Disrupting the Carbon Quo

A Case for Applied Innovation Economics

Directed Research for Professor Robert Fichman

Carroll Graduate School of Management
Boston College
Matt Marino - Spring 2010

Overview!.................................................................................................3
Assumptions!........................................................................................................3

Carbon Quo: Defined!.............................................................................4

Too Big To Fail?!...................................................................................................4

Carbon Infrastructure!..........................................................................................5

Why Carbon Energy “Sticks”!.............................................................................6

The Cost and Price of Carbon!.............................................................................7

The Cost!................................................................................................................7

The Price!...............................................................................................................8

New Energy: Defined!.............................................................................9

New Energy 1.0!..................................................................................................10

Abatement Strategies!........................................................................................10

Innovation Economics !.........................................................................11

Evolutionary Economics!...................................................................................13

Not Just Industry, Ideas!....................................................................................13

Hurdle Periods!...................................................................................................15

In the Wake of Creativity!...................................................................................16

Innovation Economics: Applied!..........................................................16

Disrupting the Carbon Quo - 1

The Perfect Storm!..............................................................................................16

A Wager for Innovation!......................................................................................17

1. Meeting Energy Demand! 17

2. Economic Growth! 18

3. The Right Kind of Feedback Loop ! 19

Accelerating the Disruption!..............................................................................19

1. Global Carbon Price! 19

2. Appoint a “New Energy Czar”! 20

3. Incubate Innovation Organically ! 20

4. Government Support for Mega Projects! 21

Disrupting the Carbon Quo - 2

In spite of advancements of exponential consequence throughout history, recent events
demonstrate that man’s struggle with the discovery, conversion and distribution of natural
resources will not cease - rather, the struggle only changes form…

• On April 5, 2010, an explosion at the Massey Coal Mine in West Virgina killed 29 miners.
This brings the total fatalities in U.S. mine disasters to 65 since the year 2000;

• On April 20, 2010, the Deepwater Horizon Oil Rig, leased for oil well drilling by BP, exploded
and eventually sank, killing 11 oil rig workers. The resulting oil well eruption is estimated to
be leaking up to 5,000 barrels per day or more into the Gulf of Mexico, for more than 28 days
straight (to date);

• On May 1, 2010, the failure of a MWRA water main that feeds the Boston metro area gave 2
million Bostonians a sense of the desperation that accompanies the search for potable water,
when it doesn’t run from the tap.

Overview
"Change is hard. Change is hardest on those caught by surprise. Change is hardest
on those who have difficulty changing too. But change is natural; change is not
new; change is important...It's time to think about the opportunity as well as the
pain."
-David Schlesinger1

This research program will explore the concept of Innovation Economics as a framework for
understanding the emergence and potential for success of mainstream renewable, clean and
efficient energy infrastructure, systems and technologies ("New Energy”), specifically within the
United States.

Assumptions
Economic analysis is inherently grounded in assumptions about human behavior and the purpose
of social (and therefore, economic) organization. Because this report will reflect concepts and
theories from a range of sources - from Keynes to Kauffman - it is important to explicitly define
theoretical "common denominators" which warrant their synthesis. For this analysis, the
following assumptions accomplish this:

1. Economic health – stable and sustainable growth – is a desired outcome of social,

commercial and political organizations;

2. Effective energy conversion systems are a requirement for economic health;

1 Friedman, Thomas. “The World Is Flat,” p20-21

Disrupting the Carbon Quo - 3

3. Environmental health – sustainable resource management and avoiding irreparable climate
damage – is crucial for human health, established civil settlements and their continued
development, and geopolitical stability;

4. Energy conversion systems have varying degrees of environmental impacts.

Carbon Quo: Defined

“For many years the knot stymied all who attempted to untie it. Then, one day,
rather than trying to untie the knot, the young Alexander simply cut the rope with
his sword.”
-Shellenberger et al2

Too Big To Fail?

The U.S. has been criticized for its disproportionate share of greenhouse gas (GHG) emissions
relative to the global population: “Developed countries consume the lion’s share of fossil fuels.
The United States, for example, contains just five percent of world population, yet contributes a
quarter [actually, 20%] of total CO2 output.”3

Technically, this is true: the U.S. contributed roughly 5.7 billion metric tons of the 28 billion
metric tons of CO2 emitted globally in 2008; that is, roughly 20%. But this statistic does not
reveal the true nature and complexity of this emerging drama, in which Economics, Energy, and
the Environment all play major roles...

U.S. GHG emissions are the direct result of energy use (and generation and conversion mix); in
turn, energy use is correlated very closely with GDP. Generating about $14 trillion of the
world's $69 trillion (in YEAR), the U.S. accounts for 20% of global economic activity - nearly
the exact same fraction as the U.S. share of global GHG emissions. 4

So reducing the U.S. GHG emissions is not as simple as switching off carbon-intensive power
plants: those power plants drive the consumption and production supply chains and behaviors not
just of U.S. markets, but of sovereign and commercial relationships throughout the world. While
the climate’s health demands immediate action, global economic health requires a stable supply
of scaled energy - a modern and tightly wound Gordian Knot.5 Indeed, the relationships between
Economics, Energy, and the Environment are highly complex.

2 Shellenberger et al. Harvard Law and Policy Review, “Fast, Clean and Cheap,” p93

3NHPR. EarthTalk, “How does population growth contribute to climate change?” Transcript retrieved from:
http://www.nhpr.org/node/26007

4 This correlation was the focus of a class session by Cutler Cleveland, Ph.D., “Energy, the Society, and the Environment,” Fall 2009

5 This clever analogy and reference can be credited to Shellenberger et al.

Disrupting the Carbon Quo - 4

Carbon Infrastructure
The phrase, “Carbon Quo,” in the title of this report, alludes to both the prevalence of and
reliance on fossil fuel dependent energy infrastructure, systems and technologies, specifically
within the United States. These include:

• Coal fired power plants, for electricity (~1450 U.S. generators)

• Natural gas fired power plants, for electricity (~5500 U.S. generators)6
• Petroleum-based fuels, predominantly for transportation (~7,300,000,000 barrels/year)7

Of course, “fossil fuels” are really carbon fuels - the deeply buried and highly compressed
fossilized remains of organic materials, aged for millions of years within the Earth’s crusts, and
extracted by means of drilling, pumping and mining. The 2008 analysis of energy flows in the
United States by the Energy Information Administration (EIA), a department of the Department
of Energy (DOE), found that 83% of U.S. energy consumption was dependent on fossil fuels.
The fuel input(s) that represents the greatest share of the energy mix is petroleum (or its
derivatives), at 37% of total energy consumption.8 The Transportation sector’s 28% share of
energy end usage reflects petroleum’s dominant role in energy consumption; Commercial,
Industrial and Residential usage sum to the remaining 72%. Notably, despite being the world’s
third largest producer of crude oil, the United States imported roughly 70% of its petroleum
energy supply.9

Throughout the Commercial, Industrial, and Residential sectors, much of U.S. energy
consumption - 40% - is utilized for electricity. Coal is the primary fuel source for electricity
conversion, at 51% of the electricity generation mix.10

The same report shows that “clean” resources provided nearly 16% of energy requirements; with
nuclear contributing about 9%, and renewable energy sources contributing about 7%.11

6 Energy Information Administration. “Existing Capacity by Energy Source,” Retrieved 15 May 2010 from:
http://www.eia.doe.gov/cneaf/electricity/epa/epat1p2.html

7 Energy Information Administration. “Petroleum Basic Statistics,” Retrieved 15 May 2010 from:
http://www.eia.doe.gov/basics/quickoil.html

8 Energy Information Administration. “Energy Flow 2008,” Retrieved 26 April 2010 from:
http://www.eia.doe.gov/emeu/aer/overview.html

9 Ibid, and: Energy Administration. “United States Energy Profile,” Retrieved 26 April 2010 from:
http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=US

10 Energy Information Administration. “U.S. Primary Energy Consumption by Source and Sector, 2008,” Retrieved 15 May 2010
from: http://www.eia.doe.gov/emeu/aer/pecss_diagram.html

11 For the purposes of this report: “Alternative” energy resources = non-fossil fuel based; “Clean” = low or zero CO2 emissions;
“Renewable” or “Sustainable” are both Clean and non-depleting of natural resources

Disrupting the Carbon Quo - 5

 Exhibit 1 - Reproduced from Source: EIA

Why Carbon Energy “Sticks”

“One reason technology changes in these waves, is because the prior technology
system establishes firmly committed ways of doing things which are not easily
disrupted.”
-Robert Atkinson12

There are reasonable explanations for how carbon-intensive energy infrastructure and systems
have such a firm grip on commercial, economic and social life. Some factors for “carbon-
stickiness” include:

1. Delivery to and consumption by end users seems relatively cheap. Statistics from
the EIA indicate that the average cost of electricity across the U.S. is 5.7 cents per
kilowatt-hour (wholesale).13 Although this figure is up roughly 10% since 2001,
industrial and commercial ecosystems have evolved to perform very efficiently from a
market perspective, making the U.S. retail electricity prices among the lowest in the
world.

2. At the same time, infrastructure is capital intensive and virtually semi-

permanent. Shellenberger et al emphasize that contemporary energy systems are
tailored for large, centralized plants and have been in use for over 100 years; factors

12 Atkinson, Robert. “The Past and Future of Americaʼs Economy,” p21

13 Energy Information Administration. “Wholesale Market Data,” Retrieved 15 May 2010 from:
http://www.eia.doe.gov/cneaf/electricity/wholesale/wholesale.html

Disrupting the Carbon Quo - 6

 which lead them to argue that, “Energy is arguably the least innovative sector of the
economy.”14

3. Government support in many forms.15 Furthermore, lobbyists for the fossil fuels
sectors actively manage subsidies, policies and legislation that support or prevent the
erosion of their clients’ business practices and markets. This is what Robert Atkinson
means when he says, “Some do not just passively wait, many actively resist the change
as it threatens entrenched ways of doing and established economic positions.”

In aggregate, these factors have led to a culture of limited invesement in innovation within the
fossil fuels sectors. BusinessWeek columnist Michael Mandel points to the discrepancy between
R&D spending in energy versus other large, industrial sectors: “Change has been far more rapid
in information processing and health care than in energy, transportation, and manufacturing
[which] depend on older technologies that date back to the 19th and early 20th centuries.”16 And
commentator David Brooks latches on to the same point: “Technology companies spend 5
percent to 15 percent of revenue on research and development. Energy companies, on the other
hand, spend only one-quarter of 1 percent.”17

The Cost and Price of Carbon

The Cost
Currently, carbon energy is energy - few viable and scalable alternatives offer a perfect
alternative. Although other pollutants comprise the full spectrum of greenhouse gases, CO2 - an
obvious byproduct of fossil fuel combustion - is the primary and predominant offender.

Describing the 2009 calendar year, the EPA reported that “the largest source of CO2, and overall
greenhouse gas emissions, was fossil fuel combustion.”18 The result of the continued combustion
of fossil fuels in all its forms is a rate of carbon emissions that accumulates in the atmosphere
faster than can be absorbed by natural carbon cycles. This is, in a highly simplified sense, what
is meant by the phrase greenhouse gas effect.

Most environmental and climate scientists agree that CO2 accumulation in the atmosphere at
current rates will lead to concentrations which raise global temperatures and upset many

14 Shellenberger et al. Harvard Law and Policy Review, “Fast, Clean and Cheap,” p105

15 Shellenberger et al, p13: “As the Stern Review makes clear, the annual investment of $33 billion in clean energy technologies
(which includes nuclear energy) is ʻdwarfed by the existing subsidies for fossil fuels worldwide that are estimated at $150 billion to
$250 billion each year.ʼ ”

16 Mandel, Michael. BusinessWeek, “This Way to the Future,” 11 October 2004, Retrieved from:
http://www.businessweek.com/magazine/content/04_41/b3903402.htm

17 Brooks, David. NYT, “American Power Act,” 29 April 2010, Retrieved from:
http://www.nytimes.com/2010/04/30/opinion/30brooks.html

18 Environmental Protection Agency Report. “U.S. GHG Emissions – 2010,” p5, Retrieved 26 April 2010 from:
http://www.epa.gov/climatechange/emissions/usinventoryreport.html

Disrupting the Carbon Quo - 7

biological and ecological cycles. Worse yet, environmental economist William Nordhaus warns
that “warming effects are indirectly amplified through feedback effects in the atmosphere, oceans
and land;” meaning there is a “snowball effect” if CO2 emissions are left unchecked.19
Environmental activist Bill McKibben advocates that carbon levels be stabilized at 350 parts per
million (ppm) to avoid the most drastic effects of climate warming; some authorities, including
reports by Princeton, McKinsey and Company, and the International Energy Association, assert a
level of 450 ppm. In either case, the fact is that carbon concentration levels are approaching
390 ppm, and rising about 2 ppm per year.

Exhibit 2 - Reproduced from Source: 350.org

The Price
Despite the escalating effects and possibilities of climate change, there is presently no universal
market mechanism to capture the costs of carbon pollution - a measure that would likely create
pressure to begin limiting emissions. Presently, carbon pollution is an “externality:” individuals,
companies, industries and countries impose the costs on the planet and others without paying for
the right to do so.

In economic analysis, it is common to overlook externalities due to ambiguity: their true effects
and boundaries are not easily aligned with their source. However, carbon emissions are both
traceable and their cost is economically quantifiable. Nordhaus estimates the true cost of carbon
emissions to be approximately $30 per ton. 20 His estimate is at the higher end of the range of the
$12 - $25 carbon “collar” recently introduced as part of the American Power Act, an energy and

19 Nordhaus, William. “A Question of Balance,” p2

20 Ibid., p11

Disrupting the Carbon Quo - 8

climate bill intended to come before Congress in 2010.21 Under these proposed pricing
schemes, heavy emitters, have measurable economic interest in maintaining the current (non-
existent) pricing scheme.

New Energy: Defined

Of course, there is nothing new about “New Energy.”22 Moreover, nearly all energy captured
and utilized by civilization is in fact some form of solar energy, even fossil fuels.

What is new is a resurgence of alternative energy conversion systems and technologies which are
gradually becoming cost competitive with conventional (i.e. carbon-intensive) generation
infrastructure. Such systems are, depending on the precise nature of energy inputs and outputs,
described as: Renewable, Alternative, Clean, Efficient or Sustainable. DOE’s Office of Energy
Efficiency and Renewable Energy (EERE) classifies New Energy systems and technologies in
the following manner:

Table 1 - Categories of New Energy

Energy Efficiency Systems Renewable Energy Systems

For Homes Solar
For Buildings Wind
For Industry Water (Hydro, Wave, Tidal)
For Vehicles Biomass
For Government Geothermal
Hydrogen, Fuel cells

New Energy systems and technologies achieve GHG emissions reductions by means of
Avoidance; that is, the systems accomplish the same or similar levels of energy output as
conventional carbon-intensive systems with little or none of the associated carbon emissions.
New Energy infrastructure is important for slowing the rate of aggregate GHG emissions, which
might halt the climate feedback cycles that are thought to accelerate climate warming.
Avoidance is one of two major strategies that will be discussed for minimizing further climate
damage.

21 Kerry, John. “The American Power Act,” Retrieved from:

http://kerry.senate.gov/americanpoweract/intro.cfm

22 See: Second Law of Thermodynamics

Disrupting the Carbon Quo - 9

New Energy 1.0
"Civilization has been slow to give up our myth of the Earth's infinite generosity."
-Barbara Kingsolver

In the later part of the 20th century, new energy systems were developed and promoted as
solutions to natural resource depletion and other environmental issues. When Marion Hubbert
first proposed the concept of “Peak Oil” in 1956, government, industry and environmental
leaders began to consider seriously the prospect of energy after fossil fuels. However,
mainstream adoption of early alternative energy technologies languished, mostly as a function of
their high cost and scalability, relative to the abundance, technology infrastructure and cost of
fossil fuel systems.

Despite the inertia of the Carbon Quo, major energy transitions have been fairly common in the
modern era, not unlike the techno-economic transitions that Atkinson describes. From human
and draft animal-powered agriculture, to early water and wind wheels, to modern internal
combustion engines and gas turbines; evolutions in energy systems have brought new waves of
economic growth and productivity, and have enabled the lifestyles and standard of living that is
customary in the developed world.

Abatement Strategies
In the report Pathways to a Low-Carbon Economy, analysts at McKinsey and Company
identified four major categories of abatement techniques: energy efficiency, low-carbon energy
supply, terrestrial carbon and behavioral change.23 For the purposes of this report, abatement
strategies are categorized by means of abatement. For example, New Energy systems and
technologies can avoid GHG emissions by replacing carbon-intensive energy generation
infrastructure. Other Avoidance measures include:

• Optimizing conversion and transmission of current energy infrastructure (i.e. efficiency

measures)
• Mitigating and minimizing emissions from conventional generation sources that remain
in the energy mix (i.e. CCS)
• Preventing deforestation: See below

Another set of strategies for reducing GHG concentrations might be called Combative. These are
measures which directly capture or eliminate atmospheric CO2. Such tactics include:

• Reforestation: Forests and soil act as natural “carbon sinks” that enhance natural
processing of CO2 from the atmosphere; while deforestation prevents the sink from
shrinking, reforestation projects attempt to make the sink bigger.

23 McKinsey and Company Report, “Pathways to a Low-Carbon Economy,” 2009

Disrupting the Carbon Quo - 10

 • Geoengineering: That is, large scale manipulation of earth-climate phenomena that
address global warming in both cause and effect manners:24
o For the former, some techniques would reduce CO2 concentrations, thereby
slowing warming effects
o For the latter, geoengineering cooling strategies deal only with combatting the
warming effects

Abatement strategies have not yet been adopted on a mass scale for a number of factors,
including:

• High initial investments and unknown payback periods: The McKinsey and Company
analysis estimates nearly a half-trillion dollar investment annually to reach a 35%
reduction in GHG emissions (baseline - 1990).25
• Technology integration, intermittence and storage: Many current investments are focused
on clean energy generation, but transmission and delivery of renewable energy - such as
the delivery of power from a solar thermal plant at night or when the sun isn’t shining -
presents its own set of complex issues.26
• An international “penguin dance:” Being a first-mover to a low-carbon economy could
restrict economic growth in the short term. Describing the American Power Act draft
legislation, environmental commentator Andrew Revkin of the New York Times remarks
that “It’s hard to see how such a bill will magically prod China, particularly, to blunt its
coal burning.”27

Innovation Economics
“The key to [Schumpeter’s] analysis was the insight that innovation is not a
regular process bringing steady incremental improvements but rather a
discontinuous process that occurs in waves.”
-Robert Atkinson

At times, economics seems abstract and merely descriptive. Alchian and Allen begin their
classic economic text, Exchange and Production, “Societies have progressed despite almost
universal ignorance of economic principles.” However, the intention of any economic
framework is for practitioners - not economists per se, but rather legislators, commercial
executives and other market participants - to understand the fundamental drivers in the economic
system. Such an understanding is important so that the drivers can be manipulated - by means of

24 Biello, David. Scientific American, “What is Geoengineering and Why is it a Climate Change Solution?” 6 April 2010

25 McKinsey and Company Report, “Pathways to a Low-Carbon Economy,” 2009

26 Woody, Todd. Grist.com, “Feds Push Solar Solutions,” 14 May 2010; Retrieved from:
http://www.grist.org/article/2010-05-14-solar-power-storage-schemes-get-a-boost-and-a-few-questions/

27 Revkin, Andrew. NYT, “American Power Act,” 12 May 2010; Retrieved from:
http://dotearth.blogs.nytimes.com/2010/05/12/the-american-power-act/

Disrupting the Carbon Quo - 11

mechanisms such as taxes, tariffs, and subsidies, to name a few - to the benefit of enterprise and
society (See: Assumption 1).

Throughout the modern era of economic thought (Adam Smith – Present), economic theories
have emphasized different drivers and forces, each with their respective mechanisms for market
manipulation. Atkinson points to the case of Herbert Hoover’s response to the Depression using
a “Classical” economic approach: “the President waited for prices and wages to fall…They fell
enough for voters to elect Franklin Roosevelt.”28 Therefore, how (and if) economic mechanisms
are levered is the direct result of the predominant economic paradigm.

Table 2 - Contemporary Economic Systems

Economic System Emphasis and “Drivers”

Classical Land, labor, capital and free markets
Keynesian Government intervention of supply and demand
to manage the interplay of inflation and
unemployment
Austrian The price mechanism
Chicago The individual, self interest, rational expectations
and free markets
Innovation The entrepreneur, ideas, competition

The economic drivers emphasized by proponents of Innovation Economics, a framework often

traced to the work of Austrian-born turned Harvard economist, Joseph Schumpeter, deviate from
those of previous systems. The innovation or growth-focused economic paradigm is concerned
with the ideation, creation and subsequent productivity gains of new entrants and businesses,
which, collectively and over time, gain enough momentum to transform entire techno-economic
ecosystems in 50-year “waves.”29 Schumpeter described each long wave economic cycle as its
own “ ‘industrial revolution’ and the absorption of its effects.” The nature of Innovation
Economics not only illuminates an understanding of energy and technology transitions of past,
but also what is required to Disrupt the Carbon Quo at present.

28 Atkinson, Robert. “The Past and Future of Americaʼs Economy,” p19

29 Atkinson, Robert. “The Past and Future of Americaʼs Economy,” p27

Disrupting the Carbon Quo - 12

Evolutionary Economics
“The essential point to grasp is that in dealing with capitalism we are dealing with
an evolutionary process.”
-Joseph Schumpeter30

Two analogies from evolutionary biology can shed light on the nature of Innovation Economics:

1. Survival of the Fittest. The analogies between Darwinism and Capitalism were made long
ago. But Schumpeter was the first to see how the decay and growth of whole sectors of the
economy rested in the minds of the “agents of change:” the entrepreneurs. He takes aim at
the nature of competition within the Austrian economic paradigm when he states that,
“Economists are at long last emerging from the stage in which price competition was all they
saw.” He proceeds to describe a new form of competition for consideration: that from “the
new commodity, the new technology, the new type of organization…which strikes not at the
margins of the existing firms but at their foundations and very lives.”31 Atkinson elaborates
on this concept, saying that the survivors of techno-economic transitions drive new waves of
economic growth and productivity gains.32

2. Punctuated Equilibrium. Paleontologists Niles Eldridge and Stephen Gould were the first
to defend the notion that significant gaps in the fossil record were not the result of the
incompleteness of the record, but rather by accelerated advancements from stray populations;
the gaps were “real,” as they say.33 A similar notion has been identified in the study of
business and marketing; the idea captured with phrases like “breakthrough,” “game-
changing,” or “disruptive” technologies. The point, as Schumpeter made, is not that its
possible to miss some marginal degree of improvement by failing to evolve and innovate, but
that the new system may not be a logical extension of the old one.

Not Just Industry, Ideas

“Having an innovative society may be more important for growth than having a
high rate of capital investment.”
-Michael Mandel

The theory of Innovation Economics is fundamentally about ideas, the subsequent creation and
implementation of new market players, and the practices and policies that support those
processes. In The World Is Flat, Thomas Friedman goes to considerable length to demonstrate
that in a global commercial environment dominated by technical specialization, liberal arts and

30 Schumpeter, Joseph. “Capitalism, Socialism and Democracy,” p82

31 Ibid., p84

32 Atkinson, Robert. “The Past and Future of Americaʼs Economy,” p23

33 Eldredge, N.; Gould, S.J., Models in Palaeobiology, “Punctuated Equilibria: an Alternative to Phyletic Gradualism.,” 1972, p84

Disrupting the Carbon Quo - 13

integrative thinking still have a major role to play in the future of the U.S. education system. He
quotes Marc Tucker, who says that market leadership amid globalization will require “a deep
vein of creativity that is constantly renewing itself,” and “comfort with ideas and abstraction” to
bring innovative products and services to market. 34 In a report advising California state leaders
about economic development, analysts from the research firm Collaborative Economics remark,
“The global innovation economy is primarily driven by ideas, and is different than the industrial
economy of the past.”35

Exhibit 3 - Reproduced from Source: Collaborative Economics

But how does one quantify the impact of a concept inherently as ethereal as an “idea?” Stanford
economists Charles Jones and Paul Romer have begun to do just that, preparing readers of their
essay, Ideas, Institutions, Population and Human Capital, with the statement that “modern
growth theory has added a stock of ideas and human capital to the familiar inputs of physical
capital and workers.” The “stock” Jones and Romer proceed to describe include population and
its growth function, differences in cross country per capita GDP, and human capital as measured
by education level.36 Additionally, the fraction of corporate revenues (re)invested in R&D, as
well as federal or state funded research programs, are commonly tracked to measure investments
in ideas.

Amid the current recession, R&D is a tempting line item targeted for cost-cutting.37 An
“innovation economist” might argue innovation practices like those of R&D form the back bone
of long-run market leadership, and that cuts can have exponential effects on the time horizon of
bringing new products to market. Speaking specifically about clean energy breakthroughs,
MacArthur Fellow, Saul Griffith, was quoted saying, “Even if I came to you tomorrow with the

34 Friedman, Thomas. “The World Is Flat,” p319

35 Collaborative Economics. “The Innovation Driven Economic Model,” p4

36 Jones, Charles and Romer, Paul. NBER Working Paper No. 15094, “The New Kaldor Facts: Ideas, Institutions, Population, and
Human Capital,” 2009

37 Mandel, Michael. BusinessWeek, “The GDP Mirage,” 9 November 2010, p35

Disrupting the Carbon Quo - 14

perfect energy idea, the reality is that to go from that idea to doing utility-scale generation would
be a minimum entry of $100 million and a minimum lead time of five to ten years.”38

Hurdle Periods
“Things don’t happen, they are made to happen.”
-John F. Kennedy

Gaps in the fossil record led Eldridge and Gould to theorize that “moments” of punctuated
equilibrium were the result of a segment of a (species) population straying from the natural
geography of their ancestors. Is there an analogous confluence of factors that lead to “Hurdle
Periods” in the understanding of innovation economics and the adoption of technology
transitions? This report refers to such potential confluences as “Hurdle Periods.”

Like an economic archaeologist, Atkinson demonstrates an “innovation record” for the U.S.
economy, each period a crest of the 50-year long wave economic cycles he prescribes. The
waves he describes are 1) the Mercantile economy of the mid-19th century; 2) Factory-based
economy of the turn of the 20th century; 3) the Corporate mass production economy of the
mid-20th century; and 4) the Entrepreneurial, knowledge-based economy of the contemporary
era. Each transition, he theorizes, was based in underlying technology and resulting business
model shifts which enabled productivity gains. For example, the emergence of electro-
mechanical and chemical technologies, the mainstream application of mass production
techniques, and the new ranks of professional management in the Corporate era of the 1940s and
1950s all helped drive a 25-year post War economic boom and the development of a
“consumption economy” and middle-class. 39

An appreciation for the power of ideas and developing systems to deploy them is not the
cornerstone of all economic frameworks. Mandel says that in the past, “technological progress -
the discovery of penicillin or the invention of the laser - was viewed mainly as the product of
science and serendipity, and therefore not very responsive to economic forces.”40 An historical
perspective is important for understanding how to actively manage innovation for economic
growth.

Hurdle Periods are perhaps best explained by Plato, who, when describing the creation of the
Athens state, said that: “Necessity is the Mother of Invention.” Innovation, too, is the result of
tension within the static regime. It is an attempt at a solution to a problem, or the result of new
knowledge or resources, and often, it is a combination of both scenarios. Ideas spring forth not
to maintain, but to improve commercial activities, striving to make products and services
cheaper, better, and faster.

38 Owen, David. The New Yorker, “Inventors Dilemna,” 17 May 2010, p46-8

39 Atkinson, Robert. “The Past and Future of Americaʼs Economy,” p29, 56-64

40 Mandel, Michael. BusinessWeek, “Can America Invent Its Way Back?” 11 September 2008, p2, Retrieved from:
http://www.businessweek.com/magazine/content/08_38/b4100052741280_page_2.htm

Disrupting the Carbon Quo - 15

In the Wake of Creativity
When innovation “disrupts,” and begins to gain market traction, there is a reorganization and
reallocation of all finite resources in the economic equation - those human, natural and
industrial. This organic phenomenon is a natural course of capitalism, and a wellspring for
growth, which occurs “whenever people take resources and rearrange them in ways that are more
valuable.”41 Of course, this process is also the source of “destruction” that Schumpeter famously
described: “In releasing their creative energies, rising entrepreneurs shove older ones aside,
destroying their dreams and often their fortunes.” In a world of scarce resources, when new
commercial connections and economic relationships are formed, old ones must be extinguished.

New technologies, systems and commercial relationships require more time, more energy, and
more oversight; there is more work in organizing chaos than in managing order. For a time,
short-term economic efficiency is subordinate to the future economic value of the newly created;
innovation is an investment.

Innovation Economics: Applied

If Atkinson considers technology the “skeleton upon which an economy is formed” then energy
systems are its heart and lungs. The parallel trajectories of economic, energy, and environmental
concerns lead us to a Hurdle Period which must be scaled in the next ten years. In the words of
the Stern Review: “The effects of our actions now on future changes in the climate have long
lead times.”42 The implications of an Innovation Economics approach can shape strategies for
the innovation and deployment of New Energy systems and technologies.

The Perfect Storm

Sebastian Junger’s famous novel follows the path of the Andrea Gail as she motors directly into
the eye of a once-a-century atmospheric storm. Why didn’t the crew change course?
Unfortunately it was a combination of ignorance - despite modern systems, weather forecasting
beyond a few days, especially in the middle of the Atlantic Ocean, is still an imprecise science -
necessity, and perhaps some arrogance on the crew’s part regarding the vessel’s and their own
capabilities.

The climatic conditions currently brewing high in the atmosphere present a similar decision
point: despite imprecise scientific tools and analysis, environmental signals point unequivocally
to anthropomorphic climate warming. In this Perfect Storm, government, industry and
environmental leaders have much more information about climate change and its potential
impacts than Captain Tyne did as he left Gloucester Harbor.

41 Romer, Paul. Concise Encyclopedia of Economics, “Economic Growth,” 2007

42 Stern Review on the Economics of Climate Change, Executive Summary Retrieved from:
http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/sternreview_index.htm

Disrupting the Carbon Quo - 16

A Wager for Innovation
Many experts agree that the costs and consequences of inaction in dealing with climate change
far exceed the investment required to slow or reverse it. In the words of the Stern Review; “the
benefits of strong, early action considerably outweigh the costs.”43 Make no mistake, the full
cost of abatement could approach nearly a quarter-trillion dollars per year; however, all estimates
in McKinsey and Company projections “correspond to less than one percent of forecasted global
GDP in 2030.” Additionally, implementing the full range of abatement measures would likely
pale in comparison to Adaptive costs; that is, the expenditures necessary for adapting civilization
to a climate roughly 4 degrees Celcius warmer than present.44

Raising the Hurdle is the fact that “the shift to a low-carbon global economy will take place
against the background of an abundant supply of fossil fuels.”45 To fund the necessary
innovation in New Energy will require consensus building that can overcome both the “crutch”
of Carbon Energy, and the campaigns of climate change skeptics - who either dispute climate
change wholly, or its anthropomorphic element. The uncertainty around climate change, its
possible effects, and the costs and benefits of different abatement approaches is reminiscent of
Pascal’s Wager.

Proponents for New Energy must move their arguments for investment beyond the
environmental attributes of the resulting infrastructure. Climate change represents only one way
- the Environmental one - by which innovation can be leveraged to make energy innovation
investments the basis for the next long wave growth cycle in the U.S. This Hurdle period is not
just one for the climate and lifestyles developed and developing economies have come to enjoy
and aspire to, but also one that can drive the U.S. economic engine through its next long wave
cycle of growth.

Specifically, Innovation Economics applied to New Energy can work on three levels:

1. Meeting Energy Demand

The EIA projects energy demand in the U.S. to grow 14% between 2008 and 2035.46 Whereas
previous solutions for meeting new demand called for new Carbon energy generation sources;
future demand can be met through innovations in energy efficiency and the energy intensity of
current generation sources, as well as generation from clean, renewable and sustainable energy
sources that reach grid price parity and displace conventional generation.

43 Ibid.

44 McKinsey and Company Report, “Pathways to a Low-Carbon Economy,” 2009

45 Stern Review on the Economics of Climate Change, Executive Summary

46 Energy Information Administration. “Annual Energy Outlook 2010,” Retrieved from:

http://www.eia.doe.gov/oiaf/aeo/index.html?featureclicked=1&

Disrupting the Carbon Quo - 17

Government funded innovation can help nascent technologies achieve the market characteristics
necessary for commercial viability. For example, DOE recently announced $62 million in
funding for research and development for solar thermal technologies that will extend operations
to 18 hours per day, giving the plants “load-following” capability.47

2. Economic Growth

As innovations in New Energy become commercially viable, sourcing energy will become more
competitive - just as it did after the passage of Public Utilities Regulatory Policy Act (PURPA) in
1978. Atkinson contends, “Only when the new technology system becomes cheap enough and
pervasive enough is it able to revitalize the engine of productivity.”48 The resulting reaction
from and “destruction” of Carbon energy providers represents the economic churn necessary for
fundamental techno-economic transitions.

Within the New Energy economy, the nature of S- or experience curves has the potential to take
new energy generation not just to grid price parity, but beyond. This is the message from the
Breakthrough Institute: “Environmentalists have been so focused on making clean energy
relatively cheaper that they overlook the possibility of making clean energy absolutely cheaper
through major investments in technology innovation and infrastructure.”49 This is a lesson
learned and demonstrated by the experience curve and resulting market penetration of utility
scale wind energy:

M. Junginger et al issued a report describing the factors for recent improvements in the progress
ratio for wind energy generation, at both the turbine technology and plant development levels.
Specifically, they cite: the upscaling of both turbine size and kilowatt capacity, the resulting
lower specific costs per kilowatt installed and higher yeild per unit of swept area, and the mass
production capabilities employed by major turbine manufacturers.50 The combination of these
improvements led the National Renewable Energy Laboratory (NREL) to accurately plot and
forecast the cost curve for energy derived from wind farms, from nearly $.30/kWh in 1980 to
roughly $.05/kWh in 2010.51

M. Junginer’s analysis presents an average progress ratio of 81% for the wind energy industry, in
line with other industrial sectors. The DOE’s 20% Wind Energy by 2030 analysis reports a more
recent and slightly higher progress ratio of 90%. Still, cumulative price reductions of 35% are

47 DOE Press Release. “Secretary Chu Announces up to $62 Million...” 7 May 2010, Retrieved from:
http://www.energy.gov/news/8958.htm

48 Atkinson, Robert. “The Past and Future of Americaʼs Economy,” p141-2

49 Shellenberger et al. Harvard Law and Policy Review, “Fast, Clean and Cheap,” p94

50 M. Junginger, et al. Energy Policy 33, “Global experience curves for wind farms,” 2005

51 NREL. “Cost Curves,” 2002, Retrieved from:

www.nrel.gov/analysis/docs/cost_curves_2002.ppt

Disrupting the Carbon Quo - 18

achievable by 2030. At that rate, the additional cost of wind generated energy to end users by
that time is projected to be only 50 cents per month, per U.S. household. 52

Of course, the projections of organizations like the DOE assume that “the low-hanging fruit of
cost reductions [have] alrady been harvested,” which accounts for modest progress ratios at this
stage.53 Their analysis does not take into account disruptive wind energy technologies, such as
those being developed by Makani Power. Makani, a firm in which Google invested $10 million,
plans to jump the Hurdle of diminishing returns of turbine tower height and blade load capacity
by capturing high altitude winds ( > 2000 ft.) with kite-like structures mounted to fixed wing,
remotely controlled aircraft. 54 Such breakthroughs represent the potential of Innovation
Economics.

3. The Right Kind of Feedback Loop

Energy is the basis for both the economic growth and lifestyle improvements which the
developed world has become accustomed to, and which (much of) the developing world aspires
to. This is demonstrated by a proven correlation between energy intensity and GDP. As the
input for productivity and GDP becomes more efficient, more reliable and more robust, industrial
capital and innovation can begin preparing for the next techno-economic transition.

Accelerating the Disruption

New Energy innovation may be the answer; but as previously stated, it is also an investment - by
whom, how and when should the investment be made?

1. Global Carbon Price

The externality of carbon emissions must be internalized through economic means. A price on
carbon puts some of the burden on heavy emitters (and via pass-through tactics, consumers), who
otherwise can free-ride the climate solutions delivered by government and environmental
capitalists. To avoid the financial “destruction” that Schumpeter describes, heavy emitters must
innovate their business models and energy generation (and consumption) systems to avoid
financial ruin.

The American Power Act proposes a carbon price collar ranging from $12 - $25. Although a
modest effort according to climate and environmental commentators, even with today’s
technologies, this makes wind, biomass and geothermal sustainable generation systems
immediately price competitive with electricity generation from coal.55

52 Department of Energy Report. “20% Wind Energy by 2030,” July 2008

53 Ibid.

54 Owen, David. The New Yorker, “Inventors Dilemna,” 17 May 2010, p46-8

55 Ibid., p99

Disrupting the Carbon Quo - 19

2. Appoint a “New Energy Czar”

The U.S. government created the U.S. Global Change Research Program (USGCRP) in response
to the Global Change Research Act of 1990. The concept for the agency is right - it is multi-
disciplinary and integrates the capabilities of 13 federal agencies, including DOE, EPA, and the
Department of the Interior - but its charter must be updated to include the power and budget to
integrate New Energy innovation activities. The new agency: the U.S. Global Change Action
Agency. Specific directives for this agency must include:

• Recommendations and thresholds for R&D tax credits for the energy industry (Atkinson
recommends 40%)
• Creation of and thresholds for Gigaton tax credits - made available to organizations or
consortiums which invest in or provide carbon emissions offsets equivalent to one gigaton
• Administration of New Energy innovation grants and guarantees, such as those made possible
by the American Recovery and Reinvestment Act

The DOE’s Office for Energy Efficiency and Renewable Energy cannot achieve the level of
multi-disciplinary integration and authority necessary for this role. As it does now for DOE, it
would remain primarily a research asset for the new agency.

3. Incubate Innovation Organically

Innovation might happen in a vacuum (sometimes), but it does not disrupt the status quo there.
Innovation must be proactively incubated and nurtured to bring ideas to market. This happens
naturally in innovation “Clusters” such as Boston-Cambridge, Silicon Valley, and Austin; where
there is a healthy interplay between companies, academia and government programs.

Clustering often occurs at a grassroots level. In Boston, reporter Scott Kirsner, through his
Innovation Economy column and Open Innovation events, accomplishes one of the central
prerequisites for innovation: uniting perhaps otherwise disparate entities. Creating a culture of
and opportunities for collaboration is how the basement investor meets the environmental
capitalist.

In the spirit of the incentives offered by “X-prizes,” this report suggests a formal “Gigaton
Scoreboard” website which tracks the carbon offset contributions of academic institutions,
companies and government programs within the confines of Boston-Cambridge, Silicon Valley,
and Austin (to kick off the concept).

Additionally, new venture formation policies should support the work of academic and
independent labs; in return for venture capital and equity, innovator-entrepreneurs can be re-
granted equity stakes only upon emissions thresholds reached through commercialization of their

Disrupting the Carbon Quo - 20

technologies, allowing them to tinker and move on, but with a vested stake in the eventual
commercial success of the technology.

4. Government Support for Mega Projects

Besides serving their specific purpose, Mega Projects analogous to the Manhattan Project or
moon landing inspire innovation to overcome Hurdle Periods, with new technologies rippling
throughout the economy for purposes and time well beyond the project itself. Currently,
ambitious renewable energy Mega Projects include the Titan Wind Farm in South Dakota (Wind,
5 GW), the Tres Amigas transmission project in the U.S. Southwest, and the DeserTec Initiative
in Northern Africa and Europe (Solar, 100 GW). DeserTec is notable for the consensus building
the project has achieved between dozens of countries, corporations and governments.

Although every electron counts, achieving New Energy efficiency, generation and integration at
scale is the only way that competition from New Energy will begin challenging the Carbon Quo.
Government support can include grants for visionary and feasibility studies, and loan guarantees
for portions of Mega Projects in stages beyond prospecting.

###

In a world of finite resources, growing geo-political stress, and one stumbling from a global
recession, there is a growing focus on how energy is both the cause of and solution for many
concerns in both the developed and developing world.

The problem with the invisible hand is, sometimes its invisible. Government intervention - not in
the Keynesian sense - is necessary in the form of extensive support for research, development
and innovation in New Energy to overcome a techno-economic Hurdle Period. At the peak of
the Hurdle, the nature of technology scaling and experience curves have the potential to
transform the energy sectors, the heart and lungs of the U.S. techno-economic system. Such a
transformation comes at a time when the U.S. is searching for the next crest of technology and
innovation leadership.

Disrupting the Carbon Quo - 21