U.S. economic leadership is at a crossroads. Recent outlooks suggest we may experience long-term stagnation and unemployment comparable to Japan’s lost decade. Yet while we have suffered an economic crisis produced by our own financial sector – losing millions of jobs, trillions in economic output, and further damaging our industrial base – China has largely shrugged off the global recession with high levels of growth and self-financed stimulus, all while purchasing billions of Treasury bills to finance our own deficit.

Meanwhile, as Breakthrough Institute and ITIF documented in “Rising Tigers, Sleeping Giant,” China and other nations are establishing dominance in one of the largest growth industries of the century. According to World Economic Forum, the global clean energy market will reach $450 billion annually by 2012 and $600 billion by 2020. Full market potential for clean energy products is much larger, with one analysis estimating Chinese market potential alone at $500 billion to $1 trillion. No wonder President Obama declared in the State of the Union, “The nation that leads the clean-energy economy will be the nation that leads the global economy.”

The United States must quickly pursue a new growth agenda, and clean energy technology offers one of our greatest opportunities. For over a decade, the primary goal of U.S. climate and clean energy advocates has been to establish a strong carbon pollution cap. This agenda is dead for the foreseeable future, and precious time has been wasted. The United States must quickly pivot from pollution regulation to an aggressive clean energy competitiveness and innovation agenda, and we can begin with new leadership in the next Congress.

Securing our competitiveness in this sector requires a comprehensive industrial development strategy (see our report, “The Power to Compete“), including robust and targeted federal support for clean energy research and innovation, manufacturing, and domestic market demand, as well as infrastructure, education, and industry cluster formation. This is necessary for a range of technologies, including but not limited to onshore and offshore wind, solar PV and thermal, advanced geothermal, hybrid and electric vehicles and batteries, carbon capture and storage, nuclear, smart-grid, and high-speed rail.

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Fortunately, this approach includes several incremental, actionable components that can garner greater support than comprehensive and controversial cap and trade. The first is research, development, and demonstration (RD&D), which is necessary to invent new clean energy technologies, components, and manufacturing processes; improve the cost and performance of existing technologies and processes; and demonstrate proof of concept for advanced and higher-risk systems. The next Congress can start by increasing federal clean energy RD&D to at least $15-20 billion per year and making the R&D tax credit permanent. This target represents a growing bipartisan consensus and contrasts with the $30 billion federal budget for health research and $80 billion for military R&D, and only $3-5 billion for energy R&D today.

These strategic federal investments, and those identified below, can be financed through a variety of modest revenue streams, such as offshore drilling royalties, an oil import fee, reduced fossil fuel subsidies, or a small fee on fossil fuel electricity. For example, an “energy security fee” of $3.50 per barrel of imported oil would raise approximately $15 billion annually; reduced fossil fuel subsidies as proposed by the administration could generate upwards of $35 billion over ten years; a utilities electricity fee could raise at least $2 billion annually, as included in the Kerry-Lieberman American Power Act; and royalties on new offshore continental shelf drilling could raise more than $100 billion over twenty years.

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The second piece is clean energy manufacturing, which can be a powerful engine for middle-class jobs and wealth creation and is essential for scaling our industry, establishing long-lasting supply chains and clusters, and reducing our trade deficit. The federal government can accomplish this through low-cost financing, tax incentives, technical assistance, and direct investment. Congress can start by extending the 48C advanced manufacturing tax credit, creating a revolving manufacturing loan fund similar to the Investments for Manufacturing Progress and Clean Technology (IMPACT) Act, and leveraging the Department of Commerce’s Manufacturing Extension Partnership.

Third, strong domestic demand will attract leading companies to locate manufacturing, supply chain, and R&D operations at home; accelerate learning-by-doing to achieve improvements in price and performance, as well as manufacturing processes; and incentivize U.S. firms to invest in clean energy technology development and deployment. Even without a carbon price, we can stimulate demand for advanced technologies with direct government procurement, especially through the Department of Defense, and through a clean energy deployment administration, renewable portfolio standard, and targeted feed-in tariffs. Unlike a carbon price, these policies can be designed to favor less-mature technologies and achieve rapid learning curves and economies of scale.

Beyond these three core components, at least three other supportive mechanisms are necessary: enabling infrastructure, education and workforce development, and industry cluster formation. For infrastructure, developing a smart electricity grid is necessary to integrate and manage renewable power; electrical vehicle infrastructure, such as charging stations, is necessary to electrify transportation; and rapid mass transit like high-speed railways is necessary to improve transportation efficiency and reduce reliance on personal vehicles.

Education and workforce development is necessary to replace the currently declining energy workforce, which could experience up to 50 percent retirement rates in the next five or ten years, and to accelerate clean energy research and construction. The next Congress can act by fully appropriating the Department of Energy’s applied science and engineering education proposal, and build upon this with a National Energy Education Act. Finally, explicit policies to develop regional industry clusters is necessary to accelerate clean energy innovation, from basic research to technology commercialization, and to enhance the competitiveness of U.S. manufacturers and suppliers.

The United States has a successful track record of catching up in strategic industries. Decades ago, after trailing Europe in aviation and aerospace, we raced ahead through sustained federal support for aviation technology development. After Sputnik was launched, we
invested heavily in education, science, and technology, leading us to win the space race. When Japan took the lead in the semiconductor industry, we formed SEMATECH to reposition ourselves as the global market leader. We can and must do the same today in clean energy, and in the aftermath of cap and trade, there’s not a moment to waste.

Teryn Norris is president and Daniel Goldfarb is program director of Americans for Energy Leadership. This article originally appeared at the National Journal Energy Expert Blog.