17.0 Introduction

Since the 1960s, environmental economists have made the case for a switch away from command-and-control (CAC) regulation toward incentive-based (IB) approaches. Their response to the question “How can we do better?”: “We can achieve the same pollution-reduction goals at much lower cost.” The previous chapter illustrated how, slowly, through a series of increasingly complex policy experiments, the cap-and-trade idea in particular has taken hold. Today, this concept has achieved broad acceptance, and IB approaches dominate new regulatory initiatives across the planet. To attack global warming, global carbon trading—under a shrinking cap—has become a fact of life in Europe, has been implemented on the east and west coasts of the United States, and is on the table in China and Korea.

While IB advocates prescribed better regulatory design for our environmental problems, a more fundamental criticism has been leveled at any regulatory approach to pollution control, including both CAC and IB. As discussed at the end of Chapter 14, regulation faces three generic problems: (1) rapid economic growth, (2) rising marginal costs of control (the “easy” point and stationary sources are already controlled), and (3) leakage (pollution regulated in one medium squeezing out elsewhere). As a result, regulation alone, even when incentive-based, may not be sufficient to achieve environmental goals.

Moreover, we have seen that regulation is highly susceptible to political influence due to its information-intensive nature. Thus, industry spends tens of millions of dollars to influence and defuse the process and yet still finds itself saddled with burdensome and seemingly irrational regulatory requirements mandated by a frustrated Congress. At the same time, environmentalists charge that the actual regulations have no teeth and are enforced only erratically. As one observer puts it, “the classical sense of law is lost in sliding scales of targets and goals, accepted tolerances and negotiated exceptions, discretionary enforcement and discretionary compliance.”¹

As indicated in Chapter 14, the regulatory approach taken over the last 45 years has made a difference. Pollution levels are well below what they would have been in the absence of regulation, although relative to the initial goal of a “clean and safe” environment, the results have been disappointing. Nevertheless, the widespread perception is that the effectiveness of the regulatory approach is limited by the complexity of the issues at stake and the related opportunities available for political influence. In addition, there is no doubt that the regulatory approach, with its associated need for detailed bureaucratic decision-making, has been costly.

Finally, with climate change, “environmental protection” has suddenly become a civilizational challenge. The scale of the energy transformation that will be needed to hold global warming to the low end is staggering. As noted in the introduction, many economists believe that by 2050, the developed countries will need to reduce emissions of carbon dioxide and other global warming pollutants by 80 percent or more—effectively, a rewiring of the entire planet with clean energy over the next four decades. To meet this challenge, simply mandating that private companies in rich countries cut their emissions to get under a shrinking national cap is inadequate. Without complementary government initiatives supporting the rapid development and diffusion of clean energy alternatives, the private sector simply would be unable to deliver the needed cuts at acceptable costs.

Given these factors, recent economic thinking has focused on the development of clean technologies as a critical complementary strategy to regulation. Rather than relying solely on controlling pollutants at the “end of the pipe,” advocates of this approach argue that government should promote the use of technologies that reduce polluting inputs and processes in the first place.

Waste reduction in manufacturing, recycling of wastes, low-input agriculture, energy and water efficiency, renewable resource use, and renewable energy production are often cited as candidates for governmental promotion on environmental grounds. Collectively, they may be referred to as clean technologies (CTs).

However, this simple formulation begs at least three questions: (1) How can we identify a clean technology? (2) If the technology is so clearly superior, why isn’t the market adopting it in the first place? (3) If the market is failing to develop the CT rapidly, how can the government successfully “pick winners” and promote certain types of technologies over others? This chapter explores in more detail the theory of clean technology, focusing on these three questions, and it ends with two case studies: alternative agriculture and recycling. Chapter 18 concludes the CT discussion with a comprehensive look at the dominant technology challenge of our time: a rapid global transition to clean energy.

17.1 Path Dependence and Clean Technology

In 1977, just as I was entering college, an early and influential book arguing for a clean technology approach to energy hit the bookshelves. Soft Energy Paths: Towards a Durable Peace, was written by American physicist Amory Lovins. Lovins viewed the United States as being at a crossroads from which two paths diverged. The first was the road then being followed—a society based on the promotion and production of cheap electricity, via an increased reliance on coal, oil, and nuclear power. Lovins labeled this the “hard” path. By contrast, the “soft” path involved a conscious governmental effort to redirect the economy toward efficient use of energy and the promotion of renewable energy technologies, especially solar power.

Because the soft path depends on decentralized power production and greater reliance on locally available resources, it promised many social benefits: “A soft path simultaneously offers jobs for the unemployed, capital for businesspeople, environmental protection for conservationists, enhanced national security for the military, opportunities for small business to innovate and for big business to recycle itself.”² But, best of all, according to Lovins, it was cheaper.

From a theoretical point of view, government efforts to influence the direction of technological progress can be justified by what economists call path dependence.³ This theory maintains that current production technologies—for example, U.S. reliance on private automobiles for urban transportation—represent only one possible path of development. A potentially cost-competitive alternative in this case might be mass transit, which is dominant in many European and Japanese cities.

The path a society chooses depends on a variety of factors, including the relative political strength of the conflicting interests, chance historical circumstance, and course consumer preferences and relative production costs. In the auto example, the U.S. government’s decision to construct the interstate highway system beginning after World War II, which in turn promoted suburban development, provided the decisive advantage to private transport.

However, once a path has been chosen, other paths are closed off; this happens for three reasons. First, infrastructure and research and development (R&D) investments are increasingly directed toward supporting the chosen technology and diverted from the competing path. Second, the chosen technology is able to exploit economies of scale to consolidate its cost advantage. Third, complementary technologies that are tailored to the chosen path develop, further disadvantaging the competing path. In the transportation example, this would include the sprawling retail and housing patterns of U.S. cities, which now virtually require a private vehicle for access.

Path dependence theory suggests that once a path is chosen, there is no easy way to switch tracks. However, in retrospect, we can see that technological choices have social consequences—the adoption of private transport, for example, has borne a substantial environmental cost. Thus, the role of government is to try to influence the current market-driven process of technological development toward a path consistent with a sustainable future. Note that this theory assumes that governments in modern capitalist societies already necessarily play a major role in shaping technological change through infrastructure decisions and subsidy policies; the key here is to ensure that the role is a positive one.

Lovins’s original argument—that government should actively promote a shift to a clean energy economy—developed intellectual force over the ensuing decades, and as global climate change moved to center stage, has begun to shape U.S. policy. Under the Obama administration, as part of the 2009 stimulus bill, many of the policy tools explored in this chapter—R&D spending, infrastructure investment, commercialization subsidies, technology-forcing regulation—were greatly expanded in an effort to build a “Green Economy.” Behind all these initiatives lies a theory of path-dependent economic development.⁴

17.2 Clean Technology Defined

For the purposes of this book, a clean technology has three characteristics:

1. It generates services of similar quality to existing technologies.
2. It has minimum long-run private marginal costs comparable to existing technologies.
3. It is environmentally less destructive than existing technologies.

1. CTs provide comparable-quality services. Judging the quality can be a difficult task. For example, in sunny climates, a cost-saving and convenient way to preheat water for a dishwasher is to install a 50-gallon drum, painted black, on the roof. However, early attempts to market such a simple and cost-effective technology foundered on consumer resistance—the barrels looked ugly to most people. On the other hand, some consumers were proud to have an energy-saving barrel on their roof.⁵ Judgments about “similar quality” are necessarily subjective. Nevertheless, a governmental decision to promote a certain technology over another requires some judgment about the relative quality of service. Bad choices will ultimately be rejected by consumers, leading to failure of the CT policy.
2. CTs are cost-competitive on a market basis. Cost comparisons between technologies should be made on the basis of long-run private marginal costs, including taxes and regulatory costs. Why not include external social costs in the comparison? A comparison of private plus social costs does indeed provide the true measure of which technology is theoretically “efficient.” However, if CTs cannot compete on the basis of private costs, then they will not be adopted, regardless of government efforts to promote them.

   For example, consider photovoltaic (PV) cells that produce solar electricity. On the environmental scale, PVs clearly pass the CT screen. Yet, if PV prices cannot be brought down to levels competitive in the private market within a few years’ time achieving so-called grid parity without subsidies, their use will not spread rapidly, regardless of governmental efforts to promote them. Clean technologies must be competitive in the marketplace to succeed.

   What is meant by long-run marginal costs? Simply the cost of producing an additional unit once the technology is mature. CTs can be divided into two categories, based on whether they are achieving the high-volume production needed to reach the long-run minimum marginal cost. Late-stage CTs are cost-competitive with existing technologies at current production levels. Examples would include the installation of housing insulation or low-flow showerheads, the on-farm adoption of less-chemical-intensive pest control, or “housekeeping” measures by manufacturing firms to reduce the generation of hazardous waste. While late-stage CTs are by definition currently cost-competitive, they may still experience economies of scale through marketing.

   Early-stage CTs, by contrast, require additional R&D or high-production volumes to achieve minimum long-run costs. Examples include start-up recycling operations, photovoltaic or solar thermal electricity production, and the manufacture of the next-generation energy-efficient consumer durables such as cars, refrigerators, lights, and air conditioners.

   Figure 17.1 illustrates an estimated long-run average cost curve for electricity produced by wind power. Wind electricity costs started out at more than $0.25/kWh in the early 1980s. By 2017, with global wind capacity at more than 400,000 megawatts, the price had fallen to less than $0.04/kWh. At favorable sites, wind has now become competitive with the cheapest new fossil-fuel plants.

   

   Per-unit costs fall for three reasons. First, as the firms invest in R&D and gain experience, they generate new and lower cost methods of organization and production. Second, as the market size increases, firms can take advantage of economies of scale: lower cost production arising from the ability to use specialized machinery and personnel at high volumes. Third, as complementary industries and markets develop, input costs fall.⁶

   As drawn, the average cost curve eventually flattens out as opportunities for technological advancement and specialization are exhausted. This portion of the curve is the minimum long-run average cost, and because the average is constant, marginal cost as well. This long-run cost, to the degree it can be estimated, should be the baseline for a comparison between two technologies, for example, wind- and coal-powered electricity.

   The history of cost forecasting is replete with major disasters, such as the famous prediction that nuclear power would one day be “too cheap to meter.” Thus, credible forecasts stay as far as possible from scenarios relying on unproven or speculative technologies and depend instead on the expected costs of implementing known production methods within a relatively short time frame.

3. CTs are environmentally superior. Point 3 in the definition of clean technology ensures that it is indeed clean, which is in fact more difficult to establish than it appears. First, it is necessary to account, at least in a rough way, for all of the major environmental impacts of a technology: in manufacturing, use, and disposal. This kind of cradle-to-grave approach is known as life-cycle analysis. A second problem arises because different technologies have various types of environmental impacts. This leads to an adding-up problem, in which the superiority of one technology over the other may not be clear-cut.

The “diaper wars” debate illustrates both the life cycle and adding-up problems. Each year, American babies use about 17 billion disposable diapers made of paper and plastic. These diapers, which account for between 1 percent and 2 percent of material entering the solid waste stream, ultimately wind up in landfills or incinerators. Green entrepreneurs saw an opportunity and argued that cloth diapers, provided through diaper services, offered a clean alternative—comparable in quality of service (including convenience) and price and better for the environment. With consumer demand spurred by this “green” marketing claim, the diaper service business was booming. However, as a counter to the solid waste concern, Procter & Gamble (maker of Pampers and Luvs) sponsored a study and related PR campaign, which maintained that reusable cloth diapers generate substantially more water pollution in the washing process than throwaways do in manufacturing. In response, the National Association of Diaper Services sponsored its own research, which undertook a life-cycle analysis of the environmental impact of the two products. The authors of this study found that, in general, liquid effluent from the manufacturing process was less harmful for cotton than for disposable diapers and that the overall water pollution advantage of disposables did not hold for cotton diapers laundered commercially.

At this point, it appears that cotton diapers have an edge in areas with solid waste problems, and overall in terms of manufacturing effluents, although disposables may be preferable in areas where municipal water treatment facilities are overloaded or inadequate. However, the scientific details have not mattered much in the marketplace. Thanks in some large measure to P&G’s ad campaign, cloth diaper services lost their environmental luster and have been virtually eliminated as a competitive threat.⁷

Life-cycle accounting of environmental impacts is an emerging science that, in certain cases, is capable of identifying the relative pollution impact of different technologies with more or less precision. However, as the diaper case illustrates, a given technology need not dominate another in all pollution areas, and depending on how the life cycle boundaries are drawn, conflicting results may arise. At this point, a policy commitment to support one technology over another must often rely on “common-sense” judgments. This in turn means that “close calls,” similarly to cloth diapers, should not be considered candidates for governmental promotion as clean technologies.

A natural way to solve the adding-up problem and compare two technologies is to monetize and total the expected life-cycle environmental damages from each source. Such a value could be used to compare the social costs of the two technologies, as is done in Table 17.1 for electricity generation from coal and solar power. Note that the clean technology, photovoltaics (PVs), does impose some externality costs on society. However, the pollution generated in the manufacture of PVs does substantially less damage than that arising from the burning of coal. By monetizing damages in this way, a CT’s environmental superiority can be judged. However, as discussed in point 2 earlier, adding environmental damages should not be part of an assessment of a CT’s cost competitiveness. Clean technologies will rapidly diffuse only if consumers face market prices that are comparable to those of dirty alternatives.

This section has provided a working definition of clean technology. We have found that both small- and large-scale technologies can qualify; there is no up-front bias toward “small is beautiful.” However, all of the clean technology candidates discussed in this chapter—PVs and other renewable energy technologies, energy efficiency, diaper services (in some areas), recycling, waste reduction, and alternative agriculture—achieve their environmental advantage by being relatively labor-intensive and/or relying to a greater extent on locally produced resources. As discussed in Chapter 6, these features can sometimes generate higher local employment levels.

17.3 If You’re So Smart, Why Aren’t You Rich?

The first objection raised to the clean technology approach is this: if these technologies are close to commercial development, generate a quality of service and have long-run production costs comparable to existing technologies, and are environmentally superior, why aren’t private entrepreneurs developing them in the first place? In other words, if CT advocates are so smart, why aren’t they rich?

The first response is that, in some cases, they are. For example, tens of thousands of American farmers have adopted various forms of low-input farming; recycling has emerged as an economic form of waste disposal in many communities; service corporations that identify cost-effective energy savings for firms and households are growing rapidly. Thus, market forces do provide some support for clean technologies. Yet, the market share for many of these CTs, while growing, remains tiny.

A variety of obstacles can discourage the market deployment of environmentally superior, cost-effective technologies. Table 17.2 provides a summary. The principal market obstacle is the lack of a substantial profit advantage for CTs. There is little incentive for private firms to undertake the marketing efforts necessary to overcome marketplace barriers to rapid diffusion: poor information, thin resale markets, poor access to capital, and high discount rates.

A second substantial barrier arises from current governmental policy: subsidies tilted in favor of existing competitor technologies. These subsidies range from R&D funding to price supports to tax credits to efforts on behalf of industry by state and federal agency personnel. Finally, of course, market prices for the competitor technology fail to reflect externality costs.

GOVERNMENT OBSTACLES TO CLEAN TECHNOLOGIES

In addition to market barriers, CTs are often disadvantaged by government action in the form of direct or indirect subsidies to highly polluting competitors. Consider agriculture, for example. As you may have learned in an introductory economics course, due to the high variability in agricultural prices, the government has historically provided farmers with a guaranteed price floor. If the market price falls below the price floor, say $2.80 per bushel for corn, the government makes up the difference. However, as illustrated in Figure 17.2, the price floor also guarantees an excess supply of corn ($q_d$ to $q_s$) that the government must stockpile. One consequence of the surplus production is, of course, greater pesticide use.

In addition, subsidy programs can directly penalize cleaner agricultural practices. Until recently, price supports were primarily available for a limited number of crops, and these crops (coincidentally?) were very high users of chemical fertilizers and pesticides. Moreover, the subsidy payments for a given year were based on past yields of the crop in question, effectively tying farmers to the production of subsidy crops. A farmer desiring to adopt a CT based on diversification into less-chemical-intensive crops and crop rotation as a method of fertilization and weed, pest, and erosion control thus might find herself doubly damned. Not only would she lose her subsidy this year, but also subsidies for any future program crops she grew would also be reduced.

While farm subsidies provide a very visible example, most CTs face competitor technologies that receive important governmental aid, either direct or indirect. As we discussed in the previous chapter, for example, solid waste disposal is often paid for through lump-sum tax payments, not by unit pricing. This provides a subsidy for large garbage producers, disadvantaging recycling. Chapter 18 focuses on subsidies for polluting technologies in the energy field.

This section has provided a look at both market and government obstacles to clean technology adoptions. We now consider how government policymakers can in fact select and promote CTs in the most cost-effective manner.

17.4 Picking the Winning Path

Recently, a prominent government critic was on the radio. He made the argument that many of the environmental problems in the western United States could be directly traced to bad government decisions reflecting industry’s influence: subsidies for ranchers leading to overgrazing; subsidies for timber companies leading to clear-cuts; subsidies for mining companies leading to water contamination and the destruction of wilderness areas; and radiation leaks and releases from nuclear facilities owned, leased, or subsidized by the government.

There are two responses to these governmental efforts at industrial promotion. One is to despair of government’s ability to rationally intervene in economic affairs. Traditional conservatives would adopt this position and argue that, despite possible market obstacles to the rapid adoption of clean technology, the only thing government should do is to level the playing field by eliminating all subsidies.

Progressives adopt an alternative response. While acknowledging government failures, they argue that a blanket call for the elimination of subsidies is naive. The challenge is to recognize the limitations of government intervention and, taking this into account, implement policies to promote CTs.

How can bureaucratic errors and political influence be minimized in this process? A three-step procedure should be followed.

1. Level the playing field. To the extent possible, subsidies for dirty technologies should be eliminated, and their external costs should be internalized, preferably through IB regulation. “Leveling the playing field” by reducing subsidies and internalizing social costs may provide clean technologies with the edge needed to succeed.
2. Promote only clear environmental winners. Given the uncertainty associated with assessing the actual environmental impacts of different technologies, only CTs with a clear environmental advantage should be considered for promotion.
3. Tie subsidies to least-cost performance. When the government does decide to actively promote a technology, subsidies should be directed only to projects that either are already cost-effective or promise to deliver cost-effective services within a relatively short period of time, say a decade or less. Subsidies to the latter category should be conditioned on observable cost reductions. In sum, government planners should focus attention on least-cost technology options, subject to an environmental screen.

This least-cost approach is consistent with path dependence theory; the government is looking for environmentally friendly “infant” industries that need only time-limited support to attain a sufficiently large scale to be self-supporting. The rationale for government subsidies under path dependence theory is to jump-start an industry for its environmental benefit, not provide indefinite promotion efforts. Least-cost planning of this type thus achieves two goals. First, government’s objective is to speed up, not replace, the market process of adoption of CTs. Market forces will naturally spread technologies with a greater profit advantage faster. The faster the technology spreads, the greater the environmental benefits society reaps. Second, by using a least-cost approach, bureaucrats can avoid making expensive commitments to technological white elephants.

A good example of government “picking losers” has been the support of nuclear fusion. Fusion is an approach to energy production based on fusing two atomic nuclei together. By contrast, commercial reactors today generate power through fission, the splitting apart of particles. The government commitment to fusion research began in 1952, spurred on by the scientific cold war with Russia. Today, after at least six decades of federal funding in the hundreds of millions per year, fusion is nowhere near commercialization.⁸

Why do such subsidies persist? A steady flow of federal dollars created a “fusion community”—physicists and engineers at university and federal labs and bureaucrats in the Departments of Defense and Energy. This community cultivated ties with key members of Congress and relied on concerns about national security to maintain funding. This is a general story: subsidies, once instituted, create “communities” that organize to protect the subsidies, and they can thus take on a life of their own.

In contrast to the open-ended support of fusion, path dependence theory suggests that a CT program can and should focus on technologies with a clear environmental advantage that will stand on their own relatively quickly. Government can then make only time-limited or performance-based commitments to the technology and thus avoid the development of vested political interests attached to a particular technology. Fusion would have neither passed an environmental screen nor survived subsidies conditioned on rapid cost reductions.

Following a least-cost strategy ensures that policy concentrates on “picking the low-hanging fruit.” Doing this gets more environmental protection for a lower investment with less risk and a lowered probability of prolonged government involvement.

17.5 Promoting Early-Stage Clean Technologies

It is useful to divide clean technologies into early- and late-stage groupings, as the market obstacles they face are somewhat different. Early-stage technologies need policy assistance to ramp up production to high volumes before they can be cost-competitive. Late-stage technologies, by contrast, have already achieved high enough production levels to lower their costs, and they have reached cost parity with dirty technologies. The barriers these late-stage technologies face are primarily a function of imperfect information: consumers must “learn” to adopt these alternatives and capitalists to finance them.

The primary barrier facing early-stage CTs is achieving high-volume production. As illustrated in Figure 17.1, this lowers per unit costs through R&D, learning by doing, and scale economies. The key policy issue is to provide some incentive for existing or new firms to enter these markets. This section discusses four policies to encourage such interest: (1) R&D funding, (2) technology-forcing standards, (3) infrastructure investment, and (4) producer subsidies.

17.6 Promoting Late-Stage Clean Technologies

Consumer and business resistance to late-stage CTs reflects a natural inclination to stick with “what works,” rather than adopt an unknown and possibly risky alternative. As we have seen, the relatively low-profit advantage of many CTs discourages private sector marketing initiatives to overcome this resistance. Government policy should therefore be directed at providing information to consumers and reducing perceived risks of adoption. Informational barriers can be dealt with through (1) product labeling and certification requirements, (2) flexible design standards, (3) the reorientation of utility regulation, and (4) technical assistance programs. A program of (5) subsidies for consumers also can attack the information problem as well as compensate for higher capital costs.

17.7 Clean Technology: Two Case Studies

Having explored the theory of path dependence and the tools for clean technology promotion, we now turn our attention to two case studies: agriculture and solid waste management.

SOLID WASTE MANAGEMENT

In contrast to alternative agriculture, recycling has received widespread governmental promotion. Largely as a result of local government mandates, the number of curbside collection programs grew from 600 in 1989 to over 9,000 a decade later and now, recycling is widespread across the United States. Is recycling a clean technology?

Americans generate more than 232 million tons of garbage each year. Depending on your perspective, that is, (1) enough garbage to fill a fleet of trucks stretching halfway to the moon, or alternatively, (2) garbage that can be landfilled in a space equivalent to less than 0.00001 percent of the continental United States (but preferably not in my backyard). On a per-person basis, it works out to about three quarters of a ton, twice as much per capita as in many European countries.¹⁵

Recycling this solid waste yields two types of environmental benefits. The most obvious is a direct benefit: cleaner waste disposal. Because recycled products are not sent to landfills or incinerators, they do not pose environmental problems in the disposal process. Recall that environmental hazards from state-of-the-art landfills are not as great as those from many other pollution sources, primarily because the only significant exposure route is local, via groundwater. Nevertheless, hazards from leachate do exist. New incinerators, although generally complying with most air pollution regulations, still generate residual hazards from regulated pollutants as well as from some that are still unregulated. Incinerator ash must be disposed of. If this is done via landfilling, the ash also presents a leachate problem.

Indirect benefits constitute the second type of environmental benefit. Table 17.4 compares the production cycle for products made from recycled and virgin materials. The recycling process is, of course, not pollution-free. In all production stages, recycling causes significant pollution. Unique recycling waste, for example, deinking sludge from paper recycling, also poses serious disposal problems. However, relative to production from virgin material, recycling often yields two important indirect environmental benefits: energy savings and upstream pollution avoided.

Virgin	Recycling
1. Raw material production	1. Collection/processing
2. Transport	2. Transport
3. Manufacturing	3. Manufacturing
4. Distribution	4. Distribution

Because secondary materials are already “preprocessed,” it generally takes much less energy to convert them into finished products. Energy savings in turn often translate into significant environmental benefits. Figure 17.3 shows the energy requirements to produce a variety of products from both virgin and recycled materials. Particularly for plastics, the energy savings are impressive: recycled plastic requires only about one-fourth of the energy of plastic made from virgin material. In addition to energy savings, the collection and processing of recycled materials can be less environmentally damaging than the production and transport of raw materials from virgin sources.

Recycling can thus have local (direct waste management) and global (indirect) benefits. From an environmental point of view, global benefits have often been thought to dwarf the local benefits. As a result, the latter attribute has motivated popular enthusiasm for recycling. “Think globally, act locally” was the slogan adopted by community groups who first promoted recycling in the 1970s. In its early days, recycling was urged as an environmental duty, and even today, most of its political impetus derives from broad support for a cleaner environment. In addition, some of its cost advantage lies in voluntary citizen efforts to sort and/or collect recyclable material. However, recycling did not take off until the local advantages of recycling as a cost-competitive waste management strategy became apparent in the late 1980s. As conventional disposal costs began to rise, along with EPA regulations forcing landfills and incinerators to internalize externalities, some communities began to make money off their recycling programs.

Is recycling cost competitive today? Yes, up to a point. The explosive growth in recycling has generally kept prices for recycled materials down, because new supplies have outstripped the growth in end-use markets. Volatile prices in end-use markets mean that recycling programs will “pay” some years and require operating subsidies in others. It is difficult to assess whether communities in general are overinvesting in recycling on purely economic grounds.¹⁶

The key to the long-term success of recycling has been, and will be, the development of end-use markets. Of course, the mere existence of cheap sources of junk will inspire entrepreneurs to dream up things to do with it. In recent years, old newspapers have been shredded and turned into animal bedding, while glass has been ground up to use for “glassphalt” roadbed.

Here, state and local government actions have been very effective at technology forcing. For example, the U.S. government purchases large quantities of recycled paper for use in copy machines. The increase in mandatory recycling, recycled content laws, and government purchase programs have all dramatically boosted investment in recycled mill capacity. Chemical manufacturers, responding in part to actual and threatened local bans on plastics, have been working hard to develop recyclable products and create end-use markets. Technology forcing has worked well here because of the wide diversity of locations of these initiatives. Under such circumstances, industry was better off meeting the technology challenge than fighting it.

Recent popular enthusiasm has thus pushed recycling to become a dominant, long-term waste management option. According to William Ruckelshaus, former head of the EPA, “If the infrastructure gets put into place, with collection systems, processing centers and end-user markets, then it will not matter if the current ‘feel good’ attitude subsides. Economics will take over and the system will be self-sustaining.”¹⁷

Recycling is an example of a successfully promoted CT. As federal regulation (of the CAC variety) internalized the environmental costs associated with landfills and incineration, these options became more expensive, and recycling became cost-competitive. At the same time, popular support for recycling at the local level was sufficient to overcome a natural tendency on the part of municipal officials to stick to proven technologies. In addition, carrots in the form of market guarantees, as well as sticks in the form of product bans and content laws, both emerging simultaneously in dozens of locales, have generated substantial investment by the private sector in developing end-use markets for recycled products.

17.8 Summary

This chapter identifies government promotion of CTs as a potentially attractive complement to regulation for controlling pollution. By internalizing social costs, regulation provides a more level playing field on which clean technologies can compete. Yet, with the easy “point and stationary source” regulatory gains already achieved, in the face of pressures from population and economic growth, and with the unprecedented challenge of climate change, rapid development and diffusion of CTs will become an increasingly important means of improving environmental quality.

Regulating waste once it is produced exacerbates short-run conflicts between economic growth and environmental quality. While in the long run, environmental regulation spawns new technologies and creates new industries and jobs, “in the long run,” as the economist John Maynard Keynes once said, “we are all dead.” As a supplement to the stick of pollution taxes (or other IB regulation), the CT approach offers a carrot of government-promoted, substitute technology. Thus, the short-run trade-off between material well-being and the environment becomes much less stark.

Moreover, path dependence theory suggests that a continued exclusive government focus on end-of-the-pipe regulation of pollutants will lead to technological progress in end-of-the-pipe waste management, rather than in waste-reducing CTs. Concerned primarily with regulatory compliance, and provided with the funding to do so, environmental managers in industry and government will continue to develop expertise in emission monitoring and enforcement, risk analysis, and benefit–cost analysis; engineers will focus on cheaper ways of scrubbing and filtering emissions and on safer ways of incinerating or burying wastes. While these skills and technologies are important for making regulation work better, they are not primarily the skills and techniques needed for a transition to CTs.

Finally, in practice, we have seen that regulation is an adversarial process in which environmentalists and industry compete in an information-intensive conflict over the drafting and enforcing of standards. A regulatory approach in one sense sets government up to fail, because the affected parties have many opportunities, and much to gain, from influencing the process. The political economy of a CT approach promises to reduce the day-to-day conflict between regulators and firms as well as limit the opportunities for political influence.

Promoting CTs, of course, is certain to have its own bureaucratic problems associated with implementation. Conservative critics would charge that the “light-handed” planning process described here, while nice in theory, would dissolve as soon as a CT agency were established. Once provided a budget, CT promotion would devolve into “heavy-handed” restrictions on industries arbitrarily judged to be “dirty” by environmentally motivated bureaucrats, coupled with expensive crash programs to develop completely ludicrous technologies, located in the districts of powerful members of Congress.

Yet, a political-economic case can also be made that a CT strategy would be an effective complement to regulation, reducing both costs and regulatory conflict with industry. Because CT development does not involve rule making at the level of individual pollutants, or extensive monitoring and enforcement, informational requirements are diminished. As the need for information falls, so do opportunities for political influence, delay, and indecision. Once funded, technology subsidies are a win-win situation; firms are rewarded for reducing pollution, rather than punished for not doing so.¹⁸ Thus, CTs can transform an adversarial relationship into a partnership. Finally, path dependence theory suggests that government subsidy commitments can and should be time-limited and/or performance-based, thus reducing both the probability of picking losers and the development of vested interests. We now turn our attention to an area often seen as critical ground for clean technology promotion: energy.

1. 17.0 This chapter focuses on government efforts to promote clean technology as an alternative to regulation.
2. 17.1 Government intervention in the early stages of technology development and promotion may be justified to achieve environmental goals under a theory known as path dependence.
3. 17.2 Clean technology (CT) is defined as having three components. CTs must (1) deliver services of a comparable quality and (2) do so with long-run marginal costs comparable to existing dirty technologies. (Early-stage CTs must achieve economies of scale before low-price production can be achieved, while late-stage CTs are already cost-competitive.) Finally, CTs must (3) be environmentally superior to existing options. Determining this requires considering all major impacts using life-cycle analysis and addressing the adding-up problem.
4. 17.3 Two general obstacles to rapid diffusion of CTs are (1) a lack of substantial profit advantage in the marketplace and (2) government direct or indirect subsidies to competitors. The lack of high profits means that there is little private pull to overcome barriers such as high sunk costs (R&D and marketing), thin markets, access to capital, and high discount rates.
5. 17.4 Government can help pick winners if it (1) levels the playing field. This entails removing subsidies for competitor technologies and internalizing social costs, preferably through IB regulation. It must also (2) focus on environmentally superior options only and (3) engage in least-cost planning. Under a least-cost approach, all subsidies are either time-limited or conditioned on cost-reducing performance.
6. 17.5 Early-stage CTs can be promoted by (1) R&D funding, (2) producer subsidies such as price preferences, procurement contracts, and loan guarantees, (3) technology-forcing standards such as the CAFE and Renewable Portfolio Standards (RPS), and (4) infrastructure investment including the smart grid.
7. 17.6 This section discusses tools for promoting late-stage CTs. These include (1) product labeling, (2) flexible design standards, (3) utility marketing of energy efficiency, (4) technical assistance programs, and (5) consumer subsidies. Subsidy programs must be carefully designed to avoid free riders.
8. 17.7 Alternative agriculture and solid waste recycling are explored as examples of clean technologies. The primary obstacle to the former is, as usual, an insignificant profit advantage that is unable to overcome adjustment costs. Policy here could focus on R&D and technical assistance. Solid waste recycling gains an environmental edge over landfilling and incineration, largely through indirect benefits: lowered upstream impacts and reduced energy use in processing. Recycling is a successfully promoted CT. As a result of government support over the last few decades, recycling has become a major waste management option.

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