Fundamentally, Esty notes, price signals can “get the largest number of actors and innovators into the process—to really have the private sector play the role of the engine of innovation and to minimize a government role in trying to pick winners.” His approach provides a level playing field for solutions.
Khosla: Fund Innovators
Khosla admits that governments around the world can set useful price signals that spur innovation. But he worries that the risk of heading down misleading paths is too high, distracting innovators from the most cost-competitive solutions. Khosla argues fervently that innovations must meet the “Mississippi test”: Will average American citizens be able to afford them? So, too, he suggests the “Chindia test”—that fast-growing economies such as those in China and India will adopt cleaner energy only when it is cost-competitive with fossil fuels.
“I depart from the environmentalists,” Khosla says. “Their approach is to promote renewables regardless of cost. I don’t want to do uneconomical things. Even if we can do it in San Francisco, if the cost is not less than the fossil fuel it’s supposed to replace, it won’t be adopted in India and China. Then it’s just a toy and not a scalable solution. This can hurt more than help real environmental solutions. I’m a fan of hybrid vehicles, but they won’t replace current cars. We don’t need a fashionable technology. We need 80 percent of the next billion cars we ship to be highly fuel-efficient. If they’re not economical, we won’t ship them.”
An example of a government-directed pitfall is the money now directed at ethanol derived from corn. Cellulosic ethanol based on noncorn products would be much more efficient. “You get an 80 percent reduction in carbon emissions,” Khosla says. “That’s what the planet needs. I don’t want to make a commitment to technology [like corn ethanol] that is a dead end.” The natural gas–powered autos championed by billionaire T. Boone Pickens also don’t come close to meeting Khosla’s requirements, because they reduce greenhouse gas emissions by 30 percent or less. “It won’t get us to a 60 to 80 percent reduction over time. We would make all that effort to switch infrastructure, but we wouldn’t get past that reduction.”
Private capital, along with governments, should therefore fund innovators who can create those ultimate solutions. Worldwide, institutions such as the World Bank, the Asian Development Bank and the International Monetary Fund “could offer low-cost loans for low-carbon projects, thus reducing the cost of capital,” especially in the developing world, Khosla says. “I’ve also discussed the idea, as others have, of the Clean Development Mechanism, through which rich countries can outsource some of their carbon-mitigation responsibilities to the developing world, where relatively easier, cheaper marginal gains can be found.” He also favors the idea of using economic incentives to combat issues such as deforestation, for example, by banning biofuels from countries that destroy large tracts of forest land to produce them.
Esty’s counterargument is that the world cannot wait around until an innovator happens to stumble on a cheap solution. He also thinks too many venture capitalists and innovators may be more interested in creating the next cool video game because that may have a more immediate market. But Khosla says investors understand that the clean-tech market is huge, and they will pursue it aggressively.