China Leads the World...In Clean-Energy Power?

These are the lead paragraphs in an article on China… the “Green” nation:

“For years, China was seen as a major obstacle to global efforts to combat climate change because of its refusal to reduce emissions under the Kyoto Protocol.

Now, for some, the concern is not that China is moving too slowly but that it is rushing ahead so fast that clean-energy companies in the West will be left in the dust.” (http://dealbook.nytimes.com/2011/01/25/efforts-to-halt-climate-change-provoke-new-optimism/?ref=todayspaper)

This article brings to mind two pieces of advice I received several years ago that I have found to be relevant over and over again.

The first is that China thinks in terms of decades, whereas the West thinks in terms of years.

This puts the West at a substantial disadvantage. We deride the Chinese because they are not moving as fast as we, who focus on what is happening “right now”, think they should be moving.

Then, when the actions of the Chinese fall into place, people in the West respond as if the success of China took them by surprise.

While the leaders in the West have focused on “legacy” issues like putting people back to work in the old jobs they got laid off from or in supporting declining industries, issues like science education (http://professional.wsj.com/article/SB10001424052748704698004576103940087329966.html?mod=ITP_pageone_1&mg=reno-wsj), all types of education (http://www.nytimes.com/2011/01/16/opinion/16kristof.html?partner=rssnyt&emc=rss), and innovation take a back seat because they only have a “longer term” payback.

The second piece of advice has to do with how programs, governmental programs, should be designed. The emphasis of governmental programs should be on policies and not outcomes.

The article mentioned above contains a quote by Vincent Mages, a director for climate change initiatives at Lafarge, the giant cement company based in France, “China talks about programs and policies rather than focusing on targets.” Mages adds, “We focus on targets too much.”

When you focus too much on outcomes, desperation sets in when the outcomes are not being met. And, outcomes are generally tied to short-term time horizons. Some outcomes emphasized by the United States government have been on a 4.0% or a 6.0% unemployment rate or a housing starts goal or the real growth rate of the economy. And, these goals are usually connected with the year after they are set. Frustration in meeting these goals often lead to even more efforts to achieve them which often results in distortions of resource allocation and, even more important, they serve as a distraction from working on longer term objectives.

People in the United States do respond to needs and do respond to opportunities. Did the capital shortage expected in the 1980s ever arise? Were there any disruptions arising from Y-2000? Has America not led the world in innovation in the area of information technology? And so on.
People respond to incentives. Just check out the research presented in the two books “Freakonomics” and “Super Feakonomics.” People will cheat if the incentives are aligned in certain ways…even teachers. They will act in destructive ways if information is not open and available. They will focus on short-term outcomes if that is where the incentives are. People respond to the incentives that are embedded in the culture of a nation.

If we are not comfortable with the results we are getting, maybe we need to look at the incentives we are setting up for our children and grand-children. Maybe we, as members of this society, are, ourselves, emphasizing outcomes for people rather than programs or lifestyles.

So, maybe, just maybe, we should begin to think in terms of decades and not just in terms of the short-term results connected with next year’s or next quarter’s profits. Maybe we should take into consideration all the costs of the decisions we make and not just the immediate ones that affect us. Maybe we should become more interested in the kind of culture we are supporting and create more positively directed programs and policies and de-emphasize our efforts to achieve specific outcomes.

There are initiatives that are popping up. “Impact” investors, like those connected with Investors Circle in the United States, are growing in importance. Investors’ Circle aims to “catalyze the flow of capital to early stage companies that address major social and environmental problems as well as grow and support the network of values driven capital investors.” Return is important, but real return is based on “smart” decision making not just expedient decision making.

There is also a new breed of commercial banks being formed like New Resource Bank in California, Green Choice Bank in Chicago, and e3bank in near Philadelphia Pennsylvania. (Note of disclosure: I am on the board of e3bank and an investor in that organization.) These banks emphasize “smart” decision making with respect to clean-energy and the inclusion of the longer term costs of not taking into consideration environmental impacts. These efforts focus on decisions that have consequences over decades and not just on next year’s profits.

These efforts, however, are just small ones. They have not achieved the scale that the Chinese effort has achieved. And, until greater “scale” is achieved, “the West will be left in the dust.”

Maybe, just maybe, this competition from China is just what we need. We, in the West…and in the United States…have been very smug about our leadership in the world. Here is a “space” in which this leadership may cease to exist in the very near future.

Could this be the “jump start” we need to get the ball rolling? Nothing drives us harder than competition. We’ll see.