Estimates as to how much investment is actually needed to build the carbon neutral economy range from 2 to 5% of GDP per year; that’s about $400 billion to $1 trillion annually for the next 10 years. Thus, Biden’s proposed $2 trillion will only be the down payment. These investments will require significant up-front public funds even as the economy continues to struggle well below full capacity. While these investments could create millions of jobs in the immediate future, a portion of the payoff would be spread over a long period. There will be more jobs and cleaner air today, and a more livable climate for centuries to come.
Not all funding for the green transition must come from the government, of course—the private sector has a big role to play. However, companies have systematically underinvested in green energy and technology relative to the amount that would be required to meet the goals of the Paris Agreement. That’s primarily because of the sizable spending required, the public nature of many of the benefits, and the potential uncertainty of such investments.
Green tech firms struggle to find financing for their ideas, which is a major barrier to tackling our growing climate problem. The finance industry, which in many respects serves as the nation’s economic planners, hasn’t shown up. Why? Finance likes to channel funds into projects with relatively low risks and high, fast private payoffs. But green investments provide the bulk of their benefits to the public and to future generations.
Venture capitalists are more accustomed to funding high-risk companies, but work hard to protect their share of future profits. Climate mitigation requires an inverse approach: the unicorns of climate innovation will generate incalculable benefit for the common good, rather than for a few investors.
America has been here before. The government has repeatedly used industrial policy to spur innovation and direct economic transformation, especially in times of peril. In fact, Alexander Hamilton made the case that the US government should guide investments in the name of the “general welfare.” Hamilton believed the economy needed government to be the guiding hand of the market, and at times to create new markets from the ground up.
Mobilizing the country for WWII is perhaps the most telling example of this approach, and one often referred to by climate advocates. As FDR called for the “arsenal of democracy” to be activated, the government used industrial policy—loan guarantees, subsidies, and procurement policy—to rapidly scale up wartime industries and create new markets.
The US government hasn’t deployed this approach only during times of crisis, though. It has continuously funded programs and agencies such as the National Institutes of Health, the National Science Foundation, the Small Business Innovation Research program, and the Defense Advanced Research Projects Agency. DARPA in particular has led to huge technological breakthroughs including the internet, GPS, cloud computing, and artificial intelligence.
More recently, we can look to the Advanced Research Projects Agency–Energy (ARPA-E), and green programs incorporated in the 2009 American Recovery and Reinvestment Act. In fact, it was a renewable-energy loan guarantee program included in that stimulus bill that financed the high-profile “failure” of Solyndra.
While Solyndra’s downfall received a lot of spilled ink in the media, Solyndra was actually one of only two failures. The other 22 companies repaid their loans, resulting in a profitable program overall that helped accelerate multiple green industries in the US. And one recipient is now a wildly successful electric automaker: Tesla.
The process of industrial development takes time. Winners, like Tesla, and losers, like Solyndra, inevitably emerge. In the early stages of any industry’s development, firms with good ideas and good products may fail for a host of reasons.
We know the economic and environmental costs of continuing to burn fossil fuels will be devastating. Federal support for green technology can help the industry past the hurdles of early market failures and the speedbumps that inevitably come with introducing new products and ways of doing things.
The Solyndra story
Solyndra ultimately failed because of global industrial changes that few could have foreseen. Solyndra aimed to produce solar panels without silicon. But technology, driven by industrial policies abroad, led to a subsequent boom in the global production of silicon, which lowered the cost of panels produced by Solyndra’s competitors. At the same time, the Chinese government began subsidizing solar production by Chinese firms, which were able to sell panels at lower prices than US firms could.
The failure of one firm, due largely to changes outside of its control, while more than 20 others succeeded under the same program, is precisely the mark of a successful industrial policy. The federal program that supported Solyndra took chances and funded projects at scales that the finance industry and venture capitalists were simply unable or unwilling to. In the end, these bets overwhelmingly paid off, providing a vital boost to the domestic solar, wind, and EV industries.
Over the past 40 years, solar panel prices have fallen by roughly 99%. How can that be? Well-crafted public policies. Even after Solyndra’s failure, sustained public investments in solar R&D built the industry into a robust alternative to fossil fuels. And tax credits helped lower the cost of producing and installing them as the industry developed. Industrial policies in China, in particular, funded solar energy research and supported manufacturers as they scaled up.
Source: Technology Review