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Directionality in Innovation Policy and the Ongoing Failure of Green Deals: Evidence from Biogas, Bio-ethanol, and Fossil-Free Steel

Part of the International Studies in Entrepreneurship book series (ISEN,volume 53)

Abstract

Environmental policy is no longer only about imposing regulations on industry. It is increasingly regarded as industrial policy. Both the European Union and national governments are taking more active roles in initiating green deals and various technologies aiming at sustainable development. In this chapter, we describe and discuss some recent experiences of green innovation policies. Historical examples concerning efforts in both biogas and ethanol are combined with a more contemporary description of fossil-free steel, i.e., steel made using hydrogen instead of coal. We argue that the presence of large public funds from different funding bodies such as the European Union, various government agencies, and municipalities has distorted incentives, making it rational for firms to pursue technologies without long-term potential. The result has been an absence of sustainable development, mounting debt, and financial problems for the actors involved. We explain these results and draw policy conclusions concerning the risks related to green deals. Relatedly, we argue that the European Union’s current efforts in hydrogen gas face similar challenges.

Keywords

  • Green deal
  • Biogas
  • Policy failure
  • Entrepreneurial state
  • Directionality

1 Introduction

A shift has taken place within environmental policies over the past decade. Environmental policy used to be primarily concerned with imposing various controls upon the emission of harmful substances. Inspired by economist Mariana Mazzucato (2015), many governments, as well as the European Union, have taken industrial policies on a new, considerably more interventionist path, sometimes referred to as innovation policy 3.0. For example, the EU Green Deal aims to mobilize €1000 billion over the coming decade in order to accomplish a transition to sustainability. A large portion of these resources will be allocated to specific technologies such as hydrogen gas. This shift toward interventionist policies stands in stark contrast to conventional wisdom concerning the state’s inability to “pick winners” (e.g., Lerner, 2009; Karlson et al., 2021) and deserves to be scrutinized in further detail.

In this chapter, we provide a critical discussion of this policy shift by raising a couple of cases of policy failure. The first two are historical yet fairly recent examples from the 2000s and concern biogas and ethanol from cellulose. They can both be regarded as policy failures as (1) they have not resulted in a transition to a more sustainable use of resources, and (2) taxpayers and publicly owned businesses have incurred significant costs and accumulated large amounts of debt. These two cases help us identify a couple of factors that together point out the downside of active industrial policies. The chapter suggests that large amounts of public money in the form of technology-specific R&D support programs, soft loans, and directed, supposedly free money distort incentives result in malinvestments, i.e., poorly allocated investments. We end the chapter with a concluding remark regarding potential risks and hazards related to interventionist industrial policies.

The insights developed from the first two cases are subsequently applied to the ongoing developments concerning the European Union’s efforts related to hydrogen gas and the evolution of supposedly fossil-free steel. We argue that fossil-free steel is in fact not fossil free, and we point out the risks of these ventures and argue they will harm both the environment and the economy.

2 Theoretical Background

An emerging consensus in society is that economic growth needs to be combined with sustainable development. Historically, these two goals have primarily been accomplished by imposing taxes, subsidies, and complete bans on certain emissions. The interplay between technology development and regulation has resulted in considerable advances (Porter & van der Linde, 1995). In industrialized countries like Sweden, 24 out of 26 harmful substances have been reduced since 1990, despite a GDP increase of 85%. For Sweden, carbon dioxide is down 28% since 1990; adjusted for GDP growth, the decline is 60% (Grafström & Sandström, 2020).

In recent years, we have witnessed the emergence of an alternative, much more interventionist approach to accomplishing economic growth and sustainability. Derived from theories on both market failure and system failure, literature on innovation systems and technological systems has argued that collective action problems may inhibit technology development (Jacobsson & Bergek, 2004). Uncertainties are initially high, huge investments are required, free rider problems may exist, and benefits may be distant. At the same time, investments in new knowledge may benefit the economy in the long term due to positive externalities.

Based on these theoretical arguments, scholars such as Mariana Mazzucato have advocated that the state take on a more active role in advancing societal goals such as sustainability (Mazzucato, 2015; Mazzucato et al., 2020). The term directionality is increasingly used among scholars in order to emphasize the role of innovation policies in directing society toward addressing grand challenges (Schot & Steinmueller, 2018). This new idea is at times referred to as innovation policy 3.0 and stands in contrast to previous innovation policy because it is explicitly concerned with making use of science, technology development, and entrepreneurship in order to address large societal challenges (Grillitsch et al., 2019). These recommendations stand in contrast to the perspectives brought forward, for example, by Josh Lerner’s Boulevard of Broken Dreams (2009). In his book, Lerner describes how innovation and entrepreneurship policies have been largely unsuccessful across both developed and developing countries. Generally, calls for increased directionality are made without considerations of the limitations of policy or policymaking (Mazzucato, 2015, 2018). Evidence of policy failure is scarcely reviewed, yet there are, by now, many studies pointing out the limited effects of more interventionist policy approaches and support structures aiming to raise innovation (Bennett, 2008; Ejermo, 2018; Karlson et al., 2021). Lerner (2009, p. 5) summarized extant evidence on government interventions for innovation: “for each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit.”

Economic theory can explain the evidence described by Lerner and other researchers. First, theories on market failure regarding innovation and technology development were derived in the 1960s and 1970s (Arrow, 1962). Empirically, it is very difficult to quantify and locate a market failure, which means that attempts to correct a market failure face the risk of being miscalculated in terms of size and scope. Second, it is difficult for the state or any other single actor to know beforehand what technology is more likely to prevail. Selection of technologies happens through trial and error over time, and capitalist competition can in that sense be regarded as a discovery procedure (Hayek, 1945). If the state decides which technology should be chosen, it is very likely that such a decision will in hindsight be regarded as incorrect. Third, the presence of interventionist policies such as targeted support structures and large amounts of public money devoted to certain technologies easily distort incentives in the marketplace and result in opportunistic adaptation by firms such as subsidy entrepreneurship (Gustafsson et al., 2020) or corruption. These three mechanisms shed light on the risks of active interventionist policies and help to explain some contemporary cases of failed industrial policies, like solar photovoltaics in Spain (Del Río & Mir-Artigues, 2012) and targeted innovation support schemes (Daunfeldt et al., 2016). In the coming section, we provide further empirical evidence on how these factors have applied to two contemporary cases of industrial policies in Sweden: biogas and ethanol from cellulose.

3 Two Historical Cases of Policy Failure: Biogas and Ethanol

We here describe and discuss how efforts related to technological development and sustainability have failed. We first look at biogas in Sweden and next turn to ethanol.

3.1 Investments in Biogas

Throughout Sweden, there are many cases of large-scale attempts and failures to develop and manufacture biogas—i.e., gas and energy from waste—over the past two decades. In 1998, a national public investigation into the technology and economics of biogas had identified a collection of limitations related to biogas, including limited economies of scale because new sites need to be built locally. The transport of manure requires an expensive infrastructure of pipes. The idea is to make use of biogas as fuel, so these public companies are really competing with gasoline and diesel, fuels that are presently very competitive and subject to considerable price variations. Attempts to introduce and sell biogas are therefore a form of speculation over an increase in oil prices over time.

In the Västerås case in the city of Västerås, 100 kilometers west of Stockholm, a couple of municipalities joined forces in the late 1990s and formed a public company named Vafab Miljö, meaning Vafab Environment. It started with the idea of a steel cow, i.e., an industrial plant that would use fertilizers from cows to make energy, a concept originally developed by two farmers and two professors at Sweden’s University of Agriculture (SLU) in the 1990s. Vafab now took part in the formation of Svensk Växtkraft AB, which can be translated as Swedish Growth. In this business 40% was owned by Vafab, 20% by the Swedish farmers association, 20% by the public energy company Mälarenergi, and the remaining 20% by 17 farmers. Early on, this initiative managed to obtain 20 million SEK (roughly €2 million) in the form of an EU grant. Over the coming years, attempts to obtain EU grants became an integral part of the business. In the next phase, a market for the biogas needed to be identified and targeted. It started with the region’s public transportation company, Västerås Lokaltrafik (VL). In 2006–2007, VL removed 40 diesel buses and replaced them with biogas buses. As these buses were not mass manufactured, economies of scale were limited and hence the buses were very expensive. Biogas buses cost an additional 14 million SEK for modifications over the coming years. VL agreed that the price they paid for the biogas would not follow the price for diesel, and it was expected that diesel prices would increase 7% annually and they would break in 2017 as the relative price gap increased over time.

In reality, this meant investments in biogas could be regarded as large-scale speculation in oil price fluctuations. Optimism was high, and VL made forecasts in 2011 that 90% of their buses would run on biogas in 2016 and 100% in 2020. The CEO of Vafab, Eva Myrinsa, argued that Vafab faced a “huge challenge” in meeting demand in the following years, when production would have to increase 150% per year. Thanks to an agreement with Swedish Biogas, the creation of another facility was initiated in 2011. The “huge challenge” turned out to become the reverse form of a challenge. As oil prices declined sharply instead of going up 7% annually, volumes of biogas sold became much smaller than expected. In 2016, production had been reduced to 1.9 million cubic meters, about 25% of the volumes that had been planned for. With a large infrastructure built for much larger volumes, mounting costs, debt, and write-offs started to accumulate. Instead of doubling sales over 5 years, sales had declined substantially.

In the Göteborg case in the late 1990s, the publicly owned energy company Göteborg Energi started investing in biogas. A collection of biogas initiatives were gathered under the name Biogas West and were funded by several municipal energy companies including Göteborg Energi. Investments continued despite mounting technological challenges. One important reason for the little attention paid to this is the opportunity to apply for and obtain public funding in the form of various targeted support programs, regarding both agriculture and climate change. Public funds from the European Union were combined with national public grants and provided a continuous flow of funding over the years.

In the Göteborg case of biogas development, losses were progressively accumulated over more than a decade, but were initially hidden through various accounting practices. As the oil price declined sharply in 2014, large write-offs became inevitable. At some point along the way, policymakers considered halting the project, but continued because they had “Klimp funds that should not be wasted.” Klimp funding was part of a national government agency-funded program for climate initiatives such as biogas, and the presence of these and other funds seem to have made it rational to continue, despite a lack of potential.

3.2 Ethanol from Cellulose

In Örnsköldsvik in northern Sweden, the municipality accumulated billions of SEK in debt due to failed investments into the making of ethanol from cellulose, i.e., from the forest. It all started in 1994 when the municipality inaugurated an ethanol gas station. After continued small investments over the years, efforts gained momentum in the early 2000s. In 2004, Prime Minister Göran Persson took part in the formation of an industrial plant aiming to create car fuel from cellulose. The ambition was to create an environmentally friendly substitute to gasoline, which in turn would result in new jobs and a resurgence of northern Sweden in terms of competitiveness.

This vision would be driven and developed by Sekab, a firm owned by three municipal energy companies in northern Sweden. Its CEO, Per Carstedt, would at times be referred to as ethanol-Jesus. His charisma and ability to attract public funds and formulate vision implied that he became a very strong leader. One former Sekab employee describes his leadership in the following way:

Carstedt was surrounded by a group of people who were not inclined to question his decisions. During long speeches, he would present completely unrealistic plans concerning how Sekab, a small publicly owned company in northern Sweden, virtually on its own would address ‘peak-oil’ and climate change. Later on, we would also end poverty in Africa. That very few questioned him was really a worrying indication.

For many decades, the rural north of Sweden has been subject to deindustrialization, a loss of jobs, depopulation, and declining welfare. Carstedt’s vision of an environmentally friendly reindustrialization, falling unemployment rates, and a widened tax base was hard to resist. The same employee cited above also described the internal culture at Sekab:

In Sekab’s distorted reality, Sweden would make use of ethanol made out of trees instead of gasoline. Internally, people who questioned this idea or raised potential challenges were often subject to ridicule by their superiors. Such voices were assumed to be bribed by big oil companies.

Sweden’s Energy Agency (SEA), Energimyndigheten, had a special role in the government’s enactment of its industrial policies, in this case with a special emphasis on energy and sustainability. In 2001, SEA provided Sekab with a 112 million SEK grant in order to build a pilot plant to make ethanol out of cellulose. Municipalities also took part in funding the building of this plant, as did several local universities. Considerable efforts were made to build capabilities, doctoral student projects were initiated at universities throughout Sweden, and many subsequently started working at Sekab. A former employee at Energimyndigheten made the following observation: “We used to have cake and celebrate every time we managed to spend money on a project.” This quote may seem strange from an economic perspective; why should authorities celebrate when they hand out money? It should be emphasized here that a government agency has a certain amount of resources that it is assigned to spend. The interviewee explains: “If a credible application was sent to us, it would get funding, if we do not receive anything credible, we would give money to the most credible one that can be found.”

The process of extracting ethanol from cellulose turned out to be much more difficult than expected. A former engineer at Sekab described the situation:

It became increasingly obvious to us how immature the technology was, our results were in fact very poor. Carstedt made it sound like the technology was ready, but we were nowhere near the level of technological advances that would have been necessary. Calculations were unrealistic and plain wishful thinking. Climate change, the peak-oil hype, and dreams of reindustrialization and new jobs however implied that nobody wanted to question our forecasts.

As a technological breakthrough appeared distant, Sekab increasingly tried to create ethanol supplies abroad. These operations soon ended up far away from Sweden. Sekab started to import ethanol from Brazil, initiated the building of a plant in Poland, planned for four factories in Hungary, and tried to grow sugar cane in Tanzania. Losses kept increasing and often amounted to hundreds of millions. Toward the end of 2006, the municipalities had to invest an additional 170 million SEK, primarily for international expansion. Land was acquired in Tanzania, consultants were hired in Mozambique, and large sums were spent in Ghana and Togo to build production capabilities. The efforts in Hungary cost 85 million SEK, with no results at all.

In September 2007, a meeting was held in Örnsköldsvik at which top municipal politicians formally admitted they are aware of all these activities. In Sweden, it is illegal to spend a municipality’s money abroad, and thus the situation became politically controversial.

Once the great recession hit in 2008, both oil and ethanol prices fell sharply. Ethanol became less and less competitive over the coming years. Despite this fact, the SEA chose to provide an additional 33.8 million SEK over the coming years to develop the plant in Örnsköldsvik. A former SEA employee described the agency’s reasoning: “We never asked whether Sekab could become commercially viable.”

The primary reason for not questioning Sekab’s commercial viability was that the SEA’s mission was to fund basic and applied research. Commercialization was never part of its mission. Over the coming years, more public money was poured into Sekab as losses accumulated. Despite an economic catastrophe and the absence of a technological breakthrough, investments have continued. In 2018, an additional €4 million were received from the European Union over the coming 3 years. In the midst of this turmoil, Sekab has also received a lot of positive PR. In 2009, the firm received the international Sustainable Bioethanol Award prize, and Robert Silverman from the US embassy visited Sekab, primarily because President Barack Obama was interested in green technologies. In 2015, Sekab received the Örnsköldsvik municipality’s annual award for green business “for its efforts to supply society with sustainable chemicals and biofuels.”

4 The European Union, Hydrogen Gas, and Fossil-Free Steel

As the European Union rolls out its Green Deal across member countries, new projects and initiatives take shape. New policies and support structures are currently implemented across the continent, and it is important to gain insights into this process at the national level. One such example can be seen in Sweden, where steel manufacturer SSAB joined forces with electricity giant Vattenfall and the mining company LKAB to develop what they refer to as fossil-free steel.

Below, we provide a critical discussion of these policies in general and of Hybrit and the Swedish experience in particular. We argue that the supposedly green steel is actually not good for the environment and explain why it presents a real danger to the economy, because it may result in electricity shortages across the country. The primary reason for this idea’s emergence relates to the massive EU funds that have been made available for such projects. Together, these funds result in distorted incentives, making it rational for firms to pursue irrational technological ventures because someone else is paying for a large portion of the resources.

4.1 Hybrit and Green Steel

Hybrit is an attempt by three firms to jointly develop green steel. This refers to steel made using hydrogen gas instead of coal. Today, steel accounts for a considerable portion of Sweden’s carbon dioxide emissions, and if Hybrit succeeds with its plans, they calculate that the savings will amount to 10% of Sweden’s total carbon dioxide emissions per year (Hybrit, n.d.).

Hybrit has ambitions to have large-scale industrial production ready in 2045. Their demonstration plant will be able to produce half a million tonnes per year and will start in 2026 (Nohrstedt, 2018; SSAB, 2021). Their competitor H2 Green Steel (H2GS) has plans for industrial production as early as 2024, with increased production until 2030, when they will be able to produce five million tonnes per year (H2GS, 2021). Although these ambitious plans are set to be achieved in the near future, major uncertainties surround the overcoming of technical obstacles like hydrogen storage, hydrogen production, and not least electricity supply (SVT, 2021).

4.2 Hydrogen Production

In terms of hydrogen production, there are currently three approaches: Gray hydrogen gas, blue hydrogen gas, and green hydrogen gas. Gray hydrogen gas uses methane to separate hydrogen and oxygen from water and thus produce hydrogen gas. The by-product, finally, is carbon dioxide. Although this method is worse for the climate, today it is the cheaper method and accounts for about 95% of the world’s total hydrogen production (My Fuel Cell, 2015; Jensen, 2021). In fact, to produce 1 tonne of hydrogen requires two tonnes of methane, forming as much as five tonnes of carbon dioxide in this process. Blue hydrogen, like gray hydrogen, uses non-renewable sources to produce the hydrogen. The difference here is that emissions are reduced with CCS (geological storage of carbon dioxide), which can reduce emissions in the process by up to 95%. However, CCS, like fossil-free steel, is a new and expensive technology that is not yet commercially available (Stensvold, 2018).

Green hydrogen is, as the name suggests, kinder to the climate. Through electrolysis, only water and supplied electricity are used to produce the hydrogen gas. The residual product becomes oxygen and instead of using coke in the iron production, the residual product becomes water instead of carbon dioxide (The Agility Effect, 2020a; Hybrit, n.d.). For the hydrogen gas to be completely green, however, the electricity supplied during the electrolysis is also required to come from renewable sources.

Both the production of hydrogen by electrolysis and long transport distances for electricity are associated with energy losses. For example, it is estimated that approximately 30–40% of the energy used in electrolysis is lost (My Fuel Cell, 2015). Transmission losses are seen as a problem with large amounts of energy, which is why the need for expansion of new high-voltage networks is considered to be large (SSAB, 2021). In both areas, technology is being developed to overcome these energy losses, but this means that technology is expensive (My Fuel Cell, 2015; Alpman, 2020).

Green hydrogen gas is little used today and the primary reason is that it is expensive. Producing one kilogram of green hydrogen currently costs €5, which is comparable to the price of gray hydrogen at €1.5 per kilogram (The Agility Effect, 2020b). Alpman (2020) explains, for example, that green hydrogen gas today is far too expensive to produce and that it is not adapted for large-scale production. Problems such as the cost of electricity varying with the weather and the need for new types of membranes and catalysts must be overcome in order to reduce prices. The industry organization Jernkontoret also describes the production and storage of green hydrogen as the biggest technological obstacle for projects such as Hybrit at present (Jernkontoret, 2020).

Hydrogen has been praised by many. For example, the then Bush administration invested US$1.2 billion, in 2003 dollars, in research to develop hydrogen-powered cars with the ambition of replacing fossil fuels (Macfie, 2003). They were convinced that the new technology with fuel cells would be cheap enough to use commercially in cars by 2010. Reality proved otherwise, due to energy losses and expensive costs, but the hope lives on. Today, the European Union has taken over the dream and has now invested €430 billion up to 2030 in its EU Hydrogen strategy (Vätgas Sverige, 2020).

4.3 Hydrogen Steel and Electricity Consumption

Hybrit and H2GS are estimated to consume 67–72 TWh in 2045, unless H2GS expands its production from 2030 (Dickson & Törnwall, 2021). To put this in context, Sweden’s electricity consumption in 2020 was 134 TWh (Swedish Energy Agency, 2020). That is, all other things being equal, these two projects alone would account for an increase of just over 50% in 2020 consumption.

Today, Sweden has a surplus of electricity almost every day of the year. In 2020, 159 TWh was produced, and after consumption, this left 25 TWh in surplus, which was exported to neighboring countries (Swedish Energy Agency, 2020). Note that exports are measured as net volumes; exports and imports occur all the time due to transmission losses over long distances. Furthermore, there is an opportunity cost, in terms of emissions, of using the otherwise exported electricity.

To some extent, the otherwise exported electricity can be used to supply these projects with electricity, but for the remaining portion of the projects’ energy needs, production needs to be developed. This raises a potential problem in the form of new high-voltage networks having to be built. Svenska Kraftnät explains that these new high-voltage networks take about 12 years to complete and that they often involve delays (SVT, 2021). We ask whether this is compatible with H2GS being up and running with industrial production in less than 3 years.

5 Analysis and Discussion

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.

6 Conclusion

This chapter has reviewed and discussed two historical examples in which interventionist innovation policies have failed: biogas in Sweden and ethanol from cellulose (Sekab). These cases stand in stark contrast to ideas about an entrepreneurial state successfully taking on Knightian risk and pursuing new opportunities.

While it is clear from the descriptions above that the presence of public funds has initiated risk-taking and ventures into new technologies, it has clearly also been unsuccessful. Interestingly, an important reason for this seems to be that the studied cases in fact contained too much risk. A combination of large, public funds seems to have made these organizations immune to risk. Biogas and ethanol from cellulose were, in reality, poorly calculated speculations over oil price fluctuations using hundreds of millions of taxpayer’s money. Once it became clear that potential was in fact limited, activities were not closed down. On the contrary, investments continued more than a decade later as public money could still be obtained for doing so.

Public funds create a peculiar incentive structure that in reality makes it rational to destroy one’s own resources. Elementary microeconomics teaches that investments continue as long as marginal revenues exceed marginal costs. This investment rule is distorted by public funds that provide a marginal revenue that effectively nullifies the costs and risks. The hidden costs, however, are very real, as we see the crowding out of other economic activities. Also, the presence of multiple, large public funds to apply for at the local, regional, national, and EU levels creates a fertile ground for corruption in the long run.

The combined effect of multiple funds available at different levels and for different ends (social, regional, environmental, and economic) needs to be discussed among both scholars and policymakers. The evidence furnished in this chapter provides insight into mechanisms that are alarming. As the European Union has moved further toward interventionist policies with regard to sustainability, there is great risk that the failures described in this chapter will increase in magnitude over the coming years.

Having observed and described the government failures related to biogas and bio-ethanol from cellulose, we have subsequently taken these insights and applied them to the contemporary case of hydrogen steel and the European Union’s current efforts related to hydrogen gas. Our case descriptions and discussion conclude that hydrogen-based steel is not good for the environment and that it has potentially detrimental effects on the economy.

Green electricity has a considerable opportunity cost, as estimations indicate that up to ten times more carbon dioxide can be saved by making use of green electricity in other ways. Hydrogen gas is associated with 30–40% losses in pure energy waste. Combining this with large technological uncertainties would arguably imply that when adjusting for risks, the net environmental benefits are questionable.

The effects on the Swedish economy may turn out to be disastrous. Expanding Sweden’s use of electricity by 50% in the coming 20 years requires a huge expansion of the country’s energy production. As there are both operational and political bottlenecks related to doing so, we see large risks of an electricity shortage if Hybrit is scaled up. H2GS alone wants to take 15 TWh into use for its potential 1500 jobs created in northern Sweden. This amount of electricity is enough to satisfy the needs of the entire Skåne region, with 600,000 jobs and 1.4 million inhabitants. In sum, these efforts seem to be poorly thought through, but they have nevertheless been met with a remarkably positive consensus among both industrialists and policymakers in Sweden. An important explanation for this discrepancy is most likely that the European Union has made billions of euros available as free money. These public funds related to hydrogen are part of the European Union’s Green Deal.

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Sandström, C., Alm, C. (2022). Directionality in Innovation Policy and the Ongoing Failure of Green Deals: Evidence from Biogas, Bio-ethanol, and Fossil-Free Steel. In: Wennberg, K., Sandström, C. (eds) Questioning the Entrepreneurial State. International Studies in Entrepreneurship, vol 53. Springer, Cham. https://doi.org/10.1007/978-3-030-94273-1_14

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