Association for Public Policy Analysis & Management

Widespread adoption of radical low-carbon innovations is necessary to decarbonize emissions-intensive industries like cement and steel.  However, for several reasons, commercializing these technologies involves overcoming a “Valley of Death,” in which incentives for investment are weak. First, radical technologies are especially prone to market failures associated with knowledge spillovers.  Second, funding requirements for demonstrations often exceed the financial resources of firms.  Third, because they are unproven at scale, these technologies are considered risky and unreliable.  Fourth, uncertainty about future markets, and particularly about future climate policies, may render risk-return ratios of these large scale projects unprofitable.  We examine these conditions in detail in our paper.

Despite strong evidence of market failures and weak private sector incentives, it is not entirely clear that governments are capable of overcoming these conditions.  The track record of previous government efforts to support large scale demonstration projects includes many examples of failure.  Previous analyses have concluded that there are structural reasons for these failures, leading to the notion that much of these efforts consist of politicians trading favors to satisfy constituencies (“The Technology Pork Barrel”) and similarly to a widely invoked heuristic that “governments should not pick winners.”  Accepting that these government failures exceed the scale of the market failures described above has strong implications—not only for whether government should support large-scale demonstration projects, but also about the viability of these technologies and consequently about climate change mitigation potentials.

To investigate how public innovation support mechanisms can maximize the effectiveness of government support to overcome the Valley of Death, we analyze past cases of demonstration projects including: carbon capture, synthetic fuels, solar thermal electricity, steel, wind, and nuclear power.  The main approach of the paper is a qualitative meta-analysis of large scale demonstration projects. We investigate the main characteristics of innovation support including: timeline, motivations, share of contribution by private sector actors, performance indicators, and market development.  Preliminarily, we find many successful projects, which were not abandoned before the project end date and achieved their intended goals; these appear to be characterized by more flexible financial constraints, a larger share of public funding, clear performance criteria (e.g. milestone setting) and independent oversight bodies.  Market volatility was in almost every case large and had important effects on the the outcomes of demonstration projects.

Our meta-analysis shows that flexibility in terms of financial contributions from the public sector does help overcome the Valley of Death, even if the technologies not ultimately widely adopted.  Independent governance structures also contribute to effective innovation support.  Given the large role of market conditions in affecting outcomes, a persistent challenge is how to manage the tradeoff between 1) developing market experience that can make projects more suitable to customers over the long term and 2) partially protecting them from the price volatility that seems endemic to the markets in which demonstration projects are meant to compete.