In his State of the Union speech, President Obama called for a big push to develop new clean energy technologies, drawing an analogy to Kennedy’s space program that put a man on the moon. The goal is good; low-cost renewable energy systems and energy-efficient technologies are the main answers to the climate problem. But a crash government program is not the best approach. When the federal government undertakes a crash program, too often what comes out is overdue, over-budget and under-performing. The effort must start with a better understanding of how technological change occurs.
Economics is not much help. In most macro-economic models technological change floats in from off stage, sprinkling fairy dust on all the actors that makes everything they do better and more efficient. Fortunately, an outside-the-box economist, Brian Arthur, who shed light on complexity and networks in economics, has also helped us to understand better how and why technological change occurs.
In his book, The Nature of Technology: What It Is and How It Evolves, Arthur points out that technological change comes about by combining one new scientific insight or technical capability with others, generating new capabilities. The startling implication is that technology expands exponentially, a phenomenon evident in today’s world. Contrary to pessimistic predictions, technological change is actually accelerating. When our caveman ancestors only had a stick and a stone to work with, progress was slow. When they put them together to make a spear and an axe, life became more interesting. Soon they had leather and sinews and planks, which gave them kayaks and huts and bows and arrows. And so it goes, every new capability generating another set of new possibilities. Now we’re combining sensors and computing capabilities with everything under the sun, from vehicles to industrial machinery to fabrics.
The other question that Arthur answers is which of those new capabilities are developed and put into use. Obviously, only a small fraction of the possible innovations ever become commercial products. The key is added value, or, in our market economy, profitability. What determines the direction of technological change is the prospect of profits. That’s why, despite the urgent need, drug companies make little effort to develop new antibiotics, which are used only for a week until the patient is cured, while the same industry works intensely on new medications for long-lasting or chronic diseases. It’s why the best minds of their generation, hoping to become “unicorn” billionaires, devote themselves to developing apps that enable people to do on their smart phones what a reasonably intelligent seven-year-old can do in her head.
Innovation has brought costs down dramatically in wind and solar energy systems and battery storage as technologies have improved and installations have increased. Solar module prices have fallen 80 percent since 2008. Onshore wind prices are lower by 64 percent since 2009. Battery pack costs have been falling by 14 percent per year since 2007. The costs of LED lights have fallen 80 percent just since 2012. This could not have occurred without government feed-in tariffs, production tax credits and other financial incentives that induced entrepreneurs and investors to get into these businesses and develop them. The effect of those incentives has been magnified by the economies of scale and “learning-by-doing” improvements that have been generated as those industries have grown. Costs and prices are forecast to fall further and make renewable technologies fully competitive across the board, as they already are in some regions and applications.
Critics have denounced these incentives as unwarranted subsidies and attempts in Washington, DC, to “pick winners.” These criticisms ignore the competitive advantage that fossil energy industries have because those don’t have to pay the heavy environmental costs and climate change damages that they’re causing. As long as that market failure continues, incentives that spur the development of clean technologies will still be needed.
There is a better way to provide those incentives, though: an economy-wide “price on carbon” created either by a carbon tax or a tradable permit cap-and-trade system. Either one would charge firms that emit carbon dioxide for the damages of global warming, improving the competitive position and raising the potential profitability of technologies that produce fewer carbon emissions or none. Such a carbon price would not involve the government in targeting particular technologies or industries for support but would provide a profit incentive for any and all clean technology innovations. Given the innumerable possibilities for innovation that current science and technology provides, who can tell what will come out of a university lab, an industrial R&D facility, or even a garage at the end of some suburban driveway?
For example, one company is developing a chemical process that converts the carbon dioxide in a cement factory’s exhaust into a low-carbon fuel. The cement industry alone produces about 3.5 percent of the world’s carbon emissions because it burns limestone (calcium carbonate), so its exhaust is 30 percent carbon. The company’s process works, but to get it into the marketplace, the executives say there needs to be a price on carbon. “Any new technology needs some sort of value attributed to the problem it is solving,” the executive said. “Governments have an important part to play in making sure that technologies like ours will get into the marketplace. We need policies that value carbon reduction, or a price on carbon.”
Policymakers who want the United States to lead in technologically advanced, rapidly expanding, profitable industries that generate lots of good jobs, and policymakers who want the United States to lead in combating the increasing threat of global warming should join forces to enact a carbon price, which would effectively accomplish both goals.
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