Efficiency and renewables receive the bulk of the recommended increment and increase their share of the total from 50 percent in fiscal year 1997 to about 64 percent in the recommended budget for FY 2003 because they scored high on potential public benefits and on R&D needs and opportunities not likely to be fully addressed by the private sector. Those recommendations of the 1997 PCAST study have been partly reflected in administration requests and to a somewhat lesser degree in congressional appropriations in the intervening years. In the most recent completed appropriations, those for fiscal year 2001, the total applied energy technology R&D budget reflects about half of the increment recommended in the PCAST study for that year over the fiscal year 1997 or 1998 baseline. Broken down, 100 percent of the increment recommended by PCAST was appropriated for fossil fuels, 55 percent of the increment for nuclear, 50 percent for efficiency and for fusion, but only 30 percent for renewables. The Bush administration's fiscal year 2002 budget request for applied energy technology R&D totaled only about $1.3 billion compared to the $1.7 billion appropriation in fiscal year 2001. That is the request proposed what I would characterize as a large step backward, one that would return the country to the fiscal year 1997-1998 R&D spending levels. That proposal is not consistent with the administration's recent statements about the importance it attaches to energy and to the role of technological innovation in addressing energy issues. In fairness, though, it has to be said that the fiscal year 2002 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 fiscal year 2002 will not follow the numbers in the administration's request but rather will substantially boost energy R&D spending toward the trajectory recommended by PCAST in 1997. That brings me to the bills under consideration in today's hearing, specifically S. 597 and let me say just a couple of words about that bill. Title XIV of S. 597, the comprehensive and balanced national energy policy act of which Mr. Chairman, of course, you were the principal sponsor, contains a great deal of the recommendations of the PCAST study. The specific focuses, the targets, the budget levels for the various components of applied energy technology R&D although slid back to 2006 from 2003 because of the gap that has materialized in the meantime, even the PCAST recommendations on the management of DOE's science and technology programs in title XV of the bill follow quite closely the PCAST recommendations on those points. I just want to say that my colleagues and I on the PCAST panel are very appreciative of the weight placed on our recommendations by you, Mr. Chairman, and your co-sponsors in the development of this bill. We did our best in that study to develop in our report a comprehensive and balanced Federal energy R&D program, and we're delighted to see so much of it reflected in the comprehensive and balanced national energy policy act that you wrote. As the authors of that bill and the other bills under consideration in this hearing are well aware, of course, a comprehensive energy policy has to include a lot more than R&D. Many of the other elements of a comprehensive policy-aspects of tax policy, regulatory policy, infrastructure development, performance standards, consumer protection are addressed in the array of bills before the committee today. Other elements, though, such as an appropriate framework of incentives and/or regulations to work in combination with advanced energy technologies to adequately reduce greenhouse gas emissions remain to be developed. Also remaining to be developed, in my view, is an adequate approach to international cooperation in energy technology innovation so that needed improvements occur worldwide. That was the subject of the 1999 PCAST study which I am not going to talk about today. R&D, in any case, should be the easiest part of energy policy in respect to gaining approval and finding the money because it is relatively non-controversial and it is relatively inexpensive. With respect to cost, let me just note that the difference between the $1.7 billion being spent on Federal applied energy technology R&D in fiscal year 2001 and the $2.4 billion recommended by PCAST for fiscal year 2003 amounts to about two-tenths of one percent of the U.S. military budget and it is equivalent to an extra 0.7 cents per gallon on the price of gasoline. Yet recent history makes it clear that even such modest investments in a secure and sustainable energy future are astonishingly difficult to attain. The chairman, the members and the staff of the Senate Committee on Energy and Natural Resources are to be commended for the major effort that you're investing as manifested in S. 597 and in this series of hearings, of which today's is just one, to address this problem. I thank you for the effort, for the confidence you've placed in the PCAST recommendations and for allowing me to present these views this morning. [The prepared statement of Dr. Holdren follows:] PREPARED STATEMENT OF DR. JOHN P. HOLDREN, PROFESSOR, Mr. Chairman, members, ladies and gentlemen: I am John P. Holdren, a professor at Harvard in both the Kennedy School of Government and the Department of Earth and Planetary Sciences. Since 1996 I have directed the Kennedy School's Program on Science, Technology, and Public Policy, and for 23 years before that I co-led the interdisciplinary graduate program in Energy and Resources at the University of California, Berkeley. Also germane to today's topic, I was a member of President Clinton's Committee of Advisors on Science and Technology (PCAST) and served as chairman of the 1995 PCAST study of "The U.S. Program of Fusion Energy Research and Development”, the 1997 PCAST study of "Federal Energy Research and Development for the Challenges of the 21st Century", and the 1999 PCAST study of "Powerful Partnerships: The Federal Role in International Cooperation on Energy Research, Development, Demonstration, and Deployment". A more complete biographical sketch is appended to this statement. My work at Harvard on energy R&D policy over the past five years has been funded, at various times, by the U.S. Department of Energy, the Energy Foundation, the Heinz Family Foundation, the MacArthur Foundation, the Packard Foundation, and the Winslow Foundation. The opinions I will offer here are my own and not necessarily those of these funders or of the other organizations with which I am or have been associated. My statement draws in part on testimonies on energy policy that I presented to other Congressional hearings earlier this year and last year (1-3) and on a review of the PCAST energy studies and their impact that I wrote with a colleague for publication in Annual Review of Energy and the Environment this fall (4). I am grateful indeed for the opportunity to testify this morning before the Senate Committee on Energy and Natural Resources, at this timely and important hearing. The scope of this morning's hearing is very broad, covering proposals related to "energy and scientific research, development, technology deployment, education, and training" in portions of eight Senate bills (S. 388, S. 597, S. 472, S. 90, S. 193, S. 242, S. 259, and S. 636). I will focus my comments more narrowly, confining myself mainly to the energy R&D sections of S. 597 and the relation of those provisions to the recommendations of the energy R&D studies that I chaired for PCAST. The 1997 PCAST report (5), in particular, is so central to my observations here that I ask that its Executive Summary be included in the hearing record as an appendix to my statement. That study was a comprehensive review of U.S. federal energy research and development, examining the recent history of public and private energy R&D, the rationales for public involvement in this activity, and the existing energy R&D programs of the Department of Energy, and offering recommendations on the focus and budgets of these programs for the five Fiscal Years 1999-2003. The study was carried out by a panel of 21 senior individuals from industry, academia, and public-interest organizations. In addition to members with experience and expertise across the full range of energy options-fossil fuels, nuclear fission and fusion, renewable energy sources, and increased end-use efficiency-it included others of senior research, management, and policy-advising experience outside the energy field (including a former chair of the Council of Economic Advisors and a former CEO of HewlettPackard), who held no prior brief for increasing federal energy research. In what follows, I first summarize the key findings of the PCAST panel and then turn briefly to the related content of S. 597. U.S. ENERGY R&D THROUGH FY1997 In the FY1997 base year for the PCAST study, Federal budget authority for applied energy-technology R&D that is, R&D focused specifically on developing or improving technologies for harnessing fossil fuels, nuclear fission, nuclear fusion, renewable energy sources, and increased efficiency of energy end use-totaled about $1.3 billion.1 Correcting for inflation, this was precisely what the country had been spending for applied energy-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 (5, 2-8). Federal applied energy-technology R&D ramped up sharply after the Arab-OPEC oil embargo of 197374, 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, applied energy-technology 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 thereafter 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 (6) 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 1 The "energy R&D" line in DOE's budget contains a number of other categories that bring the FY1997 total to almost $2.9 billion. These include Basic Energy Sciences (which includes search in materials science, chemistry, applied mathematics, biosciences, geosciences, and engineering that is not directed at developing any particular class of energy sources), biomedical and environmental research, radioisotope power sources for spacecraft, and some energy management and conservation programs that are not actually R&D at all. The PCAST-97 focus was primarily on the applied energy-technology R&D component, although one recommendation did address, in a general way, the Basic Energy Sciences part of the budget. 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 buy ers. 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 characterizing the first Clinton term; by Congressional concerns about the effectiveness of DOE management; and by lack of voter interest, in the absence of gasoline lines or soaring energy bills or rolling blackouts, in energy policy. There was, finally, the "eat your siblings" character of energy-supply constituencies: the tendency of advocates of each class of energy options (e.g., nuclear fission, fossil fuels, renewables, energy end-use efficiency) to disparage the prospects of the other options-a tendency aggravated by the zero- or declining-sum-game characteristics of energy R&D funding in this period. In the grip of this syndrome, segments of the energy community itself formulated the arguments ("renewables are too costly", "fossil fuels are too dirty", "nuclear fission is too unforgiving", "fusion will never work", "efficiency means belt-tightening and sacrifice or is too much work for consumers") that were used by various factions in the government to cut energy R&D programs one at a time. There was no coherent energy-community chorus calling for a responsible portfolio approach to energy R&D that seeks to address and ameliorate the shortcomings of all of the options. While investments in energy R&D had been falling, however, concerns about the future adequacy of the country's portfolio of energy options had been growing. Imports as a fraction of U.S. oil consumption, which had fallen from a high of 49% in 1977 to just 29% in 1985, had risen again to 51% by 1996 The rate of decline of energy intensity of the U.S. economy, which had averaged 2.8 percent per year from 1973 to 1986, had averaged only 0.9 percent per year between 1986 and 1996. The 1995 Second Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) had concluded that “the balance of evidence suggests a discernible human influence on global climate" and that "climate change is likely to have wideranging and mostly adverse impacts on human health" as well as "negative impacts on energy, industry, and transportation infrastructure; human settlements; the property insurance industry; tourism; and cultural systems and values". The United States, one of 170 nations to sign and ratify the United Nations Framework Convention on Climate Change in the early 1990s, had pledged along with other industrialnation signers to hold its year-2000 greenhouse-gas emissions to 1990 levels; but by 1996 U.S. emissions of carbon dioxide, the most important anthropogenic greenhouse gas, were 9% above 1990 levels and rising. These were among the factors that led to the President's request for the 1997 PCAST study. RATIONALE FOR FEDERAL ENERGY R&D The panel's report began with an overview of the energy-linked economic, environmental, and national-security challenges faced by the United States as it moves into the 21st century, noting that (5, p ES-1) Our economic well-being depends on reliable affordable supplies of energy. Our environmental well-being-from improving urban air quality to abating the risk of global warming-requires a mix of energy sources that emits less carbon dioxide and other pollutants than today's mix does. Our national security requires secure supplies of oil or alternatives to it, as well as prevention of nuclear proliferation. And for reasons of economy, environment, security, and stature as a world power alike, the United States must maintain its leadership in the science and technology of energy supply and use. The report also noted at the outset that U.S. interests in energy are closely coupled to what is happening in the rest of the world, above all in developing countries. The panel wrote (5, p ES-1) The combination of population growth and economic development in Asia, Africa, and Latin America is driving a rapid expansion of world energy use, which is beginning to augment significantly the worldwide emissions of carbon dioxide from fossil fuel combustion, increasing pressures on world oil supplies, and exacerbating nuclear proliferation concerns. Means must be found to meet the economic aspirations and associated energy needs of all the world's people while protecting the environment and preserving peace, stability, and opportunity. In addressing the rationale for federal government involvement in energy-technology innovation to help address these challenges, the panel stressed the large "public benefits" dimension of energy issues the point that the interests of society as a whole in environmental quality, reliability of energy supply (in both its economic and national-security dimensions), meeting the basic energy needs of society's poorest members, and providing a sustainable energy basis for economic development considerably exceed the interests of private firms in these outcomes, as reflected in the returns they can expect to gain from investments in energy R&D. The panel also noted that a number of trends within energy industries themselves—such as deregulation, energy-sector and corporate restructuring, and increasing competitive pressures on the short-term "bottom line"-were evidently combining to reduce private-sector investment in energy R&D, above all those components of energy R&D entailing substantial risks or long time horizons. Notwithstanding the force of these arguments, the panel recognized that the private sector has the dominant role in bringing advanced energy technologies into widespread use, that this will be even more true in the future than it has been in the past, and that, therefore, it is essential to shape the government's efforts in energy-technology innovation to complement and utilize the strengths of the private sector, not in any sense to replace them. The panel wrote, in this vein, that projects in the federal energy R&D portfolio (5, pp 72) should be shaped, wherever possible, to enable relatively modest government investments to effectively complement, leverage, or catalyze work in the private sector. Where practical, projects should be conducted by industry/national-laboratory/university partnerships to ensure that the R&D is appropriately targeted and market relevant, and that it has a potential commercialization path to ensure that the benefits of the public R&D investment are realized in commercial products. Although it had not been asked to address the possibility of government efforts extending beyond R&D in the direction of commercialization of advanced energy technologies, the panel offered an argument that the same public-benefits rationale supporting government involvement in energy R&D, combined with the existence of a variety of barriers to private-sector commercialization of some of the advanced energy technologies offering very large public benefits, does justify a degree of government engagement in promoting commercialization in particular circumstances. It wrote (5, p ES-28) After consideration of the market circumstances and public benefits associated with the energy-technology options for which we have recommended increased R&D, the panel recommends that the nation adopt a commercialization strategy in specific areas complementing its public investments in R&D. This strategy should be designed to reduce the prices of the targeted technologies to competitive levels, and it should be limited in cost and duration. The panel did not, however, propose either a magnitude or a source of funds for such a commercialization initiative, considering this too far beyond its mandate. PCAST BUDGETARY AND PROGRAMMATIC RECOMMENDATIONS From its detailed review of the then-existing portfolio of applied energy-technology R&D in DOE, in the context of the rationales for government involvement as just |