Bill Gates has written on his blog that we need “innovation, not just insulation” in order to reduce CO2 to manageable levels. His motivation is robust, but his thinking is … far from clear. Because he’s Bill Gates, this is sure to attract attention, but even if he weren’t, this is worth talking about. It illustrates the deep misunderstandings that most of us have about the energy sector, the possibilities for reform, and — at a much larger level — how our economy works.

What Gates gets right

Let’s start with his core thesis: Gates argues that while we might get to 30% CO2 reduction by 2020 with lots of efficiency and small-scale tweaks to the system, the long-term goal of 80% reduction by 2050 is going to be much harder — indeed, impossible without massive changes in the way we use energy, the types of energy we use, and the technologies we use for energy conversion. Ergo, we need to focus our efforts on large-scale innovation in zero-carbon technologies.

At an abstract level, this is an important point worth screaming from the rooftops. No one should define success solely by our ability to meet intermediate goals. Passing CO2 legislation is a critical first step. Hitting 2020 targets is a key second step. But neither of those steps matter if we fail on the long-term objective. This approach to long-term planning was ubiquitous amongst political leaders in an earlier era (George Marshall, anyone?) but sadly absent today. My God, do we need more of that.

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What Gates gets wrong

Unfortunately, having spotted a problem, he gets the diagnosis wrong, in ways that are far too common among damned near every Serious Person who thinks about our energy system but doesn’t live in its trenches. It’s too flat for me to ski anywhere near my home in Chicago — but I’m not foolish enough to spend my weekends hauling dirt. Similarly, the lack of innovation in our energy sector doesn’t necessarily imply that the solution is simply to do more innovating. Rather, we have to start by asking a deeper question: why is this industry so devoid of entrepreneurial creativity? Solve that question and the innovation will follow. Avoid that question and we’re molding mountains in Milwaukee.

Gates is guilty of nothing more than a common habit of mind: We see the way that hard work, entrepreneurship, and innovation drive large-scale, socially beneficial change (especially in consumer electronics) and conclude that this recipe must apply to other industries. Ten years ago, I didn’t own a cell phone, but today I have a Blackberry. Meanwhile, that coal plant down the road is 60 years old and competitive. Can’t we just innovate to make it obsolete?

Yes and no.

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Yes, the industry is devoid of real innovation. Write a list of the great technological and entrepreneurial leaders in the energy industry and you’re likely to end up with a list of cadavers. Edison, Tesla, Westinghouse … great men all, and all dead. Where are the Bill Gates, Michael Dells, and Fred Smiths of this industry? Where is the “killer app” of the last 30 years? How much greater would our lives be if this industry attracted the innovation we’ve come to take for granted in the rest of our economy?

But no, the solution to this is not to throw money at innovation. Rather, it is to understand why smart, ambitious, innovative entrepreneurs have consistently elected to pursue career paths in other industries. The Atlantic recently asked whether CEOs matter and noted that some industries (like Mr. Gates’) depend hugely on their CEOs while others (like electric utilities) don’t, because in the former case the CEO is “unconstrained” while in the latter case they are no more than “titular figureheads.” Now suppose that you are an ambitious entrepreneur, seeking to change the world. Would you rather be unconstrained or a titular figurehead? Is it any surprise that innovation is absent in such a industry?

This, at core, is why efficiency matters — and why it’s so troubling to hear Mr. Gates to write off energy efficiency with lines like “you can never insulate your way to anything close to zero.”

Of course you can’t. But there are two huge holes in that statement. First, it assumes that efficiency is simply about how people use energy rather than how we generate useful energy. When our electric sector is only 1/2 as fuel efficient today as it was in 1910, generation efficiency is key. You may not be able to insulate your way to zero, but you can make up at least half the ground between here and zero simply by deciding to stop throwing fuel away.

The second point is more critical: we have piles of efficient, profitable technologies that aren’t being deployed today, for a host of reasons ranging from utility regulation to environmental permitting rules — all of which may have been appropriate for an earlier era but are hopelessly obsolete today.

Given that reality, what would it mean if we innovated some great new technology? That’s easy — we’d simply throw another technology on a line of undeployed (but otherwise really cool) technologies.

That’s a hard pill to swallow. It flies in the face of our perceptions about the efficiency of our economy, and it flies in the experience of leaders like Gates who have spent their careers in rapidly changing, competitive, relatively low barrier-to-entry industries where the kind of stasis seen in the energy sector would drive you to obsolesence, then bankruptcy. But the discomfort of the reality has to be confronted. Like it or not, we are generating and distributing power with the equivalent of a 1980 Wang computer. And while an Intel 386 chip with Office 1995 isn’t the end goal, understanding and removing the barriers to deploying that particular technology is a prerequisite for all that follows.

In short, energy efficiency is the canary in the coal mine. Once we remove the barriers to innovation in the energy sector, we’ll see a flood of efficiency, a flood of sexy CEOs (pick me!), and a flood of those new technologies. But the cart can’t lead the horse.