On Dec. 19, President George W. Bush signed into law the Energy Independence & Security Act of 2007, a bill that, among other things, raised fuel economy standards for the first time in 32 years and set a Renewable Fuel Standard that will mandate the use of renewable biofuels by energy producers. He defined it as “a significant step” towards energy independence. And indeed, it is progress if you compare it to this Administration’s previous laissez-faire approach to fuel economy standards. But what of energy innovation?

The bill’s support of renewable fuels—specifically, a mandate that fuel producers use 36 billion gallons of renewables by 2022—should have sparked innovation in the energy sector. But instead of laying out a vision—ending U.S. dependence on foreign oil and shifting to cleaner fuels—and letting inventors and entrepreneurs develop the technologies that would realize that vision, Washington’s policymakers threw their weight behind one specific alternative fuel: ethanol.

Ethanol, and especially the corn-based ethanol that is predominant in the U.S. today, has long been controversial, with critics pointing out that turning corn into fuel requires too much energy to be environmentally efficient. Other criticisms are that it drives up food prices, risks depleting aquifers, and intensifies farm-field runoff that causes dead zones in the sea. Largely overlooked

Setting aside these worrisome issues, many have argued that the biofuel requirements mandated by the new bill will be impossible to meet using ethanol, even the cellulosic variety derived from woody plant materials. Yet the bill largely overlooked other alternative energy sources, from solar and hydroelectric to the newer fuels being produced by companies like LS9, the San Carlos (Calif.) developer of “renewable petroleum.” LS9, which was recently selected as one of the World Economic Forum’s 39 Technology Pioneers for 2008, says its fuel will be commercially available by 2010.

After the energy bill was passed, senior writer «www.businessweek.com» spoke with David Berry, a principal at Flagship Ventures, the VC firm behind LS9. Berry—who at 29 holds an MD, a PhD, and was recently named Innovator of the Year by MIT’s Technology Review magazine—spoke about the good, the bad, and the missing elements of the new energy bill. An edited transcript of their conversation follows.

The White House described the Energy Independence & Security Act as landmark. The Union of Concerned Scientists called it a “significant, concrete, and long overdue step forward.” How would you characterize the new energy bill?

The best part about it is that we’ve done something. It’s great that the government is starting to mandate things. But it left a lot to be desired. It’s great for certain industries that exist, but short-sighted in terms of emerging technologies.

By “certain industries” you mean ethanol?

Clearly the ethanol industry got preferential treatment. The bill also includes a $25 billion subsidy to help out our auto industry. Besides that $25 billion, I didn’t see a single amount more than $25 million to encourage the development of the emerging technologies that will drive us to be a more environmentally friendly economy.

Such as?

There was minimal touching on the solar and solar-thermal areas. The whole geothermal areas were glossed over. Other sorts of technologies that aren’t mature enough, like tidal, didn’t even get the glossing that would help their development.

Your portfolio company LS9 makes “renewable petroleum.” Can you explain?

It’s a molecule that looks like, acts like, and frankly is chemically identical to a derivative of petroleum. But instead of being something that you have to dig up from the ground and put through a complex process of refining, it’s the result of a bacterium we’ve genetically engineered so that it takes glucose, in any form, and turns it into petroleum.

For the past three years, China has been the financier that kept the American government well-funded. In 2004, it bought a fifth of the U.S. Treasury securities issued, a proportion that rose to 30 percent in 2005 and to 36 percent in 2006.

But according to U.S. government figures, in 2007 China has reversed course and become a net seller of Treasury securities. The U.S. Treasury said this week that China had $388 billion of Treasury bonds at the end of October, or $10 billion less than it had at the end of 2006.

Those sales of Treasuries, if the American estimates are correct, have come during a year when the dollar has been weak against most currencies, and would be consistent with China diversifying its investments into other currencies.

But the figures may be misleading.

For one thing, other Treasury estimates show that the Chinese are still increasing their holdings of bonds issued by American agencies, like Freddie Mac and Fannie Mae, and by American companies. But even including those purchases, the rate of increase of Chinese holdings of dollar-based securities seems to have eased off.

The other problem is that the Treasury has a history of getting these numbers wrong, and then fixing them up many months later.

The initial estimates are based on reports of transactions in securities, and those involving long-term securities, like Treasury bonds and notes, reflect only the initial buyer. So if China bought Treasury securities through a financial intermediary in Britain or Hong Kong, the sale might be attributed to those areas.

Each June, the Treasury does a survey of actual holdings, and revises its previous estimates. The survey from June 2007 will be incorporated in the data in February. A year earlier, the June 2006 figure was revised up by $62 billion, and a similar revision could come this year.

If so, that would reduce but not erase the trend toward China owning fewer Treasury securities. That country is running a huge trade surplus that brings in billions of dollars each month, and its options are limited.

It may need to buy a large amount of dollar-denominated investments to keep the Chinese currency from rising too far against the dollar, but those investments do not have to be Treasuries.

This week China invested $5 billion in Morgan Stanley, an investment bank that needed to raise capital.

Over all, foreigners continue to finance the American government deficit, with their Treasury holdings rising $194.7 billion during the first 10 months of the year, more than the $166 billion increase in the amount of Treasury securities held by the public.

Since January 2001, when President George W. Bush took office, the amount of debt issued to the public has risen by $1.7 trillion, with $1.3 trillion of that increase being taken by foreigners, according to the Treasury estimates.

Of that, the increase for China was $327 billion, about a fourth of the foreign total.

My philanthropic tour of Minneapolis began on the banks of the Mississippi River, where the Great Northern Railroad once transported grain from the giant mills of General Mills and Pillsbury. The Great Northern is long gone - merged into the Burlington Northern almost 40 years ago - and though the mills are still standing, they have long since been converted to other uses, as General Mills moved to the suburbs and, in time, acquired its rival Pillsbury.

Bill King, the head of the Minneapolis Council on Foundations - and my tour guide - pointed out the mills as we got into our car. As well he should have. One of the lasting legacies of the Great Northern is the Northwest Area Foundation, which was founded by James Hill, the Great Northerns founder. As of March 2007, it had $500 million in assets, and is devoted primarily to anti-poverty efforts. Minneapolis and St. Paul have an abundance of foundations that were started by the founders or top executives of many of its biggest companies, like 3M and Target.

General Mills, meanwhile, was an early member of an organization begun in the mid-1970s called the Five Percent Club: Minneapolis-St. Paul corporations agreed to set aside 5 percent of their pretax income for philanthropy. Believe it or not - and it is a little hard to believe, given the modern emphasis on maximizing profits and pleasing Wall Street - the club still exists. Now known as the Keystone Club, it has 214 members, 134 of which donate at the 5 percent level. (The others give away 2 percent of their profits.) Last year, General Mills donated more than $57 million, second only to Target, which gave away nearly $160 million.

“Heres the new Guthrie,” King said as we began the tour. The Guthrie Theater, the citys fine regional theater, recently moved into a sparkling new building by the river - one of five major arts organizations that have recently built new buildings or major additions. All of them were built, in no small part, with corporate donations.

We drove a little further. “This is where the bridge collapsed,” he said, pointing directly in front of us. He was speaking, of course, of the 35W bridge, which collapsed in August.

“When it fell, there was an immediate response from corporations,” King continued. “And a fund for victims was set up by the Minneapolis and St. Paul Foundations.”

The latter groups solicit donations from local people who want to be involved in philanthropy but lack the means to set up their own foundations. Combined, the two foundations have over $1.5 billion in assets, and are major forces in the Twin Cities.

We entered North Minneapolis, a low-income neighborhood, and drove past a storefront that said, in bright lettering, “The Cookie Cart.”

“This is a cookie business that is run by kids in the community,” King said. “It helps them learn skills that can really be useful. It has been around for 10 or 15 years.” It is largely corporate-sponsored. As we neared a school, King told me about a Medtronics-funded program that began as a $75,000 pilot program to help kids get interested in science. It has since become a $5 million, five-year program. And on, and on.

Ask anybody in the world of corporate philanthropy and theyll tell you: Minneapolis-St. Paul is like no place else, a bastion of giving in an age when most companies are cutting back. “It is an unusual city in regards to corporate giving,” said Robert Reich, a former U.S. labor secretary.

Back in the 1970s, John D. Rockefeller III said in a speech to the Minneapolis Chamber of Commerce that he had heard so much about “the public spirit of its business community, about your remarkable Five Percent Club, that I feel a bit like Dorothy in the Land of Oz. I had to come to the Emerald City myself to see if it really exists.”

So did I. And sure enough, it does exist. But why here?

If you ask this question to people in Minneapolis, you hear all kinds of theories. “When you live in such a harsh climate, you understand the need for the common good,” said Emmett Carson, the former president of the Minneapolis Foundation. Others suggested that the areas corporate generosity grew out of the Scandinavian culture that took hold in this region, with its deep Lutheran roots.

Christina Shea, the senior vice president of external relations at General Mills, thought it had to do with enlightened self-interest. “How do you attract high-powered talent?” she asked. A large part of the answer, she believed, had to do with building communities in which talented people wanted to live. Steve Rothschild, a former General Mills executive who left the company to found an anti-poverty group called Twin Cities Rising, said he thought that Minneapolis-St. Paul companies had long viewed their responsibilities broadly. “Most Twin Cities companies have a stakeholder model, not a shareholder model,” he said. There is probably some truth to all the theories.