Garnaut on Innovation

Within hours of the release of the Garnaut Climate Change Review draft report, I wrote an opinion piece for The Age on the innovation chapter [over the fold]. The report can be found here. Actually, it took me longer to download the report than to read the relevant chapter and write the piece!

My conclusion on that chapter: it marks a watershed in proper thinking about why an Australian government should support innovation and, not surprisingly, as a result as for a big hunk of support. However, I am less enamored by the focus on matching grants. There is potential for so much more when it comes to the environment.

Garnaut’s innovation plan has Australia paying its share of world R&D

by Joshua Gans, The Age, 5th July, 2008.

THE Garnaut review is proposing a sea change in the scale of government support and, more importantly, rationale towards innovation policy.

The headline proposal is for the Government to allocate more than $3 billion a year for innovation on low-emissions technologies. To get a sense of the scale of that increase, the previous government’s Backing Australia’s Ability allocated about $1 billion a year to innovation projects.

What is interesting is that Garnaut calls for this magnitude of spending while ruling out “wrong arguments” for greater spending on innovation. These include that need for speed (ruled out because, if the emissions cap is binding, that is what emissions will be; end of story), low permit prices (ruled out because the setting of future targets will mean that prices will rise and innovation is all about the future), and that innovation will soften the blow from the carbon cap (ruled out because this blow is the point of the whole exercise).

So what is the rationale for the desired spending? Put simply, it is exactly the same as why Australia needs to do something about emissions. Like Australia’s contribution to reducing greenhouse gases, its contribution to knowledge is a drop in the ocean. Nonetheless, as it is a global public good, Australia should pay its way for membership in the international community.

If, as Garnaut projects, the world fund for research in low-emissions technologies needs to be about $100 billion a year, then, proportionate to its GDP share, Australia’s contribution would have to be about 3% of this. Over all research, our share is now less than half that.

What Garnaut is doing is saying emissions caps are only part of our international commitment. We need to commit to spending on the other public good – knowledge – in the same way. And, fortunately, the revenue from emissions permits will more than cover such a commitment. This is a critical change in philosophy on innovation policy. I endorse it wholeheartedly.

Back in 2003, Northwestern University’s Scott Stern and I wrote: “Some have claimed that, as a relatively small and geographically remote economy, Australia need not invest in innovation but simply be content to adopt the best of global technology. We disagree. It is Australia’s duty as a leading member of the world community to itself become an active contributor to the world’s knowledge pool. As a prosperous nation, our payment for innovations developed by companies in other countries should be a reciprocal contribution ourselves. While individual companies invest in innovation to serve the interests of their investors and stakeholders, government investment in the innovation environment can be premised on ensuring Australia’s appropriate place in the community of nations.”

At last, we have a major government player who agrees.

What of the details? Garnaut wants to ensure the money is spent where it is needed most to fill market gaps. The report is concerned that private companies wanting to invest in research and development will suffer a first-mover disadvantage. While patents cover some of these, if you invest to overcome regulatory barriers, as you open up a market for others, you close it for your own returns. Garnaut wants the money to hit at these issues.

In this regard, Garnaut favours grants whereby the Government matches the contribution of the company to close financing gaps. But this is only part of the innovation story and still gives rise to a problem in allocating the matching grants themselves. To this end, Garnaut wants an organisation to co-ordinate this here and abroad. This is a good idea but matching grants are still a blunt instrument.

What I would like to see are prizes and other demand-pull incentives to ensure research is directed to solving problems facing Australian government and industry in meeting new emissions’ challenges.

We have a permit price that will allow unprecedented comparisons between different research proposals. A dedicated organisation can use that and create market-based incentives to drive innovative activity. That way we “don’t pay it forward” but “pay it when we get it”. This is something private philanthropic organisations have realised. Prizes remove the chance that matching turns into industry assistance; something that I, and you, would think Garnaut would worry about.

Garnaut’s proposals adopt something that I made in my submission to the review: to build courses and skills in managing emissions. Emissions trading and its effects are widespread. For businesses to manage them, they will need highly trained employees with skills across science and commerce. To date, there are no bachelors of emissions management in our universities. With the cap on the horizon and four years to train graduates, we need to get started. Garnaut is one of the first to recognise that need.

Joshua Gans is an economics professor at Melbourne Business School. He made two submissions to the Garnaut review.