With billions of dollars coming to fund the clean transition, an innovative approach is still needed to push forward radically decarbonizing new technologies.
This article was originally published by Yale e360. Read it here.
For all the great news in the Biden administration’s massive new climate spending plan, the hardest work of transforming the economy to stop global warming lies ahead. That’s because nearly all the money in the $369 billion plan will be spent on technologies that American companies already know how to deploy, such as solar farms, making buildings more efficient, and developing networks of electric vehicle charging systems.
Doing a lot more of the same will undoubtedly bring down emissions faster. But deep decarbonization requires a transformation of the American economy that will demand a much more active effort to push the technological frontier and build new industries so emissions can be driven to zero.
The mismatch between what the spending plan is set to achieve and what’s needed reflects two contrasting theories about how to clean up the U.S. economy and assure American leadership on climate. One theory, omnipresent in the new bill and in much of the enthusiasm for it, is about incentives: All firms and households need is the extra cash, such as tax credits, to induce them to switch to cleaner technologies. Even better, according to this theory, are penalties such as pollution taxes — but the climate bill has few of those because sticks are a lot more toxic politically than carrots.
What’s needed is industrial policy that pushes companies and government to test radically new solutions.
The incentives approach works well when the range of workable technological solutions is reasonably well known and the market, left to its optimizing genius, can figure the best choices. Renewable power is a good example. The costs of wind and solar generators have tumbled for decades, and as they get less costly more are deployed. Tax credits, which the new spending plan will extend reliably for many years, make these projects even cheaper and easier to finance, which helps companies put even more wind and solar into service.
But a better theory of change sees global warming as a different kind of problem — one that involves not just deploying known cleaner technologies, but also, and more fundamentally, expanding the range of technological choices and social arrangements where current solutions won’t do. This means not making changes at the margin, say, by switching from dirty to cleaner fuel, but reconceiving industrial production, agriculture and service provision to avoid or drastically reduce pollution in the first place. Yet investments in new production models and organizations to operate them are usually large and risky; companies, even with much more substantial tax credits and other incentives that are in the bill, won’t make them on their own.
What’s needed is industrial policy that pushes firms and government to test radically new solutions. That approach would combine subsidies, support services and regulation to set new floors for acceptable behavior as performance improves. For example, one way to make deep cuts in emissions from many industries is switching from natural gas to hydrogen, which will require innovations in the process for producing hydrogen, pipeline design and fuel storage, as well as new technologies to use hydrogen in new ways, such as long-distance trucking. The whole economy must be transformed.
The new spending plan takes some steps in this direction, but they are likely to succeed only if coordinated with other initiatives. Incentives to produce hydrogen (which are part of the bill) must be linked to infrastructure funding (part of an earlier bipartisan infrastructure bill) and linked to investments in radical innovation in new hydrogen technologies. The Department of Energy (DOE) already has the capacity to do this, using such tools as its loan guarantee programs, a new Office of Clean Energy Demonstrations, and innovation funding from ARPA-E (DOE’s advanced research agency).
The whole economy must be transformed.
Many attempts to build the needed, new industries will fail; when there is success, it will disrupt those who struggle to adopt it. Thus policy must be designed to help companies take big risks while also opening industrial space to new entrants. That means big spending programs targeted at novel ideas — in effect, experiments. It often requires penalties that punish companies that don’t act once better solutions have been demonstrated and translated into standards. And it requires, often, collaboration across companies so the risks can be spread out and the best ideas from all these experiments are identified quickly.
Aviation is a good example. Today many airlines and their suppliers know they need to get serious about climate change. But in practice, they are selecting the least disruptive technological options, such as new fuels that are “drop-in” replacements for jet fuel (known as “sustainable aviation fuels” or SAFs) and carbon offsets. That response is understandable — airlines today don’t have many other options. But it’s unlikely to allow deep reductions in aviation’s impact on the climate. Today’s SAFs may not scale beyond their minuscule role in aviation fuel supply, and there is mounting evidence that nearly all offsets don’t actually represent real reductions. Government, along with industry leaders, needs to make active investments in a wider range of options — such as new kinds of SAFs (for instance, those based on algae that are genetically modified to scale quickly) and propulsion systems that don’t need liquid hydrocarbon fuels at all (for instance, electricity or hydrogen).
About 10 major industries, from plastics to steel to air travel to electric power, account for most greenhouse gas emissions. In each of these sectors, this kind of disruptive industrial policy will be needed. Electricity, by far, is the most important because every serious vision for cutting emissions involves electrifying as much of the economy as practical and then cutting emissions from the power sector. The power industry can keep making some progress deploying more wind and solar, which is where about one-third of the act’s total spending will flow, while keeping many of the nation’s nuclear plants running full tilt. But deep decarbonization of electricity will require much more to push the technological frontier and to learn how new technologies are applied in practice.
One area of needed progress is with power plants that can ramp up and down as needed without causing emissions — something that is very useful for integrating wind and solar onto the grid. Hydrogen is a leading option but one that is still mostly theoretical. Offshore wind is another good example — where the ocean floor is deep (as off the U.S. West Coast) floating platforms will be needed, which requires building and testing systems at huge scale. (Programs to do just that in the North Sea will help show the way, in part.) Tax credits in the new climate spending plan will help push these technologies a bit, but a big shift will require policies that focus on testing these technologies as whole systems.
Companies and governments must collaborate to manage the risky process of testing radical new production methods.
At the same time that the technological frontier is pushed, it is also important to learn about new technologies in context. For example, if electric grids could send clearer signals to users when to cut back on power consumption, that could help avert, for example, the kinds of recent power alerts in California. In principle this can be done with existing technologies, such as by sending power users text messages asking them to cut back and by shifting more electric vehicle charging to the middle of the day when solar power output is high. But making this system work as an efficient system requires both hardware (building networks of chargers at workplaces and automating the charging process) and software (for example, systems that alert users when the grid is stressed and use other incentives, such as pricing, to alter electricity use).
Beyond the electric power industry, the need to push the technological frontier is even more daunting. In the cement and steel industries, which produce 7 percent and 11 percent of global emissions respectively, wholly new production methods are likely needed. For cement, that may mean new chemistries for cement-curing processes; in steel (along with iron production), there are new production methods that use hydrogen or electricity. In both industries, carbon capture and storage technologies could play a big role — so that any CO2 pollution produced can be caught and stored underground instead of vented to the atmosphere.
Each industry faces distinct challenges. In heavy shipping and aviation, new fuels (for example, more scalable SAFs or perhaps hydrogen) and possibly new infrastructures (such as hydrogen fueling systems) will be required. Every industry will need a flexible industrial policy. If this sounds daunting, America’s biggest industrial competitors are already implementing these kinds of policies — in China, Japan and Europe, most notably.
In a new book, we document how this approach to transformative technological change — what we call experimentalism — works in practice. Companies and governments, given powerful incentives to transform industrial and agricultural processes, collaborate to manage the risky process of testing radical new production methods. We show this process has been happening in many diverse settings — from new methods for generating electric power that don’t cause acid rain to cutting water pollution in Ireland. Each follows a similar pattern. A few, capable firms in an industry act because they face severe penalties if they fail to make an effort. Those leaders and government team up to invest in experiments. And through intensive review, companies and governments learn what works and how to apply new technologies and business models in different contexts. Government helps by absorbing some of the risk while also adjusting regulations and market rules in light of experience. What seemed daunting and impossible becomes imaginable, although often many incumbents are crushed along the way — especially the firms that drag their feet.
The $369 billion climate bill wasn’t designed for experimentalism, but a big dose of experimentalist thinking can guide what happens next.
That may sound alien, but it is exactly how we have already solved some of the nation’s and planet’s most vexing environmental challenges, from cleaning up the industries whose pollution was thinning the ozone layer to clearing the air in what used to be some of the most polluted cities, such as Los Angeles or New York or Beijing. In all these cases, looking back, the solutions seem obvious. In fact, uncertainty and risk were always present.
When firms in the chemical industry tried to eliminate substances that damage the ozone layer, for example, the solutions seemed distant. A 1987 international treaty, the Montreal Protocol, played a key role in accelerating progress by making the need for action credible and decentralizing the search for alternatives across industries and actively bringing firms in various countries into collaboration. Figuring out which experiments worked (and not) was a centralized task — performed by committees created under the protocol that helped keep the international commitments in line with what was feasible technologically and economically. Programs were funded to help developing countries get prepared for the resulting industrial changes.
This way of viewing the climate problem — as one that requires experimentalism and industrial transformation — has big implications not just for national policy but also how we think about international cooperation. Climate change shouldn’t be conceived of as a giant global commons problem — where the right incentives, at the margin, must be created in every economy around the world. Rather, it should be viewed as a problem whose global solution will emerge from clusters of early movers — governments and companies — that create industrial revolutions sector-by-sector. Those revolutions push the technological frontier and create familiarity (and better performance) for new industries. And in doing that, they make it risky for governments and firms not to join in the effort, lest they be left behind.
Although the $369 billion climate bill wasn’t designed for experimentalism, a big dose of experimentalist thinking can guide what happens next.
The new climate bill is an opportunity to help rebuild U.S. industry, but only with the right theory of change.
First and foremost, the White House must build a system for monitoring how the bill is put into practice. It is auspicious that John Podesta, a veteran of government and climate policy, has been tapped to help oversee that process. Following the mindset of incentives, the bill’s biggest programs work through tax credits — managed by the Internal Revenue Service, an organization not designed for industrial policy. At best, the IRS will do a good job of making sure tax credits follow standard accounting practices, but it can’t steer the tax code to encourage companies to select diverse technologies or evaluate performance. Regular reviews from the outside — for example, from NGOs that have technical expertise and perhaps also the National Academies of Science — can help fill in those gaps and examine how this new spending works in tandem with other spending plans, such as last year’s bipartisan infrastructure bill that also pushes money into new technology. To date, these spending bills have spawned a huge effort to push the money out the door, not engage in this systemic checking.
Second, it’s important to focus on the parts of the spending bill that, implemented well, could form the basis of a more active industrial policy. For example, there’s a huge expansion of loan guarantees implemented by the Department of Energy — a program that has a good track record of taking risks, evaluating those ventures, and adjusting them as needed. A system of tax credits for hydrogen, for example, could encourage a disruptive shift away from conventional natural gas — again, with implementation that focuses on experiments and learning.
Equally important is innovation to address past injustices in how communities invest in energy infrastructure, such as the long history of locating dirty infrastructure in low-income and neglected communities. The bill includes about $20 billion for a “green bank” to be overseen by the Environmental Protection Agency and spent on projects that help disadvantaged communities attract investment. That, too, would benefit from experimentalist thinking so that diverse ideas are tested. These kinds of investments — where technologies are adjusted for varied local contexts — are as important as frontier-pushing investments.
The new climate bill is an opportunity to help rebuild American industry, but only with the right implementation plan — and the right theory of change. Our economic competitors already know that, which is why they all are advancing clean industrial strategies that don’t just create incentives to do more of the same. In other areas, such as reversing the nation’s slippage in production of advanced computer chips, Congress has acted in ways designed to transform industries. Now, the new legislation must do the same for the climate.