Innovations often follow the path of LED technology: beginning at the periphery before becoming more widely adopted.

Image courtesy of Flickr user kitroed.

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Talking about “green technology” gets people excited. It’s thrilling to think that a new wave of inventions and discoveries will revolutionize the way we live, halt the degradation of our planet and conserve resources for future generations. And it’s more than just talk: Investors are committing real dollars. By one estimate, the global market for alternative energy sources (for example, wind, solar energy and biofuels) will reach $315 billion by 2018. In the past few years, the number of “significant investments” has grown by more than 30%.1

As the level of activity increases, however, discussions about green technology raise as many questions as they answer. Let’s say we start plugging our cars into a smart electric grid: Who will make the batteries, using which technologies, and what energy sources will we use to charge them? Similar debates arise over biofuels. Should we produce biofuels from algae? Will it become a more promising feedstock than corn or sugar cane? Can we produce a type of cement that releases considerably less carbon dioxide into the air — or should we begin developing alternative materials to replace it? Will energy management software spur U.S. households to regulate their peak load use — or is it simply too difficult to change people’s behavior?

Addressing these questions is complicated by the fundamental uncertainties that are at the heart of the green technology market. The evolution of this market space depends on forces that are beyond the control of any individual entrepreneur or investor. (See “Defining Green Technologies.”) Governments must fashion coherent and durable energy