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Innovation Policy

On World Energy Day, Applauding an Energy Breakthrough: Innovation Through Successful 'Industrial Policy'

Christopher Colford's picture

At a moment when good economic news is in short supply, this week’s observance of World Energy Day provides a chance to celebrate some positive news – positive, at least, from the viewpoint of the world's developed economies, which have lately been struggling to recover from prolonged stagnation.

The recent plunge in global energy prices was a major factor informing a World Energy Day forum on “The Green Side of Energy Security” – convened in Washington on Wednesday by the European Union Delegation to the United States. The plummeting cost of energy, thanks in part to vast increases in oil and natural-gas supplies, is now poised to give advanced economies a much-needed additional stimulus. That's helping dispel some of the gloom that pervaded the economic forecasts at the recent Annual Meetings of the World Bank Group and International Monetary Fund. 

Moreover, the current global glut of oil and natural gas also highlights the success of a far-sighted innovation program that has helped strengthen productivity in the energy sector. The success of the 40-year-long U.S. program to create more effective methods of oil and natural-gas production has has transformed the global energy landscape. If those new production methods can be responsibly carried out, in compliance with strict environmental safeguards – and, granted, that’s a big “if” – then the economy will buy some extra time as it seeks to make the transition away from fossil fuels and toward cleaner, greener, more sustainable sources of energy.  

The initiative's technological breakthrough epitomizes the creativity that public-private cooperation can unleash when governments and industries, working together, patiently invest to strengthen productivity in specifically targeted industries and sectors.

The worldwide price of crude oil has fallen about 25 percent – from more than $110 a barrel in midsummer to about $80 a barrel this week – thanks to a combination of reduced demand (due to sluggish economic activity in many industrialized countries) and vastly increased oil and natural-gas production. Despite the geopolitical tensions now afflicting several major oil-producing regions, large new supplies of oil and natural gas are projected to continue arriving on the market, maintaining downward pressure on energy prices.

Much of the increased supply has its origin in North America – where “the revolution in American shale gas and ‘tight oil’ is real,” according to energy-policy scholar and historian Daniel Yergin. Writing in the Financial Times this week, Yergin noted that “U.S. crude-oil output is up almost 80 percent since 2008, supplying an extra 3.9 million barrels a day. . . . Canadian oil sands have added another 1 million barrels a day to North American supply over the same period.”

The energy revolution is poised to deliver a powerful, positive economic impact: As industries and consumers pay less for oil and natural gas, they’ll receive the equivalent of a tax cut – with Yergin estimating its benefit at about $160 billion a year, just for the U.S. economy. Such a stimulus, if it helps buoy economic activity in Europe as well, will boost economies that have been mired in what threatens to become long-term “secular stagnation.”

For motorists who are now paying less at the gasoline pump – and for home-heating-oil and natural-gas consumers who are awaiting their first chilly-season heating bills – the oil-price plunge and natural-gas glut may seem like an economic deus ex machina.

Step by step, consider how this process delivered today's energy abundance.

There: We actually said the fateful phrase: "industrial policy."

That always-somewhat-ambiguous term, "industrial policy," may have fallen out of political favor nowadays -- but there's no real reason to shrink from the idea, even though it's currently fashionable to use a euphemism like "innovation initiative" or "competitiveness strategy."

It's true, as skeptics suggest, that it's difficult to get industrial policy right. Public-private investment programs can be complex to design and sustain: In this case, it took about 40 years of experimentation and evolution to achieve the energy program's goals. Yet, when this initiative was launched in the energy-starved 1970s, various approaches to industrial policy were being vigorously pursued by many economies, large and small. (Yes, even the United States -- and even under conservative governments, as illustrated by the Ford Administration's pursuit of this program.) Put in its historical context, this example of 1970s-style industrial policy succeeded in delivering, at last, its long-promised payoff in productivity.

Piloted during the Ford Administration and ramped-up during the Carter Administration, this effort hailed from an era when repeated oil shocks were raising fears that the industrialized world would be threatened by oil-rich countries’ production cuts and price increases. Pragmatic R&D efforts on alternative oil-production methods were methodically pursued by the U.S. Department of Energy (DOE) and the U.S. Bureau of Mines, drawing on crucial technological insights from the taxpayer-supported network of national research laboratories.

Once that initial government-funded research had laid the foundation for new technologies and techniques, the private sector stepped in and played its indispensable part. A public-private partnership through the Gas Research Institute helped perfect the new techniques, while pro-innovation tax policies granted favorable federal tax treatment for investors’ R&D commitment to the energy sector. A champion of the new technologies, George P. Mitchell, evangelized for hydraulic fracturing and horizontal drilling, even when skeptics scoffed. Researchers at the Breakthrough Institute assert: “Where Mitchell proved invaluable was [in] engaging the work of government researchers and piecing together different federally-developed technologies to develop a commercial product.” 

Better knowledge for better innovation policies: the new Innovation Policy Platform

Gerardo Corrochano's picture

We are surrounded by innovations – the outcome of innovative activities. Some affect us more than others. Some are more visible than others. In reading this blog post on a computer or a portable device, you can see how this innovation has made your personal and professional life more productive (although not necessarily easier).
You might not have heard, however, about other kinds of innovations – like the eco-friendly and affordable cooking stoves that reduce exposure to toxic gases for people in Mongolia, substantially increasing their health and lowering costs. All kinds of innovations improve people’s lives from Ulaanbaatar to Washington, increasing social well-being and driving economic growth.

Governments can support innovation through the effective use of public policy. Innovation has steadily climbed its way to the top of policymakers’ agendas in recent years, in developed and developing countries alike. This is illustrated by the importance given to innovation in such strategies as the European Commission’s “Europe 2020” growth strategy, China’s 12th Five-Year Plan (2011 -2015), or Colombia’s National Development Plan (2010-2014). Yet despite the growing consensus around innovation as a driver of sustainable growth, governments face considerable difficulties in identifying, designing and implementing the best-suited policy instruments and approaches to support innovation.

Defining good policies is a walk on a tightrope. Much like the barriers that constrain innovators inside an economy, policymakers face high costs of retaining and retrieving valuable information and best practices to help define their policies. To address this issue, the World Bank – in collaboration with the Organisation for Economic Cooperation and Development (OECD) – has developed a new tool destined to enhance the capacity of policy practitioners around the world to support innovation through better policies.

The Innovation Policy Platform (IPP) is a one-of-a-kind web-based interactive space that provides easy access to open data, learning resources and opportunities for collective learning on the design, implementation, monitoring and evaluation of locally appropriate innovation policies. The IPP contains a wealth of practical information on a wide array of innovation-related topics, such as financing innovation, technology transfer and commercialization, and innovative entrepreneurship. The IPP is intended to enable North-South and South-South policy learning and dialogue through a wide array of case studies, policy briefs and collaborative working tools. The IPP aims to create a dynamic community of practice. It is now available to the public and can be accessed at www.innovationpolicyplatform.org.

Innovation Policy Platform