Green Industrial Policy: A Climate Necessity

Industrial policy – government support of the manufacturing sector – has long been lampooned as the archetype of failed state intervention. Yet it has seen resurgence as of late, resurrected as a potential strategy for  “green growth.”(1)

The idea of promoting specific industrial aims through government strategy is subject to frequent ridicule. In supporting entrepreneurial activity, policymakers must navigate the dramatic tension between promoting certain initiatives theoretically tied to the public good without permitting capture by special interest. Decoding how particular industrial sectors or urban areas become particularly innovative – biomedicine in Cambridge, MA, or technology in Silicon Valley, CA – has proved a monumental task for economists.

Until recently, it appeared, scholars had arrived at a singular verdict. Industrial policy rarely succeeds, and if it is to have a chance of generating genuine growth, careful design and implementation are paramount.(2) The government, the conventional wisdom holds, should not be in the business of picking winners and losers. The problem, according to industrial policy’s more nuanced critics, is that the government best serves as a catalyst for early-stage projects, but often overstays its welcome. (3)

The complete absence of government involvement in the cultivation of industry and entrepreneurialism is the preserve of only arch-libertarian utopias. The true question is less a matter of “Do governments directly contribute to technological innovation?” and more a question of “How do the governments sponsor innovation, and how much credit should they get for fostering novel ideas?”

Recent scholarship has challenged the prevailing sentiment that the American government has had little impact on the seminal entrepreneurial developments of the past half-century. In her provocatively titled book The Entrepreneurial State: Debunking Public vs. Private Sector Myths, the economist Mariana Mazzucato has gone to great lengths to show how, in the words of economic policy journalist Jeff Madrick, “less and less basic research is being done by companies today. Rather, they focus on the commercial development of the research already done by the government.”(4)  Increasingly, that research is focused on relieving our seemingly intractable reliance on fossil fuels.

Reducing carbon emissions and fostering growth are often cast as irreconcilable goals. That any serious attempt to curb fossil fuel extraction would prove economically deleterious is a mainstay of arguments against decisive action on climate change. “Green growth” provides a rhetorically convenient and theoretically sound moniker for, broadly, policy approaches that encourage low-carbon economic activity, and initiatives that directly support the development of low-carbon technologies.

Empirically, markets are more likely to promote innovation when energy prices are high.(5)  In an influential American Economic Review article published in 2012, Daron Acemoglu of MIT, Philippe Aghion of Harvard, and colleagues found environmental disaster avoidable when governments act swiftly and deliberately with policies that encourage innovation in a low-carbon direction.(6)  In developing countries, the promotion of policies that are both pro-growth and environmentally conscious is not unachievable. (7)

In a recent column, the Nobel Prize-winning economist Paul Krugman found cause for cautious optimism in market-based solutions to climate change. His faith comes from progress in renewable energy technology, leading him to tentatively declare, “It’s even possible that decarbonizing will take place without special encouragement, but we can’t and shouldn’t count on that.”(8)

This newfound hope construes technology as a potent means to avoid entrenched political debates about climate policy. If a disruptive, all-encompassing, low-carbon renewable energy were successful at scale, the collective action problems that define climate change would be significantly reduced.

Yet the global energy infrastructure is predominantly outmoded – designed, from extraction to consumption – for fossil fuels. Even with profitable renewable energy technologies, the social good derived from low-carbon energy generation may outweigh benefit to private industry.  (9)

Critiques of industrial policy range from objections to its efficacy to paranoid claims of Marxism and subversive command economies. Within economic parlance, however, the detrimental impacts of carbon constitute an externality – a market failure that requires government intervention to address. Furthermore, renewable energy represents a particularly fraught problem of coordination.

Take solar power as an example: an advanced panel requires massive public investment to scale, the ability to feed into existing grid infrastructure, friendly tax policies to encourage adoption of solar power by utilities, and – certainly in the long-term – development of energy storage mechanisms.

Even with the potential for markets to naturally move towards renewables, the likelihood that these coordination problems will be endogenously addressed is low. Democratic governments must therefore identify and correct some of these market failures.

The intensity of the climate crisis suggests that green industrial policy may serve as an exception to a general avoidance of industrial policy. Larry Karp and Megan Stevenson, two economists at the University of California, Berkeley, argue that because green industries rely so much on future government policy (subsidies for individual customers adopting renewables, for example) there is little incentive to make large investments in the present.  (10)

Technological change is rarely achieved through unilateral policies. The rich history of how innovations come to fruition demands that policymakers operate with a varied toolkit, not hidebound ideology. Objections to industrial policy, emblematized by the controversy over Solyndra and loan funds dispensed by the Department of Energy in President Obama’s first term, have collapsed into partisan boondoggles rather than well-founded policy debate.

In reality, industrial policy related to energy has long been deployed in the United States. Support for ethanol, a commodity that plays well politically, has been strong since the oil crisis of the 1970s, despite the attendant environmental impacts. Furthermore, subsidization of the conventional oil industry constitutes a kind of industrial policy, although it is rarely directly derided as such. (11)

While a market-based solution to the climate crisis that emerges from a disruptive energy technology is an alluring ideal, a crisis cannot be addressed through a fevered reliance on the potential for innovation. It has to be actively encouraged. The exigencies of environmental decline, and the perverted role of carbon in the economy – CO2 will hit 400 ppm in May – demand a direct government role in energy innovation. (12)

Danny Wilson is a History and Science Concentrator at Harvard University, and the former chair of the Environmental Action Committee.

(1)The economist Dani Rodrik introduces the term “green industrial policy” in his thorough overview, see manuscript, Dani Rodrik, “Green Industrial Policy,” paper written for the Grantham Research Institute, July 2013. Paper at http://www.sss.ias.edu/files/pdfs/Rodrik/Research/Green-growth-and-industrial-policy.pdf.
(2)A survey of (usually) negative sentiments towards industrial policy is in Ricardo Hausmann and Dani Rodrik, “Doomed to Choose: Industrial Policy as Predicament,” paper presented at the First Blue Sky Conference, Center for International Development, Harvard University, September 9, 2006. See http://www.sss.ias.edu/files/pdfs/Rodrik/Research/doomed-to-choose.pdf.
(3)Josh Lerner, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed – and What to Do about It. Princeton, NJ: Princeton University Press, 2009. Lerner takes a comparative approach, citing the disparate experiences of countries that have adopted different policies designed to promote new industries.
(4)Jeff Madrick, “Innovation: The Government Was Crucial After All.” The New York Review of Books, April 24, 2014. His review is of Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths.” London and New York: Anthem Press, 2013.
(5) See Richard G. Newell, Adam B. Jaffe, and Robert N. Stavins, “The Induced Innovation Hypothesis and Energy-saving Technological Change,” The Quarterly Journal of Economics 114, no. 3 (1999): 941-975; and David Popp, “Induced Innovation and Energy Prices,” American Economic Review 92, no. 1 (2002): 160-180. Popp in particular argues that incentives in the form of taxation and regulation play a crucial role: “My results also make clear that simply relying on technological change as a panacea for environmental problems is not enough.”
(6)Daron Acemoglu et al., “The Environment and Directed Technical Change,” American Economic Review 120, no. 1 (2012): 131-166.
(7)Alex Bowen, Sarah Cochrane, and Samuel Fankhauser, “Climate Change, Adaptation, and Economic Growth.” Climate Change
(8)Paul Krugman, “Salvation Gets Cheap.” New York Times, April 17, 2014.
(9)David Popp, “Innovation and Climate Policy,” National Bureau of Economic Research Working Paper 15673
(January 2010).
(10) Larry Karp and Megan Stevenson, “Green Industrial Policy: Trade and Theory.” Policy Research Working Paper 6238, October 2012.
(11) Ibid, 34.
(12) For the Keeling Curve, a measure of atmospheric CO2, see http://keelingcurve.ucsd.edu/.