Innovation: The Garnaut Cult

Garnaut Climate Change Review: Update Paper Seven
Low-emissions technology and the innovation challenge

Professor Garnaut has a simple view of innovation. There is too little private investment in innovation generally and more public fiscal support is needed. The urgency of the need for new “clean” technology thus justifies a large transitional increase in public support for innovation related to low-emissions technology.

Garnaut’s proposal is $2 to $3 billion per year in government expenditure on research, development and commercialization. The basis for this figure is Australia’s contribution to an international $100 billion a year Low-Emissions Technology Commitment. The Productivity Commission would not approve. This is another special initiative on top of a tax on carbon (dioxide).

Is Australia such a remarkable country that it would be able to absorb such a lift in spending? This is what R&D expenditure looks like for Australia and for comparison the United States.

By way of further comparison in the US Intel spent US$5,700 million and Microsoft US$7,500 million on R&D in 2006-07, much the same as the total of our business R&D.

Professor Garnaut sees a tax on carbon (dioxide) as not sufficient to drive innovation. He wants to encourage companies by luring them with extra rewards. But this looks a bit like the Cargo Cult of New Guinea. You sit on the beach, this time with cash rewards or tax breaks rather than simulated landing strips and control towers, and technologists will arrive bearing most welcome gifts of new technology provided they are not nuclear. Like the MRET scheme here is yet another projected market failure that needs government help.

His dismissal of private investment echoes a comment from US economist Nordhaus, an expert on the economics of climate change. Nordhaus has claimed “… that virtually the entire history of American industrialization and technological innovation is the story of government investments in the development and commercialization of new technologies. Think of a transformative technology over the last century – computers, the Internet, pharmaceutical drugs, jet turbines, cellular telephones, nuclear power – and what you will find is government investing in those technologies at a scale that private firms simply cannot replicate.”

This comment is nonsense. The score card on his selected suite is Government 0 for ideas, 2 for development, the jet engine and nuclear weapons (not nuclear power) and a bit player in commercialization as military spending undoubtedly helps. It is simply the case that most innovations, over 90%, come from industry. Very few innovations emerge from government laboratories. Likewise very few emerge from universities, whose contribution is increasing “common” knowledge and training those who move into industry to create or improve products and processes. The innovations are not always technical!

An alternative selection of transforming innovations of the last 150 years would be electricity, cars and the integrated circuit. It is arguable that not one is the result of government investment or commercialization but rather a series of inventions, business opportunities and unsatisfied needs, none of which, except the last, are the concerns of politicians, functionaries or bureaucrats. The path of technical innovation is best understood looking backwards to see where you have come from as it is mostly a random walk.

Fully integrated businesses that are profitable and have sales, marketing and manufacturing are the most effective at R&D. Australia is a small country and industry structure and geography are important in determining R&D expenditure as R&D centres are usually close to head office. We have few fully integrated internationally competitive businesses that have been created from local or imported innovative ideas. It is only when there is a technology shift that start-up businesses have a chance, such as biotechnology and the internet but as they say in California “the pioneers are the ones with the arrows in their backs” as not all survive as free standing corporations. The question is whether imposing a tax on carbon (dioxide) will cause such a break? Further spending an extra $2 to $3 billion a year is an admission that a carbon tax is not sufficient incentive. But the proposed extra spending makes little sense with our business structure and R&D expenditure.

Yet Garnaut undoubtedly thinks of the CSIRO as leading development of the new energy technologies. There is an analysis of national advantages Australia may have that would be the foundations of new technologies. These advantages are to be found in a number of other countries. Further the analysis ignores the substantial contributions made to the nuclear fuel cycle as nuclear power is off limits. But that is not all. Innovation forecasting was at the centre of the Treasury modelling for Kevin Rudd’s proposed ETS. Carbon Capture and Storage (CCS) was assumed to be a commercially competitive technology by 2020. What is really frightening is Treasurer Wayne Swan musing that the government was looking at new ways to encourage investment in clean energy projects and provide additional support for innovation in a way that was supported by unions, environmental groups and superannuation funds who want to invest in the technology. This implies that the government would bear much or most of the risk!

This part of the Garnaut Review is dated and disappointing. It could get a lot worse if the Treasurer’s ideas are turned into policy. No doubt energy saving innovation will occur possibly coming from sources and ideas we are yet to have.

It is difficult to see how a nation can be taxed or lured into innovation.