Energy technology is all the rage among innovation enthusiasts these days, especially here in Montana and around the Rocky Mountain West. Our governor, Brian Schweitzer, is a pragmatic technophile who's stumping aggressively for new coal technologies, and he just announced a partnership to build a massive coal-to-diesel plant in the depressed eastern part of the state. Oil shale and oil sands deposits across the mountain region – rich in energy but difficult and expensive to exploit – are being eyed anew.

Among farmers, and among big agriculture companies, ethanol is the rage. Wind, solar, nuclear, geo-thermal – all are now attracting attention even from venture capitalists like Vinod Khosla and John Doerr, Silicon Valley superstars who until recently stuck to computers and the internet.

Yet appealing as it is to think that we can apply the Silicon Valley model of innovation to the energy problem, the fundamentals of energy technology are completely different. Computer and communications products benefit from scale economies that almost always drive the cost of successful gadgets or services down over time. With energy, the costs of the basic inputs can actually increase with volume, and the economics depend on pricing that is determined by politics, regulation (or lack thereof) and unpredictable international market forces.

Take coal technology, for example. The current processes for turning coal into diesel fuel produce a lot of greenhouse gases, and will be economical only if oil prices are high and environmental regulations are lax. So-called "clean coal" technologies for producing electricity raise the price of power plants by 15 per cent, and common sense suggests that even improved techniques will still cost more than conventional plants. In the absence of government mandates, it's not surprising that the many coal-fired power plants now on the drawing board in the West – where most of America's remaining coal reserves are located – are not slated to exploit new technologies.

The ethanol industry exists only because regulations require some ethanol in petrol, and it still isn't clear whether the corn-based process in use in the US is sustainable; if enough corn is used for fuel, the increased demand for corn may force up the price and make the whole process uneconomic. Oil sands and other alterative fossil fuels make sense only when oil prices are closer to $80 a barrel than to $40. Solar, similarly, is still dependent on tax credits to make it competitive (though at least photo-voltaic solar systems, based on semiconductor technology, do enjoy some of the same pricing dynamics as computer technologies).

The Rocky Mountain West knows all-too-well the consequences of an innovation economy built on the vicissitudes of global oil prices and political expediency. The oil crisis of the late 1970s prompted a drilling boom and the Carter Administration's infamous synthetic fuels program. When oil prices crashed in the 1980s and a free-market Administration took office, entire towns collapsed as exciting new technologies suddenly became grossly uneconomical.

Government subsidies for new energy technologies definitely carry a lot of risk: it can be hard to tell if a new process really works until it is deployed on an industrial scale, and there's lots of room for smooth talkers to take the government's money for dubious projects. Tax credits for alternative energy have often been abused.

Yet it is screamingly obvious that a certain amount of price predictability in energy markets would be a great boon to energy innovation, and the government could accomplish that easily enough through tax policy. A gasoline tax that rose when oil prices were low and declined when they were high would give entrepreneurs a clear target; if they can come up with a way to produce energy for X dollars per unit, they could forge ahead without worrying that the market price might suddenly fall below X and render their whole exercise futile.

American entrepreneurs like to think that their successes or failures come despite whatever the government might do, and of course that has never been the case. The Department of Defense played a huge role in the development of everything from the cellphone to the internet itself, and regulatory policy has always had a huge influence on innovation.

When it comes to energy, the government's role could hardly be more central. We can't invent our way out of oil dependence or global warming – or at least we can’t unless politicians and regulators deploy both their carrots and their sticks.

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Jonathan Weber is the founder and editor in chief of NewWest.Net, a new type of regional news and information service focused on the Rocky Mountain West in the United States. He was previously the co-founder and editor in chief of the Industry Standard

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