Do Government Subsidies Work for Climate Tech?

Considering the number of ways companies can raise money these days, one might question why a government would need to subsidize an industry like climate tech.

There are a variety funding sources available - venture capital, non-dilutive financing, small business innovation grants, etc. So why is it important for the government to continue subsidizing research and development of new tech?

Simply put: It may become a geopolitical advantage to do so.

What kinds of subsidies should be used?

Depending on your political leanings, you may or may not agree with government intervention to prop up companies with subsidies, but these financial tools remain a surefire way to bring cost curves down of evolving tech, and ultimately remain competitive in the ever-growing risk of energy dependence.

Tools like private loan guarantees, tax incentives, and tax credits have driven down the cost curve of all sorts of products - EVs, solar manufacturing, nuclear fusion, and more. Now, newer tech like direct air capture and large-scale lithium mining operations are seeking big checks from Uncle Sam.

Saliently, the oil and gas industry has taken advantage of the same tools.

John Doerr even notes in his book on climate solutions that, "The fossil fuel industry benefits from artificially low prices because it's been free to devastate our environment and collective health at every turn." These carbon emissions, mainly from oil and gas combustion, have been a negative externality in the production of goods and services. Many think it's time to end this way of doing things.

How the Chinese have used government subsidies

The Chinese government is no stranger to spinning up new markets and incentivizing innovation. Just in the past decade, China has become the world leader in solar photovoltaic manufacturing (owning 70% of market share), as well as lithium ion batteries (73% market share), thanks to the support of Chinese government subsidies.

The influx of funds has sparked growth in PV manufacturing within the mainland border of China. Not only are they building massive solar capacity to use within their own borders, they are unloading the same goods onto the international market. This has caused the price of PV solar to drop significantly, to almost $.03 per kWh for utility scale solar in the US.

Because the Chinese government funded this industry with so much capital, US-based solar companies couldn't compete. David Hard of ITIF notes, "The decimation of PV manufacturing outside China drove many innovative firms out of the business, in large part because they could not match the predatory prices offered by government-subsidized Chinese competitors."

The drop in prices caused companies in the US like Solyndra to fizzle out and die, among other reasons. Just this year alone the Chinese government paid $63 billion back to renewable energy firms in order to fund future projects. No one is quite sure when these subsidies will end.

Do subsidies work in the US? One company shows they can

Speaking of nearly fizzling out and dying, Tesla Motors has also faced extreme pressure in the past decade to become profitable and stay "default alive".

While the company verged on death in the early oughts building out their first products, the Tesla Roadster and large scale battery facilities, the US Department of Energy stepped in with a whopping $450 million loan to save the firm.

Luckily, the company survived and even paid off the loan a decade ahead of schedule. Without that DOE loan, however, there wouldn't be a Tesla.

We could continue to dive deeper into the topic, but I'll spare the details and leave with this: The less the US government invests in climate-related tech, the more they risk becoming energy dependent, whether through purchasing imported materials or other imported energy (See Germany's energy struggles as the Russia-Ukraine war continues).

There is no better time for the US to put subsidies to work. This will need to be done in the range of hundreds of billions annually.

I guess the question to ask now is: when will Uncle Sam starting writing the checks?

That's it for today. Did you like or dislike any of the content? Feel free to reply to this email with feedback.

Have a great weekend,

Matt from Green Era 🌎