Government support for cleantech can create innovation snowballing and lock in path dependence, displacing dirtytech

//DH

This application of innovation snowballing to climate change begs the question: when does innovation snowballing justify government intervention? Nearly any line of technology can, in theory, experience innovation snowballing, since the accumulation of knowledge could increase the productivity and profitability of most technologies.88 However, government intervention is not necessarily efficient whenever one technology’s knowledge stock is bigger than another’s. Instead, government should only direct innovation away from one technology and towards another if two specific requirements are satisfied: there is a policy

reason to redirect investment (the “ends condition”), and the government has the ability to redirect innovation efficiently (the “means condition”). In developing these criteria, we are the first to digest this economic theory into implications for broader innovation policy.

First, there must be a policy rationale for switching the innovation ladder from one set of technologies to another, typically a historically untaxed externality that both leads to underinvestment in innovation in one area and constitutes a reason to encourage innovation in that area.89 This is the “ends condition.” In the case of climate change, untaxed pollution externalities have yielded a huge amount of induced innovation in dirtytech that places it far ahead of cleantech in the innovation race.90 Innovation can build in one particular direction for many reasons. In the case of Betamax, for example, innovation arguably gravitated towards VHS for largely idiosyncratic reasons.91 However, in the absence of an externality, society as a whole has little reason to redirect innovation back toward Betamax.92 In contrast, the same pollution externalities that gave dirtytech an advantage over cleantech also provide a clear policy rationale for directing future innovation towards cleantech and away from dirtytech, even once a carbon tax is in place.93

Second, for the most effective interventions, the government must have the ability to redirect technological development through a limited intervention, after which the private sector will continue in the desired direction. This is the “means condition.” The key feature here is the degree of substitutability between the current technology (e.g., dirtytech) and the desired technology (e.g., cleantech). By substitutability, we mean the degree to which two goods are interchangeable.94 Substitutability allows technological development to be highly skewed in one particular direction. If two products are effectively identical in terms of services provided, then consumers can easily flock to the cheapest one. A high degree of substitutability therefore creates vastly greater potential for a one-time intervention to push a new technology over a tipping point. Once the costs of the emergent technology fall below those of the dominant technology, consumers will quickly switch to the new technology, bringing with them new private-sector innovation that will spur even greater cost declines, even after the public-sector push has abated. Equivalently, one can think of high substitutability as moving innovation closer to a zero-sum game. If two technologies are perfect substitutes, then one technology’s gain (in terms of new adoptees) is the other’s loss, since both are competing for the same pool of customers. In contrast, if the two technologies provide entirely unrelated services, then one technology’s gain has no bearing on the other technology’s market share.95 In the former instance, a government push can redirect customers from one technology to another; in the latter case, government subsidization of one technology will not attract customers from the other.