Innovation snowballing means supporting cleantech innovation will displace dirtytech

//DH

To some, the implications of innovation snowballing may seem unintuitive and to others, obvious. Whatever one’s reaction, the structure of the analysis is profoundly different from conventional economics. In the conventional story, a new technology can reduce the cost of producing cleantech. But the key piece that the conventional story misses is the dynamics: how that new technology not only lowers cleantech production costs today but draws in future cleantech innovators, progressively shifting production toward cleantech, creating a snowball effect. Those new innovators are drawn in because, as cleantech becomes cheaper to produce, future innovations are closer to commercialization and profitability. Furthermore, as cleantech becomes cheaper and closer to becoming the cutting-edge technology, more people will use the technology, increasing the scale over which cleantech innovators can deploy their innovation and make a profit. Once cleantech surpasses the tipping point of being the cheapest energy technology, cleantech innovation will snowball at a greater rate than dirtytech—thereby ensuring a virtuous cycle. The conventional story entirely misses these dynamics. Rather, it treats technological progress as if—once there is a breakthrough technology in solar that makes it cheaper to produce energy from the sun than from fossil fuels—technological progress will continue as if no such breakthrough had occurred and entrepreneurs would continue innovating in dirtytech at the same rate, even once it has been overtaken by solar. If policy is driven by this conventional economic view, the government loses the opportunity to push toward the tipping point and thereby efficiently and cheaply deploy the private sector to achieve greater gains for environmental quality at lower cost.

Recently, MIT economist Daron Acemoglu and his coauthors have explored the implications of innovation snowballing for climate policy. Based on empirical estimates of recent innovation activity, they find that the cost of relying on a carbon tax alone, and not encouraging cleantech through subsidies, is very large, amounting to costs equal to 1.9 percent of consumption globally. This loss translates to approximately $1.42 trillion a year—or roughly a tenth of total U.S. GDP.81 Notably, this welfare loss arises from addressing innovation snowballing with a second-best policy (carbon taxes) instead of an optimal instrument (research subsidies). If policymakers ignored innovation snowballing altogether, and devised a climate plan that solely focused on the negative externality of carbon pollution, the efficiency loss would be substantially greater.82

The best estimates suggest that global government R&D spending on cleantech is far from optimal. Acemoglu and coauthors estimate that government spending should account for roughly ninety percent of cleantech R&D funding83—a far cry from the current state where only forty-three percent of spending comes from the public sector. 84 And, according to a number of studies, government spending on cleantech R&D—which currently totals about $18 billion per year worldwide85— falls far short of needed levels. A recent report by the International Energy Agency, for example, estimated that global public expenditures on clean energy innovation would need to increase between two- and five-fold in order to maintain global warming below two degrees Celsius.86 Other researchers have reached similar conclusions using different models and alternative assumptions.87 Thus, the scope for addressing innovation snowballing in cleantech through increased public R&D spending appears significant.