Prizes and grants can break existing path dependency by encouraging follow on innovation in prosocial technology. Patents lock in existing paths of innovation and prevent innovation snowballing

//DH

a. Patents vs. Government-Set Tools

Innovation snowballing substantially undercuts the main benefits of patents—the use of the market to determine the value of innovation, and the fairness of making beneficiaries pay—while exacerbating their main cost—the impacts of intellectual property monopolization. As a result, innovation snowballing makes patents less attractive and government-set tools, like prizes and research grants, more appealing in the context of cleantech.

Much of the debate over optimal innovation policy focuses on whether markets or governments are better situated to identify and reward promising new technologies. 137 On the one hand, market-based instruments rely on price signals—rather than government experts—to allocate innovation subsidies to private entrepreneurs. Under the patent system, for instance, innovation subsidies come in the form of temporary monopolies.138 As a result, markets determine remuneration levels for an invention and private actors decide which research projects to undertake.139 In contrast, government-set innovation rewards rely on public experts to disburse innovation subsidies.140 Grants, for instance, fund specific research proposals that are selected by government specialists, while innovation competitions are designed to produce specific inventions (e.g., a car that can drive 100 miles to the gallon) by rewarding the winners with taxpayer dollars. Under both tools, then, the government determines which technologies to subsidize and the level of remuneration.

The relative strengths and weaknesses of government-set and market-set innovation instruments are well-known—and this Article does not purport to comprehensively survey the literature.141 Instead, we simply show here that innovation snowballing undercuts some of the main reasons for preferring market-set tools, in general, and patents, in particular. Specifically, the conventional view among many economists and legal scholars is that markets are better than the government at identifying commercially viable innovations.142 Relative to the entrepreneurs themselves, government experts face severe informational constraints in assessing the costs, risks, and value of private R&D—and therefore in identifying which innovations are worth pursuing and how much to invest in each.143 Markets, in contrast, incorporate the preferences of billions of people: an innovation that will benefit large segments of the population will yield large expected profits, which, in turn, will induce innovation by private actors through the invisible hand of price signals. As a result, a major purported advantage of the patent system is that the market sets the remuneration for innovation.144

Market signals, however, are much less valuable in a regime with innovation snowballing. As discussed above, many initial cleantech innovations will not be very profitable, even though they will be essential to switching society from a dirtytech to a cleantech equilibrium. Indeed, path dependency arises precisely because innovation gravitates towards technologies with the most productive and profitable knowledge stocks. As a result, markets may serve as a poor guide for addressing innovation snowballing because the market itself is not a neutral arbiter in the case of energy technologies. Because dirtytech has benefited from over a century of extra innovation resulting from an untaxed pollution externality, the present innovation playing field is tilted inefficiently towards dirtytech.145 Consequently, even with a tax on carbon, market-set instruments that are technology-agnostic cannot efficiently address innovation snowballing by correcting for this market bias. Instead, optimal innovation policy necessitates discrimination between cleantech and dirtytech.

Patents have also been justified on fairness grounds by the “beneficiaries pay” principle, since patents typically require the beneficiaries and users of an innovation to pay for it.146 Innovation snowballing, however, undercuts this logic as well. The costs of greater cleantech patent protection are borne disproportionately by large energy users and future cleantech innovators. But closing the cleantech-dirtytech knowledge gap and moving society to a cleantech equilibrium benefits all of humanity by efficiently reducing the risk of climate change and the costs of climate change mitigation. As a result, the beneficiaries pay principle actually argues against cleantech patents and in favor of cleantech grants, prizes, and R&D tax credits—each of which can spread the costs of innovation subsidization across the populace through, say, a general income tax.