Breakthrough Generation

One of the major appeals of the Waxman-Markey climate bill and other Carbon pricing schemes is that they appeal to the power of market forces to address the challenges of producing clean energy.

Largely recognized as one of the most powerful and significant developments in the history of human modernization, the free market would indeed be a powerful ally in the climate challenge.   However, as the recent economic collapse illustrates, the free market is not without its weaknesses.

In the context of the clean energy industry, major market flaws are manifested in the inability of the market to overcome the difficulties inherent in rebuilding public infrastructure like the power grid, or to incorporate the positive externalities associated with research and technological innovation.  Private firms are discouraged from the industry both by the massive capital outlays associated with it and by the inevitability of the “spilling over” of the return on their investment – the benefits of the new technologies and utilities will accrue to all firms regardless of their level of investment.

These flaws mean that a serious approach to developing clean energy technology requires large-scale public investment. However, this doesn’t mean that we ought to abandon the free market principles that we regard so highly.  Rather, it’s important to consider where the market’s real power comes from.   Economist John Kay puts it nicely in his Culture and Prosperity when he says:

“The important distinction is not the distinction between state control and private business, but between centralized and decentralized decision making. […] The truth about markets is not that businessmen are cleverer than bureaucrats: mostly they are not.  The genius of markets is that they are not dependent on the genius of any individual.”

We need to be careful not get swept up in quasi-religious devotion to Adam Smith’s “invisible hand.”  Rather, we must recognize that markets are powerful because, like in biological evolution, they allow for vast amounts of variation and experimentation and, when a variation is successful, economic incentives encourage the rapid replication of success – John Kay’s “disciplined pluralism.”

It is this disciplined pluralism that Waxman-Markey attempts to tap into to solve the clean energy problem.  However, by ignoring some of the other necessities of innovation, the bill is likely to be setting itself up for failure.

A climate effort that both uses both the strengths of traditional economic theory while also addressing the social and structural challenges associated with innovation problems seems more likely to succeed.

How then to implement a large-scale publicly funded clean-tech program that addresses the challenges of this innovation while also capturing the tremendous benefits of disciplined pluralism?

I’ll lay out a few options below, though I’ll also call on the power of disciplined pluralism to invite both criticism and other suggestions:

1. The nature of the climate problem has already shown that a plurality of solutions is necessary.  From biotech to solar to advanced transmission technologies, this diversity should be encouraged and required in any major public investment program (this is the famous “silver buckshot” approach).
2. In addition to a diversity of solutions, it will also be important to fund a multitude of researchers and research centers to encourage different foci of thought and innovation.  This will encourage a diversity of strategies from which the strongest may be selected and replicated.  This is consistent with plans like the Brookings Metropolitan proposal to develop multiple innovation institutes across the nation.
3. At the deployment stage, avoid “containment” by any group or firm.  It is important that public innovation be allowed to spill over to a variety of private firms in order to continue the process of experimentation and competition.  Though provisions must be made to ensure incentives and rewards for innovators, the public nature of the work is paramount to ensuring that disciplined pluralism may have its effects.
4. A Carbon pricing scheme should also be encouraged as a means of employing market forces to hasten efficiency improvements although this should not be perceived as a full or close to full solution.

There are undoubtedly further methods of encouraging disciplined plurality in public innovation that run the gamut from to technical to managerial and discipline-focused to plurality-focused.  These techniques should be a major component of any clean energy program so long as the program also addresses the significant challenges of innovation on a national scale.