Policies aimed at spurring a clean technology revolution show little understanding of the innovation process, how it drives technological change, and how it builds on, as much as builds, new markets.
"Clean technology" describes renewable energies like wind, solar, and nuclear; energy efficiency; environmentally sustainable materials and manufacturing processes; carbon capture and sequestration; and water and waste treatment. Clean technology innovation aspires to provide solutions for climate change, global energy security, environmental health, and economic growth.
The Need for Process-Focused Innovation Policies
Current approaches to fostering clean technology innovation focus on the supply side, generating new technologies, or on the demand side, attempting to put a market price on clean technologies (e.g., carbon). Done well, these policies have clear benefits. But they are not always effective in practice and, worse, their implementation often is financially and politically costly—preventing more effective policies from being considered or attempted.
Federal R&D spending has produced alternative technologies (inventions), but none has enjoyed broad market adoption (innovations). So, while policies focus on manipulating either the supply or demand side of clean technology innovation, they neglect the innovation process, where supply and demand come together. To describe this neglect, I posit several basic truths about innovation, and explore their implications for a clean technology revolution.
While policies focus on manipulating either the supply or demand side of clean technology innovation, they neglect the innovation process, where supply and demand come together.
First, innovation includes both the development and widespread adoption of new technologies and practices. R&D investment does not guarantee success. Most promising technologies never make it out of the lab. Those that do typically take decades to become broadly adopted—the light bulb, the automobile, and the Internet all took roughly thirty years before being embraced by the market. Intermediate goals, especially those that benefit specific interest groups, distort policy by neglecting both the long path to market and the value of each step.
Teddy Roosevelt warned that the impossible better is forever the enemy of the possible good. Pursuing the next generation of laboratory breakthroughs—the impossible better—undermines commitments to putting current alternatives into practice. The United States spent the 1970s fruitlessly looking for breakthroughs in wind technology; meanwhile, Danish companies put current technologies into practice and created the modern wind power industry. Today's solar and wind markets remain marginal—less than 0.1 percent and 1 percent, respectively, of the total U.S. energy market—and wholly dependent on inconsistent incentives for their growth.
Second, innovation depends as much on new business models as on new technologies. As innovation scholar Clayton Christenson notes, disruptive innovations typically underperform existing technologies on traditional terms and only gain market acceptance by defining new performance terms. New business models break the traditional relationships between offerings, customers, and market structures, enabling emerging technologies to compete on their strengths. The incandescent light was around for forty years, claiming a small market for independent and isolated systems, until Thomas Edison introduced the now-dominant utility model. In the early days, electric lighting could not compete on cost with gas; Edison's model enabled it to compete instead on safety, convenience, and (ultimately) a broader platform of other applications and appliances.
Today's extensive local, state, and federal energy market regulations inhibit, if not outright prevent, new business models from emerging. Solar power, for example, today competes as small-scale rooftop systems or as utility-scale plants, but is effectively prevented from exploring new business models in the vast middle ground between 100 kW and 20 MW. Similar barriers prevent development of micro-grid power systems. Unless new energy technologies can define new performance terms, they cannot compete with existing technologies' commodity pricing, production, and distribution.
Third, new business models tend to come from startups and the entrepreneurs who lead them. Incumbent firms drive incremental innovations that fit within their existing business models. By definition, incremental innovations are less risky, make better use of an incumbent's sunk costs in manufacturing, displace older technologies at a comparable scale, and work within the existing organization and industrial structures. Radical innovations, also by definition, do not.
In many ways, we depend on small firms to identify and initially develop wholly new technological pathways. Entrepreneurs can organize de novo around an emerging technology's unique strengths. Indeed, because most startups' primary goal is finding and proving a new business model before scaling, startups are perhaps the most cost-effective way to explore new clean technology innovation business models.
Startups are perhaps the most cost-effective way to explore new clean technology innovation business models.
Fourth, innovations' biggest productivity growth and impact come after new technologies are put into practice. The market validation of new business models, technology platforms, and market needs spur investment in complementary innovations up and down the new supply chain. Until this happens, the next wave of researchers, investors, and other entrepreneurs waits on the sidelines.
In the two decades following the establishment of the electric industry, for example, entrepreneurs drove exponential productivity growth and cost reductions across energy generation (advanced steam turbines), distribution (alternating current), and use (electric motors in manufacturing). Moore's law, which projects the doubling of transistors every couple of years, reflects the combined effect of these efforts.
In short, U.S. innovation policy needs to recognize and support entrepreneurs' critical role in generating (and validating) the new business models that will ensure emerging clean technologies gain a market foothold, and in the next wave of entrepreneurs who will innovate, in both production and use, the new technologies.
Policies that enable the small-scale demonstration of viable new business models would be more effective than large-scale demonstrations of unprofitable technologies. Policies that remove regulatory barriers, if only as experiments, would open the exploration of such business models. And policies that create certainty—within niche markets—will support the emergence of new companies committed to innovate along the emerging supply chain.