In a recent blog post titled "The End of Green", Thomas Friedman ponders whether the current troubles in the financial markets will end investments in sustainable technology, particularly in energy. In his conclusion, he writes:
What we are seeing in this crisis is the need for a whole new financial architecture-and people are recognizing that some problems are just too big to solve unless we approach them systematically. As it is with our economy, so it is with our ecosystem: we need a new system, and we are going to have to think things through very carefully and make some hard choices to get it right.
Although Friedman describes the risks and the opportunities better than anyone, in this point I think while his aim is true, his target selection is off. What we need is new market structures.
Many of the most eco-aware individuals are rightfully humble about are abilities to manage an ecosystem. Ecosystems are tough manage. We have bad results in managing them. We have a long record of unimagined and unforeseen interactions and consequences.
Human activities and more importantly the human innovations are just as tough to manage. Only rarely does direct government action lead to sustained innovation. Central control, whether by mandate or by target financial incentives, can only select winners. It can optimize an existing system at the cost of eliminating diversity; that's how we got the power grid we have today. New central systems for finance and will do little better. Central directives do no reward and sustain innovation; innovation is what we need most right now.
The current financial crisis come from three big picture issues. Direct interference with markets, a thumb on the scale to drive home ownership down the economic scale, increased borrowing amongst those that could not afford it and amongst those willing to game the new rules. Rent-seeking by regulation and lobbying created financial forces that were untouchable. Persistent deflationary policy drove investments seeking better return into the few areas with rising prices. These forces led to the whole arbitrage via derivatives and widespread financial exposure that we have been watching as it breaks up.
In a similar way, we have energy markets that are regulated achieve minimal risk for all and to protect current market participants. All innovations must come to market by way of the existing large utilities, and promise guaranteed results along the way. Even new technologies must promise 20 years warranties. Anything that threatens current market players must first come through utilities commission hearings or legislative mandate. This creates markets that are un-innovative, risk-adverse, and hostile to new entrants.
Two factors are critical to creating the era of E-Tech that Friedman envisions. We must have clean market structures that allow new players and new technologies to enter energy markets and succeed or fail. We must have the technical infrastructure in place to allow a much more heterogeneous market of generation, storage, conversion, recycling, and resale to develop.
Interoperability and the smart grid are at the heart of this new market design. Interoperability is necessary for consumers to swap technologies without rebuilding their entire infrastructure. High barriers to change stifle innovation. This interoperability must include interoperability with the people and business systems; without information behavior and process will not tolerate agile energy decisions. The smart grid is the core locus of interoperability, where changes in energy use and market prices in energy interact.
It's a problem of energy market rules, not financial systems.