Rethinking the Role of Government in Cleantech, Part II

Yesterday I began a discussion on the role of government in cleantech. Today, the discussion continues below.

Drawbacks of incentives

How could government grants, loans, tax credits and other subsidies possibly be bad in cleantech? Free money is good, right? Here’s a list of drawbacks to these incentives, some of them not as obvious as others:

• They can go away and cause market disruption – to wit, the points earlier in yesterday's article.
• The existence of loans and grants silences critics – Few speak out against pots of free money, because they might want or need to dip into them in the future.
• Incentives favor only those willing to apply for them – and therefore are often missed by companies working on disruptive, fast-moving tech, or who are focused on taking care of customers’ needs.
• Criteria are often too narrowly defined – Criteria for incentives often favor certain technology (solar photovoltaic over other solar, or ethanol over other biofuels), and as a result, lock out other legitimate but different approaches.
• Picking winners means designating losers – Recipients of government grants or loan guarantees get capital and an associated halo of being an anointed company. Those that don’t are comparatively disadvantaged.
• Not the best track record – Incentives go to companies best staffed to apply for and lobby for them. And those aren’t necessarily the companies that could use the capital the most effectively, e.g. to compete in world markets, or create the most jobs.

What governments could and should be doing

In the cleantech research and consulting we do worldwide at Kachan & Co., we’ve come to believe that governments are best focused on activities to create large and sustained markets for clean technology products and services.

Doing so gives assurance to private investors that there will be continued demand for their investments—one of the most important prerequisites to get venture capital, limited partners and other institutional investors to write large checks.

Given that objective, governments should, in our opinion, pursue:

• Setting mandates and standards – e.g. the amount of power generated from renewable sources, new targets for fuel efficiency, green building or other dimensions.
• Improving codes and other regulations – making building codes more stringent could drive energy efficiency, green building and smart grid investment.
• Building the talent pool
• Stabilizing the economy
• Fostering political stability
• Commitment to infrastructure projects – including water, transportation and grid.
• Building showcase projects – regions wanting to foster local cleantech can do as Abu Dhabi has done with its Masdar initiative, as Saudi Arabia is now doing with solar, or as China has done with hundreds of green development zones; in doing so, all three of these countries have sent strong signals to large corporations and investors that they view clean technology as strategic.
• Rolling back so-called perverse government subsidy support today of the fossil fuel industry, including direct and indirect subsidies.

Cities as test beds of policy innovation

Interestingly, cities are emerging as petri dishes of progressive cleantech policy, and are increasingly where such innovation is taking place.

For instance, Barcelona has established that large companies need to create as much as 30% of their power from solar thermal technologies. The city of Berkeley, California pioneered what is now known as Property Assessed Clean Energy (PACE) financing, wherein property owners are able to pay for energy efficiency and renewable energy improvements on their property taxes. This month, Phoenix, Arizona introduced what it calls the largest city-sponsored residential solar financing program in the U.S. And New York City is taking the lead in residential demand response by trialing a program to curtail the consumption of 10,000 room air conditioners at times of high demand.

Given the world’s current financial malaise, and especially in light the Occupy momentum globally, I’m surprised more folks aren’t questioning how their governments spend their money in cleantech. Because, as described above, there are other arguably more effective ways elected officials can help usher in a cleaner, greener future than throwing around billions in incentives.

After all, how much fun would a pristine planet be if we’re all destitute because governments have crumbled under crushing debt?

A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. This article was reprinted with permission from Kachan & Co.