The Right Green Industrial Policies

Although ending the mispricing of carbon would be the best way to address climate change, most governments prefer to rely on subsidies and regulations that increase the profitability of investments in renewable energy. Better that than taxing foreign green industries or restricting their market access.

MÁLAGA, SPAIN – The future of our planet depends on the world economy’s rapid transition to “green growth” – modes of production based on clean technologies that significantly reduce emissions of carbon dioxide and other greenhouse gases. Yet carbon remains badly mispriced, owing to fossil-fuel subsidies and the absence of tax revenues needed to address the global externalities of climate change.

In this context, subsidies that promote the development of green technologies – wind, solar, bio-energy, geothermal, hydrogen, and fuel-cell technologies, among others – are doubly important. First, they nudge pioneers to invest in uncertain, risky ventures, with the resulting research-and-development efforts generating highly valuable social benefits. Second, they counter the effects of carbon mispricing on the direction of technological change.

These two considerations provide mutually reinforcing reasons for governments to nurture and support green technologies. Such support has, in fact, become extensive, both in advanced and emerging economies. Look around these economies and you will find a bewildering array of government initiatives designed to encourage renewable-energy use and stimulate green-technology investment.

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