Governor Schwarzenegger and the California Air Resources Board once publicly supported building a Hydrogen Highway, “picking a winner”. The current California Low Carbon Fuel Standard (LCFS) would avoid the appearance of favoritism, despite a history of direct support for hydrogen. Advocates of plug-in electric vehicles believe that the merits of EVs warrant government support for a public quick-charge infrastructure, that would not necessarily be the outcome of the LCFS.

Listening to Science Friday on PBS recently, there was an interesting exchange between Dan Sperling, an influential member of the the California Air Resources Board (CARB) and Professor at the University of California at Davis, and Sherry Boschert, Vice President of the EV advocacy group, Plug In America.  Sperling has been known to advocate hydrogen fuel cell programs at the California state level, a stance that has historically had the backing of Detroit automakers until very recently.  Boschert and Plug-In America have been highly critical of the degree to which CARB has supported hydrogen to the detriment of battery-electric cars (BEVs) or other plug-ins (which includes EREV or PHEVs as well).   This is a version of the conflict that became part of the influential documentary “Who Killed the Electric Car”.

While Sperling in this exchange was presenting himself as an advocate of “electric drive transportation”, he mentioned a number of times hydrogen fuel cell vehicles (HFCV), which use an on-board hydrogen fuel cell to generate electricity for an electric motor to drive the wheels (a.k.a. electric drive).  Boschert pointed out that HFCV option has been used to delay and stymie efforts to deploy the much “readier” technology of plug-in battery electric vehicles for the last ten years in California and therefore around the nation.  The essence of this accusation, also popularized by the “Who Killed..” film, is that policy support and advocacy of HFCV’s blocks the implementation of any clean fuel vehicles short and medium term as HFCV technology is always ten years away from commercialization.  Boschert advocates a positive support policy for battery electric vehicles, like an embrace of public charging infrastructure for EVs by municipalities and state governments.

Sperling, though he claimed not to be opposed to supporting government EV programs, said that you didn’t want to “pick winners” in the technology derby to replace petroleum, citing the apparent disaster of corn ethanol.  Boschert countered that winners were always being picked, pointing out that HFCVs were funded by government and industry to far higher levels than battery research and battery electric vehicles.  She suggested that short of a government sponsored BEV roll-out program that there should be equal research funding for HFCVs and BEVs, though the first option was the preference of Plug-In America.

Efforts NOT to Pick Winners

The UN’s climate change effort, continued at the Bali Conference in 2007 and now at Poznan, has centered around a the market-like cap and trade system. This is an effort, following the economic vogue of the 1990′s for government to act as referee but not to pick winning technological solutions to climate change.

In California’s debates around a number of pioneering pieces of clean energy and climate legislation and regulation, the notion of “picking winners” comes up on a regular basis as an unquestioned taboo for any measure or program.  When in a discussion, someone suggests that policy be used to promote one technology or initiative and someone else in the room opposes that technology or the type of support, the accusation that one would be “picking winners” is thrown at the advocates of a prescriptive policy.  While California has many technology specific support programs, there are also important central pieces of climate and energy regulation that are designed not to “pick winners”.  The Assembly Bill 32, (AB 32) process which is California’s Global Warming Act of 2006, has almost inevitably gravitated towards a cap and trade system, which as is the Kyoto process, an effort not to pre-determine the price of carbon, nor commit California to a particular set of technological solutions to global warming.  Accompanying this process, the CARB is also working on a “Low-Carbon Fuel Standard” (LCFS) which tries to group all reduced-carbon fuels for transport together, including electricity, mandating certain reductions in carbon content occur regardless of which fuel is discussed.  Again, no “winning” fuel is picked in the LCFS.

Designers of these policies feel they are reducing government involvement to its intent while removing arbitrary rules and decisions from the process.  In theory, the idea of “not picking winners” sounds great but, as in all things, between the conception and the realization reality intrudes.

The Theory: Government as Referee

The most influential economist of the past three decades has been the late Milton Friedman, who moved the economic profession away from advocacy of government regulation or involvement in the economy. Friedman, in the tradition of von Hayek, believed that the only legitimate role that government had was to defend the nation, protect private property and regulate the money supply, there for his “monetarist” label.

The economic profession and economic modeling in business settings are right now at a watershed moment, where those individuals and theories which foreshadowed the precipitous downturn of the last few months are given a great deal more credence than the orthodoxy of only a few months ago.  In this period of flux, it is reasonable to think that some old assumptions may no longer hold water, at least during the period of crisis if not thereafter.

In the last three decades, economic policy and influential parts of the economics profession have tended to hold up the ideal of an almost entirely unsupervised market, where individual and corporate economic choices in aggregate would dictate the direction of economic life.  Expressing a belief in the individual or corporation as consumer and entrepreneur, these supply side or libertarian economic theorists believed that only unregulated market forces arrive at the optimal outcome.  By contrast, government is considered by advocates of this approach to be necessarily a hindrance to economic success and growth.  This view has remained largely unchallenged in both the Democratic and Republican parties until the recent financial system near-collapse and sharp economic downturn.

While the ideal of self-regulating markets has inhibited efforts at regulation in many areas of the economy, not everybody gave up on regulation even in the heyday of this ideal.  In those environments where regulation has been accepted as a necessary evil or even a desirable economic tool, there have been attempts to incorporate the ideal of the market into economic policies.  In California, which has a history of state-level energy regulation that has continued through the last few decades, policies that interfere less in the market are considered more desirable than those that dictate to private businesses what should happen.  The latter is termed “command and control”, which sounds less desirable than a “market-based” regulation scheme.

In the ideal market-based regulation, legislators, regulators, and the government executive branch develop rules that express a desired social outcome in its broadest, most abstract form and then allow private actors to try to fulfill those desired social aims in any (legal) way they can.  In the case of a cap and trade system, the notion is that the intended goal is a set amount of global warming gas emissions that will be reduced in subsequent years.  The auction system for pollution permits is the means by which businesses acquire permits to emit a certain amount of greenhouse gases.  When there are no more permits, the business can no longer pollute or face harsh fines.  As another example, California’s Low Carbon Fuel Standard, the amount of carbon in the fuel is regulated but there is no selection of which fuel is necessarily or potentially that with the lowest carbon content.

So in a market-based regulatory system, once the rules have been set in place, the government acts as a referee, enforcing the rules but otherwise allowing market actors to make their decisions within the constraints of the system.  In the case of cap and trade, there are two levels of market mechanisms built in:  one is through the bidding on pollution permits and the other is allowing businesses and individuals to figure out by themselves how they are going to reduce their carbon emissions.  The competing carbon tax concept is not an “un-market-based” solution though it removes the first level of market mechanisms as compared to cap and trade, instead allowing businesses and individuals to figure out on their own how they are going to avoid emitting carbon and therefore paying more carbon taxes.  So cap-and-trade is doubly market-based, while a carbon tax would be a more conventional regulation where government determines a social goal and shapes the market through a disincentive.

The Other Theory: Prescriptive Policies, a.k.a. “Picking Winners”

The history of nuclear power is very closely entwined with the intentions of government leaders and officials to demonstrate the peaceful uses of atomic power. The further development of nuclear energy and the management of its legacy will continue to require strict government oversight and direct government funding.

While there is no hard and fast line between the market-based and a prescriptive policy, there are many policies in the area of energy where government expressedly prohibits or promotes one activity/technology or another.  The longstanding US tradition of research funding for particular energy technologies is, in a way “picking winners” though the federal government has tried to spread this funding around to some extent.  In the area of lighting, for instance, certain inefficient fixtures (probe-start metal halides) will be prohibited by the US DOE for sale as new fixtures as the first of January.  The criticism by Sherry Boschert of hydrogen policy holds true:  hydrogen fuel cells have received inordinate funding in comparison to battery technology, an imbalance that historically has had the support of Detroit automakers.   Biofuel mandates in combination with the enormous subsidies for corn production and corn ethanol are prescriptive policies.

While to a self-regulating market theorist prescriptive government policies are always inefficient and, adding some rhetorical inflation, “disasters waiting to happen”, defenders of a prescriptive policy would counter that scientists and political leaders reflecting scientific and common wisdom have found that one solution is, along one or more desirable dimensions, better or substantially worse than others.  Cigarette smoking was found to cause cancer.  You didn’t wait until individual effected people discovered that they were getting sick and dying sooner if they had smoked:  government put in laws that make the sale of tobacco more difficult and mandate public warnings of smoking’s hazards.  There was a statistical relationship between smoking and cancer which market actors alone could not perceive, especially given the socially reinforcing and addictive nature of smoking.  In lighting, probe-start metal halides use more energy than pulse-start metal halides or linear fluorescents for the same light output:  this black and white finding by engineers led to an eventual step-wise ban on the sale of probe-start fixtures.

A prescriptive policy then depends on scientific knowledge to determine, before the market can discover the difference, that one course of action is more helpful than another course of action.  The trust in scientific knowledge is key for most prescriptive policies, though prescriptive policies could also rest on the consensus of political leadership or polls and perceptions of popular sentiment.  It is no wonder that declines in the authority that people attribute to scientists in the US has led to a drift away from prescriptive policies, at least in the public presentation of policy actions.  Despite the diminished prestige of science in the US pantheon of values over the past few decades, the US government is the largest funder of scientific research in the world and also, still continues to operationalize that knowledge when it comes to implementing policy.

Beyond Prescription:  Government Sponsorship

The Tennessee Valley Authority was an New Deal economic stimulus plan for the Southeast which involved the building of, among other things, hydroelectric dams on a number of rivers in the region. Still operated by the federal government, the TVA through fossil, nuclear and hydroelectric plants sells power to local private utilities and industrial power customers.

A “stronger” version of a prescriptive policy is one in which the government not only prescribes a particular solution but pays in part or in full for the realization of that prescription via taxpayer dollars.  The proposed economic stimulus packages including the much-discussed Green New Deal ideas, would be government sponsored programs by definition.  Bailouts of or support packages for individual firms or industries are government sponsored prescriptions for how the economy should remain or change in the future.  Public education is a prescriptive policy that is also government sponsored:  not only should children be educated but taxes will provide the means by which they can be educated.   Most highly industrialized countries outside of the United States have more government sponsored programs than the US, particularly in the area of social welfare.  By contrast, the US government has sponsored a very large, expensive, and technologically sophisticated military relative to other countries.

In the area of energy and transport, a government sponsored program could range from a rebate program for electric vehicle purchase to as large as the building of new power plants like the Hoover Dam or TVA projects or a system of long-distance power transmission lines for renewable energy.   These facilities could either be managed by the government as part of a public power authority or be sold off to private investors to manage.  Tax credits for oil and gas exploration or renewable energy projects are also a form of government sponsorship as to pay for these credits, taxes need to be levied or programs cut in other areas.  In any case, government sponsorship contradicts even more the ideals of advocates of the self-regulating market in the tradition of Friedrich von Hayek and Milton Friedman, as government would have a hand in setting prices or enlarge its role as a provider of services.

Real Dangers of Picking Winners

Corn ethanol is now almost universally recognized as a “false” winner, that had many powerful political friends but little scientific basis for support. Leaving aside the ethical issues of having fuel compete with food production, most scientific studies have shown that the production of ethanol from corn only nets at most 30% more energy than is input in the process. Furthermore water usage and soil nutrient depletion involved in growing the corn contribute to its overall negative picture as a fuel for mechanical devices.

While in tone this piece would seem to be critical of the categorical rejection of “picking winners’,  there are some real dangers in picking winners, especially when the process is itself wrapped in an ideology of doing the opposite, i.e. NOT picking winners.  The list below are potential real dangers of picking winners keeping in mind that these are not nearly the exclusive property of this decision making system; other forms of decision making including more market-based ones share some of these drawbacks.

1)    Corruption – Picking winners if done non-transparently and without full attention to democratic principles can lead to and/or be the product of corruption.  Picking winners involves collaboration between government and industries or professions that can shade into collusion if not pursued in a deliberate fashion with full public justification.  Bribes in various direct and indirect forms can influence the selection process.

2)    “False” Winners -  Picking winners can lead to a self-justifying selection of a technology or system that ends up being of lower quality and service than another option.  Corn ethanol, with only hope and little scientific justification, became a false winner.

3)    Economic Inefficiency – As per “2”, the government or other authority that is vested with the power to pick the winner could pick a technology or system without regard for the ultimate costs of implementing that technology.  Government officials may have no mechanisms that hold them responsible for cost overruns or other inefficiencies.  The potential for inefficiency may need to be balanced against the desirability of the goal.

4)    Lack of Accountability – related to “1” and “3”, the selection of winners may occur in ways in which those who make the decisions do not experience the effects of those decisions.   Government officials, representing the people of the US, may not be able to be held individually responsible in some circumstances.

5)    Foreclosure of future technological developments – picking a winner can narrow the market opening or close it entirely for an emerging or future technology that may turn out to be superior.  Monopolistic or oligopolistic control of markets can have the same effect.

6)    Decision-making without scientific backing – A winning technology or system may be selected without access to or utilization of the best scientific knowledge available; as we shall see below the success of “picking winners” is heavily dependent on high quality science.

7)    Decision-making without Socratic wisdom – Decision makers may feel empowered without knowing what they don’t know.  Without knowing where and to what degree they are ignorant allows decisions to be made that may ultimately be short-sighted.

8)    Arrogant self-justification – in a further development of “7” decision makers may attribute to themselves the cloak of infallibility or may downgrade the wisdom and perspective of those who are outside their coterie.  These attitudes may spring from the privilege of being able to make crucial decisions in combination with a wealth of information and resources at their disposal.

9) Economic and Political Despotism – the worst case scenario upon which much criticism of state-led policies are based, is that “picking winners” is the leading edge of authoritarianism.   Despite the tendency recently in our politics to dwell on this worst outcome, government initiative in the economy does not NECESSARILY lead to despotism as we have seen with the New Deal, WWII mobilization, the Marshall Plan, the Interstate Highway System, etc.

As we shall see below, these dangers are not necessarily an ultimate condemnation of all efforts to pick winners.

Infrastructure as Prescription

Republican President Dwight Eisenhower, building on the pr
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