We Got What We Asked For in Copenhagen!

Recently Fareed Zakaria discussed (on CNN's GPS program) an interesting idea: Let's think about acting on global warming as a form of insurance, whereby we attempt to protect ourselves (or our descendents) from a very undesirable outcome.



A new way to frame the discussion is more than welcome. We've been locked into a few typical "mental models" in dealing with this question, and they have been hampering our creative thought process. In general, three "archetypes" have dominated our approach to climate change action:



1. Advocacy (or, depending on one's opinion, "religion," or even "cult"): Key objective is to educate individual, organizations, and decision-makers about global warming (status, causes, and outcomes) and drive them to desired action (or inaction).
2. Public Policy (or, depending on one's perspective, "regulation," or "bureaucracy"): Key objective is to drive, set, and enforce public policy (like carbon cap or tax) aimed at certain environmental outcome.
3. Business (or, depending on one's bias, "capitalism," or "profiteering"): Key objective is to enable and direct market-based solutions (like credit trading platforms) aimed at desired environmental outcomes.


But these are certainly not the only potential frameworks for this issue. Let's consider Fareed's idea: What are the prerequisites for a viable "insurance" market? At the very least, insurance requires two parties which have a different perspectives about a potential risk. The two parties may have different evaluations of the likelihood of the potential risk (the risk may seem more likely to the insured than to the insurer); they may have different views on the impact of the potential event (see for example the market for Credit Default Swaps); or they may have different levels of aversion to the potential risk (which is why many people buy some type of life insurance).



Does that sound applicable to the global warming space? Of course! We have two camps with wildly differing views about the likelihood, severity, and relevance of global warming. This creates a golden opportunity for "arbitrage" through some "insurance" products. For example, let's say a policy would pay the insured $1 million for every 1 degree rise in a particular temperature benchmark by a given date. Some people think such an event is imminent, likely, and horrible—and therefore would like to buy the policy; some think that such an event is highly unlikely and of little consequence—and would therefore be delighted to issue such a policy (for a fee). With willing sellers and buyers and significant stakes, a market can emerge and flourish.



One can imagine, for example, small island states like the Maldives (which are very concerned about sea level rising) buying such a policy from Canada (winner of the "fossil of the year" award in Copenhagen). And how about these potential transactions:

• Paul Krugman buying insurance from Bjørn Lomborg



• George Soros shopping for a policy provided courtesy of Lord Monckton



• Brad DeLong getting a quote from Stephen Dubner and Steven Levitt



• Joseph Romm signing up for insurance from geoengineer Nathan Myhrvold

In general, matching two parties with wildly differing world views need not just result in name-calling and hot air (as enjoyable as that may seem for a while)—if properly managed, it could also result in a win-win solution (and nice profits, most likely). Those who worry about global warming put their money where their mouth is—by paying upfront for protection; those who don't care collect the money—but take on a major potential liability to mitigate the risks, should they materialize.

[Note: Insurance markets pose some additional interesting issues, like the questions of reinsurance, moral hazard, and self-selection; we may get back to them in a later post.]

Now the alert reader might notice something odd in the (admittedly tongue-in-cheek) illustrative transactions above. "How come," asks the reader, "you're showing the Maldives paying Canada? The Copenhagen climate talks were about precisely the opposite transaction—with developed nations paying developing nations. What's wrong with that picture?"

Well, the alert reader is correct: The climate talks used a mental model which is diametrically opposed to the idea of insurance. While insurance focuses on protection against future unknowns, the Copenhagen climate talks bogged down is discussing past behaviors. Even though only one developed nation (the U.S.) is among the five nations contributing the most to greenhouse gases (the others are China, Indonesia, Brazil, and India), developing nations are expecting payments—"penalties," "accommodation," or even "reparations"—from developed nations, on account of the history of CO2 emissions (primarily from the developed world).

This mindset is rooted in a fundamental sentiment, in developed and developing nations alike, that the history of global economic development has been unfair in some important respects and resulted in major inequality and injustice; global warming is simply a symptom of our historical excess—and taking action on climate change is a way to atone for sins of excessive development, progress, and wealth. While many talk of the "sacrifice" necessary to drive an equitable solution, Hugo Chavez has taken this mindset to its logical extreme, pointing out in his Copenhagen speech: "Capitalism is a destructive development model that … threatens to put a definitive end to the human species."


But our approach to global warming need not be one of constant self-flagellation. For example, "Energy Efficiency" (or "Resource Efficiency") could represent a terrific framework to align environmental and economic considerations.

As some readers may recall, decades ago the "quality movement" redefined the factory floor; that school of thought moved well beyond a focus on product reliability, and instilled an unrelenting commitment to eliminating all operational errors (a famous Japanese metaphor was "Pursuing the last grain of rice in the lunchbox"). "Quality" was really a pretext for world-class productivity.

Fast forward to today: By focusing on the lifetime environmental impact of their activities, businesses can drive an unrelenting focus on eliminating waste of economic and environmental resources; just like Total Quality Management became synonymous with overall productivity, Resource Efficiency can become synonymous with "lean business" and superior business performance.

Understanding the varying mental models for tackling global warming is not just a nice intellectual exercise: Each of them would lead to materially different negotiations and outcomes. For example, if we ask (as we did in Copenhagen) how to best compensate the developing world for the sins of past development, of course we end up with Hugo Chavez spitting in our face to a standing ovation. The Copenhagen climate talks embodied a subset of mental models--Advocacy and Public Policy built on a foundation of Guilt/ Penalties/ Reparations--which were evidently ineffective. The disappointing results of the conference --despite the heroic efforts of its staff and participants--reflect the fundamental flaws in these mental models.

But challenging and adjusting our mental models can help us correct our course. Much as the "reparations" mindset of Copenhagen may be a pretext to far-reaching social and political change, an "efficiency" mindset can be a pretext to overall gains in business productivity--a lot less controversial goal. Let's take advantage of that, and work to frame the global warming question in terms of Business solutions encompassing concepts like insurance and resource efficiency.

Otherwise we'll keep getting what we ask for: Just like Copenhagen turned out to be "Kyoto Light," Mexico (Climate Change conference 2010) will become--at best--"Copenhagen Light."

KEEP IT SIMPLE: From Cap-and-Trade to Tax-and-Cut

The California Air Resources Board (CARB) released last week the “Preliminary Draft Regulation for a California Cap-And-Trade Program”. Sandwiched right between “ClimateGate” and the Australian rejection of a similar system, the timing of the release could scarcely have been worse… But it’s a very important document nonetheless.

The regulation seeks to drive a reduction in greenhouse gas emissions (GHG) on the order of 2%-3% every year, potentially exceeding the targets which are being mentioned for Copenhagen. But how are going to realize them? A review of the summary text provides a quick reminder of some the challenges which are inherent to any cap-and-trade (or emission trading) scheme:

• Complexity: As most people know, the determination of carbon footprint is far from obvious, and relies on approximations and assumptions (see for example this). These pale in comparison to the additional elements built into a cap-and-trade system. Such complexity virtually guarantees that the impact on incentives will—at best—take a LONG time to materialize.
  


• Costs: The system entails significant costs to administer, monitor, track, and report, as well as the need to create and fund secondary trading platforms for the allowances/credits.
  


• Inequity: The system is potentially arbitrary, due to the likely need to allocate allowances and to adjust the allocation over time.
  


• Rigidity: A system which is not designed to be responsive to on-going changes in the conditions of Californians
  


• Adverse economic impact on growth: An effective levying of a significant tax on corporations, small businesses, and individuals (the draft suggests that some of the government revenues might be redistributed to Californians—to be further discussed).
  

These challenges should come as no big surprise to anyone even vaguely familiar with such systems. So why should California follow the wrong approach to tackle the GHG targets? I strongly believe that California—true to its track record in many fields—should innovate, rather than replicate, in this area.

So what should we do? Well, let’s go back to basics: If we seek to reduce the amount of carbon which we add to the atmosphere (beyond what is part of the normal carbon cycle), we have three primarily levers:

1. Shift the mix of energy sources away from fossil fuels (crude, gas, and coal) and to sources which have a no (or low) contribution to the carbon total
   
2. Increase the efficiency with which we use energy in our daily life (as long as some of this energy relies on fossil fuels)
   
3. Keep incremental CO2 out of the atmosphere, either by limiting deforestation, or via novel technologies for carbon sequestration and storage
   

It so happens that the first two levers can be addressed by a fairly straightforward economic mechanism: A carbon tax shift or what I’ll call “Tax-and-Cut.” Al Gore described a variant of this approach in his book, "Earth in the Balance;" my suggestion for California is:

• Tax fossil fuels (crude, gas, and coal) and their products, based on their carbon content. This would raise the costs of using energy and thus would provide a “price umbrella” for introduction of lower/zero-carbon content alternatives (dealing with issue #1 above) and also encourage consumers to adopt higher-efficiency solutions (dealing with issue #2 above).
  
  
• Redistribute the entire carbon tax revenues (ideally on a quarterly basis) to individuals and corporations, in proportion to their income tax payments to California during the preceding 12 months. Some proportion of the revenue should initially be used to increase payments to recipients of unemployment benefits and other State transfer payments.
  
  
• Set the tax level against a benchmark of the modeled societal cost of GHG (e.g., $30 per metric ton of CO2 equivalent), and the price can be set up on a sliding scale over time: for example, 25% of target cost in year 1, 35% in year 2, etc. California will still have the flexibility to adjust carbon tax level based on changes in environmental and economic conditions.

For further discussion of this topic please read Elaine Kamarck (who was Al Gore ‘s domestic policy advisor) or the Carbon Tax Center.

Having addressed items #1 and #2 with a “Tax-and-Cut” scheme, what can we do about #3 (carbon sequestration)? In part, it could be folded into Tax-&-Cut, via a carbon tax on wood products (calculated based on the net lost in sequestration capacity, in a way similar to the method for fossil fuels) and a tax credits for buyers of carbon-sequestration solutions (including RE-forestation). However, it is less obvious how California could use a tax solution as a disincentive for deforestation, given than the majority of it occurs in other nations… Something to think about—but not enough to question the superior simplicity of the Tax-&-Cut approach.

In summary: Setting up a California system for “Tax-and-Cut” which will use pricing and incentives to drive GHG emission reduction will be much simpler and cheaper than the draft “Can-and-Trade” approach, which is based on onerous limits on quantities and complex tracking and reporting.
Let’s KEEP IT SIMPLE!

Elevating the Quality of Discussion--Despite the Deafening Drumbeat

Clearly the end of October was a busy time for clean tech in general and yours truly in particular. This must be the "drumbeat to Copenhagen." Over the span of seven days, I managed to discuss environmental policy with Harvard's Prof. Mankiw (he of Principles of Economics) at just the same time when President Obama was speaking (at the other corner of Cambridge) on clean energy. The following day was what 350.org self-proclaimed as the "most widespread day of environmental action in the planet's history." A couple of days later, back in the Bay Area, I attended a dinner with Energy Secretary Chu (and 400 close friends) where he received the Business Leader of the Year Award HBS's local chapter; Secretary Chu had just announced the ARPA-E award decision and was about to board the redeye back to D.C. to testify as part of the Senate Committee hearings on a possible climate bill. Later in the week I attended an eye-opening CleanTech panel in Silicon Valley. Oh, and during my transcontinental flights I was able to catch up on the latest Environmental IEDs (Intentionally Explosive Dramas)--Levitt & Dubner's SuperFreakonomics and Jacobson & Delucchi's cover story in Scientific American--as well as some of their reverberations through the blogosphere (see for example here and there).

My conclusion? Sadly, we still have ways to go before objective, fact-based logic begins to become the norm in the cleantechsphere. Let me give you a few examples:

1) During last week's panel, a member of the audience asked the Venture Capitalist moderating the discussion: "In the past, when energy prices went up, they made it more attractive to dig up more and more fossil fuel which may have otherwise been too expensive; and that's why renewables never took off. How do VCs address the problem that, as renewable energy is raising the price levels, fossil fuel from new sources will suck up all the demand?" (I'm paraphrasing, but that's really what he asked!) The panel looked like a deer caught in the headlights, and subsequently managed to mumble something about the need to provide regulation to limit fossil fuels and thus prevent this outcome.

As would be obvious to any student of Intro to Econ, the causality is precisely reversed: higher prices for fossil fuel (due to peak oil, political forces, and a weak dollar) make expensive alternative energy more viable. This is why the economic textbook response to the climate/energy question is very straightforward (as Prof. Mankiw indicated): A carbon tax would raise the price for high-added-carbon energy (fossil fuels) and expand the market potential for more expensive (e.g., solar, wind, biomass, nuclear) low-added-carbon options. At the same time it would cut demand for energy in general--and for fossil fuel in particular. Alternatively, a direct subsidy for select renewables would increase energy demand overall while reducing the share of fossil fuel (however we'll need to find the money to fund the subsidy). My apologies for this dose of basic economics, but the point it: There are too many poorly-informed talking heads, blogging fingers, and tweeting thumbs in the cleantechsphere. Let’s make sure to bring in the right expertise!

2) Later during the same panel discussion, the moderator raised the idea of nuclear power--apparently just to make sure that each of the panelists had a chance to write it off completely, for the moderator to add some further negative "facts," and for the audience to repeatedly break into applause. No, nuclear energy is a nonstarter; neither in the US, nor in Europe. End of conversation. One could certainly get the sense that a bucket of hot tar and a pile of feathers were awaiting behind the curtain for whoever dared say anything positive about nuclear (or even nukelar, for that matter). Nobody was interested to find out, so the room reached "broad consensus". However, it so happens that most cool-headed analysts do consider nuclear power to be a necessary part of the energy portfolio; specifically, Dr. Chu and the DOE have been very clear about that point. Again, here's an obvious case where (at least in the Bay Area) emotion is trumping logic.

3) Scientific American's cover story lays out a plan to "get all global energy from wind, water and solar power by 2030." With this plan we can eliminate 75% of global CO₂ emissions (those from energy generation) for a mere $100 Trillion (yes, as in $100,000,000,000,000.00), 1.3% of the Earth's land (at zero cost), and a complete remake of our transmission infrastructure (cost TBD). What a deal! McKinsey earlier estimated that we can eliminate something like 5% of 2030 global emissions with $1.1 trillion. I have some issues with McKinsey's analysis, but it clearly provides a more attractive investment plan: If the societal cost of CO₂ is on the order of $30-$60 per metric ton, McKinsey's plan yields ROI of 10%-20%, while Jacobson & Delucchi's plan promises a whopping 1%-2%. But even Jacobson & Delucchi can't get us to anywhere near the goals of 350.org, which calls for an actual 10% reduction (from today's levels) in atmospheric CO₂ levels--as opposed to the more-common aim of slowing down the growth rate of these levels. I guess that could be the dictionary definition of OVERREACH. Why is it that--when there is so much important work to be done--authors and activists elect to divert people's attention and focus it onto such unrealistic, pie-in-the-sky initiatives?

4) Finally, a comment on style: I'm just amazed by the nasty ad hominem attacks which have become so commonplace in the cleantechsphere. Paraphrasing an old legal adage: "When the law is against you, argue the facts; when the facts are against you, argue the law; when both are against you, argue louder!" Based on the level of discussion around environmental issues, most people seem to feel that they have neither law nor fact on their side…

Perhaps more than anything else, the on-going nasty C²P² (Climate Change Public Policy) debate represents a key fallacy regarding the right way to drive change. Will the solution to our environmental issues come out of central planning? How do you think life would be with a centrally-planned Web 1.0 or 2.0, or a centrally-planned transition to desktop computing? Certainly a group of academics, a blue-ribbon commission, or a UN panel could have come up 20-30 years ago with a great transition plan, likely with a price tag around $100 trillion, to promote a couple of favorite technologies. And they would have been completely wrong. Why would it be any different for cleantech?

We have to establish a fact-based, logical set of incentives geared towards entrepreneurial work. In that context, the most critical barriers to progress are the economic recession and the difficulty of innovators to access risk capital. True economic growth and thawing of the risk capital markets would be the most important boosters to real progress. The C²P² debate is a distraction and, in effect, is part of the problem – since it engenders Fear, Uncertainty, and Doubt (FUD) about the ultimate approach; FUD has always been a barrier to innovation and progress.

C²P² has to reallocate resources to deal with environmental issues--but these resources should be diverted to the hands of entrepreneurs! Let's get real about creating real incentives for real innovation in the cleantech space:

1. Establish a carbon tax--at $10, $20, $30, or even $40 per metric ton (after establishing solid yardsticks for lifetime systemic contribution). Let's apply it also to lumber and lumber products as well (given the huge impact of logging on the carbon cycle). And while we're at it, let's call it the CO₂/H₂O tax and apply it to water as well (as the water problem is significantly more acute and imminent than global warming).
2. To prevent the CO₂/H₂O tax from killing the competitiveness of the US economy, every cent of its receipts should be redistributed as cuts in other taxes, including dramatic reductions in personal and corporate income tax and a permanent R&D tax credit; a $30 carbon tax would allow to cut federal income taxes by more than 10%--providing an incentive for work, innovation, and investment.
3. To cut the FUD factor--let's decide, announce, determine the phase-in/out schedule, implement, and move forward. The continued nasty and ill-informed debate serves no purpose but to delay real action!

We have a great opportunity to effect great economic and environmental benefits. Let's focus on that. Let's not use the overall interest in sustainability and environmental impact as pretext to change the global society and economy; such change may be necessary--but it should be the means, not the end.

Clean Tech: Call It Like It Is! ............. (part 3 of 3)

This thread started by asking:

1) What's the problem with the term clean tech?

2) Why can't the intelligent, articulate, and passionate people who care about this issue come up with a better term?

3) Should we fix it, and if so, how?

I suggested that the term Clean Tech is confusing since it casually combines into a single "space" three need segments, each entailing distinct approaches, decision makers, and decision criteria:

1) For Efficient Resource Utilization (ERU), the need is likely to be met by the market: Good business rationale, solid ROI, acceptable payback.

2) The need for Lower-Impact Alternatives (LIA) may be met by the market: The switch to renewable sources presumably offers longer-term ROI; for the private sector to pursue it, some intervention through pricing and incentives may be necessary.

3) Finally, the need for Primary Demand Suppression (PDS) is unlikely to be addressed by the market: It entails significant sacrifice and change in behavior, and the payback may be quite distant; as a result, PDS often requires major government intervention, via regulation, taxation, or even shift in property rights.

Each of these three need segments could be met with some combination of solutions/approaches, such as:

1. products (including software and service)
   
   
2. information and open standards
   
   
3. public policy (including incentives, regulation, education, advocacy, etc.)
   

The intersection of the need and solution dimensions creates a clear segmentation map, which I show below. To clarify these segments, I reviewed several alternative depictions of the clean tech space--such as the one from Khosla Ventures--and mapped them into my suggested segmentation. This is far from an exhaustive list of applications, but enough to give a sense of the range of possibilities:

Again, the story is quite clear: products and technologies are being funded and developed for ERU and LIA, but PDS won't get the same amount of pull--despite the popularity of "conservation" and "sustainable growth" sentiments.

Therein lies a possible explanation to a point which came up earlier: Why is the term CLEANTECH so confusing? The answer, of course, is that some groups believe that they have something to gain from this confusion. And who has anything to gain? Of course, advocates of Demand Suppression (PDS) may want to try to approach private investors (hoping to ride on the coattails of the ERU and LIA investment opportunities); at the same time, ERU and LIA advocates may want to associate themselves with the PDS crowd when they appeal to policymakers to support their agendas... So an unholy coalition is content with a murky definition of the space.

Is this just a theoretical discussion? Why should we care? Well, if we care about the overall importance of incorporating environmental thinking into our decisions, we should be VERY CAREFUL about such distinctions. As we're frequently reminded, economics and environment issues do collide ; for example, see discussion about real choices between LIA and PDS needs.

Recently the Environmental Business Cluster (where yours truly is a mentor to clean-tech start-ups) put together an excellent panel discussion on what it takes to make it in the clean tech space. I was struck by some insightful comments by Paul Douglas, Supervisor--Renewable Procurement and Resource Planning at the California Public Utilities Commission (CPUC). While all the goals in the cleantech space seem laudable, some are mutually exclusive; there's a need for regulatory clarity—meaning setting priorities, making choices, and deciding what not to do. For example, the CPUC is supposed to drive to high penetration of renewable energy: 33% by 2020 . But, if choices need to be made, which goal is primary: 33%? 2020? Energy costs? Market impact? Risk? "All of the above" is a nice answer, but a bit naive. In reality, regulators, entrepreneurs, and investors need to know: Which of these can be relaxed in order to accomplish a more-critical item on this list?

We'll get back to these questions in a few weeks; but let's get the foundation straight. To deal with these and related issues, we need to be very clear about the interplay of economic and environmental issues--starting with the very basic definitions of the space. And there's no way about it:

1. CleanTech IS a confusing term
   
   
2. It's not a coincidence!
   
   
3. It can be fixed--and doing so will help to improve decision making in this critical space
   

Clean Tech: Call It Like It Is! .................... (part 2 of 3)

This thread started by asking:


1) What's the problem with the term clean tech?


2) Why can't the intelligent, articulate, and passionate people who care about this issue come up with a better term?


3) Should we fix it, and if so, how?



So far I suggested that the term CLEANTECH is intentionally confusing. Now let's see what we can do about it.



The Solution


To properly frame and tackle the so-called clean tech space, we have to recognize that it consists of distinct segments.


Let's go to first principles. Say we use a product which requires a lot of some natural resource. This raises concerns for near-term and long-term sustainability. In principle, there can be only three ways to fix the situation (in order of difficulty):

1. Continue to use the product, but find ways to reduce the waste and loss involved in our consumption, so that fewer resources would be needed. Let's call this Efficient Resource Utilization.


2. Continue to use the product, but develop methods to utilize other resources, which have a lesser effect on the environment (for example, renewable sources). Let's call this Lower-Impact Alternatives.


3. Finally, we could somehow reduce our rate of demand for the product, so less resources would be required. Let's call this Primary Demand Suppression.

For example, let's look at transportation's need for fossil fuel:

1. Efficient Resource Utilization (ERU) approach would suggest hybrid cars, smaller vehicles, and other high-MpG solutions.
   
2. Lower-Impact Alternatives (LIA) approach would promote biofuels, electric vehicles, and fuel cells.
   
3. Primary Demand Suppression (PDS) approach would prefer reduced travel and may promote that via gas taxes, high-occupancy-vehicles lanes, subsidies for public transportation, congestion pricing, high parking and vehicle license fees, car sales tax, etc.

Did you notice something? While ERU and LIA approaches were generally market-based (and technology-driven), PDS resorted to taxation and incentives. In general (without taking you through all the examples), the pattern is:

1. ERU (efficiency) solutions are likely to be market-based: good business rationale, solid ROI, acceptable payback.


2. LIA (alternatives) solutions may be market-based: They presumably offer longer-term ROI; for the private sector to pursue them, some intervention through pricing and incentives may be necessary.


3. PDS (demand suppression) solutions are unlikely to be market-based: They entail significant sacrifice and change in behavior, and the payback may be quite distant; as a result, they often require major government intervention, via regulation, taxation, or even shift in property rights.

I tried to capture the distinctions in this nifty PAIN-GAIN matrix. The farther one is up and to the left in this matrix, the higher the likelihood is for market-based solutions; conversely, the farther one is down and to the right, the lower the likelihood.

So you're beginning to see the problem: When the term Clean Tech casually combines these three segments into a single "space," it does a major disservice to their distinct needs. The mix of approaches, decision makers, and decision criteria should be quite different across these segments.

(TO BE CONTINUED)

And now for something a bit different...

Sorry, but I'll have to interrupt the flow of my posts. Something has come up...

Earlier this week I attended the high-octane "Launch Silicon Valley" event. The keynote speaker was Dan Roam, the author of "The Back of the Napkin" (recommended reading!). Dan recommends to try and describe our apparently most-complex problems as simple drawings. To make his point, he challenged the audience to develop a simple picture to describe the Administration's Stimulus Plan--the $787-billion (see also here) American Recovery and Reinvestment Act of 2009 (or ARRA).

Well, I promised Dan that I would take on this challenge; and, of course, I'd like to deliver on it as soon as possible. So today I'd like to share with you my first pass.

In political economics, there have to be multiple representations for the same idea; ARRA is no exception. So let's provide two perspectives--let's just pick some random names, and call them the RED view and the BLUE view.

RED VIEW
In this view, the essence of of the plan is the creation of unprecedented budget deficits, which we will finance through huge borrowing--from China and ultimately from the next generations of Americans.

With lots of $$$ in the hands of politicians, the stimulus plan becomes a magnet for lobbying and special-interest groups, which drive the stimulus plan to spend the money on pet projects with little economic rationale; that is, except for the rationale of benefiting the special interest groups and generally advancing the re-election potential of the various politicians.

BUT WAIT--THERE'S MORE!!!

BLUE VIEW

In this view, the stimulus plan still calls for major public investment--but that investment serves as a magnet for creative project ideas and attracts otherwise-frozen private funds (required to match and benefit from stimulus funds).

The projects funded by ARRA aim to meet the economy's near-term needs (creating jobs through "shovel-ready" projects); but they also are tailored to
meet our long-term needs, by advancing Clean Technology, Health Care, and Innovation. These initiatives ultimately result in

• a more productive, faster-growing U.S. economy--which will be able to generate high tax revenues and pay down our National Debt, and
• a healthier, more environmentally-sound world for the next generations

Which View Is Right?

Both have some merit.

As an economist, I would always be skeptical about approaches which place unprecedented levels of funding and decision-making power in the hands of politicians and government officials (as well-meaning as they may be). And the bond market is telling us that it's getting harder to finance our national debt.

But, as someone very close to a lot of cleantech innovation, I can clearly see that ARRA is doing a great job of attracting creativity and some private funding. Even if some of the resource-allocation decisions of the various government agencies may be off, there's great potential to jump-start excellent initiatives in the cleantech and health-case spaces. Those, in turn, would create terrific infrastructure for future productivity and growth.

So there you have it. There IS a way to depict the stimulus plan in simple pictures (not just in narrative and tables). And then there's another way... and another... and another...

Clean Tech: Call It Like It Is! ............. (part 1 of 3)

Ever since I decided to slap the label "clean tech" on my consulting and advisory practice, I find myself having to explain what ON EARTH I mean by that. And apparently it's not just the people in my immediate circle who find the term confusing. Recently I had the opportunity to attend a panel discussion with several very sharp Silicon Valley investors with (naturally) strong opinions on technology trends. Some of their comments about clean tech truly resonated with me, questioning whether it was the right term to describe what's really going on. So I figured I may as well launch my blog with some basic definitions.

So let's get started:

1) What's the problem with the term clean tech?

2) Why can't the intelligent, articulate, and passionate people who care about this issue come up with a better term?

3) Should we fix it, and if so, how?

The Problem

The term clean tech--or cleantech, or greentech--may sound cute, but, upon reflection, is very confusing. Typically one would expect, when talking about a huge business "space" like cleantech--which calls for dramatic investments--to see

• a market, defined by a common customer need (e.g., "entertainment"), or
  
• an industry, defined by a common technology (e.g., "electronics").
  

Which one is clean tech?

Evidently, neither. "Clean" suggests a desire to have a clean environment (a need)--but are CUSTOMERS really willing to pay multiple billions of dollars for "clean" or "green" vs. other solutions? "Tech" sounds like a product--but is this space really defined by common technology products? Actually, the technologies involved are extremely varied, and many of the solutions are very low-tech (and have more to do with econonomics, business models, etc.).

In effct, it seems that "cleantech" was designed as a hybrid (pun intended):

• It's "clean"--so environmentalists and everyone who watched "Inconvenient Truth" (myself included) should be happy
• It's "tech" (ostensibly high tech)--so investors should fund it and politicans should like it.

So, unfortunately, "clean tech" is a highly confusing term. It's neither a need, nor a solution; it provides little clarity (for example, what would be EXCLUDED from this space). Why are we using it then?

The Root Cause

The overall intent of "cleantech" seems intuitively obvious: The desire to provide a healthy, safe, productive place for us (and generations to come) by making the most efficient use of our shared natural resources (like air, water, and land). But at this level, this sounds like a political campaign or a social movement for sustainability--not like an industry or a market; more important, not like something where VCs should invest.

Indeed, the term "sutainability" seems to not be in vogue anymore, for exactly this reason. Terms like "climate change" or "global warming" were supposed to somehow fix that, but people seem to have grasped that these are just euphemisms for the good ol' "sustainability." So what is one to do? Enter CLEAN TECH.

The confusion surrounding this term is not a coincidence. Many years of consulting and strategy work have taught me that confusing terms tend to stick around when someone has something to gain--economically or politically--from the confusion. As I'll show next, the loose terminology of "cleantech" bundles segments which are very different in their attractiveness to business and public policy; this bundling raises the desirability of the less-viable propositions in the mix.

The Solution?

(TO BE CONTINUED)