Economists Can Be Helpful in the Era of Green Industrial Policy - Center on Global Energy Policy at Columbia University | SIPA % - Columbia | SIPA Center on Global Energy Policy

Economists Can Be Helpful in the Era of Green Industrial Policy - Center on Global Energy Policy at Columbia University | SIPA %

A recent Energy Explained article by my colleague Robert Johnston highlights the global trend toward large-scale government interventions to bolster domestic clean energy production. Jason Furman echoed what was on the minds of many economists: “Am I the only one who doesn’t care where the wind turbines are made?”

While “green industrial policy” is a hot topic among climate-focused experts,

Economists tend to be dismissive of industrial policy. In a recent article, Duke University’s Michael Munger argues that in a liberal democracy, a socially beneficial strategy of public support for domestic industries cannot be sustained, because political actors will choose to enhance their own power over the common good.

Economists’ objections to industrial policy do not necessarily come from free-market zealotry—they recognize the major problems that arise from factors like externalities and market power. Instead, the objections reflect pessimism about the ability of governments to improve on suboptimal market outcomes, except in narrow and targeted ways.

Policy makers should take these concerns seriously. After all, policies that favor domestic over foreign producers often raise costs for consumers or taxpayers. And previous attempts to support domestic industries have produced as many failures as successes, and the failures have left harmful legacies in the form of protectionist policies, like the Jones Act that requires products to be shipped between US ports on American ships.

Governments have always provided support for domestic industries, but strict opposition to industrial policies would imply that doing nothing to support domestic actors is a better course of action. Prescriptions to avoid supporting domestic businesses and communities through the energy transition are rapidly losing their policy relevance, specifically due to the considerable risks of inaction.

The global transition to clean energy is accelerating, and greenhouse gas emissions are expected to fall in the coming decades. (To be fair, the pace of the decline is highly uncertain, and emissions have not yet started falling! simulations of a decarbonizing global economy show degrading economic competitiveness of major fossil-fuel-producing countries like the US.

A corporation that expected the demand for its product to slow or decline would be reckless not to shift its strategy. Similarly, in the face of decarbonizing energy systems, it would be reckless for governments to propose pathways to net zero emissions and simply cross their fingers and hope that domestic businesses and fossil-fuel-reliant communities successfully navigate the transition.

Of course, the flip side of the waning demand for fossil fuels are unique opportunities to capitalize on emerging markets for the technologies that may dominate clean energy economies. Governments have sprung into action. A straight line can be drawn between the recent public investment plans of China, the US, the European Union,

The policy-relevant question is no longer whether to engage in industrial policy (if it ever was), but rather how to craft strategies that put domestic industries in positions to succeed in a decarbonizing economy, while minimizing substantial policy risks.

As governments increasingly intervene in decarbonizing energy systems around the world, economists can contribute to smarter and more strategic approaches.

First, industrial policies would benefit from rigorous conceptual frameworks. The Biden administration says its industrial strategy focuses on areas “where relying on private industry … will not mobilize the investment necessary to achieve our core economic and national security interests,” which is a reasonable enough criteria, but it lacks sufficient detail to be actionable for specific decisions.

Economists can help to catalogue the myriad ways markets will fail to produce a smooth energy transition and the policy measures that can overcome those market failures. Considerable attention has been paid to cross-cutting market failures, such as the damages caused by climate change and the under-provision of R&D. Less attention has been given to the unique sets of market failures that inhibit the development of virtually all important decarbonization technologies—from electric vehicles nuclear energy clean hydrogen

Evaluating the possible corrections to these market failures includes identifying policy risks, and policy makers may take these warnings more seriously when communicated as plausible policy tweaks rather than strict opposition. For example, economists typically oppose“Buy American” provisions that mandate a portion of government purchases to originate in the country due to the benefits from cross-border trade. “friendshoring” policies.

Another important way economists can contribute to industrial policy strategies is by rigorously analyzing data. Transitions to net zero are unprecedented, so little data exists from which policy playbooks can be drawn up. This will rapidly change in era of green industrial policy.

In 2019, a Nobel Prize was awarded to three economists who helped to reinvent the field of development economics to focus less on sweeping theories of poverty reduction and more on targeted interventions with data-driven experimental approaches to evaluation.

Many economists are already hard at work. And the results can be surprising. For example, Harvard’s Dani Rodrik argues that the predominant focus of industrial policies on manufacturing jobs is misplaced, and policies should target the industries that are likely to provide high-quality job opportunities in the future, including smaller and more service-oriented sectors.

Economists’ opposition to industrial policies often comes in the form of recommending a humbler role for government. To be helpful in the era of green industrial policy, economists may need to accept a humbler role for themselves, because economics alone does not provide any easy answers about how to help domestic businesses and communities successfully navigate an energy transition. Still, economists can play an important supporting role by providing policy makers with data and concepts that serve as useful inputs to industrial policy strategies.

To co-opt an old proverb, the best time for economists to work on green industrial policy was 20 years ago; the second best time is now.