OMB Has Its Eyes on Prizes

Earlier this month, with little fanfare, the Obama Administration took a small but significant step toward encouraging greater technological innovation.  On March 8, the Office of Management and Budget issued a guidance to federal agencies on the use of challenges and prizes to spur technological innovation.  This memorandum seeks to “strongly encourage” federal agencies to “utilize prizes and challenges as tools for advancing open government, innovation, and the agency’s mission.”  It further explains that many federal agencies have sufficient statutory authority to create technology inducement prizes with existing funds and spending authority.  More here.

The Obama Administration is to be commended for this initiative.  If the federal government is to encourage greater technological innovation, it needs to move beyond the traditional (and largely ineffective) tools of subsidies and mandates.  This is partiuclarly true in areas, such as climate change policy, where policymakers have embraced policy goals far beyond existing technological capacities.  Interestingly enough, during the 2008 Presidential campaign it was Senator John McCain, not Obama, who proposed using prizes to spur innovation in the energy sector, though this proposal quickly became a footnote in his campaign agenda.

Last fall, I presented a paper on the potential use of technology inducement prizes to spur innovation in the energy sector at a climate change law and policy workshop sponsored by the University of Pennsylvania Law School’s Program on Law, Environment, and Economy.  It’s entitled, “Eyes on a Climate Prize: Rewarding Energy Innovation to Achieve Climate Stabilization.”  I’ve now posted the paper on SSRN, and reproduced the abstract below.

Stabilizing atmospheric concentrations of greenhouse gases at double their pre-industrial levels (or lower) will require emission reductions far in excess of what can be achieved with current or projected levels of technology at a politically acceptable cost. Substantial technological innovation is required if the nations of the world are to come anywhere close to proposed emission reduction targets. Neither traditional federal support for research and development of new technologies nor traditional command-and-control regulations are likely to spur sufficient innovation. Technology inducement prizes, on the other hand, have the potential to incentivize and accelerate the rate of technological innovation in the energy sector. This paper outlines the theory behind the use of inducement prizes to encourage and direct inventive efforts and technological innovation and identifies several comparative advantages inducement prizes have over traditional grants and subsidies for encouraging the invention and development of climate-friendly technologies. While no policy measure guarantees technological innovation, greater reliance on inducement prizes would increase the likelihood of developing and deploying needed technologies in time to alter the world’s climate future. Whatever their faults in other contexts, prizes are particularly well suited to the climate policy challenge.

Substantive comments and critiques are quite welcome.  I plan on making additional revisions to this paper in the weeks ahead.