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Regulatory: The Government's Search for Alternative Sources of Energy

The first week of October marked a milestone in the Obama Administration's efforts to shift the country's energy policy toward alternative and renewable sources. The Secretary of the Interior signed a lease with Cape Wind Associates to develop a 130-turbine wind farm off Cape Cod. Interior also issued permits to construct two large solar plants on federal lands in the Imperial Valley and Mojave Desert in California. The projects are funded by Department of Energy loan guarantees issued under the 2009 Stimulus bill. The Administration released plans for a joint rulemaking by the Department of Transportation and the Environmental Protection Agency that would require car makers to increase the average fuel economy of their autos to 60 mpg by 2025.

Each action has a close counterpart in the Carter Administration. The fate of those earlier initiatives has much to teach us about the current round of projects.

The Carter era alternative energy initiatives were largely dismantled in the Reagan Administration. The alternative energy demonstration projects failed and showed that the then-existing technologies were not commercially feasible sources of energy. The "technology forcing" effort to compel American car manufacturers to develop new, more fuel efficient technologies largely failed, due to consumer resistance to the cars Detroit could produce and a shift in demand to Japanese cars that already featured advance technology.

How can the government seed to obtain better results from the current round of initiatives? First, history teaches that alternative energy projects need to be managed like a venture capital portfolio - a difficult task for a political process that hates to pick winners and losers. The goal of the alternative energy initiative is to identify technologies that are feasible on a large scale and can produce energy at rates that are economically viable, without the need for indefinite government support. If a technology is not viable on a stand-alone basis, the government should not keep it on artificial life support, through economic or regulatory subsidies, but should move on to the next most promising project. Continuing to support a non-productive project for political or constituency reasons can undermine public support for the entire initiative.

Second, technology-forcing government actions, while a useful tool, have significant limits. The fact that scientists have managed to innovate to meet prior technology-forcing requirements does not guarantee that industry will be able to achieve similar successes in the future. Moreover, consumer resistance, either to the price or product features that emerge from the technology-forcing process, can defeat the initiative by compelling changes in the government's policy. With the return of lower gas prices, drivers shifted to SUVs and mini-vans whose size and weight were not as constrained by fuel economy standards. Finally, the government cannot ignore the distributional consequences of its policies. Public support for the initial fuel economy standards evaporated when the public became concerned that the initiative had contributed to a transfer of jobs from American to Japanese employers.

The Administration should bear these lessons in mind as the field deployment of alternative energy projects begins.

John F. Cooney is a partner in the Washington, D.C., office of Venable.

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