The purpose of this paper is to review the Department of Energy's (DOE) programs and recommend future directions for US policy to address President Obama's desire to save our planet from climate change and reduce reliance on oil (Roberts, Lassiter, & Nanda, 2010, p 4). The context of this review is following the 2008 election of President Obama and the enactment of the American Recovery and Reinvestment Act (Recovery Act) in February 2009. This paper will evaluate the effectiveness of the measures implemented by the Act and compare their effectiveness with an alternative strategy of implementing a carbon tax, then make a recommendation on which strategy would have achieved the President's aims in view of the political, economic and environmental situation that he faced.
The key challenge that US policy must address the reduction of greenhouse gases while growing the economy. Recovery Act spending acted as a stimulus package to revive an economy heavily affected by the GFC(Aldy, 2012 p 3). While the recovery funds were aimed at stimulating the economy, President Obama stressed the importance of the development of renewable energies in his first State of the Union address (Roberts, Lassiter, & Nanda, 2010 p 3).
The two policy options I will consider are the continuation of the current stimulus package or the introduction of a carbon tax. Both policies would be effective in achieving the President's aim of reducing negative effects on the environment and growing the economy, although through different mechanisms. There are other policy options such as cap and trade schemes, reliance on the market and government-sponsored research programs (Frank, Jennings & Bernanke 2009 pp 328-329) but these are beyond the scope of this paper (Koomey, Cooper Richey, Laitner, et al 2001).
Stimulus for renewable energy technologies
The aim of the DOE recovery measures is to provided funding for research and development of renewable energy technologies to bring them to market. The requirement for the funding stems from a market failure where private firms are reluctant to invest in R&D so to increase this, government intervention is required (Murphy & Edwards 2003 pp 5-6). R&D funding would seem a good investment for a company at first, however, the benefits from being able to produce new, more profitable technologies is not easily protected, that is, other companies may be able to free-ride on the R&D to produce similar products (Frank, Jennings S & Bernanke 2009 pp 357-358). Results from R&D create therefore, positive externalities for other companies not engaging in the research, which leads to under-investment. With government investment in R&D such as through the Recovery Act funding, the so called “valley of death” between researching a new technology and bringing to market may be overcome (Murphy & Edwards 2003 pp 3-4).
Another reason for under-investment in R&D is the inherent risk associated with...