In a recent op-ed in The Financial Times, the controversial economist Bjorn Lomborg argued that investments in research and development grants, not taxpayer-funded subsidies, are required to solve the energy problems that are causing global warming. He cites government grants for drilling research as what, he claims, eventually led to the unconventional natural gas boom (some people refer to this as the “fracking debacle”) that we are enjoying today.
“This is what the US has done with fracking. It has spent about $10 billion in subsidies over the past three decades on innovation, opening up huge resources of previously inaccessible gas,” Lomborg wrote. “Despite some legitimate concerns about safety, it is hard to overstate the benefits: US consumers are saving $125 billion annually on cheaper gas, and a switch from coal to gas has reduced US emissions by twice as much as the EU and the rest of the world have managed.”
In other words, the U.S. government’s return on investment has been spectacular in the unconventional gas arena. Spend $10 billion and get back $125 billion? Just tell me where to sign.
But Lomborg has the facts wrong. The U.S. government actually spent very little money on unconventional drilling research and development (R&D). The vast majority of innovation in the unconventional gas space has come from corporations (many of them small business wildcatters) trying new things. To claim that the U.S. government “invested” $10 billion in R&D in the natural gas space is a wild exaggeration. The primary federal institution for natural gas research is an arm of the Department of Energy called Natural Gas Technologies, which has requested a 2014 budget of only $17 million – the vast majority of which will be spent on institutional overhead, not active research.
Straight Up & Successful
In fact, the primary method in which the government helps the natural gas industry is through the tax deductible master limited partnership shelter, which most natural gas exploration projects use to shelter their profits from taxation. This is not a research and development grant. It’s a straight-up subsidy that is worth billions to the industry every year – one that has been very successful in helping to establish an unconventional natural gas industry.
Another example of a subsidy that worked is Germany’s Renewable Energy Act, better known by its German language acronym, the EEG. The EEG established the global solar industry we have today. Thanks to massive subsidization, photovoltaics moved rapidly out of the laboratory and onto German rooftops. Once a multi-billion euro market was established, then industrial competitors raced each other to cut costs, which has now led to photovoltaic panels that cost less than a dollar per watt. The solar portion of the EEG law was extremely expensive for Germany, costing somewhere between $60 and $300 billion to German ratepayers during the course of its lifetime (the range is so large because of variables regarding how future feed-in-tariff rates are calculated and what the future cost of fossil fuel generation will be). But there’s no questioning that it achieved its goal: establishing a market that didn’t exist before.
And that’s where Lomborg’s fundamental premise falters: He thinks that technology innovation is the only way to solve the global warming crisis. Yet, the best way to harness the power of technology innovation is to put it to work in an existing market. If that market doesn’t exist, then it doesn’t matter how many lab coats and microscopes you have. Combine a robust R&D program with a robust global marketplace and you will see innovation happen at lightning speed. That’s what has repeatedly happened in fields as far-ranging as semiconductors, smartphones, photovoltaics and, yes, natural gas.