Assertions that government can't pick technology winners are mostly meaningless | Notes from the Panther Lounge | David Suzuki Foundation

By Pierre Sadik

Success in the marketplace is only one indicator of whether a technology is truly a winner for Canadians. There are many environmental costs, born by all of us, that are not reflected in a given technology's performance in the marketplace.

It is axiomatic that government can't pick technology winners, right? This aphorism is often tossed around on Parliament Hill, particularly by the current government. Both this assertion and its corollary, that the private sector is better at picking technology winners, bear further scrutiny.

The claim that government is hopelessly myopic in picking technology winners is a common refrain coming from many different quarters. Free market types use it to condemn federal government subsidies aimed at promoting renewable power or saving jobs. Environmentalists sometimes use it to condemn boondoggles such as the billions in federal subsidies to Atomic Energy Canada Limited for the hapless CANDU reactor. And governments use it when they don't want to offer further subsidies.

The fact that everyone and their uncle feels comfortable using this expression is perhaps an indication of just how bereft of meaning it has become.

The assertion that government can't pick technology winners begs three important questions. What is it that government is doing that we characterize as "picking" a winner? In what context is the technology in question being adjudged a "winner"? If the federal government does indeed have a predisposition for picking losers, who is deft at picking winners?

In terms of the first question, most observers will agree that government is trying to pick a winner when a given technology is provided a government subsidy that competing technologies do not enjoy. But subsidies come in many different forms and guises. For instance, the renewable power sector is currently subsidized by the federal government via a production incentive of one cent per kilowatt hour. The coal and oil powered electricity sectors do not receive this subsidy.

The renewable power subsidy is designed, in part, to give renewables an advantage over coal and oil, or at least level the playing field between these energy technologies. But at the same time that the federal government is subsidizing renewable power it is also simultaneously subsidizing oil and coal via an accelerated capital cost allowance and other tax breaks. So who exactly is government picking as the technology winner in the electricity sector? Perhaps even more noteworthy is that the oil and coal sectors also receive an astronomical implicit government subsidy by being permitted to emit greenhouse gas pollution into the atmosphere at little or no cost.

Which takes us to the second question: what does "winner" mean? In what context is the technology in question being adjudged a "winner" and for whom is it a winner? Probably the most common definition attributed to "winner" in this context is that the winning technology is the one that succeeds in the marketplace.

But the marketplace is a fairly narrow lens through which to judge a subsidized technology. Success in the marketplace is only one indicator of whether a technology is truly a winner for Canadians. There are many environmental costs, born by all of us, that are not reflected in a given technology's performance in the marketplace. Economists call the unaccounted for cost a market externality, because the market is unable to internalize the cost. This shortcoming means the marketplace understates the actual costs to society, thus skewing which technology wins and which loses.

The refrigerant Freon provides an excellent example of this phenomenon. Freon technology was originally deemed an unqualified winner by the marketplace. It is cheap, non-flammable, noncorrosive, odourless and, above all, highly effective. But government had to step in to pick another winner because, while Freon was a sales winner, the ozone depleting characteristic of this gas where not accounted for by the marketplace in the determination of which technology should win as a refrigerant.

If the government is rotten at picking technology winners who is deft at picking them? The corollary of "the government can't pick technology winners" is probably that the private sector can. But the private sector has an equally dubious record of picking technology winners, particularly if we take into account the true social cost of a given technology. Hence a portfolio approach may be the best hedge against the pervasive inability to pick winners. Government can adopt a portfolio approach by investing in several different technologies at once. One of the best ways to do this is to offer a performance-based subsidy instead of a technology-based one.

That's exactly what the federal Conservative government did when it offered the ecoAUTO rebate subsidy for cars that meet a certain fuel efficiency standard. The performance-based subsidy was open to all technologies — gasoline, hybrid electric, biofuels — as long as the fuel efficiency threshold was met. It worked, and prompted Honda to improve the fuel efficiency of its Fit and Civic compact models solely for the Canadian market (something that is typically unheard of). Contrast the federal Conservatives' approach with the Ontario government's $10,000 subsidy for plug-in electric cars like the Chevy Volt — a targeted subsidy that excludes all other low emission vehicles technologies. The Ontario government's subsidy is highly controversial, and perhaps justifiably so.

_Pierre Sadik is the manager of government affairs for the David Suzuki Foundation. The opinions expressed are his own.

This column was first published in The Hill Times._

August 10, 2009
http://www.davidsuzuki.org/blogs/panther-lounge/2009/08/assertions-that-government-cant-pick-technology-winners-are-mostly-meaningless/

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