Thomas Friedman’s Quasi-Market Fundamentalism

New York Times columnist Thomas Friedman is a frustrating guy. He has been a stalwart, welcome advocate for clean energy and for the need to deal with climate change. Further, he gets the fact that clean energy represents a major front in the battle for international competitiveness, and has even recognized the need for some big breakthroughs in the past. As he wrote in Hot, Flat and Crowded:

All the advances we have made so far in wind, solar, geothermal, solar thermal, hydrogen, and cellulosic ethanol are incremental, and there has been no breakthrough in any other energy source. Incremental breakthroughs are all we’ve had, but exponential is what we desperately need. That’s why the green revolution is first and foremost an innovation challenge – not a regulation challenge.

So he’s a green evangelist, and he wants clean energy innovation, and that’s good. But he, like many others, also has some persistent misconceptions about how to drive the innovation he wants, or how to make sure it boosts the U.S. economy and jobs while closing the trade deficit. And that’s bad, because it means he – and others who share his view – remains stuck on partial fixes that won’t solve the energy problem if that’s the only policy set we get to choose from. He showed as much yesterday, in a fittingly-titled piece on climate change, energy policy and Solyndra:

There is only one effective, sustainable way to produce “green jobs,” and that is with a fixed, durable, long-term price signal that raises the price of dirty fuels and thereby creates sustained consumer demand for, and sustained private sector investment in, renewables. Without a carbon tax or gasoline tax or cap-and-trade system that makes renewable energies competitive with dirty fuels, while they achieve scale and move down the cost curve, green jobs will remain a hobby.

This is echoed in his recent book, and is not a new argument from him (he made similar arguments in his earlier cleantech-focused book). And many others have made and are still making the argument, even now when they’re on the outs politically. What’s strange is that he’s writing this in the same week the American Energy Innovation Council – headed by the kinds of business luminaries Friedman highly respects – released their major new report that completely diverges from this price-signal paradigm, by calling for major and direct public investment in research and innovation (more here and here).

As we’ve argued before, a carbon price is neither the most effective way to produce green jobs, nor is it the best way to drive the breakthrough innovation he knows we need. Don’t get me wrong: we need a carbon price and we need it yesterday, for many reasons, including as one way to address the deficit. Such demand-side policies are important complements to innovation policy. But we also need to utterly up-end our current energy system to stabilize emissions and get off foreign oil, and that will take some major leaps forward in cleantech, as Friedman knows. And his favored solutions – taxes and caps – don’t solve the problem on their own.

Why not? First, to make most clean energy competitive, any carbon price would have to be high indeed, on the order of hundreds of dollars per ton, immediately. Otherwise, you don’t get adoption, and thus no cost curve benefits. Yet as we’ve seen, a carbon price this high isn’t going to happen. Congress won’t try it because it is not politically or economically sustainable. Maybe someday we get a $10 or $15 price, and that would be a good thing, but a price that small won’t influence much adoption unless the cost of alternatives comes down substantially first. And there are some potential game-changers like next-generation biofuels or batteries based on new chemistries that are in development but still years from commercialization. A carbon price, of course, wouldn’t spur adoption of these. An obvious point, but one worth making nevertheless.

But even though a carbon price won’t get me to buy not-yet-commercial algae-based fuel, could it nevertheless accelerate its development so that I can buy it in two years, rather than in ten years? Probably not, and definitely not nearly fast enough, for a simple reason: price signals have their limits as influencers of radical innovation.

This is not to say they have no influence. It’s well established, for instance, that energy price increases induce businesses to invest in energy efficiency. This happened widely in the 1970s as a result of energy cost spikes. Similarly, consumer preferences and behavior shift when energy prices increase – as when they flocked to smaller cars during the 2008 oil price spike. But once you move beyond the relatively easy, low-risk changes like efficiency or proven technologies like the Prius, things get…murky. Think of it this way: Europe has high carbon taxes and much higher fuel prices than the US. This has led to smaller, more efficient cars, and marginally improves hybrid sales, but it hasn’t displaced diesel vehicles or yielded big advances in electric vehicle technology that make them a better choice than conventional vehicles to the typical consumer.

Would a carbon price inspire some additional investment in cleantech? Absolutely. But probably not enough. Business, after all, doesn’t like risky, long-term, pre-commercial investments that come loaded with risk, require both applied research and tons of capital even to just get started at the pilot scale, and might never work anyway. And even if they do work, there is no guarantee the firm that made the investments can recoup all of its costs directly, because of technological spillovers. Even venture capital is leery of many of the advanced solutions cropping up across the cleantech space.

So there are big, systematic gaps that a price signal just won’t close – and not just gaps in financing and deployment, which the Loan Guarantee Program is intended to address (for good or ill), but gaps in the development of these technologies themselves, long before they even hit the market. It’s not even really a market “gap,” per se – it’s simply how the market works. It just doesn’t produce socially optimal levels of radical innovation on its own, which is partly why there’s a broad consensus that government should fund basic research. Fortunately, government can and has stepped in to fill these gaps to catalyze public-private innovation beyond basic research, in what we can think of as the cleantech development space, through entities like ARPA-E, the Energy Innovation Hubs, and other such institutions (again, see the American Energy Innovation Council for more on this front).

These entities are working on exactly that exponential innovation Friedman says he wants, yet doesn’t seem to know how to get. He goes so far as to ignore them entirely in his summation of the Administration’s clean energy push:

President Obama has chosen not to push for a price signal for political reasons. He has opted for using regulations and government funding. In the area of regulation, he deserves great credit for just pushing through new fuel economy standards that will ensure that by 2025 the average U.S. car will get the mileage (and have the emissions) of today’s Prius hybrid. But elsewhere, Obama has relied on green subsidies rather than a price signal.

Taxes, regulations, and subsidies? We invest roughly $4 billion a year in clean energy research, development, and testing, and it’s become a major and welcome focus for the Administration, yet these don’t merit even a mention.

The question is, why not? Why do Friedman and others have this blind spot for non-market innovation?

As the title of this post implies, I would offer that many advocates suffer from a kind of quasi-market fundamentalism. This differs from actual market fundamentalism for the simple reason that they do want a form of state intervention in the economy, to limit emissions the market won’t limit on its own. But it still falls into the similar conventional-wisdom trap that ignores how radical innovation actually happens in the real world. Their apparently preferred policy response – get the prices right and the market will do magical things – is only marginally more effective at producing scalable clean energy solutions than actual market fundamentalism itself (our Economic Doctrines paper has much more on this front). The market needs to be an engine for innovation, and policy can absolutely influence that, but it takes more than price signals and carbon caps (good sources for ideas: Post-Partisan Power and Two Degrees of Innovation).

And this quasi-fundamentalism also clouds the argument for green jobs, because even if we were to pass a massive price signal tomorrow, there is no guarantee the turbines and solar panels we’d be installing wouldn’t be built in China, or Germany, or elsewhere, if we leave it up to the market alone. If you really want to create American jobs, you also need to develop a manufacturing strategy, to help domestic companies re-tool, adopt innovative methods, and boost productivity to beat heavily subsidized foreign manufacturers. This will let us both invent and build clean energy solutions here and export them there, which is an important path to net job growth. Focusing on price signals doesn’t help with any of that.

The right way to think about government’s role in the clean energy space is as a catalyzer for radical innovation and cleantech development, and not simply as a price-setter or subsidizer or setter of mandates. This means robust R&D and cohesive strategies to bring the best brains from industry, universities and national laboratories together in pursuit of visionary advances, in addition to carefully designed, cost-effective policy to create markets and drive innovation through deployment.

Indeed, there are few modern industries that haven’t drawn on public support for innovation in some way or another. We need a clean energy revolution in this country, and seeing government’s role as just a price-setter doesn’t get us there. In a post-cap-and-trade world, I’d invite Friedman and others who are searching for answers to move past their quasi-market fundamentalism and give the role of public-private innovation a hard look.

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