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Solovians see Malthusians as dreary and depressive—modern Luddites. They fear that Malthusians will resist the possibilities contained in innovation and thereby hobble attempts to improve the quality of our lives. They perceive that the benefits of technological development have transformed society without creating upward pressures on population: Better health care and pharmaceuticals have lowered birth rates as countries develop, because parents feel that their children’s survival is more secure. Solovians fear that if we focus on restraint, we may delay our collision with the Malthusian wall but we will never innovate our way over it—and thus the Malthusian prescription ensures the fate we are desperate to avoid. Dueling theories breed inaction. It is hard for either a corporation or a government to choose a direction when it is presented with two such fundamentally different choices. For the individual consumer, company, or even government, the easiest—and often apparently most prudent—course is to wait and hope for clarification on which is the right strategy. Companies reduce the immediate risk to their investors with this approach, which may explain the behavior of U.S. automakers with respect to fuel efficiency over most of the past four decades. Unable to decide between making smaller, more fuel-efficient cars and investing in electrical and hydrogen-powered engines, they settled on continuing to build pickup trucks and SUVs—which almost certainly contributed to the industry’s near collapse in 2008. Of course, the world is not black-and-white, and the extremes of both philosophies are just plain wrong. If the hard-core Malthusians were right, progress would have stopped long ago and humanity would already be in decline if not extinct. If the hard-core Solovians were right, we wouldn’t be reaching dangerously high levels of carbon in our atmosphere and Australians would enjoy the protection of a robust ozone layer above their heads. But both worldviews are also partly right. Each provides compelling explanations and predictions. Unfortunately, attempts to combine the two have so far resulted in confusion and dysfunction. The Kyoto Protocol provides a cautionary tale. Its framers, using an implicitly Malthusian conceptual structure, hoped that measuring and pricing carbon emissions would encourage incremental reductions. But they also hoped that gradually increasing the cost and decreasing the amount of emissions allowed would generate Solovian innovation in alternative energy systems and products along with carbon trading. Kyoto has produced little of either. Instead we have created expensive new industries devoted to auditing emissions, assessing the ability of tropical forests to absorb carbon, and burying liquid CO2 in abandoned mines. Our economies are still locked into burning fossil fuels, and the concentration of CO2 in the atmosphere continues to rise. The world’s leading environmental economist, William Nordhaus, has termed Kyoto’s mechanisms “inefficient and ineffective” and urged their replacement with a global carbon tax that would force consumers and companies, not governments, to innovate. So what went wrong? The problem, we believe, is that reconciling the two theories is treated as an exercise in compromise: I will give a nod to restraint if you give one to growth, and we’ll hope to get a bit of each. Many policy makers implicitly recognize that we need approaches derived from both theories to deal with the environmental crisis. But few have actually gone beyond that assumption when making policy or strategy. Go beyond it we must. For if both theories are valid—if they provide a compelling description of the world and have predictive power—then other factors must exist that determine when each best applies. As consumers, companies, or governments, we have some power to influence those factors, and thus a choice about whether a Malthusian or a Solovian dynamic will play out. But first we need more-precise information about what warrants which strategy. How to Make Innovation the Answer The most obvious requirement for radical, technologically disruptive innovation is access to risk capital for relatively unspecified investment. Alta Devices, a classic Silicon Valley start-up, believed that gallium arsenide could increase the efficiency of photovoltaic cells by about 30% over the upper limit of silicon technology. To find out whether and how this could be done at a commercially feasible price, it needed to invest $72 million in speculative R&D. Investment of this kind on this scale is typically provided by venture capitalists or the corporate venturing arms of large corporations. But before parting with large amounts of capital for such a project, investors have to believe that solving the problem will generate high and sustained revenues in the future. The most productive context for Solovian innovation features a stable, high price for either the problematic resource or its substitute. Failure to recognize these preconditions explains what went wrong with the U.S. government’s policy on ethanol. After the oil crisis of the 1970s, Congress passed a tax credit for the production of ethanol, which remains in place to this day. After a new spike in oil prices, President George W. Bush reinforced its effect by signing the Energy Policy Act of 2005, which mandates the blending of renewable fuels into gasoline and precipitated a major investment in ethanol production capacity. The idea, of course, was and is to reduce reliance on a nonrenewable fuel (gasoline) by replacing it with a renewable one (ethanol) and to reduce dependency on Middle Eastern oil. In addition, the government slapped a tariff on ethanol imported from Brazilian producers in order to promote domestic production. Naturally, U.S. ethanol production capacity increased. Setting aside the pros and cons of ethanol as a fuel, the policy was doomed from the start because the government could not deliver stable, high gasoline prices. They have, in fact, been extremely volatile—tracking the international oil price—and often very low, and the profitability of and level of investment in ethanol production have been equally variable as a result, putting Solovian innovation out of reach. The expansion of production capacity with existing technologies has driven up domestic corn prices and thus increased food prices. As the failure of the policy becomes evident, the government has signaled that it may reverse itself, but that would mean writing off the investments already made in ethanol production—and suggesting to investors that the federal government will not be a reliable partner when it comes to other green technologies. Consider, in contrast, the German government’s solar energy policy. Germany’s Renewable Energy Act was adopted in 2000 with the aim of encouraging investment in solar energy. The problem was that a serious, large-scale investment in delivering solar power required that producers get high prices for the power they generated. Consequently, the government required grid operators to purchase solar at five times the cost of conventional power—a price that would decline only slowly over time, in a carefully planned way—creating an environment that simulated a very high price for fossil fuel used to generate power. This policy meant that investors could justify the high capital cost of investing in solar power technology. As a result, Germany had installed nearly twice the expected solar capacity by 2010. This fast-growing capability was leveraged by German companies, which started to sell turnkey photovoltaic production facilities to Chinese companies. The Chinese, in turn, scaled up production and dramatically reduced the price of solar arrays. From 1998 to 2011, the period during which Germany managed its prices, the cost per installed watt for solar energy dropped from about $11 to about $3. It is expected to halve or better by 2020. The price stability offered by the government allowed investors to rely on reasonable returns on investment in solar technology and to fund the innovation in solar panel technology and production scale that has pushed the costs of solar below the all-in costs of fossil fuel alternatives. The sector has achieved a scale and technological maturity such that it no longer needs the price protection. What the German experience teaches us is that because the price of oil provides a reference point for every other kind of energy, the best thing the world could do to spur broader Solovian innovation in the energy sector would be to declare and enforce a floor oil price—either directly, or indirectly through price supports on oil-substitution technologies, like Germany’s feed-in tariff for solar power. The biggest challenge for innovation in energy is that substantial vacillation in the price of oil, which discourages large-scale investment in substitutes. The carbon offset pricing featured in cap-and-trade programs, which does nothing to dampen profitability swings for alternative technologies, is therefore not the answer. Far preferable would be a variable gap-filling carbon tax to preserve a floor price for a barrel of oil. Corporations are clearly well placed to influence that kind of decision. Many already collaborate to encourage enforcement of high prices on non­renewable resources to spur their own innovation. The European Automobile Manufacturers’ Association has advocated that “CO2 should be the key criterion for taxation to provide incentives to buy lower CO2 emitting cars.” At a minimum, corporations can help by not fighting governmental attempts to create such a context. U.S. automakers resisted the 1975 Corporate Average Fuel Economy (CAFE) standards for years, trying to circumvent them by producing vehicles that could be classified as light trucks rather than focusing on Solovian innovation.