Whether investors one day regret paying so much for
stock, they have done the planet a favor. Their enthusiasm enabled the company to raise enough money to stay afloat until it could profitably mass produce electric cars while accelerating other manufacturers’ rollouts.
Tesla, trading at more than 1,000 times trailing earnings, is only the most extreme example of a euphoria that has swept green energy. From the end of 2019, a fund that tracks a Nasdaq’s clean energy index has risen 191% compared with the broad market’s 15%. It trades at 52 times trailing earnings, nearly double the overall market’s already historically high multiple. More than a third of its 44 constituents are losing money.
“The bubble in renewables is probably the stupidest that I have seen in my career,” Charles Gave, chairman of money manager and research firm Gavekal, wrote last month.
Stupid, however, isn’t the same as useless. Some bubbles can be hugely destructive, as we saw with housing 13 years ago. Others are socially useful. Private markets generally provide too little incentive for risky innovation because shareholders only capture a small part of an innovation’s benefit; most goes to consumers (think of a lifesaving drug). A bubble can overcome that market failure as investors shower capital on countless new ventures they hope will be the next
Even as most of those ventures fail, they extend the technological frontier.
In the late 1990s and early 2000s, investors snapped up the stocks and bonds of money-losing technology, media and telecom companies. The mania financed a glut of fiber optic that drove the price of bandwidth down enough to bankrupt many telecom companies while allowing countless new businesses to emerge. It also enabled
to raise enough money to keep growing until it had proven its business model could work.
Green energy faces obstacles the dot-com boom didn’t. It mostly does what fossil fuels already do—just with less carbon dioxide emissions, a benefit that accrues to the entire world rather than producers or consumers.
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Yet renewable energy resembles high technology in one important respect. “The key technologies of renewable energy systems—solar, wind, and batteries—… follow a learning curve: each doubling of their installed capacity leads to the same decline of costs,” wrote Max Roser, founder of Our World In…
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