International governments are adopting more interventionist economic policies, particularly concerning the energy transition and associated clean technologies. Since the early 2000s, industrial policy has been a key feature of the drive for decarbonisation, but recently the priorities have shifted. While earlier efforts were concerned with reducing greenhouse gas emissions, a newfound enthusiasm focuses on reducing dependence on global value chains, which are increasingly perceived as threatening. Growing acceptance of the inevitability of energy transition also sees countries keen to gain domestic market share of rapidly growing green industries.

With the Inflation Reduction Act, the US has placed industrial policy as the centrepiece of its efforts to reach 2030 climate targets. More than $300b of public money is being made available for often quite specific sectoral interventions. The EU has published its own Net-Zero Industry Act, setting targets for domestic manufacturing to meet 40% of domestic demand for a range of clean technologies. India is using subsidies to boost domestic manufacturing of specific clean technologies, while China has been prioritising the domestic production of certain strategic goods for the past two decades under the framework of its five-year plans.

We can consider three contemporary goals of such green industrial policy. The first is reducing greenhouse gas emissions. Early-stage research and development are typically underfunded by the private sector and governments play a fundamental role. In the early 2000s, government subsidies (particularly German) for the deployment of solar PV kickstarted rapid growth and enabled huge cost reductions. The collapse in the price of renewables led to mass global deployment and was a key factor in facilitating the 2015 international Paris climate agreement.

A second goal of green industrial policy is stimulating economic growth and creating jobs. While economists debate the potential for industrial policy to create growth—it depends on the ability of governments to allocate resources better than markets—politicians are vocal proponents. The president of the European Commission, Ursula von der Leyen, has described the European Green Deal as “our new growth strategy”, while officials in President Biden’s administration frequently cite the creation of well-paying jobs as rationale for the Inflation Reduction Act.

The pandemic starkly illustrated tensions associated with dependence on foreign suppliers for medical goods, which were urgently required in vast quantities

When governments intervene in an economy with the idea of stimulating growth, they would typically focus on highly competitive domestic sectors. This gives the greatest chance of support being transformed into export revenues. However, an ongoing trend is to support industries with a relative absence of domestic players, a prime example being Indian and US support for scaling domestic solar manufacturing bases, currently dominated by China. The aim is to break import dependencies—the third goal of contemporary green industrial policy.

Growing policy concern about exposure to global value chains has been driven by the Covid-19 pandemic and recent energy crisis. The pandemic starkly illustrated tensions associated with dependence on foreign suppliers for medical goods, which were urgently required in vast quantities. During the energy crisis, the role of Russia as the EU’s primary natural gas provider created huge challenges when exports were dramatically cut. The consequence is an increased policy discussion about reducing dependence on foreign countries for strategic goods.

While this position is understandable and indeed desirable to a degree, it is vital that governments do not take it too far. Any moves toward protectionism, trade wars and slowing of the global exchange of clean technologies will increase costs of decarbonisation. It is not efficient for all developed countries to produce each and every necessary clean technology. A more nuanced approach should retain a primary focus on reducing greenhouse gas emissions.

Domestic manufacturing is not the only tool for addressing excessive import dependences. Most developed countries are dependent on fossil fuel imports, a risk far more serious to economic health than clean technology products. Two approaches to mitigate this risk have been importing from a diversified group of suppliers and stockpiling. Governments might consider maximum import shares from any one country for key goods such as solar panels and batteries. At the same time, they might stockpile key goods and inputs along the value chain such as forms of polysilicon, lithium or final products such as solar panels.

Sectors should be evaluated on a case-by-case basis for the threat of trade disruptions. Key metrics include substitutability and the lead time for new manufacturing facilities to be built. While the EU response to the cut-off of Russian natural gas led to limited economic pain, it also highlighted the ability of modern economies to rapidly adjust to supply shocks.

Green industrial policy has a pivotal role to play in achieving decarbonisation. It can broadly be considered to target three policy goals: the reduction of greenhouse gas emissions, domestic economic growth and reducing strategic import dependencies. In many cases, these goals will be complementary. In cases where policy design involves a trade-off, governments must be sure to keep the reduction of greenhouse gas emissions as the primary purpose.

Ben McWilliams is an affiliate fellow at Bruegel.

This article was published as part of PE Outlook 2024, which is available for subscribers here. Non-subscribers can purchase a copy of the digital edition here.

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Author: Ben McWilliams