Citation suggestion: Christian Sandström, CS (2023). From Green Deals to Green Bubbles: Time to Question Brussels as an Entrepreneurial State. Future Europe, 3(1), 80–90.
Abstract
This paper discusses the notion of an entrepreneurial state and questions the European Union’s (EUs) increasingly interventionist industrial policies. The EU’s green deal is a massive effort to steer the economy in new directions. Unfortunately, green deals have often resulted in green bubbles, i.e. overinvestments that fail to generate any sustainable businesses or industrial transformation in the long term. This paper presents a couple of illustrative examples of failed green deals and synthesises some of the main findings. A couple of factors jointly explain the persistent failure of green deals, including (1) if something sounds too good to be true, it is too good to be true; (2) governments lack incentives and capabilities to act as entrepreneurs; and (3) allocation of large sums of ‘free’ money to innovation and entrepreneurship distort behaviour. Green transitions become more successful when policymakers impose laws and regulations to deal with negative externalities.
Introduction: The return of industrial policy
The financial crisis and the prolonged euro crisis paved the way for a revival of interventionist industrial policies. Many countries in the Western world learnt their lessons the hard way in the 1970s and 1980s – when active industrial policies did not work. Billions of taxpayer money were thrown into declining industries, and wishful thinking has made policymakers fall into the trap of supporting firms that lack the ability to compete. Money has been squandered and ended up in the hands of crony capitalists and non-performing businesses.
In the 1990s and early 2000s, the focus of policies shifted towards the internal market, setting up fair and free competition across the European Union (EU). However, after the financial crisis, the lessons from the 1970s and 1980s have been completely forgotten.
Brussels is increasingly championing its role as an entrepreneurial actor driving innovation and sustainability across the continent. The EU Commission has been largely inspired by scholars in innovation systems and professors such as Mariana Mazzucato, who wrote the book The Entrepreneurial State (2013) and argued for more government intervention The EU is currently treading towards corporatism at the expense of a free and fair market economy.
In this policy brief, I argue that the EU’s and von der Leyen Commission’s move towards progressively more interventionist industrial policies is a mistake that will not only destroy the continent’s competitiveness but also result in environmental degradation and continued decay of the EU’s electricity system (see Wennberg and Sandström, 2022).
Green deals: The convergence of environmental and industrial policies
Recent decades have witnessed a shift in environmental policies in the Western world. Environmental policies used to be about fixing what economists refer to as negative externalities. Regulation and taxation have historically interacted with industrial development, resulting in considerable environmental progress.
Although the heavy industry has resisted these efforts at times, we have still witnessed substantial improvements. Out of the 26 pollutants measured by the Swedish Environmental Protection Agency (Naturvårdsverket), 24 declined from 1990 to 2020. While GDP nearly doubled during this period, pollution per unit of GDP was reduced by nearly 75%. Data for Swedish imports from 2008 onwards indicate a similar pattern. Several pollutants such as lead, sulphur dioxide, cadmium, arsenic, and mercury are almost entirely vanished, experiencing absolute declines of more than 95%. Regulations, technological advancements, and bans have interacted and resulted in this development (Grafström and Sandström, 2021).
This more conventional division between states and markets has been largely replaced by the convergence of environmental and industrial policies. Environmental policies are increasingly about the state making targeted and proactive efforts towards certain technologies. Sweden experienced a fair share of such efforts in the 2000s.
In Sweden and many other countries, increasing amounts of resources are being poured into the so-called shifts to sustainability. Figure 1 depicts the annual turnover of Sweden’s Energy Agency (SEA), which has more than tripled since the early 2000s. Often, these resources are matched with EU funds, so in effect, the amount of ‘free money’ available for firms is much higher.
The ongoing failure of green deals
What experience do we have with green deals, and what lessons can be learnt? The Swedish bubble in ethanol cars and ethanol production serves as an illustrative example.
The Swedish ethanol car bubble
As depicted in Figure 2, the steep growth in ethanol cars levelled off rapidly. Ethanol car sales peaked in 2008. At that time, 20% of all cars sold in Sweden ran on ethanol. Figure 3 depicts how this bubble collapsed in the following years.
There were several reasons why ethanol never became a viable alternative. First, many engines ran poorly on ethanol and broke down after a while. When they broke down, consumers became upset and blamed politicians, who in turn put the blame on car manufacturers. Second, by 2008, reports criticising ethanol started to be published worldwide. It was increasingly argued that ethanol production took so much land into use that food prices were affected in developing countries. Thus, ethanol was considered less ethically attractive.
The ethanol car bubble had its origins in a directive from the EU Commission in 2003, which compelled member states to make sure that 5% of their fuel consumption came from biofuels by 2010. Swedish policymakers were forced to act swiftly, so several laws and support structures were put in place from 2003 to 2008. Gas stations were forced to supply biofuel – in this case ethanol. Ethanol cars were made tax deductible and did not need to pay congestion taxes. All these targeted supports for this technology fuelled rapid growth from 2004 to 2008.
In the next phase, engines broke down, political support collapsed and concerns about the sustainability of ethanol increased. As depicted in Figure 4, all the support targeted towards ethanol cars discriminated against alternative cars, such as hybrid or electric vehicles, which did not grow in these years.
A bubble in ethanol production
Due to ethanol cars, Sweden also experienced a bubble in ethanol production. In the late 1990s, Prime Minister Göran Persson wanted to transition the economy towards more sustainable development. One part of this strategy was to provide targeted and specific support to set up factories to make biofuels.
The Swedish Farmers’ Association managed to negotiate tax exemptions and other supportive measures to set up a factory. The company was named Agroetanol, and its facilities were set up in the early 2000s and supplied ethanol for E5 and E10, i.e. gasoline cars that use 5% or 10% ethanol. Tariffs were introduced to shelter the facility from foreign producers. Brazilian ethanol was about half as expensive, and ethanol from the United States was also much cheaper.
As directives for including ethanol in gasoline changed, the market for Agroetanol grew. However, profits were still low as the prices of wheat and ethanol kept fluctuating in ways that were not advantageous for the firm, which also struggled to gain critical economies of scale. Moreover, the looming threat of removed tariffs was present all the time. As depicted in Figure 5, despite the tariffs, tax exemptions, and other considerable supports from agricultural policies, Agroetanol made losses for many years and margins were small.
The cost for this facility and Sweden’s domestic production is summarised in Table 1, amounting to 20.2 billion SEK.
| Type of cost | Amount (MSEK) |
| Tax-exempts | 1500 |
| Investments in the plant (1999–2000) | 500 |
| Investments in expansion (2007–2009) | 1500 |
| Tariffs | 15000 |
| Accumulated losses | 1700 |
| Total | 20200 |
A bubble in ethanol production from cellulose
In Örnsköldsvik in northern Sweden, several municipalities have accumulated billions of SEK in debt because of failed investments in making 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, the activities gained momentum in the early 2000s. In 2004, Prime Minister Göran Persson took part in the formation of an industrial plant to make car fuel from cellulose.
SEA—Energimyndigheten—played a special role in the government’s enactment of industrial policies, with a special emphasis on energy and sustainability. In 2001, SEA provided Sekab — a municipally owned company—with a 112 million SEK grant to build a pilot plant to make ethanol out of cellulose. Municipalities, as well as several local universities, also took part in funding the building of this plant.
Sekab lobbied hard from 2006 to 2008 to obtain more government grants and scale up their pilot plant into a demonstration plant. The mayor of Örnsköldsvik, Elvy Söderström (Social Democrat), did not only announce that the municipality was willing to put up resources but also made it clear that she would like to see extensive state involvement. None of the expectations to create new jobs, new technology, and re-industrialise the rural north materialised. On the contrary, the municipalities involved ended up with huge losses and mounting debt in the subsequent years (Sandström and Alm, 2022).
Other green bubbles in Sweden
Sweden experienced several other green bubbles in the 2000s; they were not only related to ethanol but also to biogas. In Göteborg, the municipal electricity and energy company, Göteborg Energy, set up a project to make gas from branches and trees. The Gobigas project attracted funding from government agencies and the EU. It obtained 222 million SEK from SEA and, later, more than 500 MSEK from the EU. These resources were combined with resources from the municipal company, which indirectly also belonged to taxpayers. In effect, tax money was put next to other tax money.
A facility was built, but technological challenges persisted and were hard to solve. Having invested more than two billion SEK in the project, the government finally terminated it because it turned out to be futile. Write-downs were now necessary, and the total cost for taxpayers amounted to about two billion SEK.
Explaining the emergence of green bubbles
Are the examples presented above just exceptions or are they necessary failures that are part of a technological evolutionary process? Are they systemic and related to overarching incentive structures that are bound to create dysfunctional results? A closer look at these green bubbles suggests the latter. There are patterns in these bubbles, and some factors recur consistently in these different cases. These factors are briefly outlined below.
If it sounds too good to be true, it is too good to be true
Green deals have provided policymakers with a ‘pipe dream’ as they have promised everything at the same time. Grand speeches about the green industrial revolution, ‘transformation’, and ‘sustainable development’ were combined with hopes of new jobs being created in rural and depopulated areas. Facilities and plants were inaugurated, and politicians received positive press coverage to increase their likelihood of being elected and re-elected.
Governments lack incentives and capabilities to act as entrepreneurs
The public sector cannot function as an entrepreneur as it has no real market and faces no risk of its own (Larsson, 2022; Sarasvathy, 2022; Elert and Henrekson, 2022). It is less likely for it to act as a competent owner as it faces a limited downside (and upside) (Foss et al., 2022; Grafström, 2022). Politicians have little experience in setting up businesses or functioning as competent owners.
Large sums of ‘free’ money related to innovation and entrepreneurship distort behaviour
The examples above illustrate that innovation grants and other forms of soft loans or ‘free’ money distort incentives and motivate firms to pursue initiatives with limited potential. When someone else pays, there is no need to make careful assessments of feasibility. Therefore, green bubbles emerge with large costs for the environment and economy.
Innovation and entrepreneurship have become a matter of appearance
In a society where everyone is obsessed with innovation and entrepreneurship as the main tools to accomplish renewal and competitiveness, it has become increasingly important among policymakers at all levels to be supportive. We, therefore, see an over-supply of support funds; support structures, such as science parks and incubators; and the emergence of an industry aimed at attracting people into innovation and entrepreneurship. The consequence of these efforts is more talk than ever about entrepreneurship while having less renewal and productive entrepreneurship (Brattström, 2022; Hunt et al., 2017).
The primary beneficiaries of interventionist industrial policies are today’s vested interests
Large industrial projects imply that incumbent firms and other powerful interest groups as well as policymakers can appear taking action to accomplish large societal goals. With more resources today – in terms of money, relations, and ability to persuade policymakers – today’s mighty interest groups are bound to gain the upper hand in large governmental programmes aimed at innovation, sustainability, recovery, or any other noble mission that is formulated by policymakers (Bergkvist et al., 2022; Sandström and Alm, 2022).
The Agroetanol case precisely illustrates this pattern. With close connections to the political powers of Sweden, the firm managed to negotiate tax exempts, tariffs, and vast support, which happened at the expense of foreign manufacturers of ethanol and Swedish consumers.
The EU’s current green deal
With the terrible history of green deals described above, one can expect that the EU had learnt something from these experiences and backed off from the interventionist approach. Unfortunately, the contrary is true.
Broadly speaking, the EU Green Deal (EGD) covers the following areas:
- Climate
- Environment and oceans
- Energy
- Transport
- Agriculture
- Finance and Regional Development
- Industry
- Research and Innovation
Such a list of areas makes it clear that the EGD is a huge effort as it covers so many different parts of the economy. The EGD is a step away from conventional economic wisdom on the role of states and markets. Here, the idea is that the state should direct efforts. It is also clear that Mariana Mazzucato has played an instrumental role in shaping the EGD.
‘The Mazzucato Report1, presented in February 2018, detailed the rationale for EU-level R&I mission, expanded the concept, put forward key criteria for the selection of missions, and outlined important considerations for their successful implementation’ (EC, 2018, p. 10).
In 2022, Mazzucato and her colleagues wrote the following for the European Commission:
‘Public authorities must steer investment-led economic development across many different sectors and instead of picking the winners, governments should rather support the ‘willing’ and the ‘innovative’, those companies willing to partner, transform and innovate towards the new green and social paradigm2’ (EC 2022, p.17).
‘Fixing markets is not enough. We have to actively shape and create them and tilt the playing field in the direction of the growth we want’.
According to Paleari, the EGD can be broken down into 68 different objectives, where 80% of them should be met by 2030. Hydrogen has received extensive support in the EGD and will thus be discussed in greater detail below.
A bubble in hydrogen?
Regarding the green bubbles in Sweden, it is clear that many of the underlying factors giving rise to green bubbles are consistent with the EU’s efforts in hydrogen.
First, the principles of technology neutrality have been disregarded as 430 billion euros are specifically earmarked for hydrogen. Both private and public organisations can apply for and obtain funds for hydrogen-related projects. If municipalities, government agencies, and corporations start talking about hydrogen as the new rock star of sustainability that they have never paid any attention to, the underlying reason is probably that there are large sums of free money that can be obtained for doing so.
These large sums of supposedly ‘free’ money result in a form of systematic subsidy entrepreneurship, where nobody is asking any critical questions simply because someone else is footing the bill. Municipalities establish ‘hydrogen strategies’ and invest in charging stations and other elements of government agencies, municipal firms, and state-owned companies. Other subsidy entrepreneurs are now attracted to hydrogen and have started engaging in various activities.
An alternative path
If green deals are bound to fail and result in green bubbles, what approach is then to be preferred?
Getting more from less
In the past decades, many parts of the Western world have experienced a decline in pollution while growing their economies. We take a brief look at the Swedish experience, see Figures 6-8 below.
Since 1990, Sweden’s population increased by just over 1.6 million and the economy almost doubled. Moreover, carbon dioxide emissions declined by 27% from 1990 to 2018. GDP per carbon dioxide unit decreased during the same period by 60%.
From 1990 to 2018, the total emissions from passenger cars decreased by 21%. Total emissions from cars decreased despite the number of cars increasing by 1.2 million (Sandström and Grafström, 2021).
Total electricity usage increased by 2.8% since 1990. Per capita and electricity use per unit of GDP decreased. Emissions of greenhouse gases from Sweden’s electricity and district heating production decreased by about 25% since 1990.
Air in Sweden has generally become cleaner since 1990. Out of the 26 air pollutants that the Swedish Environmental Protection Agency has mapped, 24 decreased in absolute numbers. However, selenium and polychlorinated biphenyls increased. After the 1995 ban on lead in petrol, lead emissions decreased by 95%. From 1990 to 2018, the annual lead emissions in the air decreased from 354 tonnes to less than 10 tonnes.
The change in air pollution (index) is presented in Figure 9. The comparison year is 1990, and a value lower than 100 means that Sweden emitted less than that in 1990. Emissions of sulphur dioxide, nitrogen oxides, volatile organic compounds, particles, and heavy metals have fallen sharply. The rate of decline has slowed in recent years, which may be because falls from high levels are relatively faster than a large fall from something that has already declined considerably. For some of the pollutants (see Figure 9), emissions have decreased by up to 80% from 1990 to 2018.
How do we get more from less?
While the data above do not suggest that environmental concern is unwarranted, the figures indicate that prudent optimism is perhaps warranted. In these cases, an interaction between regulation, competition, and technological advances seems to have contributed jointly to firms using fewer resources to obtain more output (Porter and van der Linde, 1995). How do we explain these results?
First, any input used by a firm in a capitalist economy will be subject to rationalisations. As firms want to maximise their profits, they are keen to lower costs. One way to do so is to use fewer resources. An aluminium can used to weigh about 60 grams in the 1950s, but, today, it weighs about 15 grams. In a competitive market, firms are rewarded by using fewer resources.
The exception to this pattern is when a third party is affected, i.e. when externalities are present. If production gives rise to pollution that is harming the environment but is not reflected in price, it becomes rational for firms to destroy the environment. With the emergence of tougher environmental legislation since the 1970s, we have witnessed several improvements in this area. Taxes, regulations, and prohibitions of certain substances such as lead have paved the way for a cleaner economy. Historically, the constructive interplay between regulators, consumers, and firms has paved way for a green transition.
The ban on lead in petrol is a good illustrative example. As indicated above, air-borne emissions of lead are virtually gone today, and this shift constitutes a vast improvement since the 1980s. The ban was announced well in advance and has been a part of the international debate for many years. Softer instruments such as taxes were progressively increased in the 1980s, and a ban did not come until the mid-1990s when unleaded petrol was already on the market. The main challenge for policymakers has been to ensure a consistent path, setting stable institutional arrangements in which firms can operate. The key lesson from the ethanol debacle in Sweden is perhaps the inability of policymakers to impose consistent and technology-neutral regulations over time.
In summary, these improvements have little to do with the government taking an active interventionist role in the economy. States and transnational bodies such as the EU have played an important role in enforcing standards and controls of pollution.
Conclusion: Time to question the entrepreneurial state
In 2009, Harvard professor Josh Lerner published the book Boulevard of Broken Dreams. It documented a vast collection of government failures related to innovation and entrepreneurship. Lerner stated the following: ‘for each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit’ (p. 5).
Lerner’s work provided a word of caution regarding innovation and industrial policy. Unfortunately, policymakers have chosen not to listen to this cautionary advice. Instead, they have wholeheartedly embraced the idea of an entrepreneurial state (2013) and Mariana Mazzucato’s idea of a mission economy (2021).
The findings reviewed here from the book Questioning the Entrepreneurial State (2021) revealed that this is a mistake. In this book, 32 scholars provided critical perspectives, theories, and empirical descriptions, which together point to the dangers of proactive, interventionist innovation policies.
These findings have been summarised into five overarching lessons:
- If it sounds too good to be true, it is too good to be true
- Governments lack the incentives and capabilities to act as entrepreneurs
- Large sums of ‘free’ money related to innovation and entrepreneurship distort behaviour
- Innovation and entrepreneurship have become a matter of appearance
- The primary beneficiaries of interventionist industrial policies are today’s vested interests
Endnotes
- M. Mazzucato (2018), ‘Mission-oriented research & innovation in the European Union: A problem-solving approach to fuel innovation-led growth’, Report for the Directorate-General for Research and Innovation of the European Commission https://publications.europa.eu/en/publication-detail/-/publication/5b2811d1-16be11e8-9253-01aa75ed71a1/language-en
- M. Mazzucato, R. Kattel & J. Ryan-Collins (2019) ‘Challenge-Driven Innovation Policy: Towards a New Policy Toolkit’, Journal of Industry, Competition and Trade. https://doi.org/10.1007/s10842-019-00329-w
References
Bergkvist, J. E., Moodysson, J. and Sandström, C. (2022). ‘Third-generation innovation policy: System transformation or reinforcing business as usual?’. In K. Wennberg, C. Sandström (eds.), Questioning the Entrepreneurial State. International Studies in Entrepreneurship, 53, 201–217. Springer.
Grafström, J. and Sandström, C. (2021). ‘Mer för mindre?’. In Tillväxt och hållbarhet i Sverige.
Porter, M. E. and Van der Linde, C. (1995). ‘Toward a new conception of the environment-competitiveness relationship’. Journal of Economic Perspectives, 9(4), 97–118.
Sandström, C. and Björnemalm, R. (2022). ‘Hur uppstår gröna bubbler? Lärdomar från etanolbubblan som sprack’. Ekonomisk Debatt, 50(5), 65–71.
Sandström, C. and 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. and C. Sandström (eds.), Questioning the Entrepreneurial State. International Studies in Entrepreneurship, 53, 251–269.
Wennberg, K. and Sandström, C. (eds.) (2022). Questioning the entrepreneurial state. International studies in entrepreneurship (Springer).
