Funding continues to pour into green-technology research and development despite low oil prices and a stubborn recession, but whether that will continue long enough to help the economy recover may be up to the government.

Venture capitalists invested $8.4 billion in green tech last year, according to a new report from the analysts at Cleantech Group, but there are signs of trouble on the horizon. Investments in the fourth quarter were down 35 percent to $1.7 billion from the third quarter's record high, which looks like a sign that lower energy prices are scrambling the economics that green tech companies were banking on.

If that's true, it raises a major question for advocates of clean energy: Who is going to pay for all the research and development that most say is necessary to create an economy that uses less fossil fuel, which currently meets 87 percent of our energy needs?

The answer, analysts say, is government funding — and taxing the carbon dioxide emitted when fossil fuel is burned, to make renewable energy more competitive.

"We have to find a way not to do what we did in the 1980s, when we all cheerfully forgot about energy as a society," said Lynn Orr, director of the Precourt Institute for Energy at Stanford University, which announced a $100 million endowment gift Monday. "And we now realize that we have to do something about carbon."

While $8 billion in venture capital and hundreds of millions of dollars of university research money would be enough to launch a large number of internet startups, the amount of money that could be required to drive green technology forward are staggering. Backers, like Barack Obama and his Energy Secretary-designate Steven Chu, argue that government investment will spur American innovation, leading to major export opportunities for clean energy technologies and helping mitigate climate change.

Government and big companies can be key to creating demand for new scientific innovations, said

Ira Ehrenpreis, a long-time clean-tech investor with Technology Partners. "They are creating a stimulus and a market for the breakthrough technologies that we're investing in."

One group, the Center for American Progress, a left leaning think-tank headed by the leader of Barack Obama's transition team, is recommending that the government invest $100 billion in green technologies and energy-efficiency building retrofits.

"Investing funds in a green economic recovery program that is capable in the short run of creating jobs, dampening upward pressure on oil prices, and moving our economy significantly toward a clean-energy economy is a responsible investment of taxpayer money in our present circumstances," the group wrote in a recent report on a "Green Recovery".

To make that sort of investment in the face of grinding economic pain will require a large amount of political will, said Kent Hughes, director of the Woodrow Wilson International Center for Scholars program on Science, Technology, America and the Global Economy. But he thinks that a new coalition could drive the program forward.

"The interest cluster around this has changed," Hughes said. "For a number of initiatives you have national security interests coming together with environmental interests. It's not a usual coalition but one that could be pretty influential."

Environmentalists argue that the cost of doing nothing about climate change will eventually be higher than the short-term costs of

"greening" our infrastructure.

"If you think carbon pricing is too expensive, just wait until you see the bill for failing to put a price on carbon," Eric De Place wrote on the well-known sustainability site Worldchanging.

If the Obama administration does push a lot of federal money into green technology, there will still be the issue of how those funds get distributed. Local and state governments are also trying to respond to the demands of their constituents by pushing renewable-energy portfolios for utilities operating within their borders.

There is a danger that in the rush to put new technologies out into the market, the wind and solar energy industries could become overextended. Back in the 1980s, California gave generous tax incentives to wind power, generating what became known as the "wind rush." The companies and technologies that were installed did not improve quickly enough; their costs didn't come down quite fast enough. When the incentives went away, the companies went belly-up and it has taken decades for the wind industry to recover.

Despite the focus on creating new green technologies, limited attention has been put into how to actually provide access to green funds, say the authors of a new essay in Environment magazine.

"Thus far much of the effort has been focused on technology and policy solutions, with very little attention given to how this change can be enabled through creative financing," writes an interdisciplinary group of authors from the University of California at Berkeley and a venture capital firm.

In financing the sort of energy-efficiency building retrofits recommended by the Center for Climate Progress, the Berkeley authors argue that the key is reducing the upfront cost that consumers have to pay to better their insulation or install cleaner technologies like solar panels. Though it might end up costing less in the long run to install better windows, it's cheaper in the short term to just keep what you have.

So some locales, like Berkeley, make financing available to their constituents. Like many of the details of any green-stimulus package, the details of making the loan arrangements work are complex, particularly with local governments increasingly strapped for cash, too.

But, as Stanford's Orr put it, "If this were not hard, someone would have done it already."

Image: flicker/phault

See Also:

WiSci 2.0: Alexis Madrigal's Twitter , Google Reader feed, and project site, Inventing Green: the lost history of American clean tech; Wired Science on Facebook.