Association for Public Policy Analysis & Management

At the 2015 climate negotiations in Paris, 20 of the largest countries initiated a new framework dubbed “Mission Innovation” to double public funding for energy research and development (R&D) as a key strategy for reducing greenhouse gas emissions. As with many politically negotiated targets, the implementation details of how this doubling of investment would be made was left to be resolved. Effective decision making to allocate public funds for energy technology R&D is a challenging analytic problem, requiring consideration of alternative investment opportunities that can have large but highly uncertain returns and a multitude of positive or negative interactions. This paper proposes and implements a novel method to support the energy R&D decisions implied by the targets of Mission Innovation. Our proposed approach propagates uncertainty through an economic model to estimate the holistic benefits of an R&D portfolio, accounting for innovation spillovers and technology substitution and complementarity. The proposed method improves on the existing literature and current practice by: (a) using empirically-grounded estimates of the impact of R&D investments from the most comprehensive set of expert elicitations on this topic to date; (b) using a detailed energy-economic model to estimate three classes of evaluation metrics of an R&D portfolio: system benefits, technology diffusion, and uncertainty around outcomes; and (c) using a novel sampling and optimization strategy to capture innovation spillovers. Results of this work focus on the comparison of a business-as-usual (BAU) R&D portfolio that perpetuates 2009 investments with a 2.5-times greater R&D portfolio recommended by technology experts. This design is used to estimate an optimal energy R&D portfolio that maximizes the net economic benefits of a fixed R&D budget. Results applied to the United States indicate that: (1) the median projection of the expert-recommended portfolio in 2030, relative to the BAU portfolio, reduces carbon dioxide emissions by 46 million tonnes, increases economic surplus by $29 billion per year, and increases renewable energy generation by 39 TWh; (2) uncertainty around the estimates of R&D benefits is large and overall uncertainty increases with greater investment levels; (3) a 10-fold expansion from 2012 levels in the R&D budget for utility-scale energy storage, bioenergy, advanced vehicles, fossil energy, nuclear energy, and solar photovoltaic technologies is justified by returns to economic surplus; (4) the greatest returns to public R&D investment are in energy storage and solar photovoltaics; and (6) the current allocation of energy R&D funds is very different from optimal portfolios. Taken together, these results show that reform of public energy R&D decision making processes can have an important impact on the cost-effectiveness of climate mitigation efforts