Industrial Policies Usually Do Not Work – The Obama Administration Bet On Renewable Energy Right When Shale Gas Drove Down The Price Of A Key Carbon Source Illustrates The Point

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By Paolo von Schirach

September 26, 2012

WASHINGTON – Watching the science program NOVA on PBS, (US public television), I was absolutely mesmerized by the array of incredible experimentation currently going on in universities and laboratories across America. New airplanes wings that will be able to change geometry during flight, “self healing” materials that can absorb bullets, contraptions that recreate the same photosynthesis used by plants to transform sun light into life creating processes, new chemicals that can guide medications precisely to cancer cells, thus avoiding any damage to healthy tissues.

Creativity and innovation

This TV program presented a veritable festival of creativity and innovation. All these efforts should give us hope regarding the ability of capable scientists to solve major problems while creating economic value through industrially viable versions of their discoveries.

All true, except for one thing. Most of these incredible discoveries are still at the experimental level. In most cases it is not clear if and when an economically relevant application will be created. In many instances there will never be one. In other cases there will be a bad marriage between the innovators and the business development people. And finally, even when smart people decide that the innovation is going to be a money maker, something will go wrong. Projections will turn out to be far too optimistic, market conditions will be different, and so on.

All this is well known: creating innovation and bringing it to market is a very riskly business. Most new ventures fail. Some look promising and then fail.

Renewable energy, anybody?

With this general background in mind, it is important to give a second look to far reaching US public policies, such as the push for renewable energy, that turned out to be wrong. They were not wrong as a matter of principle; but mostly as a matter of timing.

The desire to see a world in which clean technologies will provide renewable, zero emission, affordable energy is a healthy one. The world would benefit enormously from viable renewable energy. With the deployment of such technologies, we could solve the combined problems of lack of energy in emerging countries, (mostly Africa), high energy cost, pollution and climate change caused by burning fossil fuels.

Good goals, bad timing

Keeping all of this in mind, why wasn’t it a good idea for the Obama administration to support, mandate and subsidize renewable energy solutions? It was not a good idea because the timing was not right. In other words, the issue is not about the goals, but about misjudging the level of maturity of the means at hand.

Renewable energy technologies have been improved a great deal in the past decade. But as yet they cannot conquer markets based on their cost effectiveness. At least not yet. The most common mistake of policy-makers who think they understand more then they do about technologies and markets is to misread the value of they are pushing forward. And very often their “industrial policies” are misdirected because of their ideological biases and belief in politically popular simplifications.

Political bias

In the case of Obama and renewable energy there was an ideological bias against the powerful interests that support the hydrocarbon industry, (read the oil multinationals), the high cost of oil and gas, the widespread fears about the impact of global warming and the exaggerated claims made by green technology enthusiasts.

To make it simple: “Oil is dirty, expensive and bad. Money goes to greedy Exxon. Renewable is green, clean, modern, progressive and politically correct. So let’s go green!”

As I noted above, nothing wrong with the basic idea of green tech as a long term goal. But federal support for the long term goal should focus not on deployment of existing technologies but on supporting more research, so that the existing ideas could be further refined and improved upon.

Pushing for renewables in the midst of a natural gas boom

But if you are blindsided by your ideological biases, then you want to believe that existing technologies are “state of the art” therefore just fine; and so you will use public policy to force them into place. In the case of the Obama administration push towards renewables, it so happens that they did push existing technologies concurrently with a parallel but far more powerful development entirely driven by the private sector that greatly undermined the effort.

And this was the incredible hydrocarbon renaissance produced by hydraulic fracturing and horizontal drilling. These technologies, (developed by industry with no government help), created a natural gas boom, while extending all projections about US oil reserves.

So, right at the time in which Washington made a push for renewables, the same renewables were displaced by ridiculously low natural gas prices. Hard to make a case for subsidizing wind and solar when the cost of generating electricity with natural gas (a carbon source much cleaner than maligned coal) has just plummeted.

Denial

Faced with these new facts, what did the Obama administration do? For almost three years absolutely nothing. Nobody said: “Well, hold it. We had a policy based on certain premises including scarce and expensive natural gas. Now we have to review everything, as the fundamentals have changed”. No, they just kept doing the same, simply ignoring the shale gas revolution until it became so huge that they could not keep pretending it was not there.

Support basic science, stay away from industrial policies

The point of all this is that the government should be in the business of supporting basic science, especially in the uncertain sectors that the private sector would not touch. But the government should stay away from choosing technologies, while pushing them into place through market distorting tax brakes and subsidies.

And this advice comes from reviewing the record. If the private sector makes a mistake by betting on the wrong technology, it is discovered pretty soon. The market mechanism will take care of it. When the government makes mistakes the tendency is to hide them, because they are politically embarrassing. As the technologies are protected by favorable taxation, subsidies, biases regulations, tariffs and what not, it takes much longer to recognize the error.

The government should use its limited resources to create an enabling environment. Picking winners and losers on the basis of politically popular biases is a bad idea.

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