INNOVATION SNOWBALLING AND CLIMATE LAW.

• Author: Liscow, Zachary

ABSTRACT

Findings at the frontier of economics suggest startling implications of an under-appreciated fact about technological development: innovation builds on itself developing path dependencies in which past innovations attract similar, but more advanced, innovations. Innovation snowballs. The world economy needs to undergo a dramatic transformation to avoid the risk of catastrophic effects from climate change. Policy to encourage this transformation should be sensitive to innovation snowballing.

The conventional policy view has long been that, to address a social harm like pollution, the right response is simply to tax the behavior causing the harm, leading to a variety of responses including induced technological change. The Article shows that this view is incomplete. Rather, the most efficient response to climate change--and likely other social harms--requires a combination of taxes and a big push of government support to specifically redirect innovation toward technologies that alleviate social harm. Without a big push in cleantech innovation to change the trajectory of innovation, energy technology will tend to stay trapped in its high-pollution path.

For climate policy and likely other pressing policy issues, the Article suggests a paradigm shift in the role of innovation policy: from broad to targeted. Otherwise, the transition to clean energy will be longer, more expensive, and riskier for the global climate. The Article shows how to efficiently deploy innovation policy to meet this challenge.

TABLE OF CONTENTS INTRODUCTION I. INNOVATION AND SOCIAL HARMS: THE CONVENTIONAL EFFICIENCY STORY II. INNOVATION SNOWBALLING A. In Cleantech B. When Does Innovation Snowballing Matter? III. DOMESTIC POLICY A. Innovation Policy 1. Where? 2. When? 3. How? B. Non-Innovation Policy 1. Performance Standards 2. Deployment Subsidies 3. Government Procurement 4. Infrastructure IV. INTERNATIONAL POLICY A. Innovation in the International Regime B. Implications 1. The Paris Agreement 2. Knowledge Sharing Platforms 3. International Intellectual Property Regime V. POLITICAL ECONOMY CONCLUSION INTRODUCTION

To address social harms like climate change, government policy should encourage innovation in targeted areas. That's the simple point of this Article. The claim may seem obviously true--for example, that innovation policy should encourage innovations that reduce the risk of climate change over those that exacerbate the problem. But conventional law-andeconomics efficiency analysis opposes policies that seek to specifically incentivize innovation in certain areas, and argues instead that, if a party causes a social problem, the party should be taxed to discourage the activity but should not receive subsidies to develop innovations that would help reduce the social harm. (1) New economics research overturns this view, based on what we call "innovation snowballing:" innovation builds on itself over time, developing path dependencies in which past innovations make present ones more valuable, with past innovations attracting similar, more advanced innovations. (2) Thus, to maximize efficiency in the presence of innovation snowballing, innovation policy should target certain areas to address social problems, so that future innovation will follow the path toward reducing those social harms. This Article explains: (1) how conventional efficiency analysis disapproves of targeting innovation to address social problems, (2) why new economics research on innovation snowballing overturns that view, and (3) how policy should respond in the context of climate law--an area where innovation snowballing is particularly significant.

Economic analysts agree that, for innovations that could exacerbate or mitigate a social harm, there are two potential reasons for government intervention. First, since society benefits from innovation to a greater extent than innovators themselves capture (partly because not all ideas can be patented, (3)) innovators produce positive "externalities" for society. (4) Externalities can be positive (beneficial for society) or negative (harmful for society), and occur when the activities of one party makes another party better or worse off, but the first party does not bear those gains or losses. (5) Because of these positive innovation externalities, innovation should be subsidized, to encourage the socially optimal amount of innovation. (6) Technologies that produce social harms like greenhouse gas emissions also produce a second externality: a negative one, since these emissions increase climate risks. (7) Because of these negative pollution externalities, the government should adopt some form of a carbon tax to discourage pollution.

Though some have argued otherwise, (8) the conventional view is that these twin externalities--positive for innovation and negative for pollution--are separable, rather than intertwined. In particular, government innovation policy should be equally supportive of privatesector innovation in "cleantech" (technologies with low or no greenhouse gas emissions, like wind and solar) and "dirtytech" (fossil fuel technologies with significant greenhouse gas emissions and associated technologies, like fracking or deep sea oil drilling). (9) In other words, the government should not attempt to directly influence the direction of technological development. Rather, it should tax pollution, provide technology-neutral innovation support, and then let the cards lay where they fall, trusting the private sector to respond in the cheapest, most efficient way. By this logic, for example, new wind technologies and new fracking technologies should receive the same government support. The reasoning is simple: the innovation subsidy corrects for the innovation externality, which is produced by both wind and fracking innovation, and the pollution tax corrects for the pollution externality. So there is no need for additional subsidies for cleantech innovation.

This traditional argument is reflected in a wide swath of economic analysis on climate change, as well as an international climate regime that encourages reductions in greenhouse gas emissions, but does not try to do so through targeted innovation. (10) However, new research shows that this view is misguided and that, as a result, policymakers are failing to use the most efficient, cheapest, quickest, and most effective tools to reduce the risk of a climate catastrophe. (11)

Specifically, the conventional view misses the dynamics of innovation. (12) Its understanding of how innovation occurs over time is too simple. In short, it misses innovation snowballing. Suppose that an innovator comes up with a blockbuster technology making solar energy cheaper than energy from fossil fuels. In this scenario, conventional economic analysis assumes that innovation rates in cleantech and dirtytech will remain unchanged. Thus, more solar cells will be produced after the blockbuster innovation, but the breakthrough solar technology does not fundamentally alter the processes underlying innovation in cleantech and dirtytech. As a result, under the conventional framework, innovation in cleantech and dirtytech will chug along at the same pace as if the breakthrough had never occurred.

This conventional assumed response of innovation is likely incorrect. Instead, if there is a blockbuster solar innovation, innovators will flock to solar and away from dirtytech because solar is now the cheapest technology, meaning new solar innovations can be immediately commercialized for a larger number of users. Follow-up solar innovations will only further reduce the costs of solar and attract even more innovators from dirtytech to cleantech, accelerating cleantech innovation even more. Innovation in solar will, in other words, snowball, gathering speed, mass, and momentum as more innovations and innovators gravitate toward the technology with the largest stock of knowledge. (13) Building upon a few decades of work on the dynamics of innovation, (14) new research shows how innovation exhibits this path dependence--namely, how a blockbuster innovation in solar can change the course of innovation because innovation builds on itself. (15) Innovators "stand on the shoulders of giants"--and, under circumstances that this Article explains, they prefer to stand on the tallest shoulders in order to get the quickest, largest financial returns. (16)

This new research has transformational implications for the law, which this Article works out. Most basically, innovation policy should be at the core of environmental policy--and likely other areas of policy as well. In particular, environmental policy should include innovation policy that specifically encourages cleantech, since cleantech innovation needs a big push so that its innovation will snowball beyond that of dirtytech. Due to society's failure to tax greenhouse gas emission for over a century, the accumulation of dirtytech knowledge has far outpaced that of cleantech. (17) As a result, innovators are in a rut: they gravitate toward dirty technology because it has the largest knowledge stock, having benefitted from dirtytech subsidies as well as the longstanding absence of a carbon tax, and therefore promises the quickest profits. But a big push of government support for innovation in clean energy will catapult innovators out of their dirty energy rut and onto a cleantech path that the planet needs to avoid massive climate disruption.

How policymakers should implement this big push is the topic of the second half of the Article. We explain the implications for three areas of climate policy: domestic innovation policy, domestic non-innovation policy, and international policy.

First, innovation snowballing has several implications for domestic innovation policy in areas touching on climate policy. One key implication is that innovation snowballing reduces the appeal of using intellectual property (IP) to promote cleantech...