In our op-ed on Forbes.com, Julian Morris and I argue that the federal government should end the practice of giving out risky loans in an attempt to spur innovation in the energy sector:
Government shouldn’t be in the business of selecting winners and losers in business at all. But if it is going to attempt to drive “green” innovation, it should use prizes to reward actual results and minimize corruption and corporate welfare. Prizes could be used to increase energy efficiency, cost-effectively convert solar energy to electricity, waste reduction efforts, and drive advancements on any number of environmental issues. The type of crony capitalism that led taxpayers to waste over half-a-billion dollars on Solyndra needs to be eliminated. And rewarding proven success through prizes is a significantly better policy than subsidizing failure.
As we note in the op-ed, there are many reasons why this method is preferred. First, taxpayers would not be left paying for the mistakes of bad investments. With the demise of Solyndra, taxpayers are left on the hook for $535 million in bad investments. With a reward-based incentive, taxpayer money is not spent until a clear, concise, and audacious goal has been met.
Second, moving from a process-oriented grant program to an outcome-based reward program drives the kind of innovation that can only come from private actor competing against one another.
Companies do not compete through grant applications or lobbying to be one of the chosen few; all companies are welcome to participate. They don’t compete to make the case that they have a better idea — they demonstrate that they have the best idea. And, perhaps most important, the outcome-based investment produces research and development without spending a single dollar. The X Challenge may have only given the top prize to one company, but in the process they produced nine other finalists, seven of whom doubled the industry standard and a handful that have products that are marketable today.
This $1.4 million call to action prompted over 350 teams to pre-register and the results, announced October 11, were impressive. Seven of the final 10 teams doubled the standard oil recovery rate of 1,100 gallons per minute. The winner, privately-held Elastec/American Marine of Illinois produced an oil recovery rate of nearly 4,700 gallons a minute. In a single year, without any federal funding, the X Prize had identified a problem, incentivized a solution, and produced a more efficient and cheaper technology that more than quadrupled the industry standard for cleaning oil spills.
Lastly, a reward system would drive a wedge between business and government that leads to the type of crony capitalism we’ve seen in the Solyndra scandal. Why can’t the government do this in lieu of risky and politically-motivated loan programs? For one thing, it would require politicians to set policies that look beyond the horizon of the next election. Establishing a $100 million prize to the company that can develop a high-efficiency, cheap, clean, and industrial scale solar panel may take years, with no guarantee of sending home pork before their next election.
A policy that rewards outcomes will foster competition, incentivize innovation, and drive a wedge between business and government that leads to the type of crony capitalism that emerged after the demise of Solyndra. Government shouldn’t have a role in picking winners and losers in business. But if we can’t go that far, we can at a minimum insist that the government incentivize successful outcomes instead of hedging their bets on the market.