“Clean Tech”: Does Going Green Mean Going Red?

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At the AlwaysOn VentureSummit in Silicon Valley last week, the sense ofentrepreneurship was alive and well. But the current vogue for"clean tech" differs from the information technology revolutionthat has done so much for the economy and society. Ventureinvestors may be turning to government subsidy and regulatoryadvantage for their portfolio businesses, rather than producing tomeet a market demand. "Going green" may mean "going red" in atleast two senses-a more socialist political economy and agovernment even deeper in debt.

Entrepreneurs and the venture capital/finance community arecaught in the economic downdraft created by federal interventionin the economy (notby "too much deregulation"). But evidence at AlwaysOn suggestedthat the downdraft is mostly a product of psychology. Ventureinvestors citing actual numbers from the months preceding Octoberdidn't have bad news to report.

The other major theme of the conference was the tremendous voguefor "clean tech," a broad array of products and services aimed atfixing energy and environmental problems. There are lots of smartideas, lots of energetic business people, and lots of economicniches to explore in the clean-green world. But there may be aproblem with these solutions: not enough of a problem.

Yes, it was a rough summerfor gas prices-that happens a lot of summers-but there isn't afundamental energy shortage. The occasional geopolitical oil shockaside, there is plenty of oil out there, there are more oil andother energy sources waiting to come online, and incremental newefficiencies will naturally lower consumption per unit ofproductivity. No pain point in energy prices is so great that itwould justify remaking energy the way the Internet remadecommunications.

But green optimism pervades all the same. On one panel, a coupleof speakers cited "political will" as a reason for believing inclean tech. "Political will," of course, is a euphemism forsubsidies and regulation. Some entrepreneurs are looking at"the greatest wave of government intervention in business since theNew Deal" with an attitude that closely resembles enthusiasm.

But given the $1trillion federal budget deficit projected for the currentfiscal year, where would subsidies for clean tech come from? Thebest answer seems to be, "Obama saidso."

If federal dollars don't materialize, there's a potential sourceof market-making pain in a government regulation. But this is anugly alternative.

To be clear-pardon the pun-pollution is bad. More precisely (andmore economically), pollutants are an externality, and pollutersshould internalize (pay) the costs of the pollution they produce.Because the harm from pollution can be remote in time and place,tort law (allowing injured people to sue whoever causes them harm)has yet to produce an answer for pollution. There are outposts of effort on market-friendlysolutions to environmental problems, but most people fixed a fewdecades ago on command-and-control regulation. Directly regulatingpolluters is far from ideal, though. It has lots of inefficiency;it's a centralized, authoritarian approach; and it is murder oninnovation.

The issue that has everyone going this decade, of course, iswhether carbon should be treated as a pollutant-the global warmingdebate. One of that debate's most interesting dimensions is howcarbon reduction is assumed to be the only solution. There arealmost certainly less expensive ways to address the problem, likeby reducing atmospheric carbon elsewhere than at the source, byreducing warming directly, and by mitigating the effects ofwarming. A mix of carbon source reduction and these other stepsundoubtedly makes the most sense, though that complicates thedebate.

One can be so confident that a multifaceted approach is lessexpensive than reducing carbon at the source because of theextraordinary costs of carbon source reduction. A glimpse of thosecosts was made available when the Congressional Budget Officescored a couple of "cap-and-trade" bills that were introduced inthe 110th Congress. Cap-and-trade is the "least bad" regulatory wayto control carbon emissions, putting an overall cap on carbonproduction and letting a marketplace for carbon credits find themost efficient carbon source reductions.

But S.2191, the America's Climate Security Act of 2007 and S.3036, the Lieberman-Warner Climate Security Act of 2008 werethe two most expensive bills introduced in the current Congress.Respectively, they would have cost $17,000 and $12,000 per U.S.family (net present value) for just 10 years of taxing and spendingon the carbon control effort.

So is clean tech optimism caused by the belief that the U.S.government will upset the nation's economic apple cart with carbonmandates? That's the optimism a vampirefeels when the moon disappears into the fog. Relying onsubsidies or regulation to make a market is the stuff ofhorror.

Clean tech innovation is unlikely to match the innovation ininformation technology brought about by the transistor.Clean tech is about physical goods and physical processes, notinfinitely reproducible information. Clean tech is capitalintensive and will bring gains that are marginal, not dot-commagnificent. Firms getting into clean tech are on the turf ofGeneral Electric, T. Boone Pickens, and Exxon Mobil. Don't expectany Yahoo!s, Amazons, or Googles.

Have no doubt that there are many wonderful innovations andideas in clean tech. The people working on them are as bright andengaging as can be found. But it would be a pity if their eagernessto build businesses brought them to the side of yet more damaginggovernment intervention in the economy.

Subsidy programs are rarely a hand up for a needed new industry.More often, they are handouts to albatrosses. [See: bailout, auto.] Causing polluters to internalize the costs theycreate is a good thing, and regulation may be the way to do thisuntil better mechanisms come along. But solutions should followproblems. Carbon control for the sake of propping up ventureinvestment is a no-no.

If Silicon Valley "goes green" by coming to Washington seekinghelp, think more of the color red. Our political economy will growmore "red," sliding back on world gains against socialism in thelast few decades. The pools of red ink that represent thegovernment's deep debt will grow deeper. And Silicon Valley wouldbecome a parasite, drinking the blood of the economy rather thanbuilding its muscle.