Private Ordering and Public Energy Innovation Policy

Abstract

Nascent development in alternative energy technologies can be greatly affected by intellectual property environments. Tight control over foundational patent rights by a few companies can hold up commercialization. Conversely, widely dispersed ownership can create thickets that discourage innovation investment ex ante. Given the high technology nature of the most promising alternative energy proposals, such IP impacts are of great concern. This article considers the issue in the specific context of the most widely used alternative fuel source, ethanol-based biofuels. It finds that the ownership environment is quite diverse and theoretically ripe for a so-called anticommons effect. However, using analogies to general agricultural biotechnology, the article demonstrates that the biofuel patent environment is likely to undergo a striking transformation through the effects of private ordering. It articulates a general model of ordering behavior and suggests the most important conditions that facilitate ordering in particular industries. The article concludes that market-based reordering of patent ownership, although not without negatives, may promote efficient commercialization and blunt the need for government intervention in certain alternative energies. It should be factored into any rational public energy policy.

Keywords: patents, alternative energy, biofuel, anticommons, intellectual property, ethanol

JEL Classification: K11, Q34, Q40, Q42