“Follow the yellow brick road”. So Dorothy is told in the classic 1939 movie, The Wizard of Oz. Alas, if the world’s economies only had such a clear and singular path to follow subsequent to the recent promising Paris Climate Accord.
While the accord has raised hopes that government leaders are serious about reversing climate change, in reality, the path forward is probably more like a vast river with multiple tributaries that merge before powering toward the sea. To significantly reduce our carbon footprint, innovation is required on a massive scale from critical sectors of the economy: energy, transportation and agriculture, just to name a few. Such innovation will not just magically manifest itself. It requires numerous tributaries, including federal and state policy and actions by both public and private actors, leading to a carbon-reduced future. It requires the creation and adoption of a comprehensive technology and innovation policy.
“Innovation often arises out of a combination of demand pull (from consumers or businesses) and technology push (think of the new product you never thought you needed until you saw the ad). While pricing carbon is one way of creating a demand pull, it is not the only way.”
So what policy levers do we have at our disposal?
Much attention has focused on putting a price on carbon – either through a carbon tax or a cap and trade exchange program. And while this assuredly would help incentivize markets to invest in clean technology, in many parts of the world, like the United States, pricing carbon does not seem politically feasible in the near term. Even if one could wave a magic wand and institute a carbon tax, would that be sufficient to drive innovation in clean tech? Unlikely. Innovation occurs in fits and spurts. It is often unpredictable. Despite the romanticized stories of two people in a garage inventing the future, innovation (as opposed to invention) often relies on a whole ecosystem of advances to become commercially viable and to transform markets.
What else can be done?
Innovation often arises out of a combination of demand pull (from consumers or businesses) and technology push (think of the new product you never thought you needed until you saw the ad). While pricing carbon is one way of creating a demand pull, it is not the only way. Tax subsidies and credits are much maligned, but they can help emerging technologies such as solar photovoltaics move down the efficiency and price curves until they are commercially viable. Incumbent technologies such as coal already receive an advantaged ride in our economy by not incorporating into their pricing the true costs of pollution and global warming.
Standards and labels have been effective in surfacing latent demand for environmentally friendly goods and services. Consider the market for organic foods: the establishment of a USDA federal standard brought mainstream consumer awareness and purchasing power to a formerly niche industry. In the electrical utility sector, state-sponsored renewable portfolio standards such as RGGI have done much to drive the adoption of solar and wind power, even if voluntarily rather than mandated.
Federal and state governments spend billions each year. Requiring environmentally friendly goods and services in government purchases can help fuel market demand. In the private sector, Costco, Walmart and others have similarly driven incentives for green goods by requiring supply chain partners to design products that meet design, cost and environmental criteria.
Patents and other forms of intellectual property protection create incentives for businesses to innovate by providing them temporary monopoly rights on goods. Extending patent protection for clean technologies might help justify a company’s increased R&D spend, thereby leading to desired new product performance outcomes, whether for solar cells, battery technology or carbon sequestration.
While demand pull strategies as described above may hold promise, we should not forget the importance of technology push. From Silicon Valley to emerging entrepreneurial ecosystems across the country and the world, innovation emerges from formal and informal collaborations, whether based on geography or industry type. Our own research suggests that innovation in clean technology tends to concentrate in these entrepreneurial clusters, which require significant public investment in research and development in order to drive advances in areas like solar, wind and geothermal. In most cases, these clusters are anchored by either world-class research universities or large-scale national labs which provide critical talent and conduct the basic science and engineering that often fuel downstream, more applied innovation.
Immigration policy, labor policy, and entrepreneurial finance all play a role in creating the conditions for robust innovation in clean technology. Recent laws, like the JOBS (Jumpstart Our Business Startups) Act, try to directly address some of these needs. The creation of alternative investment vehicles such as crowdfunding provides additional avenues for funding innovation. And let us not forget, good old fashioned investment in research and development either through the federal government or through innovative public-private partnerships can be a significant driver of downstream innovation and commercialization. We need the collective will to pursue another “moon-shot” as was done in the 1960’s space program.
So what else is needed as part of diverse yet harmonized efforts to maximize our progress on CO2 emissions reductions before the next global climate “check-in” in five years?
Investments in infrastructure to complement the demand pull and technology push strategies above are essential. Consider electric vehicles. One of the barriers to adoption has been the lack of a network of charging stations spread across the country. Focusing on how to energize the market for charging stations could go a long way toward driving adoption of electric cars, including their potential to power sophisticated home solar energy systems. A necessary step will likely be investment in smart grid technology that allows individual home owners to buy and sell electricity. A national effort to upgrade our aging electrical infrastructure could be a big boost.
While we don’t have the luxury to “follow the yellow brick road” on a singular path to prevent devastation from climate change, we can and should develop and adopt a comprehensive technology and innovation policy that will be far more distributed and diverse in nature. We do not suggest that any of the strategies we advance is a silver bullet, or even novel. However, taken together, a combination of policy levers can help us get much further downriver toward realizing the promise of the Paris accord.
Michael Lenox is the Tayloe Murphy Professor of Business, Senior Associate Dean, and Chief Strategy Officer at the University of Virginia Darden School of Business. He is also the co-founder of ARCS and serves on the Board of Directors.
Erika Herz is Director of the Center for Entrepreneurial Studies within the Batten Institute for Entrepreneurship and Innovation at the University of Virginia Darden School of Business, and formerly the Managing Director of ARCS.