No more nudges – only an entrepreneurial state can give us a green revolution

Nurturing UK cleantech enterprise-1This post is by Mariana Mazzucato, RM Phillips professor in the economics of innovation, SPRU, University of Sussex, author of The entrepreneurial state: debunking public vs private sector myths and Green Alliance trustee.

Speaking at the start of the COP21 meeting in Paris, President Obama told delegates:

“We have proved that strong economic growth and a safer environment no longer have to conflict with one another; they can work in concert with one another.”

He’s right that a green economy need not come at the expense of growth. Policy makers must also now recognise that we cannot rely on the private sector to bring about the kind of radical reshaping of the economy that is required. As Bill Gates recently acknowledged, only the state can provide the kind of patient finance and direction required to make a decisive shift.

Nudges aren’t enough
Signals and nudges to the private sector will not get us where we need to go. If we are to have a green revolution, characterised by the kind of sweeping and widespread technological changes that characterised the IT revolution, then we need to learn the right lessons. More nudging is fudging it. Instead, states around the world must act boldly and courageously to tilt the playing field in the right direction.

Battling climate change requires efforts on multiple fronts: pushing and pulling, not nudging, both on the supply side, such as investments in R&D and innovation, and on the demand side, including changing consumption and investment patterns, and enabling diffusion and deployment.

Green innovation requires not only massive amounts of private spending on R&D, piloting and deployment, but also public investment and public sector agencies willing to take on risks in the most capital intensive and high risk areas. This public support should not be limited to basic research but must extend right along the innovation chain, as I have shown was the case with the IT, biotech and nanotech revolutions.

A crisis in investment
Unfortunately, there is a crisis in both public and private investment. Energy is receiving a falling share of R&D in the US: while energy made up 11 per cent of the total public R&D budget in 1981, it is now only four per cent of the budget (IEA 2015).

These budget cuts are putting a strain on the agencies, like the Advanced Research Projects Agency-Energy (ARPA-E), that could be driving path-breaking innovation. ARPA-E’s 2015 budget of $280 million is barely a tenth of the Defence Advanced Research Projects Agency (DARPA), an organisation which was instrumental in bringing about the IT revolution.  Sadly, the US is failing to show the leadership in investment in cleantech that it did in IT, as this table illustrates:

Government funded clean technology R&D, % of GDP, including energy efficiency, renewable energies, nuclear, fuels cells and transmission

rd-spending

Source: R&D database underlying IEA (2015), summing over all government R&D categories except ‘fossil fuels’

The private sector is also not filling the gap. Energy companies are both too financialised (channeling money back to shareholders, for instance via short run share repurchase schemes, rather than investing in long run R&D) and still spending too much on fossil fuels rather than on renewable energy. According to the IEA the share of investment in the energy sector flowing to renewables and nuclear was 16 per cent in 2013.

The scale of financialisation is shown in recent research, by economist William Lazonick, revealing that the oil major Exxon spent 59 per cent of its net income over 2003-12 on share repurchase schemes and GE, a major wind turbine manufacturer, spent 52 per cent, making them the biggest, and tenth biggest, buyers of their own shares among US firms.

The role of public development banks
So who is funding greentech? My new research with Gregor Semieniuk shows that public development banks have become the single biggest source of green asset finance. In the renewable energy sector alone, they provide more than 15 per cent of total asset finance, and four of them are among the top ten investors in renewables (see below). We find that public investors are also more likely to hold high risk investments in their portfolios.

Asset finance for renewable energy by public development banks, 2007-13 in billion USD

big-banks-jpeg

 

 

 

 

 

 

 

Source: Mazzucato and Semieniuk (2016), based on BNEF (2014). Estimates exclude small distributed capacity less than 1MW, large hydro, and refinancing & acquisition activities. Graph sources

Seven lessons for leaders
This week Gregor Semieniuk, Jim Watson and I have written a policy brief with the following lessons for policy makers and government leaders at COP21. Here are seven key points:

1. The amount of R,D,D&D (research, development, demonstration and deployment) spending needs to increase radically; this would apply to a diverse set of low carbon energy choices and across the innovation chain from basic research through applied research to demonstration, market creation and deployment. A portfolio approach to public investments is required. Many investments will fail; returns from successful investments must cover the losses.

2. Definancialisation of energy companies should become more central to green innovation policy: energy subsidies, including incentives for low carbon technology deployment and cost reduction, could be made conditional on a greater percentage of company profits being reinvested in low carbon energy R&D and less on share buybacks.

3. States need a network of mission oriented public sector institutions that can attract top talent; these would also help to inform both funding priorities for such programmes and decisions about when to change course.

4. As with IT, low carbon energy R&D must be complemented by patient long term committed finance for companies willing to engage with uncertainty. The three to five year cycles of exit driven venture capital are not sufficient. It is, thus, crucial to get the entire financial sector more engaged with financing deployment and diffusion.

5. While carbon pricing is important, it will be insufficient to support change on the scale and speed required to tackle climate change.

6. More attention should be paid to demonstration and early deployment funding. For example, the smart grid trials in the UK that have demonstrated combinations of new technologies and have also investigated consumer choices and responses.

7. More mission oriented R&D programmes may be crucial for specific advances in those areas that can achieve the scale required to meet a large share of world’s energy needs.

@MazzucatoM

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