A state-pow­ered green rev­o­lu­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

Dis­cus­sions about build­ing a green fu­ture tend to fo­cus on the need to im­prove the gen­er­a­tion of en­ergy from re­new­able sources. But that is just the first step. Bet­ter mech­a­nisms for stor­ing and re­leas­ing that en­ergy – when the sun isn’t shin­ing, the wind isn’t blow­ing, or when elec­tric cars are on the move – are also crit­i­cal. And, con­trary to pop­u­lar be­lief, it is the pub­lic sec­tor that is lead­ing the way to­ward ef­fec­tive so­lu­tions.

Since the com­mer­cial devel­op­ment of lithium-ion bat­ter­ies – the recharge­able bat­ter­ies com­mon in con­sumer elec­tron­ics – in the early 1990s, the chal­lenge of stor­ing and re­leas­ing power ef­fec­tively enough to make sus­tain­able en­ergy sources vi­able al­ter­na­tives to fos­sil fu­els has been a vex­ing one. And ef­forts by en­trepreneurial bil­lion­aires like Bill Gates and Elon Musk to over­come this chal­lenge have been the fo­cus of much ex­cited me­dia spec­u­la­tion. So how many bil­lion­aires does it take to change a bat­tery? The an­swer, it turns out, is zero. This week, Ellen Wil­liams, Di­rec­tor of the Ad­vanced Re­search Projects Agency-En­ergy, part of the US Depart­ment of En­ergy, an­nounced that her agency had beaten the bil­lion­aires to it. ARPA-E, she de­clared, had at­tained “some holy grails in bat­ter­ies,” which will en­able us to “cre­ate a to­tally new ap­proach to bat­tery tech­nol­ogy, make it work, make it com­mer­cially vi­able.”

While prais­ing Musk’s achieve­ments, Wil­liams drew a sharp distinc­tion be­tween their ap­proaches. Musk has been en­gaged in the large-scale pro­duc­tion of “an ex­ist­ing, pretty pow­er­ful bat­tery tech­nol­ogy.” ARPAE, by con­trast, has been pur­su­ing tech­no­log­i­cal in­no­va­tion in the purest sense: “creat­ing new ways of do­ing” things. And they “are pretty well con­vinced” that some of their tech­nolo­gies “have the po­ten­tial to be sig­nif­i­cantly bet­ter.”

To many peo­ple, this devel­op­ment may seem sur­pris­ing. Af­ter all, the pri­vate sec­tor has long been re­garded as an econ­omy’s most im­por­tant source of in­no­va­tion. But this per­cep­tion is not en­tirely ac­cu­rate.

In fact, his­tory’s great en­trepreneurial fig­ures have fre­quently stood on the shoul­ders of the en­trepreneurial state. The late Ap­ple founder and CEO Steve Jobs was a smart busi­ness­man, but ev­ery tech­nol­ogy that makes the iPhone “smart” was de­vel­oped with state fund­ing. That is why Gates has de­clared that only the state, in the form of pub­lic in­sti­tu­tions like ARPA-E, can lead the way to an en­ergy break­through.

It is crit­i­cal to note here that it is not the state as ad­min­is­tra­tor ful­fill­ing this role; rather, it is the en­trepreneurial state in ac­tion, creat­ing mar­kets, in­stead of just fix­ing them. With a mis­sion-ori­ented ap­proach and the free­dom to ex­per­i­ment – with fail­ure un­der­stood to be an un­avoid­able, and even wel­come, fea­ture of the learn­ing process – the state is bet­ter able to at­tract top ta­lent and pur­sue rad­i­cal in­no­va­tion.

But, of course, lead­ing a green rev­o­lu­tion will be no easy feat. To suc­ceed, pub­lic agen­cies will have to over­come sig­nif­i­cant chal­lenges. Con­sider ARPA-E, which was founded in 2009 as part of US Pres­i­dent Barack Obama’s eco­nomic-stim­u­lus pack­age. Though still in its in­fancy, the agency – based on the model of the longestab­lished De­fense Ad­vanced Re­search Projects Agency (DARPA) – has al­ready shown ma­jor prom­ise. And, fol­low­ing the com­mit­ment, made by Obama and 19 other world lead­ers at last De­cem­ber’s cli­mate change con­fer­ence in Paris, to dou­ble pub­lic in­vest­ment in green-en­ergy re­search, ARPAE seems set to re­ceive a wel­come boost in fund­ing. But ARPA-E still lacks the ca­pac­ity to cre­ate and shape new mar­kets that, say, DARPA en­joys. This rep­re­sents a ma­jor chal­lenge, be­cause the agency is work­ing in an in­dus­try that re­mains in its early stages. Though the devel­op­ment of wind- and so­lar­power tech­nolo­gies re­ceived a big push in the 1970s, both are still marked by mar­ket and tech­no­log­i­cal un­cer­tainty. The em­bed­ded en­ergy in­fra­struc­ture re­tains strong in­cum­bency ad­van­tages, and mar­kets do not value sus­tain­abil­ity ad­e­quately or price waste and pol­lu­tion fairly.

In the face of such un­cer­tainty, the busi­ness sec­tor will not en­ter the mar­ket un­til the riski­est and most cap­i­tal-in­ten­sive in­vest­ments have been made, or un­til co­her­ent and sys­tem­atic po­lit­i­cal sig­nals have been com­mu­ni­cated. Gov­ern­ments must there­fore act de­ci­sively to make the needed in­vest­ments and pro­vide the right sig­nals. Cru­cially, gov­ern­ments must also in­stall safe­guards to en­sure that the en­trepreneurial state reaps an ap­pro­pri­ate share of the re­wards for its ef­forts. In the past, this might have hap­pened via tax spillovers. But the top mar­ginal rate is nowhere near the level it was in the 1950s, when NASA, a fore­most ex­am­ple of state­spon­sored in­no­va­tion, was founded in the US. (At that time, the highest mar­ginal tax rate was 91%.) In­deed, thanks to the lob­by­ing of Sil­i­con Val­ley ven­ture cap­i­tal­ists, cap­i­tal gains tax fell by 50% in five years at the end of the 1970s. The in­creased use of up­stream patent­ing – for, it is claimed, “strate­gic” rea­sons – weak­ens spillovers.

Of course, pri­vate-sec­tor play­ers like Gates and Musk are essen­tial part­ners in driv­ing for­ward the green rev­o­lu­tion. As they as­sume a greater role in the com­mer­cial­iza­tion and de­ploy­ment of bat­tery-stor­age tech­nol­ogy, they will earn their fair share of re­wards. But shouldn’t the ARPA-E (or its an­gel in­vestors – US tax­pay­ers) also get some re­turn, for its early – and risky – in­vest­ment?

In some coun­tries, such as Is­rael (with its Yozma pro­gram) and Fin­land (with its Si­tra fund), the gov­ern­ment has re­tained a stake in state-funded in­no­va­tion. This en­ables the en­trepreneurial state to con­tinue to in­vest, cat­alyz­ing the next wave of in­no­va­tions. Why are West­ern coun­tries so re­sis­tant to this sen­si­ble idea?

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