54
EMISSIONS GAP REPORT 2018 – BRIDGING THE GAP: THE ROLE OF INNOVATION POLICY AND MARKET CREATION
Policy coordination is as important as attention to the whole landscape. For example, procurement policies cannot work unless the demanded products have been developed and demonstrated, but the dependence runs both ways: feedback effects from deployment and diffusion stimulate new product development and enable cost reductions through learning by doing (Lundvall, 1992; Freeman, 1995; Gallagher et al., 2012). This dependence also extends to consumer attitudes and their defi nition of the ‘good life’, with consumer demand for low-carbon products having the potential to drive innovation (Perez, 2017). By developing a coordinated policy that heeds these interdependencies, the public sector can not only fi x market failures, but also create and shape markets for new innovative technologies (Mazzucato, 2018b).
7.2.2 Patient strategic fi nance
Innovation policy across the innovation chain is most effective when it involves patient fi nance for direct investments from public organizations placed strategically at all stages of the innovation process. Private investors often perceive new technologies as risky and are unwilling to provide capital at scale, especially given the long lead times (CPI 2013; Schmidt, 2014; Mazzucato and Semieniuk, 2017). However, innovation feeds off patient fi nance that is looking for
long-term returns. As with any venture, such fi nance must also welcome risk and endure the failure of several projects (Mazzucato, 2018b). By being patient, such fi nance becomes strategic and supports innovation programmes until they reach their goal (Chan et al., 2017). The high-risk, long-term and capital-intensive character of the demonstration and deployment stages of innovation makes public investment in this area key.
The growth of renewable energy markets illustrates the importance of public strategic fi nance. Financing the bulk of the US$120 trillion needed to steer the energy sector onto a low-carbon path by 2050 (IEA and IRENA, 2017) will require considerable public investments. Individual projects are often very capital-intensive; even early-stage demonstrations in energy and manufacturing sectors may require investments exceeding US$1 billion, while the pathway to profi tability may take many years (Lester, 2014). Almost half of global investments in the renewable energy sector are now being fi nanced by public agencies and state-controlled enterprises, as private fi nancing has stagnated in absolute terms since around 2008.1
Public money has been disproportionately directed to high-risk projects, mobilizing, or ‘crowding in’2
additional private business and leaving lower-risk technologies such as onshore wind mainly to private actors, as fi gure 7.1 illustrates (Mazzucato and Semieniuk, 2018).
,
Figure 7.1: Average relative risk exposure on a 0–1 scale of public and private investors in renewable energy assets 2004–2014 globally, excluding investments made in China.
0.5 0.4 0.3 0.2 0.1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Mazzucato and Semieniuk (2018).
Public Risk Exposure Private Risk Exposure
1 The public share of fi nance in directed historical energy transitions was often even higher (Semieniuk and Mazzucato, 2018).
2 Crowding in is a word play on the idea of debt-fi nanced government spending replacing or ‘crowding out’ private investment. In innovative products, as this chapter shows, government fi nance (whether itself debt fi nanced or not) may be necessary to mobilise private fi nance in the fi rst place. (See also online appendix A.4 on state investment banks’ crowding in of private investors).
Risk exposure
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