Here we turn to the third question and explain how the federal government could pay for a robust energy innovation enterprise, especially in light of America's current budgetary dilemma.

In our original report, we called for a three-fold increase in annual energy innovation investments, spanning early stage R&D to early commercialization of large-scale advanced energy facilities. Numerous organizations - from both ends of the political spectrum - have studied energy innovation spending and all agree that significant increases in funding are necessary to fill the pipeline with science, material, and systems gains that can lead to the clean energy technologies of tomorrow.¹⁹

To be sure, the situation demands a combination of public and private resources and money is not the only solution. But without bringing energy investments to a level that is commensurate with the scale of the industry and with the scale of the national priorities that are at stake, we are unlikely to make the progress our country needs.

At the same time, the AEIC fully understands the gravity of the nation's current fiscal situation. Serious concerns about the mounting federal debt and budgetary deficits have led to a legitimate and urgent focus on our country's long-term fiscal health. The current estimate of the federal budget deficit for 2011 is $1.3 trillion, and by the end of this fiscal year the Congressional Budget Office (CBO) has projected that debt owned by the public will be more than $10 trillion.²⁰ While some progress may be made on identifying further deficit-reduction measures in the coming months, few expect that the country will quickly put its fiscal house in order. Pressures to reduce government spending will continue to be a strong influence on policymakers.

However, even in these challenging fiscal times, we believe underfunding energy innovation would be a grave mistake. U.S. consumers continue to send close to $1 billion overseas every day to feed our country's oil appetite, yet both the private and public sectors continue to shortchange the very RD&D investments that offer the best path toward reducing these outflows. The country can't afford to only spend its resources on consumption; it must make smart investments in activities that collectively will result in significant returns in the future.

Today, as lawmakers debate how to bring our nation's debt under control, we believe it is critical to support energy innovation budgets. To be clear, supporting innovation budgets is an investment, not a cost. The country needs to bolster its energy innovation infrastructure to attract and support the best scientific talent and drive competitive growth. As one AEIC member puts it: "In a time of austerity, the last thing one should do is under-fund R&D and high technology priorities…to do so is the equivalent of removing an engine from an overloaded aircraft in order to reduce its weight."

As business leaders, we have all faced tough budgetary decisions throughout our careers. In lean times, each of us has been tasked with cutting back and reorienting investments. These decisions are never easy, but we have always critically assessed and targeted funding cuts, being especially careful to preserve, and in some cases even increase, funding for activities that have the potential to drive future growth. Across the board reductions rarely make sense. Although innovation-based investments often will not show immediate returns - in fact, many take years to pay off - history has shown that the payoffs to successful investments are usually large.

In short, we see an urgent need for a new energy innovation funding regime that accounts for current budgetary realities, but still ensures that our nation makes targeted investments in its energy future. This will be no easy task. Creating a dedicated, consistent stream of federal dollars that is not beholden to the volatility and uncertainty of the annual appropriations process is a common but elusive goal for many interests. For too long, federal energy innovation investments have been plagued by unpredictable funding patterns. Uncertain annual appropriations, short-term tax credits, and one-time spending injections are all unsuited to creating the sustained, predictable funding stream needed to bolster the country's innovation infrastructure.

Going forward, in general and when possible, we believe federal energy innovation investments should originate from revenues from the energy sector itself rather than from general federal revenues. We believe this step is essential to modernize the nation's energy systems and to attend to the long-term national security and environmental vulnerabilities we face.

While the political obstacles are daunting, a variety of mechanisms could be employed to generate the needed revenue from within the energy sector. Options include diverting a portion of royalties on domestic resource production, reducing or eliminating current subsidies to well-established energy industries (and redirecting the savings), collecting a charge on sales of electricity, levying fees on other energy or pollution sources, and streamlining DOE. While we don't advocate for any specific option, based on our assessments, these options could provide funding offsets to support investments in energy innovation commensurate with our original recommendations.

The U.S. has an abundance of natural resources, including sizable oil and natural gas reserves. The energy sector is an enormous revenue generator for the government, which collects a variety of taxes and fees from the many companies that produce, refine, and deliver energy to consumers and businesses. Going forward, any expansion of domestic production offers an opportunity to reevaluate the revenue sharing associated with the extraction of U.S. natural resources.

With continued, and likely expanded, off-shore oil and gas exploration, shale gas production on federal lands, and enhanced oil recovery in the coming years, reorienting a portion of the current suite of domestic energy production fees - including royalty payments, lease sales, bonus bids and other charges - presents a real opportunity to raise new revenue for the federal government that could fund innovation in new energy technologies.

Former Senators Trent Lott and Byron Dorgan, co-chairmen of the Bipartisan Policy Center's Energy Project, recently proposed using a small portion of the revenues from expanded oil and natural gas production to fund alternative energy investments. Other recent proposals in Congress have suggested expanding domestic production and putting some of the revenue generated in a trust fund that would be used to support clean energy development.

Currently, a dedicated portion of oil and gas royalties support innovation activity in the oil and gas industry. The Energy Policy Act of 2005 established a Royalty Trust Fund that receives a small share of federal oil and gas royalties for research on advanced exploration and production technologies and environmental protection. Research is managed by a nonprofit public-private consortium that operates with DOE's approval. Similar fund and research structures could be established for clean energy innovation.

Because future royalties and other fees depend, to a large extent, on actual production from new areas, predicting the revenue impacts of new production is speculative. However, over the past ten years, oil and gas royalties have generated approximately $11 billion per year, 60 percent of which goes directly to the Treasury. Going forward, a portion of revenues from domestic resource extraction could be dedicated to clean energy technologies.

Federal revenues from domestic oil and gas production could generate on the order of $1-$5 billion dollars per year. ²¹

We see an urgent need for a new energy innovation funding regime that accounts for current budgetary realities, but still ensures that our nation makes targeted investments in its energy future.

Numerous state and federal programs have evolved over the years that subsidize particular energy sources or technologies. Energy subsidies come in a wide variety of forms - direct expenditures, tax expenditures and controls, among others - and are estimated to cost the government tens of billions of dollars each year. A recent conservative estimate by the Energy Information Administration is that oil, gas and coal - all mature industries - received over $4.2 billion in subsidies in 2010.²² Tax credits for ethanol - also a mature technology that simultaneously benefits from a mandatory production requirement - cost taxpayers an estimated $5.7 billion in 2010. Similarly, renewable electricity technologies received over $6 billion in public support last year (including R&D, although R&D activity constituted only a small portion - $632 million - of this support). Nearly every energy industry is subsidized in one form or another. The time has come to rethink where these subsidies go and how they are delivered.

Moreover, in the context of broader fiscal reform, the elimination of long-standing federal subsidies to well-established commercial technologies or industries appears to be gaining bipartisan political support. In both the House and Senate there have been proposals to eliminate a number of energy subsidies - including those for oil, gas and ethanol.²³ We applaud efforts to critically examine the current suite of energy subsidies, which should be used in a targeted fashion and only for a limited period of time to allow new technologies to scale up while driving down costs.

To this end, subsidies to incumbent industries and mature technologies should be reduced or reformed. The market provides ample incentives for these players to deploy technology without public support. For other technologies that are still in the earlier and more risk-prone stages of commercialization, the federal government should begin to explore a greater number of competitive subsidies, like reverse auctions, that could squeeze the most value out of every public dollar dedicated to these issues.²⁴ Going forward, a portion of revenues liberated by eliminating, reducing or reforming energy subsidies should be directed to clean energy innovation.

Reducing or eliminating subsidies and tax breaks for mature industries has the potential to raise on the order of $5-$10 billion per year. ²⁵

The term "wires charge" (also sometimes referred to as a "public goods charge") refers to a small fee imposed on each kilowatt-hour of electricity delivered to consumers. It is a fairly common levy at the state level where it is typically used to promote energy efficiency, fund research and development, or pursue other public purposes. The fee is collected by electricity suppliers and is generally kept fairly small - less than one-tenth of one cent per kilowatt-hour, for example. This limits the impact on individual consumers, but because of the large volume of electricity sold, generates significant revenue. For instance, if a 0.1 cent-per-kilowatt-hour wires charge had been applied to all retail electricity sales in 2010, a total of 3,749,985 million kilowatt hours sold nationwide - it would have raised more than $3.7 billion last year alone. Moreover, the impact on the average residential electricity consumer would have amounted to about $1 per month.²⁶

Additionally, there are various ways to adjust the wires charge formula. For example, the charge could be imposed only on electricity generated using incumbent fossil energy sources such as coal, natural gas, and oil. A nationwide "wires charge" was proposed in 2008 and 2009 as a method of funding a "Carbon Storage Research Corporation" to accelerate the commercial availability of carbon dioxide capture and storage technologies and methods. ^{27, 28} This proposal enjoyed bipartisan support and was projected to raise approximately $1 billion per year to fund the early deployment of carbon capture and storage (CCS) technologies.

Moreover, similar fees to promote R&D have been authorized in the past. For example, the Gas Research Institute, prior to 2004, was funded through mandatory surcharges on interstate pipeline customers. Total funding over the lifetime of the surcharge was more than $3 billion.²⁹ Similarly, the Propane Education and Research Council is funded through an assessment on each gallon of retail propane at the point it is odorized or imported into the United States.

There are a number of ways to structure a wires charge. Substantial revenues could be raised to fund energy innovation programs with fairly modest consumer impacts.

A wires charge on electricity sales has the potential to raise on the order of $1-$4 billion per year. ³⁰

Beyond a wires charge, there are a number of ways to levy a small fee on various energy sources that could generate significant revenues to fund new technology development. A gas tax, oil import fees, energy export fees, and even perhaps a carbon dioxide (CO2) fee are all options that could be considered.

For instance, increasing the gasoline tax would be a simple and transparent, albeit politically challenging, way to generate new revenues. The federal gasoline tax currently stands at 18.4 cents per gallon.³¹ Revenues from the gas tax go to the Highway Trust Fund, which is used to maintain and expand roads and other transportation infrastructure. As a revenue-generating mechanism, the gasoline tax has multiple positive attributes: it creates incentives for reduced oil consumption and vehicle technology innovation, and it can generate large sums because it is extremely broad-based (roughly speaking, each penny-per-gallon of tax generates approximately $1 billion per year in revenue). Although past experience (and consistent polling) suggests that the American public is strongly averse to this type of tax, conversations about increasing the gas tax persist. The President's Commission on Fiscal Responsibility and Reform included a gas tax increase, for example. While we do not want to create competition with the Highway Trust Fund, which should continue to devote much-needed resources to our nation's aging transportation infrastructure, the addition of a few cents to the gas tax could raise billions for both infrastructure and clean energy innovation activities.³²

Similarly, another old idea that is worth considering is the notion of imposing a fee on imported oil. Like a gas tax, an oil import fee could accomplish two national goals: reducing dependence on foreign oil, and raising revenue for the federal government, a portion of which could fund innovation.³³ Furthermore, as U.S. domestic production increases, the country could see energy exports, particularly for natural gas, grow as well. Charging a small fee on exports could generate federal revenue while limiting impacts on domestic consumers and deserves further consideration.

Additionally, over the long-term, a fee on CO2 emissions should be considered. Although previous Congressional attempts to price CO2 and other greenhouse gas emissions failed to gain widespread support and are unlikely to gain political traction in the near-term, there are a number of ways to structure a fee for CO2 emissions that could generate significant federal revenue in the future.³⁴ This revenue could then be used for a variety of public purposes - reducing income taxes, paying down the debt, and funding energy innovation, to highlight a few. Moreover, compared to taxing labor or savings, charging a fee for carbon emissions has significant advantages because it creates a market incentive to reduce pollution and improve the energy efficiency of our economy. While the majority of any of the revenue generated by a new CO2 fee should be devoted to bringing our national debt under control and to lowering other consumer taxes, a small, dedicated portion could also be used to fund federal energy innovation initiatives.

Energy and emissions fees together have the potential to raise more than $80 billion per year.

Although we are advocating for significantly increased investments in energy technology programs, many of which are currently housed at DOE, we recognize that the country is in a fiscal era that demands hard choices and difficult trade-offs. Policymakers will need to explore ways to streamline, and perhaps even cut, DOE programs that are non-essential in order to free up funding for technology investments that have significant potential. Numerous deficit reduction reports - including reports issued by the CBO, the Domenici-Rivlin Debt Reduction Task Force, and the President's Fiscal Commission - have highlighted options to reduce spending at DOE that were supported by previous Administrations of both political parties. We reiterate that we strongly support increased investments in DOE's energy innovation programs, but policymakers should examine options to trim other high-dollar programs in order to fund the country's energy innovation activities.

Streamlining and trimming DOE programs has the potential to save on the order of $1-$2 billion over the coming years. ³⁵

Recognizing that some of the revenue options discussed in this paper are already in place and are being used to fund a variety of state and federal programs, and also appreciating that the U.S. faces an urgent need to reduce the federal debt, we understand that our leaders face hard choices about revenue and spending priorities. Nevertheless, the AEIC strongly believes that advancing new clean energy technologies is so important that federal funding for this effort should rise to the top of our national priorities. The AEIC does not advocate for one revenue option over another; the only unacceptable option is to fail to make these investments.

The Administration and Congressional leaders recently reached a political compromise to address the national debt ceiling that includes steep cuts in federal spending. We understand that major federal spending reductions are needed. However, we urge Congress to cut strategically, as we do in the private sector. While belt tightening is appropriate, it is also important to support growth - protecting investments in technology innovation is critical to the nation's future.

Innovation investments must relate to the size of the U.S. energy market and its importance in driving the U.S. economy. It would be detrimental to our country's economy and long-term competitiveness to neglect these investments. In that context, increasing federal spending in energy innovation would have only a modest impact on the overall budget, but could have very large implications for our nation's future prosperity. Wise investments in a new generation of energy technologies are not only justified, but vital to our future.

Previously, AEIC called for a three-fold increase in annual energy innovation investments. We understand that this level of funding cannot be provided overnight. However, we maintain that investments of this magnitude should be our country's target over the next decade.

We have shown here that the resources to support this endeavor are available. We encourage our political leaders to secure those resources and direct them appropriately.