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Improving Decision Making for Public R&D Investment in Energy: Utilizing Expert Elicitation in Parametric Models

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  • Chan, G.
  • Anadon, L-D.

Abstract

Effective decision making to allocate public funds for energy technology research, development, and demonstration (R&D) requires considering 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 method to support R&D decisions that propagates uncertainty through an economic model to estimate the benefits of an R&D portfolio, accounting for innovation spillovers and technology substitution and complementarity. The proposed method improves on the existing literature by: (a) using estimates of the impact of R&D investments from one of the most comprehensive sets of expert elicitations on this topic to date; (b) using a detailed energy-economic model to estimate evaluation metrics relevant to an energy R&D portfolio: e.g., system benefits, technology diffusion, and uncertainty around outcomes; and (c) using a novel sampling and optimization strategy to calculate optimal R&D portfolios. This design is used to estimate an optimal energy R&D portfolio that maximizes the net economic benefits under an R&D budget constraint. Results parameterized based on expert elicitations conducted in 2009-2011 in the United States provide indicative results that show: (1) an expert-recommended portfolio in 2030, relative to the BAU portfolio, can reduce carbon dioxide emissions by 46 million tonnes, increase economic surplus by $29 billion, and increase 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 annual R&D budget for utility-scale energy storage, bioenergy, advanced vehicles, fossil energy, nuclear energy, and solar photovoltaic technologies can be justified by returns to economic surplus; (4) the greatest returns to public R&D investment are in energy storage and solar photovoltaics; and (5) the current allocation of energy R&D funds is very different from optimal portfolios. Taken together, these results demonstrate the utility of applying new methods to improve the cost-effectiveness and environmental performance in a deliberative approach to energy R&D portfolio decision making.

Suggested Citation

  • Chan, G. & Anadon, L-D., 2016. "Improving Decision Making for Public R&D Investment in Energy: Utilizing Expert Elicitation in Parametric Models," Cambridge Working Papers in Economics 1682, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1682
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    References listed on IDEAS

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    1. Diaz Anadon, Laura & Nemet, Gregory & Verdolini, Elena, 2013. "The Future Costs of Nuclear Power Using Multiple Expert Elicitations: Effects of RD&D and Elicitation Design," Climate Change and Sustainable Development 158747, Fondazione Eni Enrico Mattei (FEEM).
    2. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Milford, James & Henrion, Max & Hunter, Chad & Newes, Emily & Hughes, Caroline & Baldwin, Samuel F., 2022. "Energy sector portfolio analysis with uncertainty," Applied Energy, Elsevier, vol. 306(PA).
    2. Cameron Hepburn & Jacquelyn Pless & David Popp, 2018. "Policy Brief—Encouraging Innovation that Protects Environmental Systems: Five Policy Proposals," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 154-169.

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    More about this item

    Keywords

    decision-making under uncertainty; research policy; public R&D; energy R&D; energy technology;
    All these keywords.

    JEL classification:

    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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