How to react to global warming? How do wean ourselves off that harmful oil - and still prosper?

I maintained that we'd better be safe with Sinn's fears of a Green Paradox than sorry without him, notwithstanding the uncertainties of his argument.

Economist Hans-Werner Sinn is no easy read for a green German: he pretty much pulls german and European green policy into pieces. Much of his critique is plausible, if unsettling: without international cooperation, much of our unilateral efforts may be in vain.

But there's one thing where I wholeheartedly disagree with Sinn: low-carbon technology, for the time being, does indeed require subsidies.

Yes, it may be hard for states to pick winners, but low-carbon technology still needs infant industry incubation, if it is to sustain us in the near future.

Low-Carbon Technology: A Case for Internalizing Costs?

One simple (simplistic, I think) way to think about the development of low-carbon technology is to think in terms of internalizing the environmental costs of high-carbon technology. Given the right present and expected price of carbon emissions, necessary investments into new technology in renewable energy and efficiency enhancements would then be undertaken by individually rational market participants.

Sinn seems to believe that this is the best way to approach green innovation: to internalize the externality of man-made global warming and leave the rest to the market.

Low-Carbon Technology: Market Failure Under Limited Foresight

Low-Carbon Technology: A Case For Intertemporal Infant Industry Incubation

A related argument is that of infant industry protection. To become competitive, innovations in renewables and efficiency enhancement may well first have to be prototyped, improved and scaled up in protected corners of the market before they can prove their superiority on world markets.

Industries and technologies that require economies of scale and learning curves frequently require initial protection or subsidizing by a central planner, before they can successfully compete. Some (but not all!) experiences of import-substituting industrialization as well as the phenomenal technological progress of wind power in Germany seems to support this view of things.

Low-Carbon Technology: Still, Picking Winners Ain't Easy

A lesson that Hertie's guest lecturer in political economy, Dr. Stormy-Annika Mildner has instilled in me is that, just as markets, states can fail, too when it comes to the efficient allocation of scarce resources.

The history of infant industry protection certainly provides ample support for that lesson: frequently, states failed to pick the would-be winners and didn't phase out protection and subsidies when they were no longer needed. The hype around a now-demystified hydrogen economy and car and the windfalls (pun intended) gained by some renewables producers are cases in point.

Still, these shortcomings and dangers of state-intervention and infant industry incubation should not lead us to throw out the baby with the bathwater.

Sinn provides some valuable criticism of the current subsidizing of renewable energy in Germany. He argues that policies are overly complex (think: multiple sources of subsidies, plus guaranteed feed-in tariffs), feature discretionary exemptions and are not adequately integrated into the EU Emissions Trading System.

Good state-interventionist policy to incubate an infant, green industry must address these problems, and, as much as possible, leave the picking of winners to markets. In other words: we need a central planner who doesn't get her hands dirty in the minutiae of short-term fads and rent-seeking firms, but a planner that ensures that every promising solution to our global-warming predicament gets its chance to prove its merits on the marketplace.

"The future of energy will be a broad mix, not a quick fix."
Tobias Wolny, a Berlin-based lobbyist for BP.

Think subsidized venture capital, think research grants, think business incubators, think model cities, think large-scale trials, think phasing-out subsidies.

Don't think hydrogen car, cash-for-clunkers or federally subsidized bioethanol.

We don't need a state to pick the winner. We just need the state to make sure that whoever deserves, enters the competition.