Green Industrial Policy

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Industrial policy is broadly understood as governments’ attempts to target specific sectors or companies to achieve desired economic activity that fosters socially desirable domestic outcomes. This can be achieved through tools that include a range of (in)direct supports – for example, subsidies or preferential treatments – and can result in outcomes such as local employment or improving the competitiveness of national champions. Industrial policy becomes green when decarbonized economic activity and respect for other planetary boundaries become government objectives that are as important as social welfare. 

Green industrial policy is now at the top of the political agenda in many countries because it is essential for addressing those socio-environmental challenges that markets do not usually solve alone. Examples can include interventions such as just transition mechanisms that reskill coal miners to new green industries, without which the coal miners might have struggled to find other jobs; or tax credits favoring domestically produced electric vehicles, without which a domestic electric vehicle industry might have found it difficult to develop. These policies can, however, become inefficient, protectionist, or otherwise anti-competitive. Moreover, they leave room for state capture, rent-seeking behaviors, and a wide variety of political maneuvering to prop up less efficient technologies despite better alternatives. 

Managing these dynamics while striving to achieve the best outcomes can be challenging. Germany’s transition from gas heating to heat pumps can serve as a valuable example. In this case and others like it, the switch itself seems technically straightforward. The incumbent technology is considerably less efficient and more carbon intensive than the new one, and it requires imported fuel. Yet because installing heat pumps has a much higher capital cost than staying with gas heating, it is not clear how any government mandate could succeed in passing those additional costs along to homeowners and tenants. Thus, finding a clear policy is made challenging by the fact that compromise must be found between long-term ecological and security outcomes and social tensions.