Prizes to Address Climate Change

The 2005 and 2007 Omnibus Energy Bills created a new category of energy advanced
biofuels. Staying out of the technical weeds, this new category recognized biofuels
created from organic materials other than seeds. Corn, soybeans, and other seeds have
been used for some time to manufacture liquid fuels such as ethanol and biodiesel. But
the use of seeds carried a lot of controversy because the seeds are also used for food.
Advanced biofuels offered a potentially major addition to the portfolio of carbon free
renewable fuels and held the promise of creating a major weapon to combat climate
change without competing for food.

Advanced biofuels must be derived from organic materials other than seeds. For example,
for corn plants to qualify as advanced biofuels you had to use as feedstock portions of the
plants other than seeds to manufacture ethanol or another qualified liquid fuel that could
replace fossil fuel.

The legislation supported advanced biofuels by creating a mandate to eventually blend 26

billion gallons of qualified fuels into the overall liquid fuels used in the US retail market
with no CO2 emissions thereby reducing US admissions by 2.6 million metric tons. This
mandate is a big deal. The challenge facing the mandate came from a simple problem: no
one knew how to produce advanced biofuels.

The cynical response to the mandate was to summon King Canute who famously
overestimated his power over nature and thought he could order the tides to stop. Canute
famously failed to halt the tides. Is the creation of the advanced biofuels mandate a
Canute like command to demand the creation of advanced biofuels? No.

The creation of the advanced biofuel category accompanied by a mandate requiring

blending fuels essentially created a prize that encouraged innovation. Any company that
could solve the technology challenge of advanced biofuels had access to the guaranteed
26 billion gallon market. Without the mandate, energy from advanced biofuels is

basically indistinguishable from other forms of energy: a BTU is a BTU. With the
mandate, advanced biofuels are set into a special category. Qualified biofuels have to be
blended into the overall stock of liquid fuels.

Through the legislation the mandate created a valuable prize. Firms chased the prize by
investing billions of private venture capital into the chase. There are several important
lessons to be learned here. First, the advanced biofuel mandate did not involve
government picking winners. The mandate created the broad challenge but the decision
about how best to solve the technology challenge was left to private companies.

Significantly more than 50 firms invested in a variety of possible solutions ranging from
gasifiers to algae to enzymes and beyond. For the most part all of this investment came
from private firms basically using venture funds to pursue their favored solution. The
mandate created a condition for energy that mimicked how the drug industry works. Drug
companies pursue new drugs because creating the drugs gives them access to a new
untapped, guaranteed market. Drug developers estimate the value of the market and base
their willingness to invest in the technology based at least in part on the size of the
market. Always of course being mindful of the risk of the pursuit.

How did the mandate work? The vast, vast majority of firms failed in their pursuit of the
advanced biofuel prize but a few have had success. POET, Abengoa and a few others are
undertaking their initial commercial plants. How important is their success? Some
aggressive estimates place the domestic potential for biofuels at over 100 billion gallons
per year of liquid fuels that would have zero carbon emissions.
The real potential for advanced biofuels goes far beyond the domestic market; its global.
These types of mandates/prizes can be used to direct the great stream of venture capital
into significant technology innovation.

Addressing climate change will require a new wave of innovations to manage and
systematically reduce carbon emissions. Mandates/prizes offer an efficient, new policy

tool to organize and direct private investments in those innovations. And to fully capture
the commercial potential, prizes are only one part of a portfolio of policies that would
have to include a workable cap and trade system.

Finally, this new mandate actually shares an unexpected heritage with the Hoover Damn
which is rightly celebrated as one of the iconic success stories of the government
response to the Great Depression. The Damn was built in record time and under budget.
It employed thousands of unemployed workers. It created new towns to service the
construction of the damn. The Damn provides valuable electricity and water to the
region. It was and is still an immense physical presence dominating public perception and
shaping our belief in what can be done. While at first glance there seems little
resemblance to the advanced fuels mandate/prize a closer look reveals a few striking
similarities.

Federal workers did not build the Hoover Damn. The Damn was built by the private
company precursor of the Bechtel Corporation. The federal government did the
permitting, planning, and early stage work that allowed the construction to be done. In
important ways the role of government was to offer the construction of the Hoover Damn
as a prize.

The advanced biofuels mandate is opening an even more important door. Looking ahead,
the challenge for technology innovation to control CO2 emissions from electricity
generation, heavy industrial processes, and system improvements from life cycle
improvements dwarfs the challenge (and opportunity) faced with the creation of the
Hoover Damn. Prizes offered after careful planning can channel the best private efforts
and investments to capture global prizes.