Abstracts and Reviews

Unleashing Innovation: The Right Approach to Global Climate Change
The Business Roundtable has completed a report which is based on a recently completed survey of BRT member companies and identifies 38 specific opportunities to improve regulatory, tax and trade policies to encourage elaborate innovation and implementation of new energy-conserving technologies.

EXECUTIVE SUMMARY

This report is a direct outgrowth of The Business Roundtable’s (BRT) July 1999 white paper, The Role of Technology in Responding to Concerns About Global Climate Change. That report concluded that increased and widespread deployment of more energy-efficient technologies and the development of new and breakthrough technologies constitute the most effective responses to concerns about global climate change. The report identified major new technologies on the horizon in virtually every sector of the economy — from hydrogen-source fuel cells for motor vehicles to “smart wings” on aircraft and “smart windows” in office buildings. It identified information technologies that promise to change radically the ways in which energy is managed and used in every sector. It also identified new technologies for the combustion of ultraclean fossil fuels and fossil fuel alternatives, as well as new technologies for sequestering and mitigating carbon emissions.

The report emphasized the central role the private sector must play in developing and commercializing new technologies. It also recognized that public policy plays a pivotal role in developing new technologies that address environmental concerns, particularly climate change. The BRT therefore proposed two policy initiatives to accelerate long-term technology development and short-term deployment of existing technologies.

The first initiative was the National Summit on Technology and Climate Change, held Aug. 30–31, 2000, at the National Academy of Sciences in Washington, D.C. The technology summit brought together technology leaders from industry, research laboratories, universities and government agencies to explore long-term policy options for accelerating technology development. These technology experts focused on three critical issues: creative models for successful public-private research partnerships; effective policies for international technology transfer; and increased industry involvement in framing and advancing the national research and development (R&D) agenda.

This paper is the result of the second initiative. It identifies near-term opportunities in existing regulatory, tax and trade policies for accelerating the development, commercialization and global dissemination of advanced technology. U.S. regulatory, tax and trade laws make important contributions to a cleaner, healthier and safer environment. They facilitate an effectively functioning economy and an efficient global trading order. Too often, however, the implementation of these laws and policies unintentionally increases risks and uncertainty, discourages innovation, and raises costs.

This report identifies instances where regulatory policy, tax and trade laws inadvertently have a chilling effect on research, innovation and the global dissemination of advanced technologies. It proposes solutions that will drive more rapid innovation, while improving environmental performance.

This report is based directly on the working knowledge and experiences of the BRT’s member companies. These companies collectively account for much of the technological research and innovation currently under way to meet the energy challenges of the new millennium. The companies responded to a survey that asked them to identify “the types of issues, policies, regulations and tax rules that impede early adoption and export of energy-efficient or carbon-reducing technologies.” To ensure the accuracy and practical value of the report, the companies were asked to concentrate their responses on those specific issues with which they have direct knowledge and experience. Each company also was asked, again based on its direct experience, to propose a practical solution to each issue it identified.

In total, the companies identified 38 barriers — 21 regulatory, six tax and 11 trade barriers — together with 38 proposed solutions. The issues identified by BRT companies and the solutions proposed are, in many cases, similar or identical to those raised by nongovernmental organizations (NGOs), think tanks, research universities and government agencies themselves.

Chapter I identifies regulatory barriers to innovation that fall into three basic categories: barriers to the use of alternative fuels; barriers to the use of energy-efficient technologies; and barriers that stymie technological innovation.

Alternative fuels, including natural gas, hydropower and syngas derived from biosludges, result in lower carbon dioxide (CO 2 ) emissions compared with traditional fossil fuels such as coal. In some cases, they also help to reduce other emissions. There are, however, numerous regulatory barriers to the use of these alternative fuels, including: Delays and uncertainties resulting from the multiple layers of permit reviews under the Clean Air Act impede the implementation of less carbon-intensive manufacturing technologies; the Federal Energy Regulatory Commission’s (FERC) complicated and lengthy hydropower licensing process jeopardizes the long-term use of low emissions energy sources in electric power generation; and the Resource Conservation Recovery Act’s (RCRA) “Derived From” rules for hazardous wastes forestall the substitution of biosludges derived from the treatment of hazardous waste-water for fossil fuels in the generation of electricity.

BRT members also reported regulatory obstacles to the development and use of energy-efficient technologies. These include conflicting federal and state vehicle emissions standards that impede the development of more energy-efficient engine technologies; technology-specific air quality standards that result in increased materials costs, waste and energy consumption; and antiquated building codes that prohibit the use of building designs that would conserve construction materials and reduce heating requirements.

Regulatory policies that thwart innovation include New Source Review (NSR) requirements under the Clean Air Act that have prevented the adoption of energy-efficient technologies in the utility sector and in many industries; inflexible Clean Air regulatory requirements that prevent emissions trading or netting (emissions trades within a plant facility); and inadequate scientific and economic bases for environmental regulations.

A significant number of the proposed solutions to these regulatory barriers call for improving current regulatory and permitting requirements. The proposed solutions focus on four main points: substituting performance standards for technology-specific standards; establishing broad environmental performance standards for manufacturing plants and industry; allowing regulatory agencies to consider inherent tradeoffs among competing environ-mental, safety and energy-efficiency goals; and providing a consistent set of policies among the various regulatory agencies.

Chapter II identifies U.S. tax laws that discriminate against investments in climate-related research and innovation. BRT members identified three broad categories of tax-related barriers: international tax policies; the treatment of research and development tax incentives; and the U.S. tax code’s capital cost recovery provisions for depreciable lives. These policies are especially punishing to investments in energy-efficient technologies, which are constrained by regulatory and international barriers and for which there is only limited market demand.

Two major U.S. international tax policies are particularly disruptive: A U.S. company transferring climate-related or other technology to its foreign subsidiary must charge the subsidiary an arm’s-length royalty on which it then must pay taxes to the U.S. treasury — even though the environmental technology transferred represents a cost to the user and does not generate any incremental income. Another significant barrier is the U.S. tax code’s treatment of foreign source income, which imposes double taxation on U.S. multi-nationals by reducing their capacity to claim foreign tax credits when they incur U.S. expenses for interest, research and development.

BRT members identified three barriers with the nation’s R&D tax credit: its on-again-off-again nature; the inconsistent and uneven way in which it is applied across firms and industries; and the inadequacy of existing credits as they relate to climate-related expenditures.

BRT members noted that the U.S. tax code’s capital cost recovery provisions require considerably longer periods for writing off investments in energy-efficient plants and equipment than make economic sense or than are required by many other countries.

Proposed solutions to the tax barriers include eliminating taxation of climate-related technology transfers; eliminating the double taxation resulting from the required allocation of U.S. interest and R&D expenses to foreign income; making the R&D tax credit permanent, with enhanced tax credits for breakthrough energy-efficiency technologies; and liberalizing the capital cost recovery system for investments in climate-related technologies.

Chapter III identifies two broad categories of trade-related barriers: U.S. laws that impede the export of energy-efficient technologies and other nations’ laws that impede the import of U.S. energy technologies and services.

U.S. export controls are significant barriers to U.S. exports of energy-efficient and other technologies. They interfere with sales of high-tech equipment and certain software that can be used for energy and process management.

There are a number of import barriers to U.S. energy-efficient technologies and services. Developing economies, such as China and India, levy high tariffs on energy-efficiency technology, and countries such as the Philippines and Korea impose nontariff, regulatory barriers that constrain U.S. exports of environmental and energy services. These include restrictions on the commercial presence of U.S. suppliers, restrictions on the employment of needed foreign technical workers, restrictions on foreign investments in public utilities and state-granted monopolies to suppliers of energy services.

Many countries, including the United States, give preferences to local suppliers in governmental procurement policies. These preferences make it harder to implement state-of-the-art energy efficiency and other technologies. This is a particular problem for U.S. electric power companies. Weak protection of U.S. patents and trademarks also discourages technology transfer. Another major barrier to energy-related investments in developing countries is a lack of infrastructure to support the investments. The necessary supporting infrastructure includes financial, legal, regulatory and market institutions; physical infrastructure such as communications and transportation capacity; and the technical and managerial skills needed to assess, implement and maintain advanced climate-related technologies.

The proposed solutions by BRT member companies focus on eliminating these and other barriers to international trade in energy-efficient technologies and services. This prospect provides a special opportunity to show how more open markets can promote both domestic and global economic and environ-mental goals.

Chapter IV of this report provides a brief summary and conclusion. The appendix then lists each of the regulatory, tax and trade barriers and proposed solutions.