Following the tenfold growth of Tesla’s stock between March 2020 and January 2021, the company’s founder, Elon Musk, has emerged as the avatar of green innovation. The Tesla phenomenon has spilled over into the rest of the nascent electric-vehicle (EV) industry, sprinkling stardust on a host of green startups with unproven technologies and minimal revenues.
As entrepreneurs and private investors step in to do what governments have failed to do, some commentators now believe a “Green Revolution” is at hand. Others, however, look at the same picture and see the early signs of a “greentech bubble.”
The greentech (or cleantech) boom is indeed vulnerable. Like the earlier digital boom that resulted in the dot-com bubble of the late 1990s, it is heavily reliant on an outside force that could suddenly recede—namely, easy money. In today’s environment of low interest rates, the present value of future cash flows has been inflated, and thus will plummet were interest rates to rise.
For ten years now, central banks have set policy rates below the rate of inflation—which itself has resided at historically low levels. As a result, negative real interest rates on safe assets have pushed large institutional and retail investors alike into riskier assets yielding higher potential returns. It is worth remembering that just before the recent focus on greentech stocks, the Big Tech giants achieved extremely high valuations as part of a broader “unicorn bubble” in private markets, where “unconventional” investors paid premium prices for unsellable shares of what they hoped would be the next FAANG (Facebook, Apple, Amazon, Netflix, Google) stock.
In any case, the US Federal Reserve has responded to the COVID-19 crisis with a commitment to keep its policy rate near zero until the US economy achieves “maximum employment and inflation averaging 2% over time.” Yet, given the rapid administration of COVID-19 vaccines under US President Joe Biden’s administration, the stage is being set for normalization in capital markets.
So, the question is not whether the green bubble will burst (all bubbles do, eventually), but whether it will burst before the Green Revolution has established a firm foothold. Will the capital mobilized by the current boom be wasted, or will it be embodied as the infrastructure needed to turn the revolution into the new normal?
Effecting radical change in energy supply and consumption inevitably will require what only the state can provide: vast public investment and new rules of the road (taxes and regulations). We know this from the history of the digital revolution in the second half of the twentieth century, which I examined in my book Doing Capitalism in the Innovation Economy.
In technological revolutions, state actors must play the initial leading role, by establishing a politically legitimate mission (such as winning the Cold War) to justify massive spending on high-risk programs. Likewise, it is the state that must fund upstream investment in basic research whose potential returns are too uncertain to motivate the private sector. And, as a novel technology matures, the state creates a market by serving as the first customer, thereby pulling the supply side of the innovation economy down the learning curve to low-cost, reliable production.