How can innovation be fostered in the current economy?
by: John Winston
The major failure of the environmental movement in this past decade has been its inability to put to rest the question of whether or not we need to be greener and more efficient, despite an overwhelming, constantly growing body of evidence that attests to that fact.
First of all, there is a virtual consensus among the world’s scientific community that fossil fuels are destabilizing climate patterns, a shift with costly and disastrous impacts. Even for those who have been tricked into believing there is a serious climate science debate, there are a number of more tangible reasons to shift away from conventional energy use and to lower energy use overall.
Setting aside the costs of climate change, the costs of conventional coal-fired plants are quite high. A recent Harvard study (Dr. Paul Epstein, “Full cost accounting for the life cycle of coal”) calculates the costs of the destruction of some of America’s most beautiful land by coal mining, as well as the healthcare costs associated with coal-based air pollution, to make the true cost of coal power much more expensive than the 5-10 cents per kilowatt hour that ratepayers see on their bill. According to the study, the health costs of cancer, lung disease, respiratory sickness and mercury poisoning, in addition to the costs of crop damage and degradation of the physical environment, top $300 billion per year. These costs, by the way, are not only paid by individuals with the misfortune to live near these facilities, but also by the federal and state governments that pay for a significant portion of the healthcare costs created by the mining and burning of coal.
Furthermore, the recent disaster in Japan shows that the human and financial costs of relying on nuclear power can be great. Similarly, natural gas, often hailed as the clean, cheap and abundant compromise between coal and renewables, is proving to have much greater measurable environmental costs than advertised due to the groundwater poisoning and greenhouse gas emissions associated with fracking.
The more positive side of the argument for investment in green technologies is the significant economic benefit that awaits those who invest in the coming wave of innovation. As Americans continue to debate the risks and realities of climate change and brand investment in this sector a luxury if not a waste, many of the world’s biggest economies are building a strong advantage in green tech research, manufacturing and deployment. China and Western Europe, in particular, have developed strong industries in solar and wind technologies. Germany in particular has focused on building next generation solar manufacturing equipment, which it provides to the world at a great benefit to our economy.
In an age when American manufacturing is ailing and many steel workers find themselves unemployed, it is a shame to stand idly by and watch the rest of the world build our wind turbines, a generation technology that is nearing the cost of conventional energy in parts of the US. Just ask John Fetterman, the major of steel town Braddock, Pennsylvania, who has actively campaigned for the US to build up its clean energy manufacturing industry to provide good jobs for his constituents and others around the country and to protect the planet for future generations.
The more one looks at all the facts, the more it seems that the question is not whether we can afford to invest in green innovation in this economic and environmental crisis, but whether we can afford not to.
So how do we, as proud but concerned Americans, ensure that we make the necessary investments to become a world leader in green energy innovations? There are at least two methods.
The simplest, most elegant solution to nurturing American innovation is to harness the power of the free market. It is ironic that such a notion is fully supported by the direst opponents of government investment in supporting green innovation. Their line is that whenever government tries to interfere in business and the economy, the results are inefficiency and waste.
There are several things wrong with this argument, and a close look at history shows that many of the innovations that are touted as achievements of the free market are in fact largely due to government investment. Not least among these historical innovations are the internet, GPS, aviation, biotechnology and computers. But more importantly this argument ignores the fact that the freedom of the free market really refers to its ability to optimize resources under a given set of rules. What makes businesses become winners in the marketplace is their proficiency at navigating the system as it stands.
And it so happens that the system currently in place in America and much of the world is one that ignores the costs of damaging the environment. This concept of externalities is well understood in economics, yet it has failed to guide decision making in the environmental realm. If the system in which the free market exists was corrected to include these costs which are largely written off today, then the free market would be able to function properly and allocate resources to the energy technologies that will cost the least in the long run. Seeing a profit to be made in cleaning up the planet rather than polluting it, private investors would grow the industry with all the efficiency and ingenuity that America’s innovative business culture represents.
Opponents of government investment in green innovation point out (and exaggerate) the impacts on one’s energy bill. They claim that Americans cannot afford such a financial burden, and seem to suggest that the alternative is free. But these costs are real and growing, and even if it feels free because we don’t make monthly payments, we are incurring a great debt. Isn’t the recent debt crisis enough to make us realize that borrowing against your future ends in disaster?
Multiple rebuffed attempts at passing cap and trade legislation, a policy conceived under President Reagan and pursued to great success under President George H.W. Bush, makes it clear that the political will to make such a change does not exist today amongst legislators and their constituents. But since this path represents the best opportunity to spur American innovation at little cost to the public sector, the fight to pass such legislation should not be forsaken.
In light of this legislative stonewalling, some of our political leaders have begun to rely more heavily on a second technique to spur innovation – direct and indirect government investment in technologies.
As previously mentioned, government investment has played a critical role in the development of some of our most important (and profitable) technologies. Politicians today have attempted to continue that tradition. With the American Recovery and Reinvestment Act, President Obama funneled money toward researchers in government and private labs, as well as companies developing and marketing innovative new technologies.
However, by divorcing itself from the free market, this path does incur more risks and it is important when money is tight that we invest it intelligently and effectively. Critics of public investment in technological development can fairly point to certain examples of wasteful spending, such as the Futuregen ‘clean coal’ facility or the nuclear fast breeder reactor project, which together cost in the billions of dollars and produced almost nothing. Nonetheless, discounting all forms of government investment because of certain failures is as foolish as approving all investments because of past successes. If we are to pursue this path of selective investment to spur green innovation, we must focus on investments that limit risk and encourage private investment.
There are a number of innovative ways to achieve this kind of targeted investment. One important element is to understand what is preventing private investment. In many cases, private industry finds it too risky to invest in developing new technologies and bringing them to market. Great ideas can die in the lab without the angel investment dollars to get the project sufficiently developed so that private investors feel comfortable investing.
One common argument against even this type of investment is that if such investments were truly worth making, then private angel investors would be making them. There is a twofold response to this point. First, private investors will seek what they believe to be the most low-risk, high-reward opportunities available to them; just because they don’t invest in a particular project doesn’t necessarily make it an unworthy investment. Second, even if one accepts that the projects in which the government invests have greater risks and lower financial returns, it is misguided to be comparing the investing acumen of private industry and government.
The real comparison is the cost of investing in these relatively low cost, potentially groundbreaking technologies that leverage private investment versus the costly government programs that aim to develop a technology independently of private industry or else spur the industry through large-scale government procurement. Perhaps an even more important comparison is the cost of investing smartly versus the cost of doing nothing.
There is hope for America yet—both economically and environmentally—but we need to act fast. By encouraging and supporting our government in its effort to find the most cost-effective methods of investing in green technologies, and by fighting for the ultimate goal of fixing market incentives to let private industry power the green revolution, we can help to make this transformation possible.
