China is pulling ahead of Europe when it comes to investing in green projects, while president Donald Trump's scepticism towards climate change is risking the US's status in the field, author and professor Mariana Mazzucato tells Stefania Palma.

Mariana Mazzucato

A follower when it came to green innovation less than a decade ago, China is now leading the field. In 2015, its clean energy investment broke all records at $119.1bn – double that of the US, according to Bloomberg New Energy Finance. 

And while today companies and countries opt in or out of climate-friendly policies, soon this will no longer be optional, according to Mariana Mazzucato, economics professor at the University of Sussex.

“And at that point, countries such as China that have made green investments early will be ahead. Innovation is characterised by what economists call increasing returns to scale, so being first matters in going up the learning curve,” says Ms Mazzucato, who, from March, becomes director of the Institute of Innovation and Public Purpose and professor in the economics of innovation and public value at University College London. 

Although Chinese green investment figures dropped to $87.8bn in 2016, as the country digested the wave of projects it has set up, its success lies beyond investment volumes. It has successfully adopted a growth model where, contrary to popular belief, public long-term investment – not private, exit-driven venture capital – nurtures innovation, as Ms Mazzucato outlines in her book The Entrepreneurial State.

In it for the long haul

Long-term commitment is crucial when it comes to investing in innovation, according to Ms Mazzucato. “Countries that have a systemic approach to green innovation have huge potential to gain from economies of scope and scale. The UK’s patchy, start-stop approach [for instance], keeps away private businesses, which invest when they see continuity and opportunities,” she says.

The Chinese government’s diverse green investment portfolio, which includes solar, wind, hydro, tidal and geothermal energy, makes these investments even more sustainable. “Whereas in the US, over-focusing on fracking has reduced the diversity of the public investment portfolio, which increases risks for the entire economy,” says Ms Mazzucato.

Crucially, China’s ability to secure returns on its green investments by retaining equity has helped it sustain high public spending in the sector. “Governments should think like an investor: you need a revolving fund to cover the downside and get the next level of investment in,” says Ms Mazzucato. State-owned enterprises, the China Development Bank, a public venture capital fund, and regional and national banks are just some Chinese public organisations investing in green energy.

But to sustain China’s momentum, big investment is not enough. A broader, more flexible set of public investors is needed to engage progressively with the private sector, says Ms Mazzucato. “Big organisations can get inertial. To invest in green and [in] innovation, you need sub-units that are nimble. China needs to build organisational experience to achieve this,” she adds.

Meanwhile, although the US largely pioneered public investment in innovation worldwide, it has not always secured returns on these investments. “If you want innovation-led but also inclusive growth, the state needs to think about securing returns. Otherwise you get the Silicon Valley effect, where huge amounts of public money are invested, the rewards create billionaire firms, and the public school system is terrible. This just shows lack of planning,” says Ms Mazzucato. 

Trump worries

Green innovation in the US could be challenged further under president Donald Trump, who during his campaign said global warming is a work of fiction. “If Mr Trump puts the brakes on US green investments, he is killing the chance of the US being a leader in the next innovation wave,” says Ms Mazzucato. “He is in some ways the puppet of an extremely conservative Republican party. Even if he didn't really mean it, his words on climate scepticism have enabled strong anti-green forces.” 

Across the Atlantic, countries such as Germany and Denmark stand out as leaders in green innovation in Europe. But, says Ms Mazzucato, political fractures in the continent are not allowing the EU as a whole to keep up with China.

“When you no longer believe in the power of public investment to determine long-run growth, you lose the vision. There is an obsession in Europe with running surpluses and cutting deficits to almost zero,” she says. “We tell ourselves Germany is doing well because it tightened the belt, when actually big public investments from organisations such as KfW, Fraunhofer and the Max Planck Society have contributed to growth. But that is not the story being sold to Greece, Portugal, Italy and Spain. We are self-destructing.”

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