table shows the distribution of the proposed increases.

Table 1. PCAST-Recommended DOE Budget Authority for Energy-Technology R&D (millions of constant 1997 dollars)

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The detailed programmatic recommendations within these budget lines stressed the importance of strengthening efforts on what S.1008 has called "breakthrough" technologies -- those with the potential to deliver large improvements in performance. All of the PCAST budget recommendations were unanimous, notwithstanding the diversity of energy (and nonenergy) backgrounds represented on the panel and notwithstanding the history of disagreements among the different energy constituencies about funding priorities. The unanimity on the panel emerged from detailed joint review and discussion of the content of the existing programs, the magnitudes of unaddressed needs and opportunities, the current and likely future role of private industry in each sector, and the size of the public benefits associated with the advances that R&D could bring about. Efficiency and renewables received the great bulk of the increment—and increased their share of the total from 50% in FY1997 to almost 64% in the FY2003 recommendation- because they scored high on potential public benefits and on R&D needs and opportunities unlikely to be fully addressed by the private sector.

Besides these budget recommendations, the panel offered a number of recommendations about

Holdren Statement for the Record on S.1008 • 25 July 2001 • page 5

increased coordination between DOE's Basic Energy Sciences (BES) program and its appliedenergy-technology programs;

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more systematic efforts within DOE at integrated assessment of its entire energy R&D portfolio "in a way that facilitates comparisons and the development of appropriate portfolio balance, in light of the challenges facing energy R&D and in light of the nature of private sector and international efforts and the interaction of U.S. government R&D with them" (5, p ES-6);

other improvements in DOE's management of its energy R&D portfolio, including that overall responsibility for that portfolio be assigned to a single person reporting directly to the Secretary of Energy and that increased use be made of industry/national-laboratory/university advisory and peerreview committees, while reducing internal process-oriented reviews.

The panel also recommended strongly that increased attention be devoted to the opportunities for strengthening international cooperation on energy-technology innovation—a recommendation that became the basis for the subsequent PCAST study with this focus (9).

Table 2 shows the distribution, across the energy sectors, of PCAST's recommended budgets for FY1999-2003, Administration requests for FY1999-2002, and Congressional appropriations for FY19992001, along with the appropriations from FY 1998. These figures show that the requests and appropriations rose, through 2001, in a pattern similar to that recommended by PCAST, but at a slower pace and with a particularly conspicuous shortfall in the renewable category. In addition, since the PCAST study, DOE has undertaken a major effort in integrated analysis of the Department's entire energy R&D portfolio, which reaffirmed the overall direction of the program while highlighting some key gaps, including energy-system reliability and international cooperation on energy-technology innovation. DOE has also made considerable effort at, and progress in, addressing its management challenges.

As indicated in Table 2, the Bush Administration's FY2002 budget request for applied energytechnology R&D, totaling about $1.3 billion, proposed a large step backward -one that would return the country to essentially the FY1997-1998 spending levels. This proposal is not consistent with the Administration's recent statements about the importance it attaches to energy issues and to the role of technological innovation in addressing them. (In fairness, however, it must be said that the FY2002 budget request had to be submitted before Vice President Cheney's energy task force had completed its work). In any case, I hope that Congress's appropriation for FY2002 will not follow the numbers in the Administration's request but will boost energy R&D spending toward the trajectory recommended by PCAST in 1997.

The supplemental appropriations for energy-technology R&D in S.1008 would be a major step in the right direction...and not just for FY2002 but for the ensuring nine years. Specifically, it must be supposed that a substantial fraction of the $4,000,000,000 appropriation for FY2002 to FY2011 -- averaging $400 million per year for the indicated decade that the bill would direct to the DOE Office of Carbon Management would be devoted to the responsibilities of that office specified in Subsection 1624.a.2.A, namely to "manage an energy technology research and development program that directly supports the [Climate Change Response] Strategy", with a focus on “high-risk, bold, breakthrough technologies". This

b The PCAST-97 study did not review the content of the BES program, but it did recommend, in light of the close coupling between advances in BES and progress in the applied-energy-technology R&D, that DOE consider expanding its BES effort in parallel with the recommended increase in applied-energy-technology work

Holdren Statement for the Record on S.1008. 25 July 2001 • page 6

increment to Federal energy R&D expenditures under existing programs is certainly not excessive in light of the stakes and the opportunities

Table 2. PCAST Recommendations, Administration Requests, and Congressional Appropriations for Applied Energy Technology R&D, FY1998-2003 (millions of as-spent-S)


FY98 appropriation

FY99 appropriation

Admin request
PCAST reccmdtn

FY00 appropriation

Admin request
PCAST reccmdtn

FY01 appropriation

Admin request
PCAST reccmdtn

FY02 Admin request

PCAST reccmdtn

FY03 PCAST reccmdtn

effic renew

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Notes: The values listed here may vary from other tabulations due to rescissions, uncosted obligations, inclusion or exclusion of other budget lines, and other factors. The efficiency line listed here does not include state and local grants, or the Federal Energy Management Program. The nuclear fission line includes only direct civilian energy-related R&D and University training support. The fossil energy line does not include expenditures for the clean coal program, which is a demonstration rather than a research and development effort.

associated with development of a more climate-friendly array of energy technologies than what would be likely to emerge under a business-as-usual R&D pattern, and the conditions the bill attaches to its expenditure seem to me to well designed to maximize desired outcomes.

Beyond Domestic R&D: Aspects of Commercialization and International Cooperation

To the great credit of the drafters, the bill's language calls (at several locations) for measures going beyond the usual boundaries of R&D to move climate-friendly energy-technology innovations forward toward commercial application. This mirrors a finding in the 1997 PCAST study that, when the public benefits of commercial application of the fruits of energy R&D would considerably exceed the expected returns from deployment to private investors (as would be the case for many climate-friendly technologies), a degree of government involvement in pushing beyond R&D toward demonstration and accelerated commercial deployment can be warranted. Both the PCAST report and the language of the bill stress the importance of this being done wherever possible through public-private partnerships, and in all cases with limits on the extent and duration of government support until the "hand-off" to the private sector has been

Holdren Statement for the Record on S.100825 July 2001 page 7

Also to the credit of the drafters, S.1008 recognizes explicitly that the global climate-change challenge cannot be met through development and deployment of advanced energy technologies in the United States alone, and it draws the logical conclusion that the United States has an interest in cooperating with other countries above all the less-developed countries to promote the development and implementation of climate-friendly energy technologies everywhere. This, too, mirrors findings of the 1997 PCAST report, as well as of the subsequent 1999 report that was focused entirely on the needs and opportunities for increased U.S. engagement in international cooperation on "energy research, development, demonstration, and deployment". The initiatives that emerged from the 1999 PCAST recommendations in the Clinton Administration's FY2001 budget proposal fared very badly in Congress (of a requested increment of $100 million for international energy cooperation in FY2001, only $8.5 million was appropriated), and it is particularly gratifying now to see the crucial need for increases in such cooperation reflected in this new legislation.

Coordination and Oversight

Two more themes of the PCAST studies that are evident as well in the provisions of S.1008 are the need for better coordination within and among the Federal agencies with responsibilities for energytechnology innovation and for international cooperation with respect to it, and the desirability of making greater use of advice and oversight from experts in the corporate, academic, and NGO sectors. I find most of the provisions of the bill in these directions - including the coordinating and integrative-analytic functions to be embodied in the White House Office of Climate Change Response, the Interagency Task Force under its direction, the DOE Office of Carbon Management, and its Center for Strategic Climate Change Response, and including the advisory and oversight functions of the U.S. Climate Change Response Strategy Review Board -- to be potentially helpful.



I question, however, whether the bill's provision establishing a procedure for annual certification by National Laboratory directors that the nation's energy R&D efforts are on track technically and financially is really needed or appropriate. This provision appears to be modeled after the process in which the national weapons laboratory directors certify annually the safety and reliability of the U.S. nuclear stockpile. But in that case, the lab directors are certifying matters that are entirely within the province of the three laboratories' collective expertise and responsibility. In the case of energy R&D, the national efforts include much that is done in the national laboratories but also much that is done outside them. The basis on which the laboratories would make the specified certification is therefore much less clear for energy R&D than for the status of the nuclear weapons stockpile. And there is potential for conflict between the energy R&D oversight responsibilities of DOE headquarters -- including the new such responsibilities specified in this bill -- and the certification responsibilities of the national energy labs, as well as potential for disputes arising from the quite different points of view and emphases of the different labs. If, after deliberation and consideration of other points of view, this lab-director certification process does survive in the final legislation, I suggest that the directors of the Livermore National Laboratory, the Los Alamos National Laboratory, and the Princeton Plasma Physics Laboratory should be added to the list of those participating in the certification, because these three labs-like the others now named - all have important functions both in applied energy-technology R&D and in basic energy sciences.

Requirements for Analysis

I believe the requirements that this legislation would impose on various offices and agencies for analysis and documentation of their efforts and of the compatibility of these with the overall strategy are, for the most part, reasonable and appropriate. I think, however, that the requirement imposed on the Secretary of State by Subsection 1623.4.C.iii.L, relating to specification of the economic and environmental costs and benefits of proposed international treaties, should be slightly softened by means of the words I have added

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