Re: Innovation Is the Only Answer

Unsurprisingly, Noah Millman has produced a long, thoughtful and insightful post on how to address climate change. I agree with a lot of it, but not all of it.

Noah (if I may) characterizes my argument correctly, with one important exception. He says that:

The proposed alternative is to encourage innovation to eventually make the fossil fuel economy obsolete. Jim Manzi specifically thinks the government should be spending a few billion dollars a year on such efforts – a drop in the bucket relative to the costs of climate change legislation.

In fact, I have very specifically argued against using government-directed investment for this purpose:

One obvious approach is to have the government fund technology research directly. The danger here, of course, is that we end up back in the failed game of industrial policy. Such dangers are not merely theoretical. The federal government was the key sponsor of, for example, the shale oil and large-scale wind turbine debacles in response to the energy crisis thirty years ago. Setting the right scope for such a program and managing the funding process carefully would each be essential to prevent it from becoming corporate welfare.

We should limit government investments to those topics that meet specific criteria. They should be related to detecting or ameliorating the effects of global warming, should serve a public rather than a private need, and should provide no obvious potential source of profit to investors if successful. Important examples include improved global climate prediction capability, visionary biotechnology to capture and recycle carbon dioxide emissions, or geo-engineering projects to change the albedo of the earth’s surface or atmosphere. On the other hand, most technologies that would contribute to the ongoing long-run transition of the economy away from fossil fuels, like more efficient fuel cells for autos or lower-cost solar power sources, need no government funding, since there is ample profit motive to develop them. As evidence, massive amounts of venture funding and large-company internal capital allocations are flowing to these opportunities right now. Government attempts to direct such development would almost certainly destroy value through political allocation of resources.

In the terms of Noah’s post, I am basically arguing for government-led technical innovation only on what he calls “the other side of the carbon ledger” (roughly speaking, geo-engineering). I think this difference turns out to be material to the broader argument, as Noah then goes on to say:

So I would argue that there are two key points of agreement between the opposing camps. First, that climate change is a real and potentially very serious threat. Second, that significant technological innovation is an absolutely necessary component to addressing that threat.

Which leaves as the proper question to debate: what is the most effective way to get that innovation, “effective” being defined as some function combining “shortest time” and “lowest economic cost” (the precise function being left open as a side debate).

Check on the first asserted point of agreement, but not on the second – at least not exactly. My position is that a comparatively narrow kind of technical innovation is the proper role for the government, but not the kind of broader management of the energy sector of the economy that is what I think Noah means by those words.

So, if he and I agree that government-led innovation is useful for geo-engineering, and we further agree that government led technology innovation is not an effective method for pushing the broader economy to adopt less carbon-intensive energy sources, then I think we’re back to the debate about whether or not pricing carbon is a good idea as a means to accomplish this second goal.

I don’t think so. Even if we assume away the gigantic problems of international coordination and the real-world costs that would be imposed by any conceivable US political deal that did this, no realistic US price on carbon is likely to induce the kind of transformation that many advocates rhetorically imagine, whether through a few big breakthroughs or through many incremental steps.

Consider as an important example that most major Western European countries have had very high gas taxes – typically several dollars per gallon – for decades. But despite the efforts of lots of very smart engineers, the automobile has been a pretty stable technology for these same decades. Raising the price of gas does reduce consumption, and will of course induce some incremental innovation. But Western Europe seems to me to a big enough market so that if a low-carbon technology could be developed globally that was competitive with internal combustion in the face of a ~$5 per gallon gas tax, we already have a big enough end-use market to induce it. Why would increasing prices in America work when it hasn’t for Europe? There might be some carbon price that would radically accelerate innovation across the array of uses of fossil fuels (the limit case is simply outlawing coal and petroleum), but it has never, to my knowledge, been imposed anywhere at scale, presumably because it would impoverish any country that tried.

I do agree that a debate about the proper role of government in encouraging technical innovation around the broader goal of accelerating the ongoing de-carbonization of advanced economies is a potentially productive discussion. This is mostly because it is more likely than the current academic economists’ debate about “pricing carbon” to get focused on practical and useful questions. I’m generally opposed to industrial policy for what I consider to be very well-founded reasons, but such abstractions are only the starting point for analyzing specific proposals. The history of technological-economic innovation in America is a complicated story that involves markets, but also government interventions form canals and railroads to WWII, Apollo and the War on Cancer. Though I haven’t seen a persuasive proposal for such an intervention in this case, I remain in principle open to the concept, and believe that credible ideas merit targeted scrutiny.