Busting the Myths Around Public Investments in Clean Energy

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Conventional wisdom suggests that governments know too little about market trends to effectively pick economic winners by investing directly in companies and technologies.8. Economists generally advocate the alternative approach: this policy should be designed to put a price on GHG emissions so that the private sector itself has the financial incentive to pick its own winners in line with the goal of reducing emissions. .

We highlight three reasons why winner selection is necessary. First, political reality makes it unlikely that GHG price signals will be widely enough adopted with high enough prices in the near future to drive technological change at the pace required in most markets.9. Indeed, efforts to advance pricing mechanisms at the federal level remain elusive in the United States. Instead, technology- and sector-specific policies have become the centerpiece of decarbonization policies in the power and transport sectors.ten, including the Biden administration’s climate strategy. These initiatives tend to focus less on policy outcomes, such as emission reductions, and more on policy inputs, such as technology choices. Although technology subsidies and standards may also face political opposition, especially at later stages11they tend to garner more political support than GHG pricing.

In many cases, therefore, governments are already picking the winners, contrary to much rhetoric. And, even in the presence of GHG pricing, the path-dependent nature of technological change suggests that clean energy subsidization has an important role to play.12.13. Carbon-intensive technologies have accumulated a much greater stock of knowledge over time, making investments in them more profitable than those in clean energy. Public investment can help clean energy technologies overcome this challenge.

Another reason to re-examine the role of government is the need to invest in technologies that require large capital investments today, but have great future potential for reducing emissions. In these cases, picking winners means advancing policies that lower cost curves and thus produce benefits in the future longer than what the private sector is likely to find attractive today.14. This market dynamic is particularly true for innovation in hard-to-reduce sectors such as aluminum, cement, steel and aviation and for negative emissions technologies.

An important side benefit of lowering the costs of capital-intensive technologies – especially those penetrating homes to promote energy efficiency – is that they will help energy-insecure households by reducing their energy load. . Studies have found these households to be disproportionately low-income and of color15.

Finally, picking winners through public investments can help build the political constituency and community involvement needed to advance climate change and clean energy policies. As governments invest in low GHG technologies, they begin to engage the beneficiaries – both businesses and communities – and thus shift the balance of power from polluters to economic winners of the climate change. decarbonization16.

The selection of winners is inevitable and not bad in itself. The real question is how to do it well. First, the nature of winner selection must change as technologies and markets mature. In early investments in demonstration and initial deployment, policymakers will need to bank on individual companies and consortia. As technologies mature and the potential of different technologies becomes clearer, they should focus on choosing technologies. Then, once various technologies in a sector reach maturity, public support could shift to other technologies at an early stage, and regulatory standards and carbon pricing policies could drive demand for continued deployment of these mature clean energy technologies.

Second, investment decisions need to be more rules-based and goal-based. This principle argues in favor of setting targets for the environmental performance of investments, including lowering costs, increasing efficiency or reducing GHGs. For example, the US Department of Energy’s SunShot initiative has set a target for the cost of solar energy per kilowatt hour. Selecting the winners therefore becomes a strategy to focus and intensify the competition towards clean energy.

Third, policymakers should focus on technologies that maximize emissions reductions over time, based on both emissions reductions per unit deployed and scalability. Markets cannot be relied upon to optimize these critical policy dimensions.

Fourth, closing the valley of death – the funding gap in commercializing technology at an early stage – should be a priority. The use of advanced commercial commitments is a proven policy, i.e. governments provide an advance contract to purchase a certain quantity of a new technology once it is commercialized. It has been a success for vaccine development17. IBM only needed one major government contract to move forward with personal computer development18.

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