February 6, 2018

Graeme Dickson - 2020 Group board member

Can governments create new low carbon industries?

Boardmember Graeme Dickson asks if the Scottish Government is ready to strategically lead the country into a low carbon future.

The transition to a low carbon economy will provide opportunities for new industries and business models to develop. Governments are naturally keen to see the benefits of those developments accrue to their economy. The UK Industrial Strategy says, “The move to cleaner economic growth – through low carbon technologies … – is one of the greatest industrial opportunities of our time.”

There are risks as well as opportunities in seeking such industrial strategy benefits. Curiosity driven research and specific support for early stage technologies are well-established roles for government. But there is a need for further research on how technologies can best be supported through to production. The challenge is that private capital is often short term and risk averse. Some economists have suggested that the state needs to be the provider of ‘patient capital’ to facilitate innovation. However, experience demonstrates that the returns on such public investment are uncertain. Some failures are inevitable even for promising inventions in potentially large markets. Past failures led to the injunction that governments should not “pick winners” with the US Congress legislating to curtail investment following the loss of $535 million in one company, Solyndra.

In the face of this dilemma, what should governments do? New research looks at the Scottish Government’s aspirations to build a wave and tidal current energy industry in Scotland. It sets out the learning from that and proposes future changes.

Policy briefing: Marine energy in Scotland: another case of ‘picking winners’?

The driver behind this industry was the considerable wave and tidal resource around Scotland’s coastline. The Scottish Government invested heavily over the last 15 years to accelerate the development of a new, indigenous industry. It introduced a wide range of marine energy support measures. Some of its mechanisms were ambitious, novel and generously funded. However, the expectations of both industry and politicians were unreasonably high. Moreover, the timescale envisaged was overly ambitious.

The Scottish Government backed two leading wave companies but faced a dilemma when their private funders withdrew. It faced the prospect of investing over £300 million to take the devices to a more commercial stage, but decided that it could not make that massive commitment. The two companies later failed and over £30 million of government funding was written off. This did not attract any political criticism, suggesting a consensus existed to support the interventions. Today, wave power devices remain at the early stage of technological development.

The new research offers three insights. Firstly, it suggests that the Scottish Government’s interventions did not appear to follow a coherent strategy over time to develop a challenging new technological innovation system. Secondly, it did not consider the significant wider changes taking place in the energy landscape. Thirdly, its energy innovation policy relied on a restricted pool of expert advice.

The lessons from this research may be applicable to the development of other new technologies, particularly in the energy sector. One approach, mirroring experience in the US, would be to invest in a wide portfolio rather than pick a leading technology. This would, however, require a substantial budget. In the case of smaller economies like Scotland, this may require building a wider international funding consortium.

Another key lesson from the research is that good governance practice across advisory institutions and policy makers is essential. If Scotland is to implement its ambitious future energy strategy successfully, it should create a new advisory board including experienced and impartial members. The form and scale of government interventions should be based on sound and impartial advice that builds on past experience.

There are hopeful signs that some of the lessons of marine energy have been taken into account by the Scottish Government. In contrast to the UK’s position, the new Scottish Energy Strategy is more measured in its expectations for industrial opportunities. It notes that low carbon solutions are “central to our ambitions of producing sustainable, inclusive growth” and that the new Scottish National Investment Bank will have “low carbon investment as part of its mission-based approach.” But there now appears to be less hype and more realism in the prospects of rapidly creating new industries.

Tweet Graeme at @graemefdickson