Should we expect our vaunted market economics to innovate a climate change solution? Even economists as bullish as Severin Borenstein see the flaw in market-driven solutions. The professor of business and policy at UC Berkeley and an advisor to California’s Cap and Trade system launching this fall insists it will take a balance of subsidies to green power and taxes on brown, i.e. fossil fuels. Speaking at Case today, Borenstein cast doubt that America—let alone developing countries like China and India—can resist the cheap fossil fuels still in the ground.
“Some people think Silicon Valley and the Internet are the model for clean tech,” he said. “But, innovation is going to have to be on the cost side.”
“Even distributed generation—where the solar industry advertises you can ‘stick it to the man’ (putting in your own solar panels)—appeals to too few people to solve climate change. Most people don’t want to produce their own energy, or their own food. They want to live their lives.”
Innovation in clean energy has too many barriers. Like the low cost of fossil fuels, and the cost to scale renewables up due to limited supplies of raw materials like silicon for solar panels.
“It’s not an overnight sensation like the Internet,” said Borenstein, who teaches about transferring clean tech into market opportunity.
He sees more business upside for companies like O Power, which are focused on the behavior adjustment business. They provide comparative data on how much energy your neighbors use. Studies are proving that neighborhoods with this data adjust their energy expenditures by 1-2% annually.
One percent is not going to end climate change, either, Borenstein said. Again, the problem is the cost for carbon is too low. In lieu of policy, such as a tax on brown energy, the market doesn’t respond with clean tech solutions. Oil will stay around $20 a barrel and clean energy will not compete.
“The fundamental problem is there’s a lot of cheap oil in the world. We can hope for science to produce magic that makes renewables competitive. Or we can raise prices.”
Clean tech subsidies need to go hand in glove with policy that puts a price on the cost to burn fossil fuels.
“Then, we could rely on the market to figure out what to do.”
Borenstein estimates it would take a $150 per ton—not the $20/ton price tag in the 2009 Waxman-Markey bill passed by the House of Representatives—price on carbon to move the market toward innovation.
The second ‘must have’ is a 30-year horizon for how much brown energy we want to replace with green energy.
“Now, we’re just subsidizing more wind and solar without understanding (how much fossil fuel) we’re displacing. It’s a sobering fact, but we’re facing $20 a barrel for oil and lots of economic incentive for energy companies to extract it cheaper."
Oil shale in Northeast Ohio and elsewhere is just the latest way of extracting fossil fuels that came from government investment.
“All of this is just direct subsidies picking winners and losers. We do need to have more direct subsidies to direct science. We did this with the National Cancer Institute. We have no national energy institute.
“Alternative energy’s advantage has to be in cost. It’s not rapidly scalable, so government policy should be focused on subsidizing innovation and pricing carbon.”
Although it’s not like the typical path for venture capital, clean tech funders should focus on “more midstream investment…in order to get through the valley of death,” Borenstein said, using a Silicon Valley term for the period between seed capital and buyout. “We should look to investments that have knowledge spill overs which drive competitors to look again at R&D. Subsidizing solar has little spill over.”
The U.S. clean tech R&D budget of $200 million should be in the range of $300 million to $2 billion, Borenstein says, citing U.S. Department of Energy and conservative think tank, the Cato Institute. “The Obama Administration wanted $15 billion a year. That’s $50 a person. The government is already in the business of taking risks.”