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Rethinking the Role of Government in Cleantech, Part II

Yesterday I began a discussion on the role of government in cleantech. Today, the discussion continues below.

Drawbacks of incentives

How could government grants, loans, tax credits and other subsidies possibly be bad in cleantech? Free money is good, right? Here’s a list of drawbacks to these incentives, some of them not as obvious as others:

  • They can go away and cause market disruption – to wit, the points earlier in yesterday’s article.
  • The existence of loans and grants silences critics – Few speak out against pots of free money, because they might want or need to dip into them in the future.
  • Incentives favor only those willing to apply for them – and therefore are often missed by companies working on disruptive, fast-moving tech, or who are focused on taking care of customers’ needs.
  • Criteria are often too narrowly defined – Criteria for incentives often favor certain technology (solar photovoltaic over other solar, or ethanol over other biofuels), and as a result, lock out other legitimate but different approaches.
  • Picking winners means designating losers – Recipients of government grants or loan guarantees get capital and an associated halo of being an anointed company. Those that don’t are comparatively disadvantaged.
  • Not the best track record – Incentives go to companies best staffed to apply for and lobby for them. And those aren’t necessarily the companies that could use the capital the most effectively, e.g. to compete in world markets, or create the most jobs.

What governments could and should be doing

In the cleantech research and consulting we do worldwide at Kachan & Co., we’ve come to believe that governments are best focused on activities to create large and sustained markets for clean technology products and services.

Doing so gives assurance to private investors that there will be continued demand for their investments—one of the most important prerequisites to get venture capital, limited partners and other institutional investors to write large checks.

Given that objective, governments should, in our opinion, pursue:

  • Setting mandates and standards – e.g. the amount of power generated from renewable sources, new targets for fuel efficiency, green building or other dimensions.
  • Improving codes and other regulations – making building codes more stringent could drive energy efficiency, green building and smart grid investment.
  • Building the talent pool
  • Stabilizing the economy
  • Fostering political stability
  • Commitment to infrastructure projects – including water, transportation and grid.
  • Building showcase projects – regions wanting to foster local cleantech can do as Abu Dhabi has done with its Masdar initiative, as Saudi Arabia is now doing with solar, or as China has done with hundreds of green development zones; in doing so, all three of these countries have sent strong signals to large corporations and investors that they view clean technology as strategic.
  • Rolling back so-called perverse government subsidy support today of the fossil fuel industry, including direct and indirect subsidies.

Cities as test beds of policy innovation

Interestingly, cities are emerging as petri dishes of progressive cleantech policy, and are increasingly where such innovation is taking place.

For instance, Barcelona has established that large companies need to create as much as 30% of their power from solar thermal technologies. The city of Berkeley, California pioneered what is now known as Property Assessed Clean Energy (PACE) financing, wherein property owners are able to pay for energy efficiency and renewable energy improvements on their property taxes. This month, Phoenix, Arizona introduced what it calls the largest city-sponsored residential solar financing program in the U.S. And New York City is taking the lead in residential demand response by trialing a program to curtail the consumption of 10,000 room air conditioners at times of high demand.

Given the world’s current financial malaise, and especially in light the Occupy momentum globally, I’m surprised more folks aren’t questioning how their governments spend their money in cleantech. Because, as described above, there are other arguably more effective ways elected officials can help usher in a cleaner, greener future than throwing around billions in incentives.

After all, how much fun would a pristine planet be if we’re all destitute because governments have crumbled under crushing debt?

A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. This article was reprinted with permission from Kachan & Co.

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One thought on “Rethinking the Role of Government in Cleantech, Part II

  1. I continue to disagree with the argument that subsidies for renewables are not a desirable policy tool. One argument put forth is that governments should focus on “activities to create large and sustained markets for clean technology”, and that cleantech subsidies are not effective. But that argument is not even relevant. The market for renewable energy already exists – it is the same energy market that is currently served largely by traditional energy sources like gas, coal, and oil. If renewables can step up to the plate, their investors are already guaranteed a large and stable market. Subsidies will allow renewables to compete in that already-existing market. As I noted yesterday, removing uneeded and outdated subsidies for traditional energy sources (oil, gas, and coal – and nuclear), while re-directing that revenue stream to more renewable subsidies that are not subject to cuts every few years; would create just the sort of sustained market access that the author advocates.
    Most of the deficiencies noted for subsidies, are either not valid or are comparatively small potatoes. For example, “[t]he existence of loans and grants silences critics”: this hardly qualifies as a significant deficiency. First of all, it isn’t even a provable hypothesis. Second, there is no shortage of critics for renewable (or other) subsidies – so no one need be seriously concerned about silencing any critics. And, “[i]ncentives favor only those willing to apply for them”: this is a crazy argument. First of all, what’s wrong with not bestowing a subsidy on any entity that can’t be bothered to even apply for it? I have no problems with that. Second, who in their right mind believes that a company will not apply, if that subsidy is vital to their market competitiveness? And if they’re so busy making money, or doing business, or whatever, to have time to apply; then they probably will survive just fine without it. “Criteria are often too narrowly defined”: this is no more often true for subsidies, than it is for some of the governmental mandates being advocated for. “Picking winners means designating losers”: this is a false argument. Subsidies do not imply the picking of any winners or the exclusion of any losers. Renewable subsidies are broadly defined; and any company wishing to bring such technology to market can apply. Government does not pick who chooses to apply and who does not. And this one, “[n]ot the best track record” has already been shown to be false in my comment posted to part one of this article. Subsidies have an excellent track record of helping traditional energy industries over the past century-plus.
    Finally, no one would disagree that a role of government includes building the talent pool, stabilizing the economy, fostering political stability, or commitment to infrastructure projects. But these things are already being done all around the world (better perhaps in some places than in others). These are not exclusive to the cleantech sector. And they should not rule out the side-by-side use of the subsidy policy tool to further societal goals even more effectively. In fact, mandates and subsidies, working together, can accomplish far more than either tool used in isolation.

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