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Green Industrial Policy - Concept, Policies, Country Experiences
vi
TABLE OF CONTENTS
iv ACKNOWLEDGEMENTS
v FOREWORD
Erik Solheim
vii LIST OF BOXES
LIST OF TABLES
xi EXECUTIVE SUMMARY
Tilman Altenburg, Claudia Assmann
PART 1: CONCEPTUAL FOUNDATIONS
1 Chapter 1 Green industrial policy: Accelerating structural change towards wealthy green
economies
Tilman Altenburg, Dani Rodrik
PART 2: THE ECONOMIC AND SOCIAL CO-BENEFITS OF GREEN TRANSFORMATION
22 Chapter 2 What can developing countries gain from a green transformation?
Emilio Padilla
38 Chapter 3 Gaining competitive advantage with green policy
Stefan Ambec
50 Chapter 4 Enhancing job creation through the green transformation
Michela Esposito, Alexander Haider, Willi Semmler, Daniel Samaan
PART 3: ACCELERATING CHANGE
69 Chapter 5 In with the good, out with the bad: Phasing out polluting sectors as green
industrial policy
Aaron Cosbey, Peter Wooders, Richard Bridle, Liesbeth Casier
87 Chapter 6 Developing green technologies and phasing them in
Babette Never, René Kemp
102 Chapter 7 Pricing environmental resources and pollutants and the competitiveness of
national industries
Kai Schlegelmilch, Hans Eichel, Anna Pegels
120 Chapter 8 Promoting circular economies
Verena Balke, Steve Evans, Liazzat Rabbiosi, Sandra Averous Monnery
134 Chapter 9 Trade and investment law and green industrial policy
Aaron Cosbey
PART 4: COUNTRY EXPERIENCES
153 Chapter 10 Renewable energy as a trigger for industrial development in Morocco
Georgeta Vidican Auktor
166 Chapter 11 Germany: The energy transition as a green industrial development agenda
Anna Pegels
185 Chapter 12 Electric mobility and the quest for automobile industry upgrading in China
Tilman Altenburg, Kaidong Feng, Qunhong Shen
199 Chapter 13 Ethanol policy in Brazil: A ‘green’ policy by accident?
Pedro da Motta Veiga, Sandra Polónia Rios
CHAPTER 1 1
2
1. INTRODUCTION
There are two major reasons for governments and countries with whom developing countries should
societies to accelerate structural change in their catch up, ignoring the limits of our planet’s carry-
economies and proactively shape the direction of ing capacity. Environmentalists have tended to
the change. First, there is the challenge of creating put conservation first and downplay the challenge
wealth. Structural change, that is, the reallocation of creating wealth for billions of people who aspire
of capital and labour from low- to high-productiv- for a better material life. In this chapter we make
ity activities, is a key driver of productivity growth an effort to bring these perspectives together and
and higher incomes. This is particularly important suggest ways of balancing the inherent trade-offs.
for developing countries where incomes are low
and poverty is pervasive. According to the latest Industrial policy is our analytical angle. Industrial
available estimates, 767 million people lived on policy refers to government actions to alter the
less than US$ 1.90 a day, and 1.9 billion people in structure of an economy, encouraging resources
the developing world still had less than US$ 3.10 to move into particular sectors that are perceived
a day in 2013–a clear indication that the current as desirable for future development. Tradition-
structural composition of national economies ally, industrial policy has focused on productiv-
does not provide a sufficient number of produc- ity enhancement as the key mechanism that
tive jobs (World Bank 2016). Second, economic would ensure rising returns to capital and labour
development has so far been achieved at the cost and thus enable economic growth and prosper-
of severe overexploitation of natural resources. ity. Increasingly, however, the goals of industrial
Humanity is approaching various ecological policy have been broadened. In practice, industrial
tipping points beyond which abrupt and irrevers- policy agencies undertake measures to influence
ible environmental change at large geographical structural change such that regional disparities
scales is likely to happen (Rockström et al. 2009). are reduced, labour-intensive industries or small
Radically new techno-institutional systems are enterprises are encouraged and/or the econ-
needed to decouple economic development and omy becomes environmentally more sustaina-
human well-being from resource depletion and ble (Altenburg and Lütkenhorst 2015). The main
waste production. While many of the required objective of this chapter is to show how industrial
technologies are already available, the incen- policies can be designed to deal with the dual
tives guiding resource allocation need to change challenge of shifting economic structures in a way
profoundly to disrupt current unsustainable tech- that prosperity is increased while at the same time
nological pathways and change some economic replacing environmentally unsustainable activi-
subsystems entirely, such as those for energy ties with sustainable ones. The rationale for indus-
provision and transport (IPCC 2014). trial policy rests on the idea that market prices are
not always the best guide to allocating invest-
This chapter explores the policy options for ments. We shall argue in the chapter that this idea
managing structural change that accounts for applies with much greater force where climate
both the productivity and the environmental chal- change and green technologies are concerned.
lenges in a harmonised way.2 This is a challenge
for all countries. Yet we put developing econo- A quick word about the term ‘industrial policy’:
mies at the centre of our analysis because this We use this term because it has a well-recog-
is where the need to accelerate wealth creation nised meaning and a long history. But the range of
is greatest, and many stakeholders perceive this policies we shall cover goes much beyond indus-
as incompatible with environmental conserva- try itself. In view of this, some terms that have
tion. Governments typically put economic growth recently come into use, such as structural trans-
above environmental objectives, arguing that part formation policies or productive development
of the income generated can be used to clean up at policies, would perhaps have been more appropri-
a later stage. Also, the policy discourse has often ate. We stick with the traditional term; though we
been biased towards specific objectives: Indus- caution the reader that the kind of issues we cover
trialists have mainly sought solutions modeled here concern entire economies and not just manu-
after the successful cases of early industrialising facturing industries.
2 While this chapter puts the dual challenge of creating wealth and greening economies at the centre of its analysis,
industrial policy should in fact be assessed against a wider range of societal objectives, as laid down in the 2030
Agenda for Sustainable Development (UN 2015). Increasing employment opportunities for youth, reducing regional
disparities or supporting women’s entrepreneurship are all legitimate goals. Ultimately, industrial policy has a norma-
tive content that depends on what societies define as desirable future courses for social and economic development
(Altenburg and Lütkenhorst 2015).
Chapter 1
Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies
We proceed in three steps. Section 2 analyses the policy. In section 3 we extract the main lessons
dual challenge in greater detail. It first summa- from various decades of controversial debate on 3
rizes what we know about the link between industrial policy and bring out three key princi-
structural change and wealth creation; it then ples of smart policymaking that maximise the
addresses the need to decouple human develop- governments’ ability to overcome market failures
ment from non-renewable resource consumption while keeping the inherent risks of misallocation
and pollution, and it shows how this translates and political capture to the minimum. Section 4
into a structural transformation of economies, takes this debate one step further, exploring the
including those of developing countries. The extra challenges of a green transformation and in
section ends with a discussion of synergies and what ways green industrial policy must go beyond
trade-offs between the two objectives. Sections the common practice of industrial policy in a
3 and 4 then deal with the design of industrial business-as-usual setting. Section 5 concludes.
3 This dynamic is captured in the Economic Complexity Index developed by Hausmann and others. In their Atlas of
Economic Complexity, the authors show how strong the correlation is when natural resource exporters are excluded
(Hausmann et al. 2014).
4 By comparison, “an expansion of non-tradables is self-limiting, as the domestic terms of trade eventually turns against
non-tradables, choking off further investment and growth“ (Rodrik 2006).
Green Industrial Policy - Concept, Policies, Country Experiences
impressive growth stories were based on export- computerization in the next few decades. Apply-
4 led growth in manufactures, particularly in East ing the same methodology to developing coun-
Asia (Stiglitz and Yusuf 2001; Commission on tries, the World Development Report 2016 finds
Growth and Development 2008). even higher automation potentials–two thirds
of today’s jobs in developing countries could be
However, the share of manufacturing value added lost to automation, for instance–but assumes that
in GDP tends to have a historical maximum, automation will proceed more slowly due to time
beyond which it starts to decline. This transi- lags in technology adoption (World Bank 2016:219).
tion towards post-industrial economies happens
due to three factors. First, technological progress In the past, reallocating workers from low produc-
in manufacturing reduces demand for workers tivity agriculture to export-oriented light manu-
and shifts employment to services, where the facturing activities was a powerful driver of
potential for automation is not as big. Second, industrialisation and productivity growth. East
as incomes rise, demand shifts away from food Asian economies especially benefited from this
and manufactures to increasingly differentiated shift, from Korea and Taiwan in the 1970s to more
services. Third, manufacturing industries become recent industrialisation experiences in China,
more and more knowledge-intensive and there- Vietnam and Cambodia. Progress in labour-saving
fore create demand for specialised production-ori- technologies, however, is now likely to radically
ented services in areas such as engineering, reduce the opportunities for boosting produc-
information technology and finance. It should be tivity through the attraction of investment in
noted that the boundaries between manufactur- labour-intensive export industries. At the same
ing and services are increasingly blurred and the time, globalization creates new opportunities for
interdependency of manufacturing and services industrial development as it facilitates access to
increases. This is reflected in an increasing share hitherto inaccessible technologies and markets.
of value added from services embodied in manu- However, it can also accelerate premature dein-
facturing products (OECD 2015). dustrialisation as it puts newly emerging small
industries in direct competition with highly
The problem of today’s developing economies is competitive global corporations that have accu-
that, with the exception of some East Asian coun- mulated knowledge and network externalities
tries, manufacturing value added and employ- over decades and, on top of that, exploit the econ-
ment tend to stagnate at very low levels. Most omies of scale associated with globalized markets.
developing countries are moving from agricul- Even in the latecomer countries’ own domestic
ture or mining as their main economic drivers to markets, imports often stifle local industry devel-
services without going through a proper process opment. While a number of highly competitive
of industrial development, a process known as firms and regional clusters in developing coun-
premature deindustrialisation (Rodrik 2016). In tries have been able to reap the opportunities of
Latin America, manufacturing industry`s contri- global markets, such successes have been the
bution to GDP and employment has peaked exception rather than the rule. This explains why
early at a much lower level than one would have since the 1950s, “very few [countries] have become
expected from the patterns of today’s industri- high-income economies. Most developing coun-
alised countries and is now shrinking. In Africa, tries have become caught in what has been called
manufacturing industries are stagnating at a low a middle-income trap, characterized by a sharp
level (Diao et al. 2016). The same study finds that deceleration in growth and in the pace of produc-
labour productivity is stagnant or even declining tivity increases” (Agénor et al. 2012).
in the modern sectors. Given the importance of
manufacturing and modern services as drivers The few successful upgraders include oil export-
of diversification and productivity growth these ers and Eastern European countries benefiting
trends cast doubts on Latin America’s and Africa’s from EU accession, as well as East Asian coun-
prospects for future economic growth and welfare. tries. The latter in particular placed emphasis
on technological learning and capacity building,
Two factors are particularly important to under- especially in manufacturing. They had insti-
stand these trends: labour-saving technological tutions in place to manage structural change,
progress and globalization (Rodrik 2014). New providing coordination for the emergence of new
technologies are reducing demand significantly economic activities, nurturing entrepreneurship
for routine labour activities in manufacturing and investing in education and skills develop-
and services (Brynjolfsson and McAfee 2014). ment to ensure that human capital adapts to
For the US, Frey and Osborne (2013) calculate changes in the productive structure (Amsden
that about 47 per cent of jobs are susceptible to 1989; Wade 1990). The lesson from their success
Chapter 1
Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies
is clear: the creation of wealthy economies is International Panel on Climate Change predicts
strongly correlated with the ability to manage that if we continue to manage our economies in 5
structural change in a way that enhances produc- the same way, global mean surface temperature
tivity in a socially inclusive way. will increase by 3.7°C to 4.8°C by 2100 compared
to the average for 1850 to 1900 (IPCC 2014). Melting
of polar ice and thawing of permafrost soils are
2.2. TAKING ECOLOGICAL BOUNDARIES
two dangerous accelerators of global environmen-
INTO ACCOUNT: A GAME-CHANGER FOR
tal change. But there are other big threats to the
STRUCTURAL CHANGE
Earth System calling for urgent action including
The global economy is on an unsustainable path. loss of biodiversity, ozone depletion, ocean acid-
Since the industrial revolution, the world econ- ification, water shortage, soil degradation, accu-
omy has grown at the expense of the environment. mulation of nitrogen in aquatic ecosystems and
Natural resources have been exploited without the accumulation of chemical waste and plastics
allowing stocks to regenerate, pollutants have (Rockström et al. 2009; WBGU 2014).
accumulated in the biosphere, ecosystems have
These fundamental threats to humanity need
been degraded severely and biodiversity has been
to be taken into account when thinking about
lost at an alarming rate. Already in the early 2000s,
further growth and structural change of econ-
the Millennium Ecosystems Assessment, a UN-led
omies. The way economic transactions are
global assessment of the Earth’s ecosystems,
currently organized largely ignores the social cost
concluded that about 60 per cent of the ecosys-
of resource depletion and pollution. Natural capi-
tem services examined had been degraded or
tal embodied in fertile soils, fresh water, clean air
were used in ways that cannot be sustained (MEA
and productive ecosystems is being wasted. This
2005). Similarly, UNEP (2011) summarises a series
waste undermines the basis for future economic
of reports showing severe overexploitation of fish
development and jeopardizes the progress made
stocks, increasing water scarcity, decreasing soil
on social welfare (Fay et al. 2015). Therefore, we
quality and unsustainable rates of deforestation.
need to recognise environmental sustainability as
Through product and process innovations, fundamental to the production process.
resource efficiency is increasing worldwide. Put
In essence, human well-being and economic
differently, fewer natural resources are needed to
progress need to be decoupled from non-renew-
produce the same unit of output; but this increase
able resource consumption and emissions (UNEP
in efficiency has been quite modest, with the
2011). To make economic development sustaina-
effect that GDP growth globally has more than
ble, resource efficiency needs to increase at least
outweighed the efficiency gains (Jackson 2016;
at the same rate as economic output. The largest
Wiedmann et al. 2015). This led to a situation
challenge is how to achieve the steep decline in
where “global material extraction more than
GHG emissions needed to keep global temper-
doubled in the past 30 years, from around 36
ature rise well below 2°C. To achieve this, global
billion tonnes in 1980 to almost 85 billion tonnes
carbon intensity would have to be reduced by 6.3
in 2013, an overall growth of 132 per cent” (Vienna
per cent every year to 2100, much faster than the
University of Economics and Business 2016).
modest annual decline of 1.3 per cent achieved
Environmental contamination also increased.
between 2000 and 2014 (PwC 2015).
In the case of anthropogenic greenhouse gases,
emissions rose from 33 to 49 Gt CO2e per year So far, none of the major economies has achieved
from 1980 to 2010 (IPCC 2014). Due to continued this. However, ‘absolute decoupling’ is not impos-
growth of the global population and increased per sible. Enormous resource efficiency jumps are
capita consumption, particularly since the turn technologically feasible: with the shift to renew-
of the century, “anthropogenic pressures on the able energy, the use of smart information and
Earth System have reached a scale where abrupt communication technology systems, the use of
global environmental change can no longer be energy-saving technologies and, last but not least,
excluded” (Rockström et al. 2009). Research on changes in consumer behaviour. To accelerate the
environmental systems highlights the existence required technological and business model inno-
of tipping points at which environmental change vations, however, economic incentives need to
accelerates due to self-reinforcing mechanisms be set very differently. Above all, environmental
and systems are unable to restore their previous costs need to be much better reflected in prices,
equilibrium (Lenton et al. 2008). regulations must be tightened and subsidies for
fossil fuels and other unsustainable goods and
Global warming is the most pronounced threat to
practices need to be phased out.
human development and the environment. The
Green Industrial Policy - Concept, Policies, Country Experiences
Doing so will invariably have deep and system- if catastrophic climate change is to be avoided
6 wide implications, comparable to those observed (McGlade and Ekins 2015). Fossil fuel reserves as
during the first industrial revolution or the rise well as assets that depend on transforming and
of information technology (Pérez 2002). It will trading fossil fuel, such as refineries, power plants
change the way we farm our land and manufac- and petrol distribution networks, may therefore
ture goods, where we source our energy, how we be overvalued. Rapid technological progress in
transport things and how we build our infrastruc- low-carbon technologies and/or more ambitious
ture and design our cities. Among the various decarbonisation policies may force the holders
environmental challenges, mitigating climate of carbon assets to adjust their values, which in
change will have arguably the deepest implica- turn may cause a carbon bubble shock with deep
tions for structural change because it affects the repercussions for banks, pension funds and insur-
energy and transport sectors that so far have ance companies (Weyzig et al. 2014). The Econo-
fuelled economic development, literally. Accord- mist Intelligence Unit estimates that within the
ing to the Intergovernmental Panel on Climate global stock of manageable assets the value at risk
Change, global annual CO2 emissions will need to due to climate change ranges from US$ 4.2 trillion
be reduced 42 to 57 per cent by 2050, relative to to US$ 43 trillion between now and the end of the
2010, and 73 to 107 per cent by 2100 (IPCC 2014). century (EIU 2015). The Financial Stability Board
To achieve such levels of decarbonisation, major recognises such asset stranding related to climate
systemic changes are indispensable: Electric- change to be a relevant risk to the global financial
ity generation needs to shift fully from fossil to system and therefore put a reporting system in
renewable sources; as power generation is decar- place, the Task Force on Climate-related Financial
bonised, transport, heating and other energy using Disclosure (TCFD 2017). In fact, some institutional
sectors need to be electrified, including road traf- investors have started to withdraw from carbon
fic; and resource efficiency needs to be increased assets (Schwartz 2015). Hence there are market
radically across all industries, including the shift mechanisms at work that accelerate the struc-
to circular economies where waste is reduced, tural change towards a low-carbon economy.
reused or recycled (Fay et al. 2015).
While mining and power supply industries are
Some of these changes are already in full swing, most affected, structural change in other indus-
others yet to come. Global energy systems–and tries is following. Regulators in all main automo-
all the related manufacturing and service activi- tive markets including the European Union, USA,
ties related to power generation, transmission and Japan and China, have defined roadmaps for
storage–are already undergoing a fast and radi- reducing average CO2 emission levels of new cars.
cal change. Renewable energy technologies have Within a few years, these levels can no longer be
been adopted widely around the world. Electricity achieved by efficiency gains in fuel-driven cars
from hydro, geothermal and certain biomasses alone, forcing manufacturers to incorporate elec-
can now compete with fossil fuel-based electric- tric and hybrid cars into their product range and
ity, as do wind and solar power in good locations, to rapidly increase their share in overall sales. The
and further cost reductions are expected. While private sector is in fact responding. Electric vehi-
15 years ago renewable energy power installa- cle deployment has recently taken off with expo-
tions played a negligible role in global electricity nential growth rates, albeit from a low basis. In
generation, “the world now adds more renewable 2016, the global stock of electric cars exceeded two
power capacity annually than it adds in net new million, up from a few hundred ten years earlier
capacity from all fossil fuels combined” (REN21 (OECD and IEA 2017). With rapidly falling battery
2016; REN21 2017). prices and increasing battery performance, electric
cars will soon be fully competitive with fuel-driven
Firms continuing to invest in unsustainable tech- cars (Altenburg et al. 2017, this volume). Early
nologies run the risk of having to write off major movers such as Tesla and Toyota are taking market
investments. According to McGlade and Ekins shares from established carmakers that have been
(2015), climate research suggests that “to have at slower to adapt. Similar changes can be observed
least a 50 per cent chance of keeping warming in other product categories: reflected in growing
below 2°C throughout the twenty-first century, the markets for organic food, biodegradable packaging
cumulative carbon emissions between 2011 and and renewable building materials, for example.
2050 need to be limited to around 1,100 gigatonnes
of carbon dioxide.” As a consequence, about one Not only products will change, but also production
third of oil reserves, one half of gas reserves processes and business models. Circular econ-
and at least 80 per cent of known coal reserves omy models are being developed to minimise
cannot be burnt and need to be kept in the ground material and energy flows through industrial
Chapter 1
Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies
systems and make sure residuals of one produc- degradation undermines the ecological founda-
tion process are used as input for another (Ellen tions for economic growth and human well-be- 7
MacArthur Foundation 2012). In energy systems, ing, most obviously in countries that depend
new technologies enable the development of on economic activities in agriculture, forestry
decentralized mini grids where customers can or fisheries. Second, pollution and waste typi-
flexibly respond to price signals, supplying power cally reflect inefficiencies in production, and
or reducing demand when the price on the grid resource-saving techniques tend to amortize
is high and consuming power when it is low very quickly even without consideration of posi-
(Nathaney et al. 2016). Worldwide, new business tive externalities. Third, sticking to traditional
models are flourishing, models based on sharing products and processes as the worlds’ domi-
rather than owning assets, in most cases facil- nant economic actors shift to greener goods and
itated via online marketplaces. These include production techniques will drive a wedge between
sharing of cars, accommodation or taxi services. local and global practices. This makes it more
Last but not least, the certification and accredi- difficult to compete in the future, considering that
tation industry is receiving a boost, as economic trade and investment treaties increasingly regu-
actors are increasingly obliged to prove that their late environmental issues and that lead firms in
production processes comply with various envi- global value chains impose progressively higher
ronmental requirements. environmental standards. Fourth, countries
should avoid getting locked into unsustainable
In sum, the recognition of ecological system infrastructure and business practices because
boundaries has already become a game-changer the costs of switching in the future will likely be
for economic development. Incentive systems disproportionally high. Therefore, today’s invest-
are changing–still too slow from an environmen- ments in high-carbon energy infrastructure may
tal perspective–and a lot of experimentation is turn into financial burdens soon, as renewable
happening in terms of new products and processes. energy becomes cheaper and commitments to
decarbonise become binding and costly. Devel-
2.3. CHANGE WILL AFFECT oping countries are in an advantageous position
DEVELOPING COUNTRIES in the sense that most of their energy and urban
infrastructure is yet to be built, so they can avoid
How relevant are these changes for developing costly misdirected investments in unsustaina-
countries, taking into account that “many are ble infrastructure. Fifth, many new green tech-
unable to keep up with the investments to satisfy nologies come with co-benefits. For example,
the basic needs of their citizens, let alone the effi- investing in clean air greatly improves health
cient cities, roads, housing, schools, and health conditions and reduces health-related expendi-
systems they aspire to create” (Fay et al. 2015:2)? tures; and communities can be electrified at lower
In fact, many people in developing countries, cost when new technologies make it easier to use
including government officials, regard environ- local sources of renewable energy at small scales.
mental protection a luxury their countries should Sixth, green industrial policies drive innovation.
deal with at later stages of development, once the While new-to-the-world types of innovation will
more pressing problems of human development mostly likely be developed in a relatively small
have been solved. number of countries with strong national inno-
vation systems, certain innovations may also
Still, even when governments put their own
be developed in poorer countries and drive local
national social and economic objectives first,
productivity growth and job creation. Table 1.1
there are strong arguments for not delaying the
provides an illustrative overview of new green
transition to a green economy (Padilla 2017 and
product and service opportunities, differentiating
Ambec 2017, this volume). First, environmental
between countries by level of income.
Green Industrial Policy - Concept, Policies, Country Experiences
Table 1.1: New green product and service opportunities for countries at different income levels
8
Higher middle and high income countries Low and lower-middle income countries
New Renewable energy technologies including Low- and medium tech, low cost products
products high-tech components of solar photovoltaics, such as solar water heaters, solar water
concentrated solar power, wind turbines and pumps, solar driers; drip irrigation systems;
geothermal technologies; energy storage rainwater harvesting technologies; LPG, LNG or
technologies including fuel cells and lithium- ethanol cook stoves; LNG-based three-wheeler
ion batteries; electric vehicles; new lightweight taxis.
materials; bioplastics; carbon capture and Inputs for global green production for which
storage technologies; high performance factor endowments exist: such as lithium, rare
building façades. earths, cellulosic ethanol.
New Design and operation of smart grids, closed- Simple low-cost services such as for operation
services cycle eco-industrial parks, intelligent transport and maintenance of decentralized and mini
systems, advanced energy management electric grid solutions; labour-intensive waste
systems, electronic road pricing, tracking recycling; low-carbon livestock management;
and tracing systems for environmental management of rapid transit systems.
performance along value chains. Labour-intensive tasks in emerging green
global value chains, such as assembly of solar
panels or lithium-ion cells.
In fact, awareness of the need for green industrial fleet emissions, to restrict access of high polluting
policy is clearly increasing among developing vehicles in inner cities or to oblige taxi fleets to
country stakeholders. Governments of countries run on ethanol or compressed natural gas.
at very different income levels have enacted
green economy strategies, ranging from Ethio-
2.4. THE DUAL CHALLENGE
pia, Rwanda, Cambodia and Vietnam to Mexico
and China. Growing recognition is also reflected Governments around the world are thus
by the 197 countries party to the 2015 Paris Agree- confronted with a dual challenge: to accelerate
ment under the United Nations Framework structural change towards higher productivity
Convention on Climate Change, thereby commit- in a way that is socially inclusive and to align
ting to limit the increase in the global average economic development with the carrying capac-
temperature to well below 2°C above pre-indus- ity of our planet. Recognizing the need to harmo-
trial levels, to pursue efforts to limit the temper- nise both objectives and to make industrial policy
ature increase to 1.5°C above pre-industrial levels environmentally sound is essential. In this regard,
and to formulate and communicate long-term the unanimous global agreement on the 2030
low greenhouse gas emission development strat- Agenda for Sustainable Development has been a
egies. So far, the existing commitments, known major achievement (UN 2015).
as Nationally Determined Contributions, are not
sufficiently ambitious to stay below the envis- However, not a single country has been able, so
aged threshold levels (Climate Action Tracker far, to enhance the welfare of its citizens without
2015), and we may expect a gap between political increasingly depleting its resource base. In this
declaration and actual implementation; but the regard, governments in search of a welfare-en-
trend towards greener technologies and incentive hancing sustainable economy are entering
systems is unlikely to be reversed. Especially in uncharted territory. There are obvious trade-offs
the field of energy generation, renewable energy between the welfare and environmental sustaina-
technologies are becoming much more cost-ef- bility objectives, at least in the short and medium
ficient in many more locations. Developing and term. Ostensibly, internalizing environmental
emerging economies now account for about half costs that have been externalized in the past
of global renewable energy investments and the increases the apparent cost of production and
market for renewables-based mini-grids is boom- reduces cost-competitiveness if competitors
ing (REN21 2017). With regard to air pollution, do not have to bear these costs. Moreover, green
many developing countries and municipalities investments have opportunity costs: governments
have taken drastic measures to regulate trans- need to find a good balance between the necessary
port. These include measures to reduce allowable investments in environmental improvements and
Chapter 1
Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies
other outlays, such as those for health, education to be able to design green industrial policies
and infrastructure. But there are multiple syner- while Maximising gains and minimizing costs. 9
gies as well. The search for green technologies This will be challenging, given that optimal solu-
will create many opportunities for economic tions depend on situation-specific factors–from
development, health benefits, improved efficien- resource endowments and techno-institutional
cies and better living conditions. Governments capabilities to the distribution of power between
must understand these synergies and trade-offs the polluting incumbents and green newcomers.
5 Countries that managed to close the technological and income gap vis-à-vis more advanced economies invariably
employed a range of carrots and sticks to protect and nurture their national industries. Empirical evidence shows this
for the early catching-up experiences of Germany, the United States and Japan as well as for the more recent post-
World War II examples, from the early “Asian Tigers” of Korea and Taiwan to the current emergence of China. None of
the countries that strictly followed the Washington Consensus, in contrast, has achieved comparable success in terms
of technological upgrading, economic growth, and poverty reduction (Rodrik 2005; Chang 2009).
Chapter 1
Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies
3. the urgency to achieve structural change within claim that ambitious caps would threaten their
12 a short period of time, to preclude the risk of international competitiveness in order to keep the
catastrophic environmental tipping points cap high and the price of use rights low; and they
4. enhanced uncertainty due to long time hori- ask for assignment of free use rights. As govern-
zons of some transformations as well as ments do not want to harm their national indus-
dependence on policy changes tries, cap-and-trade systems so far have often
5. additional policy interfaces and therefore the failed to set ambitious caps (Helm 2010; IPCC 2014).
need for particularly encompassing policy Environmental taxes, in contrast, do not guaran-
coordination tee an upper limit to resource use or pollution
6. a motivation to manage global commons, because industry’s readiness to pay taxes defines
such as the atmosphere and oceans, for long how much they will reduce that resource use or
term sustainability, which may not always be pollution. But taxes have several advantages. As
aligned with immediate national interests. they are directly set by a government authority,
the additional cost for firms is more predictable.
In what follows, we will address each of these Also, taxes create a double dividend as they not
defining features one by one. only reduce environmental impacts but also raise
revenues for the government. These can be used
4.1. THE IMPORTANCE OF to reduce other taxes or increase government
ENVIRONMENTAL EXTERNALITIES spending, both of which help to build societal
support for environmental tax reforms. Finally,
The most obvious specificity of green indus- taxes are easier to implement than cap-and-trade
trial policy is that it aims to correct the failure systems, making them particularly attractive for
of markets to reflect the social costs of envi- developing countries (Schlegelmilch et al. 2017,
ronmentally harmful production. For compa- this volume).
nies investing in green technologies, the private
return lies significantly below the social return, As market instruments that encourage entre-
resulting in underinvestment. Quoted in The preneurial search and cost-effective allocation,
Guardian Newspaper, regarding his report for the both cap-and-trade and environmental taxes are
UK government, Stern tells us “Climate change is increasingly being applied internationally. For
a result of the greatest market failure the world several reasons, however, pricing environmental
has seen” (Benjamin 2007; Stern 2007). Hence the goods is not sufficient (Fay et al. 2015). One limi-
theoretical case for applying industrial policies tation is that there may be other market failures
to accelerate and upscale investments in green hampering green transformations–for example
technologies is even stronger than it would be for those related to incomplete information, lack
other technologies. of coordination or inadequate appropriability of
research and development investments. Another
To close the gap between private and social limitation consists in ethical concerns about pric-
returns the first-best solution would be to price ing. Not everyone would agree with the basic idea
the use of environmental goods, such as water or that everything nature provides can be expressed
clean air. This has a big advantage: market actors in monetary values. These critics hold, for exam-
can use their ingenuity to find the most cost-ef- ple, that the preferences of future generations
fective way to consume less of these goods. There cannot be fully reflected in market prices. In
are basically two ways that governments can addition, first-best policy instruments may not be
attach prices to environmental goods: cap-and- available for political or administrative reasons.
trade systems and environmental taxes on
resource consumption or emissions. In cap-and- Hence policy mixes are usually required that
trade systems, governments define an upper limit combine market-based instruments, regulations,
for the use of a resource or emissions and then capacity building, subsidies and other compo-
distribute or auction use rights among economic nents in various ways. The right combination
actors, which can then be traded. This encour- depends on country conditions, such as what
ages all participants to explore and implement degree of policy complexity can be handled
the most cost-effective solutions6. Defining the and how well the government is insulated from
cap and allocating use rights, however, is not easy lobbying pressure. Also, governments need
for political reasons. Polluter lobbies typically to anticipate the trade-offs between pricing
6 For the case of climate change mitigation, Cramton et al. (2017) convincingly argue why a global carbon price would
be much more effective than the current practice of individual pledges with weak review mechanisms. Rather than
depending on altruism it would create a reciprocal common commitment, whereby “each country would commit to
placing charges on carbon emissions sufficient to match an agreed global price formula.”
Chapter 1
Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies
environmental goods and competitiveness. competing in the market place. In contrast, the
Polluting industries will intentionally face higher logic of green transformations implies that where 13
costs and may therefore lose any advantage over environmentally sustainable solutions compete
competitors from other jurisdictions where the with harmful ones it is in the public interest to
same industries are not taxed. At the same time, accelerate the substitution rather than waiting
pushing industries early on to develop clean tech- for markets to reward commercially superior
nologies may result in early mover advantages if alternatives. Never and Kemp (2017, this volume)
other jurisdictions impose similar conditions with discuss how standards can be used to accelerate
a time lag (Porter and van der Linde 1995; Ambec the diffusion of green technologies.
2017, this volume).
Third, an important part of green industrial policy
is to proactively phase out harmful technologies.
4.2. SYSTEMATICALLY STEERING In some cases, such as when substances that
INVESTMENT BEHAVIOUR deplete the ozone layer or greenhouse gases are
concerned, it is not enough to promote the devel-
The overarching objective of bringing the econ-
opment and deployment of sustainable alterna-
omy back into a ‘safe operating space for human-
tives. Green industrial policy defines road maps
ity’ necessarily gives structural change a direction
and sets incentives to phase unsustainable tech-
(Rockström et al. 2009). First and foremost, tradi-
nologies out. Cosbey at al. (2017, this volume)
tional industrial policy aims at enhancing produc-
show how this can be done in practice.
tivity growth and incomes but, in most cases,
leaves it to market forces to find the most lucrative Fourth, while conventional industrial policy rarely
technologies and business models. Green indus- tries to affect consumer behaviour, influenc-
trial policy, by comparison, is driven by scientific ing purchase decisions is an important element
evidence of environmental threats. This implies of green industrial policy. Mandatory labelling
a much clearer picture of which technologies programmes may help to make markets transpar-
and business models are good or bad. Underlying ent and enable consumers to distinguish products
green industrial policy is the Pigouvian idea of with different environmental effects. Educational
steering investment behaviour systematically and programmes can encourage people to reuse and
permanently towards what governments conceive recycle things. However, it should be noted that
as environmentally sustainable (Spratt 2013:12). consumers do not respond perfectly to price
signals. Even when new products exist that are
This leads us to four peculiarities of green indus-
better in many ways and cheaper, many consum-
trial policy when it comes to issues of technol-
ers stick to the bad old alternatives because they
ogy choice and promotion: First, there needs to
do not understand the situation well, because
be agreement on which technologies are good
their neighbours have not changed or simply
for a sustainable future. This is far from trivial
out of force of habit. Green industrial policy can
because alternative solutions may exist, all with
use a wide range of options to encourage green
some trade-offs that imply difficult value judg-
consumption and shift markets using advertise-
ments. For example, from a decarbonisation
ments, nudges and green default options, among
perspective, biofuels are desirable substitutes for
other schemes. A rapidly growing literature
fossil fuels, but their commercial production may
shows how insights from behavioural science can
lead to monocultures, loss of biodiversity, higher
be used to influence consumers in a pro-environ-
food prices and increased pressure on unutilized
mental way (Sunstein and Reisch 2013; Price 2014).
vulnerable land. In a similar vein, nuclear energy
and large-scale carbon capture and storage are
advocated by some as necessary elements of 4.3. URGENCY TO ACT FAST AND
decarbonisation strategies but rejected by others UPSCALE EXPERIMENTATION
for their inherent risk of large-scale contamina-
tion. What is desirable thus depends on value Some economic activities have strong impacts on
judgments, and political deals are needed to specific ecosystems or even on the entire Earth
define what merits support. System. These ecosystems have a certain capac-
ity to react to disturbances and return to their
Second, there is a case for subsidizing deploy- previous equilibrium state; but thresholds exist
ment of clean technologies, even beyond the beyond which such return is no longer possible
point where they break even with harmful tech- and systems may collapse, in some cases with
nologies. Traditional industrial policy would potentially catastrophic effects for life on Earth
foster technologies only at their infant stage (Lenton et al. 2008). It is thus truly vital to avoid
and withdraw support as soon as they start such tipping points.
Green Industrial Policy - Concept, Policies, Country Experiences
2009). Natural science research is thus needed specialised firms make parallel investments in
to understand the inherent economic risks in batteries and charging infrastructure, and new 15
ecosystems’ dynamics and inform policymakers technical standards are developed as well as
and investors. credible policy road maps that signal the phase-
out of fuel engines. Well-managed coordination
Overall, uncertainty tends to be larger in green processes with strong political backing are needed
transformations than in ordinary market-driven to bring such change about.
transformations. Governments thus have a
particularly important role in reducing uncer- While the failure of markets to bring about simulta-
tainties and related investment risks. They can neous large-scale investments in complementary
do so by drafting roadmaps to augment inves- fields is one of the key reasons for adopting indus-
tors’ confidence in long-term policy targets. The trial policy in general, such coordination failure is
EU’s energy targets and its reduction targets particularly problematic when change is system-
for automotive fleet emissions are cases in wide and transformative, as it is the case in the
point. Governments can also provide guaran- greening of economies. As economic subsystems
tees. Renewable energy laws in many countries tend to be interlocked, transformative change in
combine guaranteed purchases from independ- one subsystem tends to have repercussions on
ent power producers with guaranteed minimum others. When energy systems shift from fossil to
prices, known as feed-in tariffs. Also, they can renewable biofuel, it has unintended consequences
anchor certain long-term targets in international on land and food prices; if dams are built to create
treaties. All these measures help to lock polices hydropower, it affects water supply for agriculture;
in, shielding them from political cycles and if agriculture shifts to organic, markets change for
increasing investment security. producers of fertilisers and agrochemicals.
On the other hand, given technological uncer- Hence, new policy interfaces become relevant to
tainties, policy frameworks also need a certain understand the interdependencies and optimise
degree of flexibility to respond to changing the outcomes for all sectors of a society, especially
circumstances, such as new environmental risk civil society. Political decision-makers need to take
assessments, emerging technological options or various stakeholder interests into account when
changing prices. The challenge is thus to find a designing policies. This, again, is not a unique
good balance between providing ‘directionality’ feature of green industrial policy, but it is a particu-
and encouraging entrepreneurial experimentation larly relevant element of it, because stakeholders
(Mazzucato 2013). lobbying for the preservation of jobs provided by
polluting industries are often better organized
than environmental groups or social activists, for
4.5. ADDITIONAL POLICY INTERFACES AND
instance. The political feasibility of green economic
NEED FOR POLICY COORDINATION
reform therefore often depends on compromises
Often the green transformation goes far beyond among these interests, even though some compro-
the replacement of individual technologies. What mises may reduce the policies’ effectiveness in
is pursued is a transformative change of entire terms of environmental performance. Hence poli-
production systems, such as the energy system or cies need to be co-designed by participants with
the transport system. This requires simultaneous strictly environmental interests and those help-
changes on several fronts including the develop- ing to maximise social welfare, as well as those
ment of various interdependent technologies and supporting economic or industrial interests.
business models and the related adjustments of
regulations and support systems. Such systemic 4.6. THE MOTIVATION TO PROTECT NOT
change is unlikely to proceed smoothly without a ONLY NATIONAL INTERESTS BUT ALSO
proactively coordinating public agency. For exam- GLOBAL COMMONS
ple, no company would dare to invest in offshore
wind parks unless other investors ensure the The agenda of green industrial policy is partly
synchronized establishment of a grid that allows driven by international agreements, such as
to bring electricity to the shore and further on to the Paris Agreement, where governments have
the main centers of demand. That, in turn, requires committed to decarbonise their economies; the
complex plan approval procedures involving Montreal Protocol on the protection of the ozone
affected communities as well as regulatory provi- layer; and other treaties concerning fisheries
sions for electricity transmission through vari- management, marine and air pollution control,
ous systems. Likewise, carmakers are unlikely to proper management of hazardous materials or
shift from fuel-driven to electric cars unless other genetic diversity of crops. All these agreements
Green Industrial Policy - Concept, Policies, Country Experiences
have a differential effect on industries: restrict- market leaders and creating thousands of manu-
16 ing the expansion of resource-using industries facturing jobs. But after a few years, Chinese low
and/or forcing them to use product substitutes cost competitors started to crowd out the German
or to develop different technologies and busi- industry, and many German solar panel manu-
ness models, for example. They all serve to solve facturers went bankrupt (Lütkenhorst and Pegels
collective action problems at an international, 2014). This led observers to criticise German solar
often global, scale. policy as one that created a market but failed
to build an industry (Paris Tech Review 2012).
This is another important difference vis-à-vis From a global perspective, however, Germany’s
traditional industrial policy. Normally, govern- support for the industry enabled the first large-
ments will try to implement the required policies scale photovoltaic module production that in turn
in such a way that they enhance the productiv- brought unit prices down–by 80 per cent in the
ity, competitiveness and employment potential of period 2009–2015 (IRENA 2016). The supply trig-
its domestic industries. Thus “…the benefits vest gered worldwide deployment of this green tech-
almost exclusively in the implementing country, nology. In terms of national industry, China was
and the costs are borne by foreign producers–a the main beneficiary (Pegels 2017, this volume).
traditional mercantilist outcome” (Cosbey 2017,
this volume). When it comes to green industrial More recently, a similar story is happening with
policy, there are likely to be positive externalities electric vehicles, where China is the pioneer that
for the global environment and for other coun- accelerates the global diffusion of greener tech-
tries. As pioneering countries develop solutions nologies. Here, the government heavily subsidises
for environmental pressures, their industries the shift from internal combustion to electric
will allow other countries to solve their domestic engines, thereby making China the lead market
problems at a lower cost (Fankhauser et al. 2012). where new models are developed, tested and
These spillover effects have important implica- rolled out in mass production (Altenburg et al.
tions for the way we judge public subsidies. While 2017, this volume). Given that China is the world’s
in normal conditions, industrial policy should not largest automobile market and served largely by
enter into a competition on the basis of subsi- multinational carmakers, China’s industrial policy
dies; a ‘subsidy race’ among nation states can be is accelerating the cost degression of electric cars
a good thing as it accelerates the development and batteries to the benefit of the rest of the world.
and global dissemination of green technologies
(Rodrik 2014:471). Currently, such positive spillovers from national
policies to global green technology diffusion have
Hence, policymakers need to ponder the effects mainly happened unintentionally. To accelerate
on domestic industry and global commons. the worldwide diffusion of technological solutions
Ideally, green industrial policy improves both in for managing global commons, more international
tandem, but outcomes differ in practice. Germa- technology cooperation is needed. This requires
ny’s solar policy was temporarily seen as a expansion of mechanisms that fund international
successful industrial policy in the traditional, research and development, knowledge sharing
national sense. A fairly high guaranteed feed-in and technical assistance to developing countries,
tariff contributed to the diffusion of solar panels such as the Global Environmental Facility and the
in the German market, and local companies UNFCCC’s Technology Mechanism.
reaped early mover advantages, becoming world
5. CONCLUSIONS
Governments, those of developing countries in competitiveness and more and better jobs. This
particular, are facing a dual challenge: they need chapter shed some light on the policy options.
to advance structural change towards higher
productivity while at the same time decoupling In the long term, there is no trade-off among
human well-being and economic progress from social, economic and environmental objectives:
resource consumption and emissions. This there is no human development or economic
implies the need to better integrate industrial success on an uninhabitable planet. In the short
and environmental policies–rethinking the term, however, there are trade-offs to be consid-
former from an environmental perspective and ered. For example, pricing environmental goods
exploring how the latter can contribute to greater puts an additional, but appropriate, burden on
producers who have been able to externalize
Chapter 1
Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies
these costs in the past and may jeopardize their When it comes to the urgent need to decou-
competitiveness and employment capacity. At ple human development from non-renewable 17
the same time, moving to greener economies resource consumption and pollution, market
holds many benefits even from a purely economic signals alone are even less effective. First, envi-
perspective, as greater resource efficiency lowers ronmental costs are not sufficiently reflected
costs, early movers may develop new markets, in market prices, and second, the green trans-
asset-stranding is avoided and new job opportu- formation requires system-wide changes–such
nities open. as radical redesign of the predominant energy
systems–that cannot take place without well-co-
Governments need to understand the oppor- ordinated interventions to deal with multiple
tunities and pitfalls to minimise the costs and coordination failures. As a consequence, green
maximise the gains, striking a fine balance industrial policy is in many aspects similar to
between environmental objectives and competi- traditional industrial policy, but it has to come to
tiveness, industrial development and job agendas. grips with additional layers of complexity: The
It should be noted that this is a classic political need to avoid negative environmental externali-
transformation project rather than a techno- ties requires specific policy instruments, such as
cratic exercise. First, because finding the right cap-and-trade systems and environmental taxes.
balance of competing objectives and decid- The urgency to phase out polluting technologies
ing among various alternative techno-institu- and replace them with green substitutes within
tional pathways implies value judgments; and short time frames calls for more comprehensive
second, because transformations always create and aggressive research and development and
winners and losers. Governments need to create technology diffusion programmes. The neces-
consensus on the direction of change and facil- sary restructuring of entire economic sub-sys-
itate compromises among stakeholders. This in tems presupposes long-term strategies spanning
turn presupposes a thorough understanding of several decades that offer clearly defined interim
interest groups and their power resources. When targets and, where necessary, credible long-
some elements of the transformation encounter term subsidy schemes and financial guarantees.
strong resistance from interest groups, govern- Furthermore, particularly comprehensive policy
ments need to identify less contested no-regret coordination and consensus-building mecha-
options, such as resource efficiency programmes nisms are needed to manage radical systemic
with quick economic returns or pollution control changes at the interface of industrial and envi-
programmes with benefits for large parts of the ronmental policies. Thus as a rule, green indus-
society, to propel the transformation forward. trial policy is more ambitious than most industrial
Fortunately, there are already strong forces driv- policies of the past. This increases the risks of
ing the green transformation, such as the decreas- misallocation and political capture. We argue,
ing price of renewable energy generation, an however, that the long-term costs of not taking,
increasing number of environmentally conscious or of delaying, action are much larger than the
citizens ready to wield their voices and their risks of losing part of the industrial policy funds
buying power, lead firms in global value chains to non-performing programmes and that there
pushing for greener supplies, international trea- are proven policy design principles that greatly
ties demanding greener standards and institu- reduce the risks of ineffectiveness and capture.
tional investors pulling out of carbon assets.
Countries are likely to reap multiple benefits when
Accelerating structural change always requires they take a proactive stance and accelerate their
a proactive public sector. The case for industrial green transformation in a way that combines
policies is theoretically very strong and backed by social, economic and environmental objectives
evidence. Public policies have a role in supporting and when they design their policies according to
research and development, subsidizing entrepre- the three basic principles of effective industrial
neurial cost discovery, coordinating complemen- policymaking. Well-designed green industrial
tary investments that need to be undertaken policies are crucial not only for bringing economic
simultaneously and facilitating information development back into the safe operating space
sharing and technological learning. In these for humanity; they can also serve as an invest-
areas, social benefits tend to be much higher than ment programme for long-term productivity gains.
returns to private investors, so that markets alone
cannot provide socially optimal solutions.
Green Industrial Policy - Concept, Policies, Country Experiences
18
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