Moonshots seem impossible—until they’ve hit their target. This was the mantra of our in-person accelerator workshop, hosted with our partners at Unlock Aid in Mexico City. The workshop was just one part of our larger accelerator process where we’re working with innovators to develop moonshots around global development targets. FAS’s largest policy-development convening to date brought together over 70 participants (representing 40+ organizations, 25+ countries, and six continents) to think through creative approaches for achieving the United Nations Sustainable Development Goals by 2030. 

Maeve Skelly leading a brainstorming session

After years of Zoom calls, phone conferences, and emails, meeting our accelerator cohort in person was a refreshing change of pace. Connecting IRL enabled free-flowing collaboration on big issues like global water security, access, and safety. We saw convergence across organizations: City Taps, Drinkwell, and Evidence Action came together to create the “WaterShot”—a new approach to solving water access with an outcomes marketplace framework. We were reminded anew that policy is powered by people—and that strong interpersonal connections inevitably lead to better and more creative policy ideas.

Brainstorming at the event was inspired by remarks from global development leaders. Project Drawdown spoke about the Drawdown Framework for climate solutions, NPX Advisors demonstrated how to drive better outcomes with advanced market commitments, and Nasra Ismail, a leader in global development strategy, talked about the power of coalition building.

Josh Schoop answering participant questions

The workshop was an initial opportunity to expose global development experts to the idea that policy, like seed funding or infrastructure investment, is an input that supports scaling. Most individual innovators are understandably hyper-focused on scaling up their individual ideas or products. But good policy is needed to build a flourishing global development environment—a rising tide that lifts all entrepreneurial ships. An underlying theme of the Mexico City workshop was the importance of policy as a growth enabler. 

Now that we’re back in DC and over our jetlag, the accelerator continues, and we’re working with workshop participants to inform policymakers on key priorities for global development policy. We’re thinking about pain points in the field and opportunities for systems change, including earmarking funds for innovation, uplifting and incorporating community voices to policy, and setting new standards that focus on results.

The field of global development can be individualized and competitive—grants are few and far between, which doesn’t always foster shared best practices. But achieving the SDGs by 2030 must be a collaborative effort. Problems like climate change and food security are more pressing than ever, and they require an entirely new way of thinking about global development—finding and building on opportunities from proven results. Later this fall, look out for our participants’ moonshot memos as we roll them out. And if you have an idea about meeting the SDGs with a moonshot—or something else—why not submit it? Aiming at the moon is one thing, but getting there takes dedicated and sustained collaboration, and we’re so honored that these daring organizations want to work with us to do just that.

The Accelerator cohort in Mexico City

The Day One Project is going international! My colleague Josh Schoop and I will be spending this week in Mexico City with our partners at Unlock Aid, where we’ll be co-hosting the Reimagining the Future of Global Development Moonshot Accelerator. This will be our eighth accelerator cohort, and the very first in-person group. 

We’re convening a group of 70 entrepreneurs, innovators, policymakers, and funders from around the world to think big about the future of global development and how government, business, industry, and aid can meet the UN’s Sustainable Development Goals (SDGs) by 2030. With the recent passage of a historic investment in the transition away from fossil fuels, the time is now to act on the biggest threats facing humanity. Sitting squarely within ‘the decade of delivery’—the remaining years we have to achieve the SDGs— this moonshot accelerator serves as an important call for action. 

Our goal for this accelerator is to disrupt. We aim to generate new models to seed, scale, and implement catalytic solutions. The inspiration for the design of this accelerator comes from the “moonshot” model that the Kennedy administration pioneered to put the first man on the moon. A moonshot has since come to mean solving a daunting problem in an accelerated time period, requiring breakthrough, innovative, and radical thinking. If the past decades have not delivered the necessary change, then we have to shoot for the moon.

Over the course of the week, we’ll be working with the accelerator cohort to develop their own moonshots in health, the green economy, biodiversity, food and water insecurity, and more. These moonshots will be the building blocks for a Global Development Outcomes Marketplace, pitching funders and policymakers on new ways to unlock innovation in global development. Innovation here involves so much more than just new technology – it means new systems, processes, cooperation, organizing, and change, while ensuring that diverse perspectives are leading the way forward. 

We’re really invested in these ideas and the people driving them, so here’s a sneak peek at a couple innovative groups joining us in Mexico City: Instiglio, headquartered in Bogotá, Colombia, is experimenting with new global development systems, like innovative financing methods, while SwipeRx in Indonesia is dedicated to revolutionizing the pharmacy industry with a tech-based solution. There are, of course, so many more groups who’ll be discussing and testing their ideas in-person, and the goal is to channel this cohort’s diverse expertise to create high-level, actionable recommendations for funders and multilateral organizations that center equity and outcomes. 

I’m most excited to hear from experts and entrepreneurs from all over the world on what has been holding back progress despite attempted solutions, and I look forward to collaborating on what a new set of systems could look like. I’m excited to learn from our inspiring cohort, and to build mutual understanding across sectors to find ways to improve current solutions and break ground on a new path forward.I have high hopes that this accelerator will reinvigorate global development and uplift new voices and ideas in order to build a more prosperous planet. I resonate strongly with the voices of young people demanding urgent climate action worldwide–it’s time to harness this momentum to make sustainable, transformative change. Follow the journey of our first in-person accelerator on Twitter.

Background and Purpose

On July 26, 2022, MIT Mobility Initiative, MIT Washington Office, and The Engine hosted a workshop with leaders from the U.S. Department of Transportation (DOT) and infrastructure stakeholders — industry veterans, startup founders, federal, state and local policymakers and regulators, academics and investors.

The purpose of this convening was to engage a broad, diverse set of stakeholders in a series of ideation exercises to imagine what a set of ambitious advanced research programs could focus on to remake the future of American infrastructure. This read-out builds on a partnership FAS and the Day One Project have with the Department of Transportation to support solutions-based research and development. You can learn more about our work here.

The workshop consisted of two sessions. In the first working session, attendees discussed key challenges in infrastructure and possible research priority areas for ARPA-I. In the second half of the first session, participants were asked to come up with priority program areas that ARPA-I could focus on

During the second working session, participants considered the barriers that prevent the translation of breakthrough science and engineering into infrastructure reality, and opportunities for ARPA-I to smooth some of those frictions as an institution.

Resulting Recommendations

While some of the recommendations below may ultimately fall outside of ARPA-I’s mandate, or may require further Congressional authorization, they emphasize the need for ARPA-I to be strategically coordinating future deployment at scale even at the earliest stages of a project.

Deploying capital strategically

• Use existing or new authorities, such as consortium Other Transactions Authority, prize challenges, and public-private capital matching to ensure maximum flexibility and capital availability to fund complex, capital-intensive infrastructure investments. 
• Create an Office of Scale-up within ARPA-I to ensure coordination across all “valleys of death” from early-stage basic research to full scale deployment. Mechanisms can range from early-stage open seed topics to later-stage Scale-up and deployment loan contracting mechanisms. 

Establishing development and test infrastructure:

• The costs of infrastructure testbeds are prohibitive for most innovators. Creating government-sponsored testbeds, with participation from standards and regulatory bodies, would decrease the need for private capital and could create early linkages between innovators and those in charge of deployment. Existing national labs may have relevant expertise and equipment. Opening up access to these facilities through consortia, lighter weight Cooperative Research and Development Agreements (CRADAs), or other low-friction mechanisms may also have similar effects.

Catalyzing stakeholder collaboration:

• For early-stage researchers, create a community to share, discuss, and reflect upon the innovative landscape of infrastructure projects. To help reduce later-stage friction, create an Office of Strategic Engagement that would report to the ARPA-I director. This office would coordinate ARPA-I investment areas with external stakeholders, including academia, corporate partners, regulatory bodies, and, perhaps, even local community deployment advocacy.

Congressional negotiations over the massive bipartisan innovation bill have stumbled over a controversial proposal to expand the geographic footprint of National Science Foundation (NSF) funding. That proposal, in the Senate-passed U.S. Innovation and Competition Act (USICA), mandates that 20% of NSF’s budget be directed to a special program to help institutions in the many states that receive relatively few NSF dollars.

Such a mandate would represent a dramatic expansion of the Established Program to Stimulate Competitive Research (EPSCoR), which currently receives less than 3% of NSF’s budget. Major EPSCoR expansion is popular among legislators who would like to see the research institutions they represent become more competitive within the NSF portfolio. Some legislators have said their support of the overall innovation package is contingent on such expansion.

But the proposed 20% set-aside for EPSCoR is being met with fierce opposition on Capitol Hill. 96 other legislators recently co-authored a letter warning, “Arbitrarily walling off a sizable percentage of a science agency’s budget from a sizable majority of the country’s research institutions would fundamentally reduce the entire nation’s scientific capacity and damage the research profiles of existing institutions.”

Both proponents and opponents of the 20% set-aside make good points. Those in favor want to see more equitable distribution of federal research dollars, while those against are concerned that the mandatory set-aside is too massive and blunt an instrument for achieving that goal. Fortunately, we believe compromise is achievable—and well worth pursuing. Here’s how.

What is EPSCoR?

First, some quick background on the program at the heart of the controversy: ESPCoR. The program was established in 1979 with the admirable goal of broadening the geographic distribution of NSF research dollars, which even then were disproportionately concentrated in a handful of states.

EPSCoR provides eligible jurisdictions with targeted support for research infrastructure, development activities like workshops, and co-funding for project proposals submitted to other parts of NSF. A jurisdiction is eligible to participate in EPSCoR if its most recent five-year level of total NSF funding is equal to or less than 0.75% of the total NSF budget (excluding EPSCoR funding and NSF funding to other federal agencies). Currently, 25 states plus Puerto Rico, Guam, and the U.S. Virgin Islands qualify for EPSCoR. Yet the non-EPSCoR states still accounted for nearly 90% of NSF awards in FY 2021.
 

Why is expansion controversial?

As mentioned above, the Senate-passed USICA (S. 1260) would require NSF to devote 20% of its budget to EPSCoR (including research consortia led by EPSCoR institutions). The problem is that EPSCoR received only 2.4% of NSF’s FY 2022 appropriation. This means that to achieve the 20% mandate without cutting non-EPSCoR funding, Congress would have to approve nearly $2 billion in new appropriations for NSF in FY 2023, representing a 22% year-over-year increase, devoted entirely to EPSCoR. This is, to be blunt, wildly unlikely.

On the other hand, achieving a 20% budget share for EPSCoR under a more realistic FY 2023 appropriation for NSF would require cutting funding for non-EPSCoR programs on the order of 15%: a cataclysmic proposition for the research community.

Neither pathway for a 20% EPSCoR set-aside seems plausible. Still, key legislators have said that the 20% target is a must-have. So what can be done?

A path forward

We think a workable compromise is possible. The following three revisions to the Senate-proposed set-aside that everyone might accept:

1. Specify that the 20% mandate applies to institutions in EPSCoR states rather than the EPSCoR program itself. While specific funding for the EPSCoR program accounts for less than 3% of the total NSF budget, institutions in current EPSCoR states actually receive about 13% of NSF research dollars. In other words, a substantial portion of NSF funding is allocated to EPSCoR institutions through the agency’s normal competitive-award opportunities. Given this fact, there’s a clear case to be made for focusing the 20% ramp-up on EPSCoR-eligible institutions rather than the EPSCoR program.

    

2. Specify that the mandate only applies to extramural funding, not to agency operations and administrative appropriations. This is simply good government. If EPSCoR funding is tied to administrative appropriations, it may create an incentive to bloat the administrative line items. Further, if the mandate is applied to the entirety of the NSF budget and administrative costs must increase for other reasons (for instance, to cover future capital investments at NSF headquarters), then NSF may be forced to “balance the books” by cutting non-EPSCoR extramural funding to maintain the 20% ESPCoR share.

    

3. Establish a multi-year trajectory to achieve the 20% target. As mentioned above, a major year-over-year increase in the proportion of NSF funding directed to either EPSCoR or EPSCoR-eligible institutions could cripple other essential NSF programs from which funding would have to be pulled. Managing the deluge of new dollars could also prove a challenge for EPSCoR-eligible institutions. Phasing in the 20% target over, say, five years would (i) enable federal appropriators to navigate pathways for increasing EPSCoR funding while avoiding drastic cuts elsewhere at NSF, and (ii) give EPSCoR-eligible institutions time to build out the capacities needed to maximize return on new research investments.

Crunching the numbers

To illustrate what this proposed compromise could mean fiscally, let’s say Congress mandates that NSF funding for EPSCoR-eligible institutions rises from its current ~13% share of total research dollars to 20% in five years. To achieve this target, the share of NSF funding received by EPSCoR-eligible states would have to rise by approximately 9% per year for five years.

Under this scenario, if NSF achieves 3% annual increases in appropriations (which is close to what it’s done since the FY 2013 “sequestration” year), then we’d see about 13% annual growth in NSF research dollars funneled to EPSCoR states due to the escalating set-aside. NSF research dollars funneled to non-EPSCoR states would increase by about 1% annually over the same time period. By the end of the five-year period, EPSCoR-eligible institutions would have seen a more than 80% increase in funding.

Annual increases in NSF appropriations of 2% would be enough to achieve the 20% set-aside without cutting funding for institutions in non-EPSCoR states, but wouldn’t allow any growth in funding for those institutions either. In other words, the appropriations increases would have to be entirely directed to the rising EPSCoR set-aside.

Finally, annual increases in NSF appropriations of 5% would be enough to achieve the 20% set-aside for EPSCoR-eligible institutions while also enabling non-EPSCoR-eligible institutions to enjoy continued 3% annual increases in funding growth.
 

The next step

U.S. strength in innovation is predicated on the scientific contributions from all corners of the nation. There is hence a clear and compelling reason to ensure that all U.S. research institutions have the resources they need to succeed, including those that have historically received a lower share of support from federal agencies.

he bipartisan innovation package offers a chance to achieve this, but it must be done carefully. The three-pronged compromise on EPSCoR outlined above is a prudent way to thread the needle. It should also be supported by sustained, robust increases in NSF funding as a whole. Congress should therefore couple this compromise with an explicit, bipartisan commitment to support long-term appropriations growth for NSF—because such growth would benefit institutions in every state.

The bipartisan innovation package offers enormous potential upside along several dimensions for U.S. science, innovation, and competitiveness. To enable that upside, an EPSCoR compromise is worth pursuing.

Summary

Robotic and automated systems have the potential to remove humans from dangerous situations, but their current intended use as aids or replacements for human officers conducting border patrols raises ethical concerns if not regulated to ensure that this use “promot[es] the safety of the officer/agent and the public” (emphasis added). U.S. Customs and Border Protection (CBP) should update its use-of-force policy to cover the use of robotic and other autonomous systems for CBP-specific applications that differ from the military applications assumed in existing regulations. The most relevant existing regulation, Department of Defense Directive 3000.09, governs how semi-autonomous weapons may be used to engage with enemy combatants in the context of war. This use case is quite different from mobile sentry duty, which may include interactions with civilians (whether U.S. citizens or migrants). With robotic and automated systems about to come into regular use at CBP, the agency should proactively issue regulations to forestall adverse effects—specifically, by only permitting use of these systems in ways that presume all encountered humans to be non-combatants. 

Challenge and Opportunity

CBP is currently developing mobile sentry devices as a new technology to force-multiply its presence at the border. Mobile sentry devices, such as legged and flying robots, have the potential to reduce deaths at the border by making it easier to locate and provide aid to migrants in distress. According to an American Civil Liberties Union (ACLU) report, 22% of migrant deaths between 2010 and 2021 that involved an on-duty CBP agent or officer were caused by medical distress that began before the agent or officer arrived on the scene. However, the eventual use cases, rules of engagement, and functionalities of these robots are unclear. If not properly regulated, mobile sentry devices could also be used to harm or threaten people at the border—thereby contributing to the 44% of deaths that occurred as a direct result of vehicular or foot pursuit by a CBP agent. Regulations on mobile sentry device use—rather than merely acquisition—are needed because even originally unarmed devices can be weaponized after purchase. Devices that remain unarmed can also harm civilians using a limb or propeller. 

Existing Department of Homeland Security (DHS) regulations governing autonomous systems seek to minimize technological bias in artificially intelligent risk-assessment systems. Existing military regulations seek to minimize risks of misused or misunderstood capabilities for autonomous systems. However, no existing federal regulations govern how uncrewed vehicles, whether remotely controlled or autonomous, can be used by CBP. The answer is not as simple as extending military regulations to the CBP. Military regulations governing autonomous systems assume that the robots in question are armed and interacting with enemy combatants. This assumption does not apply to most, if not all, possible CBP use cases.

With the CBP already testing robotic dogs for deployment on the Southwestern border, the need for tailored regulation is pressing. Recent backlash over the New York Police Department testing similar autonomous systems makes this topic even more timely. While the robots used by CBP are currently unarmed, the same company that developed the robots being tested by CBP is working with another company to mount weapons on them. The rapid innovation and manufacturing of these systems requires implementation of policies governing their use by CBP before CBP has fully incorporated such systems into its workflows, and before the companies that build these systems have formed a powerful enough lobby to resist appropriate oversight. 

Plan of Action

CBP should immediately update its Use of Force policy to include restrictions on use of force by mobile sentry devices. Specifically, CBP should add a chapter to the policy with the following language:

• A “Mobile Sentry Device” should be defined as any remotely controlled, autonomous, or semi-autonomous mobile technology used for surveillance. Examples of Mobile Sentry Devices include self-driving cars, legged robots, or quadcopter drones. 

• No amount of force may be determined “reasonable” if administered by a Mobile Sentry Device, whether the Device is (i) completely controlled by an agent or officer, or (ii) operating in an autonomous or semi-autonomous mode.
  • No Mobile Sentry Device may be authorized to administer Lethal Force, Less-Lethal Force, or any type of force applied directly by contact with the Device (i.e., contact equivalent to an “Empty Hand” technique). For example, a legged robot may not be used to discharge a firearm, disperse Oleoresin Capsicum spray (pepper spray), or strike a human with a limb. 

• A Mobile Sentry Device may not be used as a Vehicular Immobilization Device (or used to deploy such a device), whether the Mobile Sentry Device is (i) completely controlled by an agent or officer, or (ii) operating in an autonomous or semi-autonomous mode. 

• When powered on, Mobile Sentry Devices must maintain a distance of at least two feet from any humans not authorized to operate the Device. The Device and its operator are responsible for maintaining this distance. 

• Mobile Sentry Devices may not be used to detain or perform arrests, nor to threaten or intimidate with the implicit threat of detainment or arrest. 

• A Mobile Sentry Device may be used to administer humanitarian aid or provide a two-way visual or auditory connection to a CBP officer or agent.
  • When approaching people to offer humanitarian aid, the Device must use de-escalation techniques to indicate that it is not a threat. These techniques will necessarily vary based on the specific technology. Some examples might include a flying device landing and immediately unfolding a screen playing a non-threatening video, or a legged device sitting with its legs underneath it and cycling through non-threatening audio recordings in multiple languages. 

• When used for humanitarian purposes, the Device may not touch its human target(s) or request them to touch it. To transfer an item (such as food, water, or emergency medical supplies) to the target(s), the Device must drop the package with the items while maintaining at least two feet of distance from the closest person. 

• When used to provide a two-way visual or auditory connection with a CBP officer or agent, the Device must indicate that such a connection is about to be formed and indicate when the connection is broken. For example, the Device could use an audio clip of a ringing phone to signal that a two-way audio connection to a CBP officer is about to commence.

These regulations should go into effect before Mobile Sentry Devices are moved from the testing phase to the deployment phase. Related new technology, whether it increases capabilities for surveillance or autonomous mobility, should undergo review by a committee that includes representatives from the National Use of Force Review Board, migrant rights groups, and citizens living along the border. This review should mirror the process laid out in the Community Control over Police Surveillance project, which has already been successfully implemented in multiple cities. 

Conclusion

U.S. Customs and Border Patrol (CBP) is developing an application for legged robots as mobile sentry devices at the southwest border. However, the use cases, functionality, and rules of engagement for these robots remain unclear. New regulations are needed to forestall adverse effects of autonomous robots used by the federal government for non-military applications, such as those envisioned by CBP. These regulations should specify that mobile sentry devices can only be used as humanitarian aids, and must use de-escalation methods to indicate that they are not threatening. Regulations should further mandate that mobile sentry devices maintain clear distance from human targets, that use of force by mobile sentry devices is never considered “reasonable,” and that mobile sentry devices may never be used to pursue, detain, or arrest humans. Such regulations will help ensure that the legged robots currently being tested as mobile sentry devices by CBP—as well as any future mobile sentry devices—are used ethically and in line with CBP’s goals, alleviating concerns for migrant advocates and citizens along the border.

Frequently Asked Questions

What is the purpose of regulating CBP use of autonomous robots as mobile sentry devices rather than purchasing of autonomous robots?

Regulations on purchasing are not sufficient to prevent mobile sentry device technology from being weaponized after it is purchased. However, DHS could certainly also consider updating its acquisition regulations to include clauses resulting in fines when mobile sentry devices acquired by the CBP are not used for humanitarian purposes.

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Why is Department of Defense (DOD) Directive 3000.09 not sufficient to regulate the use of force by all government agencies?

DOD Directive 3000.09 regulates the use of autonomous weapons systems in the context of war. For an autonomous, semi-autonomous, or remotely controlled system that is deployed with the intention to be a weapon in an active battlefield, this regulation makes sense. But applications of robotic and automated systems currently being developed by DHS are oriented towards mobile sentry duty along stretches of American land where civilians are likely to be found. This sentry duty is likely to be performed by uncrewed ground robots following GPS breadcrumb trails along predetermined regular patrols along the border. Applying Directive 3000.09, the use of a robot to kill or harm a person during a routine patrol along the border would not be a violation as long as a human had “meaningful control” over the robot at that time. The upshot is that mobile sentry devices used by CBP should be subject to stricter regulations.

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What standards do robotics companies have on the use of their technologies?

Most companies selling legged robots in the United States have explicit end-user policies prohibiting the use of their machines to harm or intimidate humans or animals. Some companies selling quadcopter drones have similar policies. But these policies lack any enforcement mechanism. As such, there is a regulatory gap that the federal government must fill.

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Is updating its Use of Force policy the only way for CBP to regulate its use of mobile sentry devices?

No, but it is an immediately actionable strategy. An alternative—albeit more time-consuming—option would be for CBP to form a committee comprising representatives from the National Use of Force Review Board, the military, migrant-rights activist groups, and experts on ethics to develop a directive for CBP’s use of mobile sentry devices. This directive should be modeled after DoD Directive 3000.09, which regulates the use of lethal autonomous weapons systems by the military. As the autonomous systems in DOD Directive 3000.09 are assumed to be interacting with enemy combatants while CBP’s jurisdiction consists mostly of civilians, the CBP directive should be considerably more stringent than Directive 3000.09.

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Would the policies proposed in this memo vary with the degree of autonomy possessed by the robot in question?

The policies proposed in this memo govern what mobile sentry devices are and are not permitted to do, regardless of the extent to which humans are involved in device operation and/or the degree of autonomy possessed by the technology in question. The policies proposed in this memo could therefore be applied consistently as the technology continues to be developed. AI is always changing and improving, and by creating policies that are tech-agnostic, CPB can avoid updating regulations as mobile sentry device technology evolves.

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Summary

The scale of mobilization and technological advancement required to avoid the worst effects of climate change has recently led U.S. politicians to invoke the need for a new, 21st century “moonshot.” The Obama Administration launched the SunShot Initiative to dramatically reduce the cost of solar energy and, more recently, the Department of Energy (DOE) announced a series of “Earthshots” to drive down the cost of emerging climate solutions, such as long-duration energy storage.

While DOE’s Earthshots to date have been technology-specific and sector-agnostic, certain heavy industrial processes, such as steel and concrete, are so emissions- intensive and fundamental to modern economies as to demand an Earthshot unto themselves. These products are ubiquitous in modern life, and will be subject to increasing demand as we seek to deploy the clean energy infrastructure necessary to meet climate goals. In other words, there is no reasonable pathway to preserving a livable planet without developing clean steel and concrete production at mass scale. Yet the sociotechnical pathways to green industry – including the mix of technological solutions to replace high-temperature heat and process emissions, approaches to address local air pollutants, and economic development strategies – remain complex and untested. We urgently need to orient our climate innovation programs to the task.

Therefore, this memo proposes that DOE launch a Steel Shot to drive zero-emissions iron, steel, and aluminum production to cost-parity with traditional production within a decade. In other words, zero dollar difference for zero-emissions steel in ten years, or Zero for Zero in Ten.

Challenge and Opportunity

As part of the Biden-Harris Administration’s historic effort to quadruple federal funding for clean energy innovation, DOE has launched a series of “Earthshots” to dramatically slash the cost of emerging technologies and galvanize entrepreneurs and industry to hone in on ambitious but achievable goals. DOE has announced Earthshots for carbon dioxide removal, long-duration storage, and clean hydrogen. New programs authorized by the Infrastructure Investment and Jobs Act, such as hydrogen demonstration hubs, provide tools to help DOE to meet the ambitious cost and performance targets set in the Earthshots. The Earthshot technologies have promising applications for achieving net-zero emissions economy-wide, including in sectors that are challenging to decarbonize through clean electricity alone.

One such sector is heavy industry, a notoriously challenging and emissions-intensive sector that, despite contributing to nearly one-third of U.S. emissions, has received relatively little focus from federal policymakers. Within the industrial sector, production of iron and steel, concrete, and chemicals are the biggest sources of CO2 emissions, producing climate pollution not only from their heavy energy demands, but also from their inherent processes (e.g., clinker production for cement). 

Meanwhile, global demand for cleaner versions of these products – the basic building blocks of modern society – is on the rise. The International Energy Agency (IEA) estimates that CO2 emissions from iron and steel production alone will need to fall from 2.4 Gt to 0.2 Gt over the next three decades to meet a net-zero emissions target economy-wide, even as overall steel consumption increases to meet our needs for clean energy buildout. Accordingly, by 2050, global investment in clean energy and sustainable infrastructure materials will grow to $5 trillion per year. The United States is well-positioned to seize these economic opportunities, particularly in the metals industry, given its long history of metals production, skilled workforce, the initiation of talks to reach a carbon emissions-based steel and aluminum trade agreement, and strong labor and political coalitions in favor of restoring U.S. manufacturing leadership.

“The metals industry is foundational to economic prosperity, energy infrastructure, and national security. It has a presence in all 50 states and directly employs more than a half million people. The metals industry also contributes 10% of national climate emissions.”

Department of Energy request for information on a new Clean Energy Manufacturing Institute, 2021

However, the exact solutions that will be deployed to decarbonize heavy industry remain to be seen. According to the aforementioned IEA Net-Zero Energy (NZE) scenario, steel decarbonization could require a mix of carbon capture, hydrogen-based, and other innovative approaches, as well as material efficiency gains. It is likely that electrification – and in the case of steel, increased global use of electric arc furnaces – will also play a significant role. While technology research funding should be increased, traditional “technology-push” efforts alone are unlikely to spur rapid and widespread adoption of a diverse array of solutions, particularly at low-margin, capital-intensive manufacturing facilities. This points to the potential for creative technology-neutral policies, such as clean procurement programs, which create early markets for low-emissions production practices without prescribing a particular technological pathway.

Therefore, as a complement to its Earthshots that “push” promising clean energy technologies down the cost curve, DOE should also consider adopting technology-neutral Earthshots for the industrial sector, even if some of the same solutions may be found in other Earthshots (e.g., hydrogen). It is important for DOE to be very disciplined in identifying one or two essential sectors, where the opportunity is large and strategic, to avoid creating overly balkanized sectoral strategies. In particular, DOE should start with the launch of a Steel Shot to buy down the cost of zero-emissions iron, steel, and aluminum production to parity with traditional production within a decade, while increasing overall production in the sector. In other words, zero dollar difference for zero-emissions steel in ten years, or Zero for Zero in Ten.

The Steel Shot can bring together applied research and demonstration programs, public-private partnerships, prizes, and government procurement, galvanizing public energy around a target that enables a wide variety of approaches to compete. These efforts will be synergistic with technology-specific Earthshots seeking dramatic cost declines on a similar timeline.

Plan of Action

Develop and launch a metals-focused Earthshot: 

• Design and announce the Steel Shot in close partnership with industry, labor, and communities. DOE should hold a series of roundtables with industry, labor, and communities to define and calculate the gap between zero-emissions and traditional production, often called the “green premium,” for clean steel and aluminum. This should incorporate measures to achieve near-zero carbon dioxide emissions as well as deep reductions in other harmful air and water pollutants to achieve a “Zero for Zero in Ten” goal – zero dollar difference for zero emissions steel within one decade. DOE should launch the Steel Shot with pledges from major steelmakers and steel purchasers, such as automakers.

• Calculate targets along the way to the decadal goal and define how success will be measured. After launching the new Earthshot, DOE should release a Request for Information (RFI) and use an initial Steel Shot Summit to compile projections for anticipated cost parity milestones along the way to the decadal target. DOE should plan to update assessments of the current “green premium” on a regular basis to ensure that research, development, and demonstration efforts are targeted at continued reductions in the cost of clean steel – not just improvements over the original baseline. To assess the emissions footprint of various steel production processes, DOE should work closely with the White House’s Buy Clean Task Force, which was tasked with developing recommendations for improving transparency and reporting around embodied emissions, particularly through environmental product declarations.

• Hold an annual Steel Shot Summit to bring together technologists, industry, and financiers to share solutions and develop projects. DOE should hold an annual Steel Shot event to help to highlight existing innovation efforts underway and connect stakeholders. This summit will build on existing Eartshot stakeholder gathering efforts underway, such as the Hydrogen Shot Summit and the Long Duration Storage Shot Summit.

Invest in domestic clean steelmaking capacity:

• Stand up the seventh Clean Energy Manufacturing Institute with funding for cooperative applied R&D and a demonstration facility. Last year, AMO put out a Request for Information on the establishment of a seventh Manufacturing USA institute on industrial decarbonization. The RFI had a particular focus on metals manufacturing. In 2022, DOE should formally issue a funding opportunity for the institute, with a requirement that the institute conduct cooperative R&D in industrial decarbonization practices and operate a manufacturing demonstration and workforce development facility for low- and zero-emissions manufacturing processes.

• Launch an annual competition for entrepreneurs and companies demonstrating low- and zero-emissions processes that reduce the green premium. Modeled after the SunShot’s American Made Solar Prize, AMO could issue a series of smaller-scale prize competitions targeted at challenges for clean metals. Prizes are particularly effective for challenges where the desired end target is defined and clearly measurable, but the optimal solution to achieve this target is not yet known. The variety of potential solutions for steel decarbonization makes the sector an excellent candidate for a prize program with multiple rounds and awardees. DOE could consider subprograms within the Steel Shot prize that align with reducing key sources of emissions – EPA identifies the three sources of emissions as 1) process emissions, 2) direct fuel combustion, and 3) indirect emissions from electricity consumption.

• Pass legislation to directly invest in deployment of commercial-scale solutions. While a prize program can promote prototype and pilot-stage technologies, real-world demonstration and deployment will buy down the cost of clean steel. These investments should pursue a range of decarbonization opportunities across blast-oxygen furnaces, electric arc furnaces, and emerging direct reduction approaches. They should also ensure that federal funds go to projects with strong labor standards, building on a long legacy of quality U.S. steelmaking jobs. The original American Jobs Plan released by President Biden proposed ten “pioneer facilities” to demonstrate clean industrial processes, including steel. Several proposals included in House-passed bills, such as the Build Back Better Act and the America COMPETES Act, would provide new authorities to DOE to fund commercial-scale retrofits and first-of-a-kind facilities employing clean steelmaking technologies. For instance, an amendment to America COMPETES expands the industrial decarbonization RD&D program authorized in the Energy Act of 2020 to include “commercial deployment projects.” Should these provisions pass, they can be leveraged to rapidly retrofit facilities and achieve the goals of the Steel Shot.

Create demand for “green steel” through market pull mechanisms:

• Match innovators and steelmakers with private purchasers to generate demand for clean metals. Demand-pull incentives can reduce risk for U.S. steelmakers and move the innovations that emerge from DOE R&D and prize programs into commercial adoption, which is critical for additional “learning-by-doing” at scale. DOE can work with domestic industries that are major purchasers of steel to develop sector-based advanced market commitments as part of the Earthshot launch. For instance, DOE should leverage its relationships with major automakers with ambitious climate goals, such as Ford and GM, to spur auto sector commitments to purchasing clean steel. In developing these advanced market commitments, DOE can work with the First Movers Coalition, a consortium of private sector buyers of innovative, clean products, launched by the State Department and the World Economic Forum in Glasgow in 2021. They included both steel and aluminum in their initial round of target products. 

• Use federal procurement power to favor “green steel” for government-funded projects, including infrastructure and defense. AMO and DOE’s Federal Energy Management Program should advise the General Services Administration, Department of Defense, Department of Transportation, and other major federal procurers as they execute federal sustainability plans and procurement working groups, including the Buy Clean Task Force announced in December 2021. For instance, DOE can utilize the Earthshot to provide recommendations on reasonable costs for steel included in a Buy Clean program, and provide technical assistance to innovators to access federal clean procurement efforts.

Frequently Asked Questions

Is a sector-focused Energy Earthshot really necessary?

The lower technology prices targeted by the Hydrogen Earthshot and the Carbon Negative Shot are necessary but not sufficient to guarantee that these technologies are deployed in the highest emissions producing sectors, such as steel, cement, and chemicals. The right combination of approaches to achieve price reduction remains uncertain and can vary by plant, location, process, product, as noted in a recent McKinsey study on decarbonization challenges across the industrial sector. Additionally, there is a high upfront cost to deploying novel solutions, and private financers are reluctant to take a risk on untested technologies. Nonetheless, to avoid creating overly balkanized sectoral strategies, it will be important for DOE to be very disciplined in identifying one or two essential sectors, such as metals, where the opportunity is large and strategic.

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Why are metals the best opportunity for a sector-focused Earthshot?

These products are ubiquitous and increasingly crucial for deploying the clean energy infrastructure necessary to reach net-zero. The United States of America has a long history of metals production, a skilled workforce, and strong labor and political coalitions in favor of restoring U.S. manufacturing leadership. Additionally, carbon-intensive steel from China has become a growing concern for U.S. manufacturers and policymakers; China produces 56% of global crude steel, followed by India (6%), Japan (5%), and then the U.S. (4%). The U.S. already maintains a strong competitive advantage in clean steel, and the technologies needed to double-down and fully decarbonize steel are close to commercialization, but still require government support to achieve cost parity.

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Will this Earthshot reduce U.S. metals manufacturing competitiveness?

U.S. steel production is already less polluting than many foreign sources, but that typically comes with additional costs. Reducing the “green premium” will help to keep US metal producers competitive, while preparing them for the needs of buyers, who are increasingly seeking out green steel products. End users such as Volkswagen are aiming for zero emissions across their entire value chain by 2050, while Mercedes-Benz and Volvo have already begun sourcing low-emissions steel for new autos. Meanwhile,  the EU is preparing to implement a carbon border adjustment mechanism that could result in higher prices for steel and aluminum-produced products from the United States. The ramifications of the carbon border tax are already being seen in steel agreements, such as the recent US-EU announcement to drop punitive tariffs on each other’s steel and aluminum exports and to begin talks on a carbon-based trade agreement.

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What is the right baseline to use for calculating the “green premium” of metals?

Breakthrough Energy estimated that the “green premium” for steel using carbon capture is approximately 16% – 29% higher than “normally” produced steel. Because there are a variety of processes that could be used to reduce emissions, and thus contribute to the “green premium,” there may not be a single number that can be estimated for the current costs. However, wherever possible, we advocate for using real-world data of “green” produced steel to estimate how close DOE is to achieving its benchmark targets in comparison to “traditional” steel.

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Summary

Congress, the White House, and federal agencies are growing increasingly concerned about the decline in U.S. industrial leadership. The emergence of China’s industrial dominance and the supply chain challenges exacerbated by the Covid pandemic have opened a political window of opportunity. With the Infrastructure Investment and Jobs Act, as well as pending U.S. competitiveness legislation, Congress and the White House are poised to direct significant investments to regions that have suffered from the decline of legacy industries, ranging from the Rust Belt to coal communities. Innovative energy technologies are at the center of this effort. Not only will clean energy supply chains be necessary for the U.S. to rise to the climate challenge, but they have emerged as the main battleground in global industrial competitiveness, as major economies around the world make significant investments in renewables, electric vehicles, and emerging technologies like clean hydrogen. 

There are a range of interventions underway across federal agencies to strengthen U.S. manufacturing and promote regional economic and workforce development. The Department of Energy (DOE) is a key player in fostering innovative manufacturing ecosystems around clean energy technologies and low-carbon industries. 

For nearly half a century, DOE’s State Energy Program (SEP) has supported state leaders as they plan for a clean energy future. However, a resilient, secure, and prosperous clean energy economy increasingly demands investments in advanced energy manufacturing and supply chains. This memo proposes that the Administration update SEP to the State Energy and Manufacturing Program (SEMP), and outlines a specific set of reforms — many of which fall within existing program authorities — that will empower states and regions to foster a strong clean energy manufacturing base and enhance U.S industrial leadership.

Challenge and Opportunity

This Administration and Congress have identified regional innovation as a critical area to advance U.S. competitiveness and economic revitalization. This regional approach is woven throughout the bipartisan Infrastructure Investment and Jobs Act (IIJA), which includes regional hubs for clean hydrogen and other emerging technologies; the U.S. Innovation and Competition Act (and its House companion, the America COMPETES Act), which includes funding for regional innovation clusters; the Build Back Better Regional Challenge funded under the American Rescue Plan, which devotes $1 billion to revitalizing regions suffering from disinvestment; the Interagency Working Group on Coal and Power Plant Communities and Economic Revitalization; and the White House’s supply chain and industrial decarbonization efforts.

These investments also recognize that global growth sectors align with decarbonization. Despite U.S. leadership in R&D for solar photovoltaics, electric vehicles, advanced nuclear reactors, and more, the U.S. has failed to retain significant domestic manufacturing capacity for the energy technologies of the future, posing risks to middle-class jobs, energy security, and climate action in the years ahead. 

Today, China owns 80 percent of the solar supply chain, produces roughly half the globe’s electric vehicles, and leads the world in clean energy investments, spending more than double that of the U.S. While major announcements from U.S. automakers in the past year have brought hope of American electric vehicle leadership, other clean energy industries are struggling in the absence of U.S. manufacturing incentives. 

DOE’s recent supply chain report highlights the need to “leverage regional assets, including resources and workforce development, to support the creation and expansion of industrial clusters” and identifies a range of avenues to provide regional technical assistance. It also states that DOE should “consider whether new authority is needed to enable federal awards, matching grants, direct loan, and loan guarantees to support creation of these clean energy manufacturing clusters and leverage existing public programs (federal, state, local) for regional innovation and manufacturing ecosystems.”

One existing program which could be leveraged in this effort is the State Energy Program (SEP). SEP was authorized by the Energy Policy and Conservation Act of 1975, passed in response to the energy crises of the 1970s. The program has historically provided cost-shared technical assistance to states to aid in energy conservation planning, as well as some limited financial assistance (i.e., revolving loan funds) for states to increase energy efficiency and clean energy in public operations, such as municipal buildings and schools. The program has five goals:

• Increase the energy efficiency of the U.S. economy; 

• Implement energy security, resiliency, and emergency preparedness plans;

• Reduce energy costs and energy waste;

• Increase investments to expand the use of energy resources abundant in states; and

• Promote economic growth with improved environmental quality.

SEP is considered highly effective, with a leverage ratio of 1:11 between federal and non-federal (including private) funds, annual energy cost savings of $7 for every $1 spent, and hundreds of thousands of students educated in energy efficiency.

Congress and DOE have proposed expansions to the scope, scale, and targeting of SEP in the past (see FAQ #2). These increases in funding and prioritization for low-income and environmental justice communities are well-warranted given the SEP’s strong track record and high return-on-investment, but so too should the scope of funds be updated to reflect our modern supply chain challenges. Energy supply chains and clean U.S. manufacturing have become bipartisan priorities and critical elements of meeting U.S. climate goals.

In the absence of additional support for regional clean energy supply chains, it is highly likely that the U.S. will continue to cede ground to foreign competitors in the energy technologies of the future and grow increasingly reliant on materials manufactured abroad. This poses risks to our ability to mitigate climate change, ensure energy security and national security, and capture the economic benefits of the clean energy revolution. It also is likely to inhibit energy innovation, as regional manufacturing clusters promote “learning-by-doing” and drive advances in material sciences and processes that are simply not possible to achieve in the lab. Finally, maintaining a narrow focus on energy conservation could limit the ability for all states to plan effectively for the clean energy future and develop comparative advantages; even after accounting for population, states do not participate evenly in all aspects of the program based on their needs, interests, and capabilities (see ORNL program evaluation, Figures 3-32). An expanded mandate could increase uptake of the program among states that may have a strong manufacturing base but have been unable to maximize the benefits of a program with a more narrow scope.

Therefore, DOE should leverage its existing authority to rename the program to the State Energy and Manufacturing Program (SEMP) and expand technical and financial assistance to include clean energy supply chain planning. At the same time, Congress should reauthorize, update, and increase funding for the program to ensure states have the ability to develop robust regional clean manufacturing hubs. As domestic clean energy supply chains emerge as a critical element of the national climate, manufacturing, and jobs agenda, this remains pursuant to the program’s goals of promoting energy security, resilience, and economic growth.

Plan of Action

The following action plan includes both executive and legislative actions to update SEP to enable states to plan for and develop a strong U.S. manufacturing base for clean energy. These actions should be implemented in Program Year 2023, with new program guidance issued in early 2023.

Recommendation 1. Make manufacturing an explicit goal of SEP and begin providing technical assistance for clean energy supply chain and manufacturing planning.

Manufacturing is critical to the program goals of energy security, resilience, and economic growth. To indicate its expanded mission, DOE should update the name of SEP to the “State Energy and Manufacturing Program (SEMP)” and begin providing technical assistance to support local and state clean energy supply chains and manufacturing capacity. While Congress should codify this goal, DOE can begin today by leveraging existing authorities like the Energy Technology Commercialization Services Program (42 U.S. Code § 6322(f)). This optional program helps small businesses and start-ups manufacture clean energy technologies (see FAQ #1). DOE can also consider whether to reinstate Renewable Energy Market Development programs, which under the American Recovery and Reinvestment Act (ARRA) covered efforts to “develop or expand existing manufacturing capacity for renewable energy equipment and components and support development of specific renewable energy facilities.” 

Recommendation 2. Extend eligibility of technical assistance to consortia of states to support regional planning. 

SEP is an arrangement between DOE and designated state energy offices. DOE should foster regional clean manufacturing ecosystems by issuing new program guidance that enables states to submit collaborative energy plans, particularly for optional plan components. 

Recommendation 3. Increase scale of funding and expand funding mechanisms. 

To enable more robust utilization of existing programs and expansion to manufacturing activities, Congress should increase overall funding for core SEMP activities to roughly $400 million per year (not including additional funding for challenge grants), commensurate with levels proposed by Congress in the CLEAN Future Act (see FAQ #2). Additionally, Congress should explicitly include clean energy and low-carbon manufacturing planning within the core SEMP planning and technical assistance process, and create a new revolving loan fund, the State Advanced Energy Manufacturing Fund, to provide additional financial support to states to use on manufacturing projects. As with SEP’s existing revolving loan fund for building efficiency, these funds could be distributed once the state has “demonstrated a commitment” to promoting clean energy manufacturing through state and private efforts.

Recommendation 4. Direct states to consider opportunities to coordinate with the Department of Commerce, Regional Commissions, and other DOE-led manufacturing initiatives. 

Several federal government programs, including the Economic Development Administration and Appalachian Regional Commission, already focus heavily on regional development strategies, which tend to consider advanced manufacturing opportunities. There are several existing DOE-led and DOE-adjacent initiatives that contribute to this mission as well, including DOE’s Advanced Manufacturing Office, the National Institute of Standards and Technology’s Manufacturing Extension Program (MEP), the Manufacturing USA institutes, and DOE battery manufacturing grants and hydrogen hubs authorized in IIJA. IIJA also authorized a new State Manufacturing Leadership program to provide competitive financial assistance to states that develop smart manufacturing programs.¹ This program is fundamentally different from SEP – it provides short-term competitive assistance rather than long-term block grants, and focuses on advanced manufacturing techniques regardless of sector rather than clean energy supply chains specifically. However, it could be merged with an expanded SEMP, or at least closely coordinated. Additional legislation, such as the COMPETES Act — which contains funding for regional innovation hubs, microelectronics research centers, and direct grants for solar and semiconductor manufacturing — could build upon these regional ecosystems.

SEMP can and should complement these efforts by providing consistent, long-term support directly to state governments, rather than specific projects or companies, to effectively plan and coordinate regional development strategies focused on clean energy technologies. This will enable states to develop and execute on regional manufacturing roadmaps over the course of decades. To do so effectively, SEMP should coordinate with related programs and agencies to identify strategic opportunities for clean energy manufacturing, particularly during the guidance development process.

Recommendation 5. Direct states to dedicate at least forty percent of funds to low-income, environmental justice, and energy communities. 

Under the Biden-Harris Administration’s Justice 40 commitment, forty percent of DOE funds are to be directed to underserved communities. Clean manufacturing can be a crucial tool for promoting economic revitalization and environmental justice in these communities, including those that have historically hosted emissions-intensive manufacturing facilities or fossil fuel production. DOE’s Office of Economic Impact and Diversity should help to connect states with tools, such as its energy justice dashboard and the funding clearinghouse from the Interagency Working Group on Coal & Power Plant Communities, and provide technical assistance to identify and prioritize these communities in SEMP-supported initiatives. 

Frequently Asked Questions

Are these reforms to the State Energy Program within statutory authority?

Yes. Under existing authority, SEP technical assistance and funds support state energy plans that include a series of mandatory components focused on efficiency, but may also include additional measures to promote renewable energy commercialization, manufacturing, and deployment. During the ARRA-era expansion of SEP, more than $250 million in assistance went to the purpose of “Renewable Energy Market Development,” which aimed to “develop or expand existing manufacturing capacity for renewable energy equipment and components and support development of specific renewable energy facilities.” Three specific provisions that may support manufacturing efforts are 42 U.S. Code § 6322(d)(11), “programs to promote energy efficiency as an integral component of economic development planning;”[1] 42 U.S. Code § 6322(d)(7), “programs to promote the adoption of integrated energy plans which provide for . . . evaluation of a State’s . . . available energy resources . . . and . . . energy supplies;”[2] and 42 U.S. Code § 6322(f),  the Energy Technology Commercialization Services Program. Under the latter, states can devise plans to:

1. aid small and start-up businesses in discovering useful and practical information relating to manufacturing and commercial production techniques and costs associated with new energy technologies;


2. encourage the application of such information in order to solve energy technology product development and manufacturing problems;


3. establish an Energy Technology Commercialization Services Program affiliated with an existing entity in each State;


4. coordinate engineers and manufacturers to aid small and start-up businesses in solving specific technical problems and improving the cost effectiveness of methods for manufacturing new energy technologies;


5.  assist small and start-up businesses in preparing the technical portions of proposals seeking financial assistance for new energy technology commercialization; and


6.  facilitate contract research between university faculty and students and small start-up businesses, in order to improve energy technology product development and independent quality control testing.

[1] “[E]nergy efficient, next-generation materials and innovative process technologies” align with DOE’s efforts on advanced manufacturing. See DOE Advanced Manufacturing Office, Research & Development.

[2]  Integrated resource planning often addresses fuel (e.g., coal, natural gas) availability, and with the 21st century’s rapid deployment of renewable energy and battery storage facilities, it is now additionally critical to analyze and promote plans to strengthen the supply chain for renewable energy and battery storage components.

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Has SEP been expanded in the past?

While annual block funding for states has settled at $62.5 million in recent years, Congress has pursued significant expansions to SEP. ARRA provided more than $3 billion to SEP, with no matching requirements for states, as part of its temporary green stimulus (the program created more than 100,000 jobs). ARRA also temporarily expanded SEP’s activities to broader clean energy market development, including manufacturing. In the current Congress, the CLEAN Future Act proposes an infusion of $3.6 billion over ten years in formula grants to states to enable states, localities, and tribes to reduce emissions, deploy clean energy, and improve efficiency at public facilities. At least 40% of funds would need to be set aside for environmental justice and/or low-income communities. Last year, IIJA authorized a State Manufacturing Leadership program that, while not explicitly a part of SEP, could provide a blueprint for an expanded state block grant program. Finally, DOE’s FY22 budget justification also requested $300 million to enable “Build Back Better Challenge grants to incubate novel approaches to clean energy technology deployment, prioritizing investments that meet energy needs at the local level, and are inclusive in elevating impoverished and disenfranchised communities, and/or communities that have been marginalized or overburdened.” The final FY22 appropriations bill provided $70 million for SEP and $20 million for the challenge grants, per the Senate report.

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Why are existing SEP funding levels insufficient?

By many measures, the U.S. is not deploying energy efficiency, clean electricity, and other decarbonization technologies at the speed necessary to avoid the worst effects of climate change. According to the International Energy Agency, if we hope to get on track to net-zero emissions by 2050, the global community will need to roughly triple investment in clean technology to more than $4 trillion by 2030. Our top economic competitor, China, is poised to capture a much larger share of this economic opportunity than the U.S., largely due to their proactive work to build out their supply chains. For instance, in the next two years, analysts forecast that China’s manufacturing capacity for wind and batteries will grow 42 and 150 percent, respectively. All of this points to the need for significant additional funding for programs that accelerate deployment of clean energy in the United States.

The ARRA-era expansion of SEP showed that states have the capacity to absorb significantly larger sums while maintaining strong returns-on-investment, leverage ratios, and job creation figures. For instance, ARRA funds amounted to a highly-efficient $14,000 per job created, inclusive of direct, indirect, and induced jobs. The funding levels proposed in this policy brief are an order of magnitude smaller than those in ARRA, but are aligned with recommendations from the Biden Administration’s DOE and the current Congress.

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Why is SEP funding for manufacturing planning needed on top of related EDA funding and initiatives?

SEP funding provides consistent, direct support to state governments to enable effective long-term planning for clean energy and energy security, of which manufacturing and supply chains are a critical component. As the U.S. looks to strengthen its energy sector industrial base (ESIB), sustained and strategic regional planning efforts will be paramount. Since SEP provides regular block funding to states every year and has enjoyed decades of bipartisan support and a strong evidence base of success, a reauthorized SEMP can ensure that state, local, and Tribal governments have the tools they need to plan effectively over the long haul. While coordination with EDA technical assistance, public works, and other programs will be important, EDA provides more project-based funding at the local level, operates on shorter timeframes, and may or may not be ESIB-oriented.

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Are state energy offices likely to be enthusiastic about expanded support?

The cost-shared structure of SEMP ensures that states are committed to the projects they undertake, and the historically high leverage ratio of federal to non-federal funds, sustained under a major funding influx through ARRA, suggests that states have an interest in more robust state energy planning and project development, and are therefore likely to welcome additional support. This extends to private actors as well. According to a 2015 program evaluation, “A number of studies of SEP activities have found that sponsors of ratepayer-funded programs collaborated closely with state energy offices to leverage their own resources, especially with the influx of ARRA funding. This means that, ‘in the absence of the program, the array of resources available to market actors in the [programmatic activity] would have been reduced not only by the absence of the SEP [programmatic] activities, but by a reduction in the level of resources available from other program sponsors.”

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On September 16th, 2021, the Day One Project convened a closed-door listening session for interagency government leaders to hear from co-founders and supply-chain leaders of 10 startups in critical industries — bioeconomy, cleantech, semiconductor — about challenges and opportunities to scale their operations and improve resilience in the United States. The panel was moderated by Elisabeth Reynolds, Special Assistant to the President for Manufacturing and Economic Development. The overarching theme is that for innovative companies in critical industries, the path of least resistance for scaling production is not in the United States — but it could be.

Unlike many startups that are purely software based and can scale quickly with little capital expenditure, these companies produce a product that requires manufacturing expertise and can take longer and more capital to grow to scale. Capital markets and government programs are often not well aligned with the needs of these companies, leaving the country at risk that many of the most cutting-edge technologies are invented here, but made elsewhere. As there is a tight relationship between the learning-by-building phase of scale up and innovation capacity, outsourcing production poses a threat to U.S. competitiveness. The country also risks losing the downstream quality manufacturing jobs that could stimulate economic growth in regions across the country.

Key Takeaways:

Challenges

• Overseas government incentives and manufacturing ecosystems, like intellectual property support, subsidies, and more available advanced manufacturing technology options, are more attractive than U.S. offerings.
• Shortcomings with existing federal programs and funding include a lack of government outreach to navigate the complexity of opportunities, regulations that delay access to funding on appropriate timelines, and misplaced emphasis away from commercialization.
• Supply chain gaps and opportunities for sustainable manufacturing in the United States were identified in quantum and bioindustry sectors.

Solutions

• Additional government financing mechanisms, like tax-credits for R&D and renewable tech and government co-investment opportunities through an expanded EXIM Bank, In-Q-Tel, J2 Ventures, and programs like the Development Finance Corporation (DFC) were highly encouraged.
• Improving government processes and regulations through reducing funding application timelines in the Department of Energy’s Loan Program Office or providing better guidance over The Committee on Foreign Investment in the United States (CFIUS) restrictions on quantum companies’ foreign acquisitions.
• Government demand-pull incentives were the most important solution recommended by startups in order to guide the development of technology from basic science to commercialization.

Challenges

There are significant challenges to taking advanced technology from earlier R&D phases to manufacturing products that demonstrate viability at scale. Available financing opportunities do not adequately support longer time horizons or larger capital requirements. A lack of manufacturing and engineering skills pose another barrier to scaling a product from prototype to pilot to commercial production. After many decades of disinvestment in the country’s manufacturing base, overcoming these challenges will be difficult but essential if we are to grow and benefit from our most innovative, emerging companies. As two of the bioeconomy startups stated:

“The USG knows how to fund research and purchase finished products. There is not enough money, and far more problematically, not nearly enough skilled Sherpas to fill the gap in between.”

“Manufacturing … has been considered as a “cost center,” … reducing cost of manufacturing (e.g., moving manufacturing sites offshore) is one of the major themes … Rarely there are investments or financing opportunities coming to the sector to develop new technologies that can drive innovation…the types of investment are usually very large (e.g., capex for building a manufacturing plant). As a result, it has been very hard for startups which dedicate themselves to novel, next generation manufacturing technologies to raise or secure sufficient funding.”

During the conversation, three specific challenges were identified that speak to key factors that contribute to this manufacturing gap in the United States:

1) Overseas Government Incentives and Manufacturing Ecosystems

The startups largely agreed that overseas governments provide more incentives to manufacture than the United States. Often, these countries have developed “manufacturing-led” ecosystems of private companies and other institutions that can reliably deliver critical inputs, whether as part of their value chain, or in terms of their broader development needs. Some examples from the companies include:

• “A Dutch-owned manufacturing plant in Brazil was designed to produce 30 million gallons of oil from algae; the favorable rates for such an endeavor were only made possible by the financing provided by the Brazilian Development Bank to bridge the gap of scale.” —Bioeconomy startup.
• “Currently, with a lack of biomanufacturing capacity in the US, there is a scramble for companies trying to secure capacity at contract manufacturing facilities, which are usually filled. Many are looking to other countries for scale up.” — Bioeconomy startup.
• “There are far more off-shore companies that support semiconductor packaging, manufacturing, and testing … given the volumes of these companies, it is much cheaper to do this off-shore…as foreign fabrication facilities have more technically advanced semiconductor manufacturing processes.” —Semiconductor startup.
• “The Taiwan Semiconductor Manufacturing Corporation (TSMC) also offers a much wider variety of IP support in their process libraries for semiconductors—much of this IP is production proven with a roadmap for support on future technology nodes.” —Semiconductor startup.

2) Shortcomings with Existing Federal Programs and Funding

The U.S. government has a wide range of programs that focus on supporting innovation and manufacturing. However, these programs are either targeted at the earlier stages of R&D and less on manufacturing scale up, are relatively small in scope, or involve time consuming and complicated processes to access them.

• “National Quantum Initiative allocates $1.4B towards the growth of the quantum industry and workforce, but most of this funding is going to National Labs. Larger contracts and grants to small businesses are needed.” —Semiconductor startup.

• “[Obtaining federal funding] is more complicated than going for venture backing or going to other countries.” —Semiconductor startup.
• “Regarding our knowledge of financing or other government support options currently available, I would say that any additional awareness, education or direction you can provide us with would be welcomed … even just making a single connection could prove beneficial and lower the burden [of figuring out how to access federal programs].” —Bioeconomy startup.
• “As we grew, we ran into early challenges convincing capital providers about the market drivers and perceptions about the waste industry and infrastructure …The time/timing of Department of Energy Loan Program Office funding has been a challenge taking over a year from review to award to project funding. Process doesn’t always match up with the speed of technology development and market need for commercialization.” —Cleantech startup.
• “Key U.S. federal agencies, most notably the National Security Agency (NSA), have publicly indicated a non-embrace of emerging quantum secure communication technology … The NSA position (which prefers new algorithm development) is greatly hampering VC investment in quantum component suppliers.” — Semiconductor startup.

3) Supply Chain Gaps and Opportunities for Sustainable Manufacturing in the U.S.

A few specific instances were described where the United States lacks access to critical inputs for bioeconomy and quantum development, as key suppliers are located abroad. However, as these emerging fields develop, critical inputs will change and present an opportunity to course correct. Therefore, improving our domestic manufacturing base now is vital for driving demand and establishing innovation ecosystems for industries of the future.

• “Quantum tech is going to be critical to the next century of product and tech development…The quantum supply chain currently has significant choke points for US suppliers. Many critical components (such as single frequency lasers, non-linear crystals, and InGaAs single photon detectors) are not available through US vendors.” —Semiconductor startup.
• “A lack of current capacity in the U.S. is also the opportunity for the industry as well to develop more sustainable processes, as new material inputs are developed and created, there will need to be new processes and new ways of manufacturing … With new bio inputs there is an opportunity to build up our biomanufacturing ability, produce on demand and rebuild that converter level, train a new workforce and create the building blocks for new materials that we need here to make products.“ —Bioeconomy startup.

Solutions

Startups commented on the importance of expanding funding opportunities, such as co- investment and tax credit solutions, as well as key process and regulatory changes. Most importantly, startups highlighted the importance of demand-pull mechanisms to help commercialize new technologies and create new markets.

1) Additional Government Financing Mechanisms

Several companies commented on the need to provide additional financing to support manufacturers, as equipment is often too expensive for venture avenues and other forms of capital are not readily available. These solutions include expanding government co- investment and leveraging tax credits.

• “Expanding the scope of the EXIM to support manufacturers looking to export materials and products abroad would be of interest. In the case of new, advanced biomaterials we have found that the EU is driving a great deal of demand interest as well as early adoption. Helping smaller companies with new materials developed in the US navigate this might benefit the speed of commercialization.” — Bioeconomy startup.
• “Two specific financing mechanisms to be expanded are 1) Increased funding for accelerator programs that support emerging US-based manufacturing companies and 2) government funding of venture capital companies like In-Q-Tel and J2 Ventures that can help support early-stage technology companies.” — Semiconductor startup.
• “Policymakers should support, maintain, and expand programs like the recent Development Finance Corporation’s investments [under Defense Production Act authority] to accelerate the domestic production of pharmaceuticals and active ingredients, particularly for essential medicines that are in short supply and often needed in response to public health emergencies.” —Bioeconomy startup.
• “The R&D Tax Credit is one of the most effective and efficient federal tax incentives for driving innovation across a variety of industries…an enhanced R&D tax credit for companies investing in research and development of technology to enable the domestic production of active pharmaceutical ingredients … would fully unlock the potential of synthetic biology and result in meaningful and immediate changes to the U.S. pharmaceutical supply chain.” —Bioeconomy startup.
• “Provided the incentives are set at adequate levels, incentives such as renewable energy and storage tax credits could be structured with bonuses to support domestic manufacturing in our selection of suppliers.” —Cleantech startup.

2) Improving Government Processes and Regulations

A few of the startups identified specific government processes or regulations that could be improved upon, such as application times for funding in energy sectors or restrictions in procurement or foreign acquisitions.

• “Department of Energy loan mechanisms appear to be developing positively, but for them to be effectively utilized, there needs to be a simple and swift process for application and decision making. We hear horror stories of 9 months to 3 years for this process currently.” —Bioeconomy startup.
• “In-Q-Tel is an excellent funding vehicle … However, they require a Department of Defense (DoD) sponsor. Given the stance of NSA, DoD sponsors are unwilling to support an investment in a non-NSA desired technology. This eliminates a critical government financing mechanism.” —Semiconductor startup.
• “Securing the US supply chain in quantum is going to require the acquisition of key foreign owned companies and processes. For small companies, these acquisitions are only possible when equity sharing is included in the negotiations. The Committee on Foreign Investment in the United States (CFIUS) restrictions greatly complicate these negotiations since foreign ownership in a US company that is producing products with national security implications is restricted. Although these restrictions are still needed, it would be helpful if CFIUS could provide more direct guidance to US companies negotiating the acquisition and transfer of foreign manufacturing capabilities.” —Semiconductor startup.

3) Government Demand-pull Incentives:

Most, if not all, startups felt that the best role for the government is in creating demand- pull incentives to support the development of technology from basic science to commercialization and help create new markets for leading-edge products. This can range from procurement contracts to new regulatory standards and requirements that can incent higher quality, domestic production.

• “The best role that the Department of Defense or other agencies can play is that they can help drive the demand for these technologies.” —Cleantech startup.
• “The most important thing that the Government can do to help speed the financing and adoption of new advanced materials is to help to build the pull through from research and new materials development to the final product … We believe that we have a once in a generation opportunity to re-imagine how we manufacture goods and products here in the US. We need to look at the whole of the supply chain from molecule and material inputs to final products. There has been a hollowing out of the middle of the supply chain for manufacturing here in the United States.” — Bioeconomy startup.
• “Policymakers should continue to invest in public-private partnerships like the Manufacturing USA Institutes, which brings together experts from government, academia, and industry to support projects from the research phase through the commercialization of innovative technologies.” —Bioeconomy startup.
• Examples:
  • “If there were a mechanism to incent companies and early adopters to reducetheir petroleum inputs and bridge the gap all the way to the domestically sourced chemical inputs to their domestic manufacturing it could help to create more secure supply chains.” —Bioeconomy startup.
  • “Domestic procurement requirements … could stimulate investment in domestic pharmaceutical supply chain[s] … Policymakers should consider maintaining a list of essential medicines and give preference to domestically sourced pharmaceuticals (and active ingredients) in any federal procurement programs” —Bioeconomy startup.
  • “Policymakers should consider directing the Food and Drug Administration to create a priority review designation for domestically sourced pharmaceutical products and active ingredients. By moving these products to the top of the priority list, manufacturers would have another incentive to change supply chain practices and shift production back to the United States.” —Bioeconomy startup.

Conclusion

These anecdotes provide a small window into some of the challenges startups face scaling their innovative technologies in the United States. Fixing our scale up ecosystem to support more investment in the later-stage manufacturing and growth of these companies is essential for U.S. leadership in emerging technologies and industries. The fixes are many — large and small, financial and regulatory, product and process-oriented — but now is a moment of opportunity to change pace from the past several decades. By addressing these challenges, the United States can build the next generation of U.S.-based advanced manufacturing companies that create good quality, middle-skill jobs in regions across the country. The Biden-Harris Administration has outlined a new industrial strategy that seeks to realize this vision and ensure U.S. global technological and economic leadership, but it’s success will require informing policy efforts with on-the-ground perspectives from small- and medium-sized private enterprises.

S. 1605 — National Defense Authorization Act for Fiscal Year 2022

​SEC. 1004. Commission on Planning, Programming, Budgeting, and Execution Reform.

            (a) Establishment.–

                         (1) In general.–There is hereby established an independent commission in the legislative branch to be known as the “Commission on Planning, Programming, Budgeting, and Execution Reform” (in this section referred to as the “Commission”).

                        (2) Date of establishment.–The Commission shall be established not later 30 days after the date of the enactment of this Act.

            (b) Membership.–

                        (1) Number and appointment.–The Commission shall be composed of 14 civilian individuals not employed by the Federal Government who are recognized experts and have relevant professional experience one or more of the following:

                                    (A) Matters relating to the planning, programming, budgeting, and execution process of the Department of Defense.

                                    (B) Innovative budgeting and resource allocation methods of the private sector.

                                    (C) Iterative design and acquisition process.

                                    (D) Budget or program execution data analysis.

                        (2) Members.–The members shall be appointed as follows:

                                    (A) The Secretary of Defense shall appoint two members.

                                    (B) The Majority Leader and the Minority Leader of the Senate shall each appoint one member.

                                    (C) The Speaker of the House of Representatives and the Minority Leader shall each appoint one member.

                                    (D) The Chair and the Ranking Member of the Committee on Armed Services of the Senate shall each appoint one member.

                                    (E) The Chair and the Ranking Member of the Committee on Armed Services of the House of Representatives shall each appoint one member.

                                    (F) The Chair and the Ranking Member of the Committee on Appropriations of the Senate shall each appoint one member.

                                    (G) The Chair and the Ranking Member of the Committee on Appropriations of the House of Representatives shall each appoint one member.

                        (3) Deadline for appointment.–Not later than 30 days after the date described in subsection (a)(2), members shall be appointed to the Commission.

                        (4) Expiration of appointment authority.–The authority to make appointments under this subsection shall expire on the date described in subsection (a)(2), and the number of members of the Commission shall be reduced by the number equal to the number of appointments so not made.

            (c) Chair and Vice Chair.–The Commission shall elect a Chair and Vice Chair from among its members.

            (d) Period of Appointment and Vacancies.–Members shall be appointed for the term of the Commission. A vacancy in the Commission shall not affect its powers and shall be filled in the same manner as the original appointment was made.

            (e) Purpose.–The purpose of the Commission is to–

                        (1) examine the effectiveness of the planning, programming, budgeting, and execution process and adjacent practices of the Department of Defense, particularly with respect to facilitating defense modernization;

                        (2) consider potential alternatives to such process and practices to maximize the ability of the Department of Defense to respond in a timely manner to current and future threats; and

                        (3) make legislative and policy recommendations to improve such process and practices in order to field the operational capabilities necessary to outpace near-peer competitors, provide data and analytical insight, and support an integrated budget that is aligned with strategic defense objectives.

            (f) Scope and Duties.–The Commission shall perform the following duties:

                        (1) Compare the planning, programming, budgeting, and execution process of the Department of Defense, including the development and production of documents including the Defense Planning Guidance (described in section 113(g) of title 10, United States Code), the Program Objective Memorandum, and the Budget Estimate Submission, with similar processes of private industry, other Federal agencies, and other countries.

                        (2) Conduct a comprehensive assessment of the efficacy and efficiency of all phases and aspects of the planning, programming, budgeting, and execution process, which shall include an assessment of–

                                    (A) the roles of Department officials and the timelines to complete each such phase or aspect;

                                    (B) the structure of the budget of Department of Defense, including the effectiveness of categorizing the budget by program, appropriations account, major force program, budget activity, and line item, and whether this structure supports modern warfighting requirements for speed, agility, iterative development, testing, and fielding;

                                    (C) a review of how the process supports joint efforts, capability and platform lifecycles, and transitioning technologies to production;

                                    (D) the timelines, mechanisms, and systems for presenting and justifying the budget of Department of Defense, monitoring program execution and Department of Defense budget execution, and developing requirements and performance metrics;

                                    (E) a review of the financial management systems of the Department of Defense, including policies, procedures, past and planned investments, and recommendations related to replacing, modifying, and improving such systems to ensure that such systems and related processes of the Department result in–

                                                (i) effective internal controls;

                                                (ii) the ability to achieve auditable financial statements; and

                                                (iii) the ability to meet other financial management and operational needs; and

                                    (F) a review of budgeting methodologies and strategies of near-peer competitors to understand if and how such competitors can address current and future threats more or less successfully than the United States.

                        (3) Develop and propose recommendations to improve the effectiveness of the planning, programming, budgeting, and execution process.

            (g) Commission Report and Recommendations.–

                        (1) Interim report.–Not later than February 6, 2023, the Commission shall submit to the Secretary of Defense and the congressional defense committees an interim report including the following:

                                    (A) An examination of the development of the documents described in subsection (f)(1).

                                    (B) An analysis of the timelines involved in developing an annual budget request and the future-years defense program (as described in section 221 of title 10, United States Code), including the ability to make changes to such request or such program within those timelines.

                                    (C) A review of the sufficiency of the civilian personnel workforce in the Office of the Secretary of Defense and the Office of Cost Assessment and Program Evaluation to conduct budgetary and program evaluation analysis.

                                    (D) An examination of efforts by the Department of Defense to develop new and agile programming and budgeting to enable the United States to more effectively counter near-peer competitors.

                                    (E) A review of the frequency and sufficiency of budget and program execution analysis, to include any existing data analytics tools and any suggested improvements.

                                    (F) Recommendations for internal reform to the Department relating to the planning, programming, budgeting, and execution process for the Department of Defense to make internally.

                                    (G) Recommendations for reform to the planning, programming, budgeting, and execution process that require statutory changes.

                                    (H) Any other matters the Commission considers appropriate.

                        (2) Final report.–Not later than September 1, 2023, the Commission shall submit to the Secretary of Defense and the congressional defense committees a final report that includes the elements required under paragraph (1).

                        (3) Briefings.–Not later than 180 days after the date specified in subsection (a)(2), and not later than 30 days after each of the interim and final reports are submitted, the Commission shall provide to the congressional defense committees a briefing on the status of the review and assessment conducted under subsection (f) and include a discussion of any interim or final recommendations.

                        (4) Form.–The reports submitted to Congress under paragraphs (1) and (2) shall be submitted in unclassified form but may include a classified annex.

            (h) Government Cooperation.–

                        (1) Cooperation.–In carrying out its duties, the Commission shall receive the full and timely cooperation of the Secretary of Defense in providing the Commission with analysis, briefings, and other information necessary for the fulfillment of its responsibilities.

                        (2) Liaison.–The Secretary shall designate at least one officer or employee of the Department of Defense to serve as a liaison between the Department and the Commission.

                        (3) Detailees authorized.–The Secretary may provide, and the Commission may accept and employ, personnel detailed from the Department of Defense, without reimbursement.

                        (4) Facilitation.–

                                    (A) Independent, non-government institute.–Not later than 45 days after the date specified in subsection (a)(2), the Secretary of Defense shall make available to the Commission the services of an independent, nongovernmental organization, described under section 501(c)(3) of the Internal Revenue Code of 1986 and which is exempt from taxation under section 501(a) of such Code, which has recognized credentials and expertise in national security and military affairs, in order to facilitate the discharge of the duties of the Commission under this section.

                                    (B) Federally funded research and development center.–On request of the Commission, the Secretary of Defense shall make available the services of a federally funded research and development center in order to enhance the discharge of the duties of the Commission under this section.

            (i) Staff.–

                        (1) Status as federal employees.–Notwithstanding the requirements of section 2105 of title 5, United States Code, including the required supervision under subsection (a)(3) of such section, the members of the commission shall be deemed to be Federal employees.

                        (2) Executive director.–The Commission shall appoint and fix the rate of basic pay for an Executive Director in accordance with section 3161(d) of title 5, United States Code.

                        (3) Pay.–The Executive Director, with the approval of the Commission, may appoint and fix the rate of basic pay for additional personnel as staff of the Commission in accordance with section 3161(d) of title 5, United States Code.

            (j) Personal Services.–

                        (1) Authority to procure.–The Commission may–

                                    (A) procure the services of experts or consultants (or of organizations of experts or consultants) in accordance with the provisions of section 3109 of title 5, United States Code; and

                                    (B) pay in connection with such services the travel expenses of experts or consultants, including transportation and per diem in lieu of subsistence, while such experts or consultants are traveling from their homes or places of business to duty stations.

                        (2) Maximum daily pay rates.–The daily rate paid an expert or consultant procured pursuant to paragraph (1) may not exceed the daily rate paid a person occupying a position at level IV of the Executive Schedule under section 5315 of title 5, United States Code.

            (k) Authority to Accept Gifts.–The Commission may accept, use, and dispose of gifts or donations of services, goods, and property from non-Federal entities for the purposes of aiding and facilitating the work of the Commission. The authority in this subsection does not extend to gifts of money. Gifts accepted under this authority shall be documented, and conflicts of interest or the appearance of conflicts of interest shall be avoided. Subject to the authority in this section, commissioners shall otherwise comply with rules set forth by the Select Committee on Ethics of the Senate and the Committee on Ethics of the House of Representatives governing Senate and House employees.

            (l) Legislative Advisory Committee.–The Commission shall operate as a legislative advisory committee and shall not be subject to the provisions of the Federal Advisory Committee Act (Public Law 92-463; 5 U.S.C. App) or section 552b, United States Code (commonly known as the Government in the Sunshine Act).

            (m) Contracting Authority.–The Commission may acquire administrative supplies and equipment for Commission use to the extent funds are available.

            (n) Use of Government Information.–The Commission may secure directly from any department or agency of the Federal Government such information as the Commission considers necessary to carry out its duties. Upon such request of the chair of the Commission, the head of such department or agency shall furnish such information to the Commission.

            (o) Postal Services.–The Commission may use the United States mail in the same manner and under the same conditions as departments and agencies of the United States.

            (p) Space for Use of Commission.–Not later than 30 days after the establishment date of the Commission, the Administrator of General Services, in consultation with the Commission, shall identify and make available suitable excess space within the Federal space inventory to house the operations of the Commission. If the Administrator is not able to make such suitable excess space available within such 30-day period, the Commission may lease space to the extent the funds are available.

            (q) Removal of Members.–A member may be removed from the Commission for cause by the individual serving in the position responsible for the original appointment of such member under subsection (b)(1), provided that notice has first been provided to such member of the cause for removal and voted and agreed upon by three quarters of the members serving. A vacancy created by the removal of a member under this subsection shall not affect the powers of the Commission, and shall be filled in the same manner as the original appointment was made.

            (r) Termination.–The Commission shall terminate 180 days after the date on which it submits the final report required by subsection (g)(2).

Summary

The Biden Administration should enhance the efforts of the U.S. Patent and Trademark Office (PTO) to defend against fraudulent trademark registrations. Since 2015, the PTO has struggled to cope with a rising flood of fraudulent trademark applications originating mainly from China. One study indicates that as many as two-thirds of Chinese trademark applications for certain classes of goods include falsified evidence that the applicant is using the mark in commerce in the United States — a requirement for trademark registration under U.S. law. High proportions (up to 40%) of these fraudulent applications survive the PTO’s application-review process and result in fraudulent trademark registrations.

Urgent action is necessary. The PTO reports that the trademark application rate has recently surged to extreme levels, which has doubled the number of applications awaiting examination. Many of these applications likely contain fraudulent claims of use. Identifying and denying fraudulent claims will help ensure that only those businesses that are actually using their trademarks in U.S. commerce benefit from the U.S. trademark system. In addition to creating a fair playing field for companies (both American and foreign) that abide by the rules, countering fraudulent trademark registrations will support American economic recovery from the COVID-19 pandemic by providing small businesses with robust protection for brand names of new products.

Summary

President Biden made advanced manufacturing a major policy priority during his campaign, including calling for a significant expansion of manufacturing programs to reach 50 communities through new manufacturing-technology hubs. Expanded manufacturing programs will invest in our nation’s long-term competitive innovation capacity. However, building these programs successfully requires a thoughtful and practical implementation plan. This memo presents two categories of recommendations to improve the U.S. advanced-manufacturing ecosystem:

1. Improve the existing Manufacturing USA institutes. Some new institutes are needed, but the Administration should concentrate first on strengthening support for the 16 existing Manufacturing USA Institutes, renewing the terms of institutes that are performing well, and expanding the reach of those institutes by launching more workforce-development programs, regional technology demonstration centers, initiatives to engage small- and mid-sized manufacturers and build regional manufacturing ecosystems.

2. Implement a multi-part strategy for collaboration among the Institutes: First, the Administration should create a “network function” across the Manufacturing USA Institutes because firms will need to adopt packages of manufacturing technologies not just one at a time. This could be supported by the National Institute of Standards and Technology (NIST) and would combine the advances of different Institutes and package them to be integrated and interoperable for easy adoption by firms. Second, a NIST-led traded-sector-analysis unit should be created to evaluate the manufacturing progress of other nations and inform Institute priorities. Third, the Administration should provide research and development (R&D) agencies with resources to build manufacturing-related R&D feeder systems (e.g., an expanded pipeline of manufacturing technologies) that aligns with Institute needs. Fourth, the administration should establish an Advanced Manufacturing Office within the White House National Economic Council to coordinate and champion all of the above, as well as numerous other manufacturing programs.

Improving university/corporate research partnerships is key to advancing U.S. competitiveness. Reform of the IRS rules surrounding corporate sponsored research taking place in university facilities funded by tax-exempt bonds has long been sought by the higher education community and will stimulate more public-private partnerships. With Congress considering new ways to fund research through a new NSF Technology Directorate and the possibility of a large infrastructure package, an opportunity is now open for Congress to address these long-standing reforms in IRS rules.

Challenge and Opportunity

Research partnerships between private companies and universities are critical to U.S. technology competitiveness. China and other countries are creating massive, government-funded research centers in artificial intelligence, robotics, quantum computing, biotechnology, and other critical sectors, threatening our nation’s international technology advantage. The United States has responded with initiatives such as the corporate research and development (R&D) tax credit, the SBIR and STTR programs, Manufacturing USA institutes, and numerous other programs and policies to assist tech development and encourage public-private collaborations. States and cities have mirrored these efforts, helping to build a network of innovation hubs in communities across the nation

The U.S. Innovation and Competition Act recently passed by the Senate is designed to build on this progress. A key provision of the Act is the establishment of a National Science Foundation (NSF) Directorate for Science and Technology that would “identify and develop opportunities to reduce barriers for technology transfer, including intellectual property frameworks between academia and industry, nonprofit entities, and the venture capital communities.”

One such barrier is the suite of “private use” rules surrounding corporate research taking place in university facilities financed with tax-exempt bonds. Tax-exempt bonds are a preferred financing option for university research facilities as they carry lower interest rates and more favorable terms. But the Internal Revenue Service (IRS) prohibition on “private business use“ of facilities financed using tax-exempt bonds have the unfortunate consequence of hamstringing the U.S. research enterprise. Current IRS rules place universities wishing to avoid concerns about sponsoring research from outside organizations to hold the rights to almost all intellectual property (IP) generated within their research facilities, even when the research is sponsored by private corporations. This can lead U.S. corporations wishing to retain IP rights to partner with universities overseas instead of U.S. universities institutions. Small technology companies whose business plans depend on their claim to IP rights may similarly avoid partnerships with universities.

Though the IRS has issued policies that aim to address these problems (e.g., Revenue Procedure 2007-47), such policies are so narrow in scope that most research partnerships between companies and universities are still considered private uses. As a result, universities engaged in cutting-edge, industry-relevant research face an unenviable choice: they must either (i) forego promising partnerships with the many companies unwilling to completely cede claims to IP rights, (ii) dedicate substantial time and administrative resources to track and report all specific instances of corporate-sponsored research occurring in facilities financed by tax-exempt bonds, or (iii) use funding that would otherwise be available for research to finance facilities through taxable bonds.

Forcing this choice upon universities further exacerbates a system of “haves” and “have-nots”. Large and/or well-endowed universities may have the financial resources to avoid relying on tax-exempt financing for research facilities, or to hire sophisticated and expensive legal expertise for help structuring financing in a way that complies with IRS rules. But for many — perhaps most — universities, the more viable solution is to avoid corporate-sponsored research altogether.

Complex federal rules governing intellectual property and private business use are widely acknowledged as an issue. A memo from the Association of American Universities (AAU), which represents the leading research universities in North America, notes that “[m]any universities believe that the remaining [IRS] private use regulations are overly restrictive” and “[limit] their ability to conduct certain cooperative research.” Similarly, the website of the Carnegie Mellon University Office of Sponsored Programs warns:

“While colleges and universities have lobbied the Internal Revenue Service to reconsider its position with respect to sponsored research in bond financed facilities, they have not, as yet, been successful. Consequently, if the University does not receive fair market royalties from the sponsors of sponsored research, it risks having its tax-exempt bonds become taxable, with all of the concomitant consequences.”

At a 2013 hearing on “Improving Technology Transfer at Universities, Research Institute and National Laboratories” before the U.S. House of Representatives Committee on Science, Space and Technology, several university witnesses and members of Congress commented on the complications that federal rules present for cooperative research conducted by universities working in partnership with corporations.

In 2014, Congress introduced H.R. 5829 to amend the Internal Revenue Code to provide an exception from the “business use” test for certain public-private research arrangements, but it did not pass as a stand-alone bill.

In June 2021, the American Council of Education and Association of American Universities released a letter to Congress on behalf of over 20 higher education organizations asking Congress to modernize rules on tax exempt bond financing.

Overly restrictive federal rules may hamstring bipartisan efforts by the new administration and Congress to accelerate tech commercialization and enhance U.S. competitiveness in science and technology (S&T). The recent U.S. Innovation and Competition Act, passed by the Senate, for instance, aims to support public-private partnerships, cross-sectoral innovation hubs, and other multistakeholder initiatives in priority S&T areas. But such initiatives may run afoul of rules on facilities financed by tax-exempt bonds…unless reforms are adopted.

Plan of Action

The administration should implement the following two reforms to clarify and update rules governing use of facilities financed by tax-exempt bonds:

1. Eliminate the requirement that universities must retain ownership to all IP generated in university-owned facilities financed by tax-exempt bonds. Instead, universities and corporations should be allowed to negotiate their own terms of IP ownership before entering a research partnership.
2. Broaden applicability of IRS safe-harbor provisions. IRS revenue procedures include safe-harbor provisions that exempt “basic research agreements” from restrictions on private business use. The IRS defines basic research as “any original investigation for the advancement of scientific knowledge not having a specific commercial objective.” This definition is too narrow. But especially today, the lines between “basic” and applied research are blurry — and virtually nonexistent when it comes to cutting-edge fields such as digitalization, biosciences, and quantum computing. The IRS should broaden the applicability of its safe-harbor provisions to include all research activities, not just ‘basic research’.

Together, these reforms would support new public-private initiatives by the federal government (such the research hubs funded under the U.S. Innovation and Competition Act); help emerging research universities (including minority-serving institutions such as historically black colleges and universities (HBCUs) and Hispanic-serving institutions (HSIs)) grow their profiles and better compete for talent and resources; and repatriate corporate research to the United States. Moreover — since other countries do not have similarly onerous restrictions on research activities conducted in facilities financed with tax-exempt bonds — these reforms are needed for the U.S. tech economy to remain competitive on an international scale.

These reforms require changes to tax laws, but do not require a direct outlay of federal appropriations. Reforms could be implemented as part of several tech-commercialization legislative packages expected to be considered by this Congress, including the U.S. Innovation and Competition Act or the proposed US Infrastructure bill.

Conclusion

As the Congress and the Administration explore ways to make the U.S. more technologically competitive, ensuring robust university-industry partnerships should be a key factor in any strategy. Reforming the current rules concerning corporate research performed in university facilities needs to be considered, given that the IRS rules have not been updated in over 30 years. The debate over the infrastructure bill or other competitiveness initiatives provides such an opportunity to make these reforms. Now is the time.