Financial Innovation in Clean Energy

Yesterday I dinged a Slate article trying to find something good to say about Limp Bizkit* as "contrarianism run amok," a common criticism of the magazine. That said, Daniel Gross today makes a good -- and contrarian! -- argument that what is most needed to advance clean energy in this country is not new technology, as is often claimed, but new ways to finance it:

As Rive has discovered, the future of the alternative-energy industry now depends far more on financial engineering than mechanical engineering. Clean-tech trade publications are filled with breathless coverage of new innovations: thin-film solar technology, advanced batteries, cars powered by hydrogen fuel cells. But money has never been harder to come by, thanks to the struggling capital markets. "The alternative-energy sector is flat on its back," says David Crane, CEO of giant energy producer NRG. "There's no debt financing available from Wall Street." The Cleantech Group reported that in the first quarter of 2009, total green-energy-venture investments fell 50 percent from the first quarter of last year.

Government policy has traditionally played a part in kick-starting new technology, whether by providing land and financing for railroads or commissioning the first telegraph line. When the profit motive kicks in, the private sector begins to fund development. Both types of financial innovation will be needed for the fledgling alternative energy to thrive—and there are already signs of creative breakthroughs.

This is an important point to make; for all the (justified) outrage over Wall Street's use of "financial innovation" in the past decade, an effective climate policy needs to figure out new ways to getting money to alternative energy projects, which often have large upfront costs and, in the case of energy efficiency projects, long payback periods. The obvious tool for this, of course, is carbon pricing, but there are lots of things that we can pursue that get us to the same goal. One way to do this, besides the methods Gross mentions, is through feed-in tariffs, which have helped make a rather cloudy country like Germany a leader in solar power. We also need to reexamine traditional financial instruments and see if we can make them more energy-conscious, as it were. If I may plug my employer for a moment, rolling the costs of energy efficiency investments into people's mortgages would go a long way toward reducing the carbon intensity of the nation's housing stock.

At the same time, we would do well to be wary of too much, or the wrong kind of financial innovation in the alternative energy industry, just as we are of financial innovation more generally. To tie this in to my previous post on the subject, there's a case to be made that the various mandates and tax credits that have been used to subsidize alternative energy thus far have done more harm than good (see the textbook argument here, or the many biofuels debacles). Yet again, our financial system is hardly a free market -- especially these days -- and it's the responsibility of government to ensure that it is serving societal goals, a sustainable energy regime being among them.

* Speaking of Fred Durst, this blog (via Vulture) may be the best thing on the Internets today.