Making Clean Technology and Economic Growth Work Together

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My name is Jacquelyn Pless. I'm an assistant professor in the technological innovation, entrepreneurship, and strategic management group at MIT Sloan School of Management. In my research, I focus on the drivers and the consequences or the effects of innovation for social progress.

So what I mean by that is really a focus on what are the policies and the institutions that help shape the incentives that firms or companies have to innovate in. The areas that are most important in pressing for society's challenges. So things like education and health.

But I particularly focus on the energy sector and innovation that protects environmental systems. So things like clean tech, or what it might mean for manufacturing firms to reduce their emissions. In that research, I use the tools, the theoretical and empirical tools of economics.

For the most part I use econometric analysis. And so these are methods that seek to ask questions about what is the causal effect of x on y? So we might think about what is the impact of a regulation on firm emissions or their performance? Things like that. Or what is the effect of some subsidy or tax incentive on a company's innovation practices?

Do they start innovating in clean tech or dirtier energy technologies with those incentives? And so the econometric methods primarily use basically statistics to ask and answer questions around economic theory, testing some of those assumptions, and looking at policy effects.

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JACQUELYN PLESS: So one project that I'm also excited about is looking at the effect of an environmental regulation in China on the performance and productivity of industrial firms. So the industrial sector is one that's extremely pollution intensive, and especially in China over the last 10, 20 years, given a lot of the development that has happened. And what we are doing is testing whether that regulation increased or decreased their performance and productivity. Because the common narrative around how environmental regulation might impact the economy is typically that economic growth and environmental regulation are at odds with each other. But that doesn't necessarily have to be the case.

So we might think, OK yes, environmental regulation can be costly to implement, to enforce, or perhaps it it kind of shifts the composition of industries within an economy. But at the same time, it provides incentives for firms to innovate. Because in order to comply, they might need to adopt or develop new technologies, processes, or practices.

And then at the same time, air pollution, or other types of pollution, has negative effects on economic development and growth in the sense that it hurts our health. It's been shown there's actually increasing evidence now that air pollution itself can reduce labor supply, so how frequently people can go to work. Air pollution can also kind of dampen a student's ability to learn and reduce test scores. So we can think about how these negative environmental externalities and pollution do have these implications for growth that are negative. And so addressing them might have this positive effect on development as opposed to environmental regulation always just be costly.

And so in this work, what we're doing is saying, well, what exactly is that narrative that we typically see in the policy world and policy discussions? Do these two, do economic growth and environmental regulation have to be at odds with each other? And so we, empirically, with all of this data on all industrial firms in China, we estimate the effect of this environmental regulation on their, say, their productivity. So productivity is typically a measure that has been shown, productivity and innovation, has been shown to be a key contributor to economic growth. And so if this regulation actually enhances firm productivity, then we can think about this environmental regulation as actually being good for socioeconomic development.

And the ways in which we might think that it could be a negative effect would be if the environmental regulation is just too costly. But at the same time, it could have these positive effects in the sense that it induces firms to adopt these new, or develop new technologies, processes, and practices that might make their operations more efficient. And so what we're finding is that this environmental regulation actually has pretty strong positive effects on these firms' performance and productivity on average. So the productivity increases by about 5% on average, particularly for these industrial firms that are a little bit less pollution intensive, but still polluted and still polluting and still regulating. But then it has, at the same time, almost no effect or a slightly positive effect on the firms that are in these most pollution intensive industries.

So what this is basically saying is that, this dialogue that's typically found in the policy discourse as well as in the economic literature, is that environmental regulation, in this case, is actually enhancing productivity, which then can filter through to economic growth and development. And what we can show also is that the ways in which firms are achieving this differs depending on whether it's a private firm or a state owned enterprise. So China has this kind of long history of implementing and enforcing regulations differently for the private sector versus the state owned firms. And what we can find is that these private firms are achieving these productivity gains primarily through improving the productivity of their labor and their inputs, which implies that they are innovating in their processes and practices.

On the other hand, the state owned enterprises, it does not appear as though the regulation is enforced in the same way. They are achieving productivity gains, but our evidence suggests that they might be benefiting from some type of government favoritism, perhaps in being favored in some type of sales contract or public procurements after the policy is implemented to basically allow them to survive. And so what that then tells us is actually that enforcement or the strength of institutions is extremely important for environmental regulation to have these positive effects or to provide the incentive for firms to innovate. And without that, firms do not have that incentive and this might help to explain some of the, perhaps, negative effects or the null effects that we find typically in some of the economics literature of the impact of environmental regulation on firm performance.

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JACQUELYN PLESS: So given how it's very difficult to, say, predict when the sun might be shining during the day and also because it's very difficult to change human behavior and habits and really our needs and demands that improve our quality of life, such as being able to turn our lights off when we need to or turn them on when we want to and need to, to be able to use our computer when we need to, it's very difficult to change this behavior.

And so while there are a lot of arguments in the literature for how such behavior change is going to be a big part or should be a big part of how we reduce emissions associated with the electricity grid, I would say that it will and should be part of the answer, but it can only go so far. And that's what we're starting to see in the literature now and in new empirical evidence and with one of my recent projects, is that it really can only reduce electricity consumption by so much.

And so without being able to change all of these habits, the solution is really finding a way to provide all electricity in some type of net zero emissions way. And what I mean by that would be, OK, we use as much of that renewable electricity in real time as we can, but we find technologies or redevelop new technologies that also allow us to store that excess energy, such as through these batteries.

Batteries can really deal with some of that intraday balancing, but we also need a lot of new innovation and new technologies to allow us to then balance that consumption over longer time periods, say, over a few weeks. If you're in some region where there's no sun whatsoever through the winter and the wind is not blowing, you need to be able to say, OK, well, if we generate a lot of power from renewable electricity during one time of the year or one time of the day, how can we find a way to then consume that later?

So from my perspective, innovation just has to be a huge part of the picture here. Whereas behavior change will reduce the amount of innovation or reduce the amount of, say, electricity that we will need to store in order to do that. But given how difficult it is to change behavior and given how quickly we really do need to reduce emissions in order to address climate change and mitigate the potential consequences in the future, we just need to innovate and make this happen technologically as well.

And when I say this, so developing the technology, I have so much faith in being able to innovate. And the pace at which innovation is moving these days is unbelievable. But oftentimes, what it comes down to is driving down those costs, which happens in various ways. It can happen with additional innovation, by using materials in a different way. It can also largely be around diffusion, so learning by doing and getting these technologies out there. And doing so relies so much on the political and economic aspects as opposed to just the technology itself.

So a common misunderstanding is that a lot of renewable electricity technologies and using them is so much more expensive than using, say, coal or natural gas that we've had forever. But that's simply not true. So over the last 10 years, we've seen the cost of, say, solar come down massively. And in a lot of parts of the world, using these renewable energy technologies and electricity is actually cheaper than the fossil fuels that we've relied on for so long.

And so getting through this narrative in politics and in our societal conversations around these issues, it's just really important to note, OK, integrating renewable electricity, it's not more costly and it also can provide so many other benefits that help drive socioeconomic developments.

Integrating these resources is not at odds with that type of development. So the common narrative is usually just that it's too costly and that it's going to increase the price of electricity, but that's simply not true.

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JACQUELYN PLESS: We need to change the narrative around how environmental protection and economic development are necessarily at odds with each other. So they both can be achieved with regulation or policies and in particular say, carbon taxes, where we just need the right policy mix in order to make this happen.

So we think about carbon taxes in particular as providing the incentives to innovate in renewable energy technologies. And there has been evidence of this being true. But at the same time, we need to also think about these other research and development tax credits and subsidies that go specifically towards the developments and diffusion of renewable energy technologies.

And so the idea is that we basically need policies that address the incentives to innovate across the entire, what I would call the innovation spectrum. So from that basic research and development to applied research and development. So this would be when you're trying to say, drive down the costs of something or bring some type of basic R&D into developing a technology itself, and then through to commercialization.

And so this would include things like basic R&D subsidies that can go to private entities. It also could be funding that goes towards educating students. So perhaps fellowships for training students and their PhDs to work on these topics.

And then we also need policy support on that say, commercialization and the diffusion side of things where we help to pull that technology to market. And this has been one of the really big barriers actually in the renewable energy technology development and diffusion context. Because innovating in energy, it has some unique features that are very challenging in terms of it being a very capital intensive industry.

But in particular, the timeline between idea development and commercialization is just extremely long and extremely uncertain, especially with there being a lot of policy uncertainty. And so with that in mind, there have been some new funding models developed. And we probably need to continue thinking about this in terms of trying to shorten that or narrow that gap between technology development and commercialization. So I would say that can and should be an area of focus moving forward.

And another policy that should be prioritized is just a policy around using evidence-based policy. So we haven't had a ton of really great empirical evidence yet on what exactly the policy design should be in order to drive innovation in renewable energy at a decent pace. That evidence is starting to emerge.

But what we don't know is how different policies interact say, with this basic R&D tax credit along with carbon taxes. And so we really need to continue putting time and effort into understanding the effects of these policies. And then when policy is then implemented, it should be evidence-based. We should be looking at what does the research say in terms of what policy designs work versus not.