The Contrarian

Yesterday there was an interesting blog post by Matt Bowman about a San Francisco based professor and entrepreneur Jon Fisher in which Fisher was quoted saying that social media companies were using up all the available venture capital and making it more difficult for companies involved in clean tech to get funding.  He said:

“I think these Web 2.0 guys are poised to suck the oxygen out of the liquidity markets and hurt the cleantech guys…. We must have a Tesla we must have these battery companies, we must have desalination companies…. I think it’s a zero-sum game as far as the money available to companies these days. So I would like for the Web 2.0 guys to sell their companies successfully and I think they missed their window.” The ballooning amount of capital tied up in Web 2.0 is leaving precious little for critical innovations.

While that’s an interesting take, I am not sure I agree with it.  The logic is off because it implies that if Web 2.0 was not around all the money would naturally flow to cleantech.  Now, I am a big fan of cleantech and I also happen to think that Web 2.0 technologies are, in many instances, over-hyped.  Nonetheless this statement shows a fundamental misunderstanding of economics.

Money flows to where it is treated best, the old Wall Street saying goes meaning it is invested where the investor believe it will gather the best return.  That’s capitalism.  If Web 2.0 was not around there is nothing to guarantee that cleantech would be the beneficiary for the simple reason that the economic drivers are not in place to make cleantech a money destination, at least not in any large measure.  That’s disappointing but true.

The reason cleantech is not better funded can be found in society’s attitude toward conventional fuels.  We like them — a lot.  Fossil fuels might be damaging the environment but they are relatively cheap and there is a many trillion-dollar infrastructure to process and use them.  That infrastructure and favorable tax laws that make coal and petroleum artificially cheap are the real reason that cleantech is not doing better.

Also, with projections of disastrous climate change still pegged at mid century the middle-aged people who make the investment decisions have adopted an attitude of IBG/YBG or I’ll be gone/You’ll be gone.  It’s scary but there it is.

At the heart of not treating money well enough in cleantech is the inconsistency of market pricing.  When gasoline was four dollars per gallon, people started driving less and looking for alternatives.  Americans drove 122 billion miles less from November 2007 to November 2008 (U.S. DOT) when gas prices spiked and we looked for efficient cars too.  But we quickly reverted to type when prices receded.

That makes investing in cleantech extremely dicey.  If an investor wants to get involved in solar energy or wind that investor needs to know that there is a reasonable probability of making a return on the investment.  But people are fickle, we won’t buy wind-based electricity at seven cents per kilowatt hour even though we know it’s better for the environment than nickel a kilowatt coal based power.

What’s needed is a level playing field, something we don’t have right now because in the U.S. we subsidize coal and petroleum based power and we externalize the environmental costs.  By that I mean the cost to the environment of strip mining coal and putting its carbon into the air is not accounted for.  Yet, the entire cost of all wind generating equipment must me accounted for in the price of its power because there are no subsidies for it.

Putting cleantech on the same footing as dirty carbon would not be hard to do.  If we put a four dollar tax on a gallon of gas, for example, it would make electric cars competitive.  Internalizing the cost of carbon fuels would make electric power more expensive too and make alternative forms of power generation cost competitive.

Economists call this a market signal and Thomas Friedman writes eloquently about it in his latest book “Hot, Flat, and Crowed”.  Once investors know that the cost of all power will be competitive then they can have the confidence to invest in developing it.  That’s the benefit we need and the reason cleantech isn’t doing better.

Finally, if you think that a four dollar tax is the height of irresponsibility consider this.  As imported liquid fuels become more expensive, the price we pay at the pump will go out of the country enriching the treasuries of oil producers enabling some of them to finance fundamentalism and worse.  It would be better if that money flowed into our treasury and we used it to green the economy (Friedman, again).  But that takes political will, something as elusive as funding for cleantech.