Both the biogas and the Sekab ethanol experience can be regarded as contemporary illustrations of the ongoing shift toward a different form of environmental policy. Sustainability is no longer about legislation, taxes on emissions, or subsidies for certain technologies. It is also about the state taking on an active, interventionist role, providing considerable financial and educational resources for the formation of new technologies and related firms. In this sense, the state has acted in line with arguments advanced by Mazzucato (2015), taking on genuine Knightian risk and increasing levels of directionality. The case descriptions above, however, stand in contrast to the positive effects of such an “entrepreneurial state” (Mazzucato, 2015) and rather seem like additional examples of Josh Lerner’s Boulevard of Broken Dreams (2009). Lerner (2009) points out the combination of information and incentive problems in innovation policy and explains why government efforts in technology are often misguided. Despite high expectations, billions of SEK in public money, and considerable investments in new technologies, no widespread diffusion of a more efficient and environmentally friendly use of resources can be observed. At the same time, taxpayers have incurred large costs; these resources could have been used for other purposes.
As cases of failed interventionist policies, the biogas and Sekab experiences provide an opportunity to identify important insights into the mechanisms of interventionist policies and how the entrepreneurial state can fail. Below, we elaborate on these insights.
5.1 Public Funds and the Economics of Incentive Distortion
As seen in both the biogas and ethanol cases, the presence of large public funds for specific technological efforts seems to have paved the way for the persistence of these efforts, despite the facts that technological breakthroughs and commercial viability seemed rather hopeless.
Public money seems to have made these firms immune to risk. The biogas initiatives were built on a business case in which oil prices were assumed to rise 7% annually. Effectively, these municipal companies were using billions of taxpayer money to speculate over oil price fluctuations. Speculating over natural resources is inherently risky, but nobody seems to have questioned these efforts. The combined presence of large, public funds available both regionally, nationally, and at the EU level seems to have created an environment in which it is not only possible, but also rational, to allocate vast resources to risky and technologically impossible ventures. Consider the following hypothetical example: If someone gave you €1 million but asked you to destroy something in return, what would be the total value of goods and services that you would be willing to destroy? The hypothetical answer would be €999,999, because then you would theoretically earn €1.
The ever-present demands for co-financing in EU projects, along with the presence of government funds, make it rational to destroy capital in reality. Elementary economics teaches that firms will produce as long as their marginal revenue is higher than their marginal cost. Put differently, if the next unit a firm considers making does not generate revenues that match the marginal cost, the firm will not make it. Applying such elementary microeconomic logic helps to understand why destruction of capital is likely to prevail. Marginal revenues equal at least the public funds received for investing in biogas, and municipalities can almost invest a similar amount of money as their marginal cost and the efforts would still make sense. Put differently, the presence of large external, public funds, and the demand for co-financing makes it rational to destroy capital.
This argument may seem like an overly cynical theoretical construction. Unfortunately, it has significant applicability and explanatory power. Revisiting the case of biogas above, the quote concerning “Klimp funds that should not be wasted” indicates precisely such a logic. At the point it becomes clear that the project is futile and needs to be shut down, there are still strong incentives to continue, because doing so is connected with a marginal revenue, in terms of obtaining more public money.
The story of Sekab and cellulose from the forest further illustrates this pattern. Despite the technology appearing to be underdeveloped and lacking potential, investments continued and became increasingly esoteric. The fact that Sekab still continues to attract millions of euros in EU money many years after it has broken municipal laws, created debt for taxpayers, and not made any economic advances indicates how the presence of large public funds make it very difficult to shut initiatives down.
5.2 Indirect and Hidden Costs
Organizations applying for public money may obtain large funds, yet at the same time they face an opportunity cost. The time and effort spent in order to search for, apply for, obtain, administrate, and report cannot be neglected. These efforts can be quantified but are rarely considered. It is harder to estimate the effects of lost opportunities, as these opportunities by definition will never be realized. Time and attention are scarce resources; if spent on one activity, they cannot be spent on another.
In rural Sweden, the sum of all public funds from the state and from the European Union amount to at least €100 per inhabitant. As such vast resources trickle down into the local economy, a considerable portion of the economy will be devoted to dealing with these funds instead of building other ventures. While the need for real, significant reforms is pressing in most European economies, such efforts are halted when entire regions become dependent on external funds.
5.3 Public Sector Inefficiencies and the Risk of Corruption
The two cases described above also illustrate how the financial logic of public funds tends to be focused on cost rather than value. A government agency has a certain amount of money assigned to distribute over a year. If they do not spend that money in any given year, there is an apparent risk that they will miss out on that money the next year. The quote concerning “celebrating by having cake together” at one government agency illustrates this effect.
Questions related to corruption need to be addressed within the scope of this chapter. The Sekab case covered how a firm owned by municipalities was in fact spending its money in illegal ways as it conducted business abroad. Moreover, it is impossible to assess how resources have been spent. For example, the consultant fees in Mozambique or the 85 million SEK spent building a plant in Hungary. Some observers argue that there are plenty of traces of corruption in the biogas cases as well.
Again, the effects of public funds on incentive structures need to be discussed. When receiving a public grant, the funding agency imposes certain demands concerning things like accounting and co-financing. If an organization receives grants from several different funding bodies at different levels, the level of administration and volume of reporting procedures increase exponentially. Dealing with all these layers of money naturally leads to the creation of different subsidiaries and a variety of different organizational forms. An internal bureaucracy of large proportions has been created. The fertile soil for creative accounting and corruption has also been created.
The Sekab case illustrates how political and commercial priorities may conflict and that when public funds are present, the former tend to gain the upper hand. Despite being an economic catastrophe that has received a lot of attention in Swedish press, Sekab kept receiving positive media coverage. Sekab received various awards, both locally and internationally, and was visited by people from the US embassy. For the politicians involved, Sekab might have been a success story. Policymakers may have appeared as visionary and decisive, combating climate change with initiatives that resulted in new pilot plants and new jobs in the short run.
5.4 Hydrogen Steel: A Risk for Both the Environment and the Economy
As stated above, hydrogen steel requires large amounts of electricity. The supposedly fossil-free steel will make use of 67–72 TWh of electricity, totaling more than 50% of Sweden’s annual electricity production today.
The opportunity cost for such volumes of electricity cannot be neglected. According to Professor Björn Karlsson at the University of Gävle, 15 TWh could be used to transfer electricity to countries like Poland or Germany, where coal plants emit a lot of greenhouse gas. Making use of 15 TWh in this way would mean that 15 million tonnes of carbon dioxide could be removed. As fossil-free steel will make use of 67–72 TWh, we estimate that at least ten times more carbon dioxide emissions could be removed by making use of electricity in this alternative way.
Although this calculation may seem theoretical, the opportunity cost nevertheless needs to be considered. Referring to green steel as green or fossil free is only correct as long as there is no better alternative use of green electricity. In the foreseeable future, there are many much more efficient ways to cut emissions. Moreover, according to Tobias Persson at Tillväxtanalys, there is already considerable competition from recycled steel, which amounts to 40% of all steel consumption today and makes use of 75–95% less energy than conventional steel (FTI, 2009).
Making use of hydrogen gas is also associated with substantial losses of energy throughout the process. About 30–40% of all energy is lost in the process of electrolysis (My Fuel Cell, 2015). If so, large amounts of energy are lost along the way and the total amount used is 70 TWh, about 21–28 TWh will disappear. This volume corresponds to 15% of Sweden’s electricity production and all energy that is used by the Skåne region, with its 1.4 million inhabitants and 600,000 jobs. How can it be sustainable to implement a process which effectively wastes 30–40% of all green electricity in Sweden?
5.5 A Threat to the Economy and Free Competition?
Presently, the Swedish electricity system sometimes runs at maximum capacity. In southern Sweden, electricity prices are already high, and their concern is mounting over the long-term supply of electricity.
When looking at the Swedish electricity system, it is clearly unprepared for an expansion of more than 50% over the coming decades. Creating such an increase in the need for electricity without any serious plans regarding how this can be accomplished is clearly a gamble with the country’s economy.
As described above, the Hybrit initiative has already received considerable public support. Not only billions of cheap loans, EU funds, and funds from the Swedish Energy Agency, but Hybrit also requests access to the vast amounts of green electricity mentioned above. All these benefits raise important questions concerning effects on competition. Can competition be fair and on equal terms when one actor receives so many billions of state support?
So far, European Union’s novel approach to sustainability, with its €1000 billion that are largely borrowed, targeted hydrogen gas money, taxonomies, and emerging carbon dioxide tariffs, has not been discussed regarding its effects on the market economy and the notion of free enterprise.
The presence of large public funds in the form of cheap credits, conditioned loans, and research funding also results in an indirect yet significant steering of the economy. In Sweden, steel manufacturer SSAB is increasingly controlled by the state and other state-owned companies. The other two firms involved in Hybrit (Vattenfall and LKAB) are completely owned by the state already. This is not a coincidence.
About 75% of the private and entrepreneurial venture H2GS is funded through green project credits, a form of unconditioned loan that can be written off. Out of 25 billion SEK that will be raised, 17.5 billion will be such green project credits. Is it therefore meaningful to speak of H2GS as a private initiative at all?
The past century of worldwide economic development strongly suggests that high levels of state involvement in the economy are not compatible with development or freedom. Large interventions have large effects on free enterprise and the dynamics of a market economy. The shift that has taken place is alarming and deserves to be discussed more seriously.
5.6 Repeating the Mistakes of Biogas and Ethanol
The biogas and ethanol cases covered in this chapter provided insights into how public funds distort the incentives of firms. The cases both illustrate how billions were wasted by publicly owned firms in a process through which their own resources could be matched with public funds, effectively making it rational to destroy capital. On numerous occasions it was clear how these firms were realizing the futility of continuing their efforts but chose to do so anyway, for the simple reason that they could obtain public grants for doing so. Hence, the presence of a multitude of different public funds for different purposes creates an environment in which organizations effectively become immune to risk.
We argue that a similar form of distortion, albeit on a larger scale, has been created by the EU Green Deal and that the Hybrit case constitutes an alarming illustration of this pattern. Investments are huge, and the technological risks regarding steel production using hydrogen and the storage of hydrogen are considerable. Positive effects on the environment are questionable, and the indirect effects on the Swedish economy must not be underestimated, bearing in mind the risks of an electricity shortage in the coming years.
The discrepancy between this reality and the public debate in Sweden concerning Hybrit is striking. Despite the issues raised above, no one within the political or economic establishment, beyond the authors, has raised any concerns. On the contrary, the Hybrit firms are heralded as environmental heroes by the media; the Swedish prime minister inaugurated Hybrit’s pilot plant in 2018 and stated: “I am very happy and proud to be here today. In Sweden we show the way forward as we are pursuing what can become the greatest technology transition in 1000 years” (Affärer i Norr, 2018).
When €320 billion of EU money is up for grabs for making use of hydrogen gas, and when funds can be matched, combined, and recombined into a pseudo-economy in which economic laws of scarcity no longer exist, no one has any incentives to question the process. Risky and reckless ventures are perceived and discussed as opportunities for the simple reason that someone else is bearing all the risk. These funds result in large-scale subsidy entrepreneurship that make destruction of capital rational because it is much easier to put up your own money if you obtain public funds for doing so. In this sense, the Hybrit case and the large-scale experimentation with hydrogen gas that is currently taking place in Europe resemble the painful and expensive experiences regarding biogas and ethanol from cellulose described previously. There are many examples of how such policies have turned into veritable disasters. We hope that our concerns are exaggerated and that we will be proven wrong.
5.7 EU Funds Result in Environmental Nationalism
Ironically, the presence of large EU funds for innovation and sustainability seems to result in a form of environmental nationalism. Hybrit and similar initiatives in Sweden state boldly that their aim is to contribute to Sweden becoming an economy that is completely free of fossil fuels. While this may sound like a noble cause, most environmental problems, including air pollution and climate change, are after all global problems that require coordination between different countries. If one country lowers its emissions at the expense of a substantially lower cut in emissions elsewhere, the net contribution of such an initiative is in fact negative. We may end up with a form of environmental nationalism through which countries pride themselves in optimizing emissions at the local or national level while the overarching effect is negative.
The funds available from the European Union for different member states and firms to apply for result in precisely this form of suboptimization. Ironically, the presence of pan-European support structures leads to a form of environmental nationalism that leads to the absence of sustainable development.