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

December 10, 2008 • TechKnowledge No. 121

At the AlwaysOn Venture Summit in Silicon Valley last week, the sense of entrepreneurship was alive and well. But the current vogue for “clean tech” differs from the information technology revolution that has done so much for the economy and society. Venture investors may be turning to government subsidy and regulatory advantage for their portfolio businesses, rather than producing to meet a market demand. “Going green” may mean “going red” in at least two senses‐​a more socialist political economy and a government even deeper in debt.

Entrepreneurs and the venture capital/​finance community are caught in the economic downdraft created by federal intervention in the economy (not by “too much deregulation”). But evidence at AlwaysOn suggested that the downdraft is mostly a product of psychology. Venture investors citing actual numbers from the months preceding October didn’t have bad news to report.

The other major theme of the conference was the tremendous vogue for “clean tech,” a broad array of products and services aimed at fixing energy and environmental problems. There are lots of smart ideas, lots of energetic business people, and lots of economic niches to explore in the clean‐​green world. But there may be a problem with these solutions: not enough of a problem.

Yes, it was a rough summer for gas prices-that happens a lot of summers‐​but there isn’t a fundamental energy shortage. The occasional geopolitical oil shock aside, there is plenty of oil out there, there are more oil and other energy sources waiting to come online, and incremental new efficiencies will naturally lower consumption per unit of productivity. No pain point in energy prices is so great that it would justify remaking energy the way the Internet remade communications.

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

But given the $1 trillion federal budget deficit projected for the current fiscal year, where would subsidies for clean tech come from? The best answer seems to be, “Obama said so.”

If federal dollars don’t materialize, there’s a potential source of market‐​making pain in a government regulation. But this is an ugly alternative.

To be clear‐​pardon the pun‐​pollution is bad. More precisely (and more economically), pollutants are an externality, and polluters should 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‐​friendly solutions to environmental problems, but most people fixed a few decades ago on command‐​and‐​control regulation. Directly regulating polluters is far from ideal, though. It has lots of inefficiency; it’s a centralized, authoritarian approach; and it is murder on innovation.

The issue that has everyone going this decade, of course, is whether carbon should be treated as a pollutant‐​the global warming debate. One of that debate’s most interesting dimensions is how carbon reduction is assumed to be the only solution. There are almost certainly less expensive ways to address the problem, like by reducing atmospheric carbon elsewhere than at the source, by reducing warming directly, and by mitigating the effects of warming. A mix of carbon source reduction and these other steps undoubtedly makes the most sense, though that complicates the debate.

One can be so confident that a multifaceted approach is less expensive than reducing carbon at the source because of the extraordinary costs of carbon source reduction. A glimpse of those costs was made available when the Congressional Budget Office scored a couple of “cap‐​and‐​trade” bills that were introduced in the 110th Congress. Cap‐​and‐​trade is the “least bad” regulatory way to control carbon emissions, putting an overall cap on carbon production and letting a marketplace for carbon credits find the most 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 were the 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 spending on 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 carbon mandates? That’s the optimism a vampire feels when the moon disappears into the fog. Relying on subsidies or regulation to make a market is the stuff of horror.

Clean tech innovation is unlikely to match the innovation in information technology brought about by the transistor. Clean tech is about physical goods and physical processes, not infinitely reproducible information. Clean tech is capital intensive and will bring gains that are marginal, not dot‐​com magnificent. Firms getting into clean tech are on the turf of General Electric, T. Boone Pickens, and Exxon Mobil. Don’t expect any Yahoo!s, Amazons, or Googles.

Have no doubt that there are many wonderful innovations and ideas in clean tech. The people working on them are as bright and engaging as can be found. But it would be a pity if their eagerness to build businesses brought them to the side of yet more damaging government 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 they create is a good thing, and regulation may be the way to do this until better mechanisms come along. But solutions should follow problems. Carbon control for the sake of propping up venture investment is a no‐​no.

If Silicon Valley “goes green” by coming to Washington seeking help, think more of the color red. Our political economy will grow more “red,” sliding back on world gains against socialism in the last few decades. The pools of red ink that represent the government’s deep debt will grow deeper. And Silicon Valley would become a parasite, drinking the blood of the economy rather than building its muscle.

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