The idea that Green Tech Could Form the Foundation of a Major Economy is Unrealistic
American, Chinese, and European policymakers seem convinced that supporting high-tech green industries is the key not only to a sustainable future, but also to a prosperous one. But the idea that green tech could form the foundation of a major economy is unrealistic.
US President Joe Biden’s administration included generous green subsidies in the Inflation Reduction Act, which aims to build a “clean-energy economy powered by American innovators.” Former European Central Bank President and Italian Prime Minister Mario Draghi has delivered an influential report to the European Commission arguing that the European economy’s future depends on a dual competitiveness and decarbonization strategy. And China has invested heavily in turning the “new three” industries – solar photovoltaic, lithium-ion batteries, and electric vehicles (EVs) – into export engines.
The details are different, but the underlying idea is the same: supporting high-tech green industries is the key not only to a sustainable future, but also to a prosperous one. But how credible is this logic? Can a large economy like the United States, the European Union, or China really be built on a foundation of green tech?
Probably not. For starters, energy represents only a small share of these economies, and in most industries, energy amounts to just 2-5% of total costs. Of course, that share is much higher – more than 10% – for certain energy-intensive sectors, such as cement, iron and steel, and building materials. But these sectors are unlikely to contribute much to an economy powered by green tech.
More important, the green transition will require much less new technology than is widely assumed. For the foreseeable future, the bulk of the zero-carbon power the world needs will be provided by existing technologies: solar panels, wind turbines, and batteries. Solar cells have been around for almost a half-century, though the earliest versions were so bulky and expensive that they were used only for satellites. Wind turbines have been around for even longer. Even lithium-ion batteries have been on the market for more than 30 years.
Yes, there is room for further research and development; new ways to produce these goods can be discovered. But the impact of further advances in these technologies will be limited. For example, while it is possible to improve “smart” grid management – including by deploying artificial intelligence – losses in the electricity and transmission systems are largely unavoidable. Ultimately, rapid adoption of renewables depends not on cutting-edge innovation, but on the humdrum task of driving down the cost curve of known technologies.
Another reason why it would be difficult to build a strong economy on green-tech foundations is that solid-state goods, such as solar modules and batteries, are best suited for mass production. This means that they require large up-front investment, and as production scales up, both costs and prices fall. Last year, Chinese exports of solar modules were 33% higher in terms of generation capacity, but their value actually fell slightly, because unit prices decreased by one-third. Something similar is likely to happen for batteries.
In other words, a country seeking to lead in green tech might find itself spending ever-larger sums to increase its capacity to produce goods whose prices continue to fall. China, with its large savings surplus, can afford such investments – and the entire world benefits if two solar-module factories are built where one would be enough (especially if the alternative is more ghost cities) – but the US and the EU cannot.
Even for China, the extent to which rising exports in the “new three” industries have translated into higher GDP growth is unclear. While they are producing goods with significantly more high-tech content than the “old three” export engines – household appliances, furniture, and clothing – they are, for the time being, mostly operating at a loss. And when it comes to EVs, the model and brand – neither of which has anything to do with green tech – matter much more than performance, and here Chinese producers do not have a natural advantage. In any case, EVs hardly count as a separate industry from the batteries on which they depend.
A key obstacle to the rapid roll-out of renewables profits are stubborn “soft costs” – such as permitting, planning, and marketing – which are generally much slower to fall than hardware costs. When it comes to diffusion of solar power, for example, these costs are estimated to be at least as important as the cost of the panels themselves.
One of the costliest elements of the net-zero transition will be the insulation of buildings. In the EU, this task – which requires only known materials, skilled artisans, and efficient planning – often comprises a large share of total estimated investment needs. The countries that make the fastest progress on this front will be those with better-skilled construction workers and less cumbersome homebuilding and planning procedures – not those that produce the most high-tech equipment.
The task of decarbonizing the energy sector and, subsequently, the entire economy is as urgent as it is monumental. But rather than focus on becoming a green-tech “leader” – a strategy that will not necessarily lead to economic dynamism – policymakers should shift their attention to the often-unexciting activities that will actually accelerate progress.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
