Environment sustainability and Green Industrial Policy

Rajbir Saha

(rajbirsaha1995@gmail.com)

Climate change and environmental sustainability have taken an increasingly important space in academic and policy debates. However, whether most countries can reduce their CO2 emissions while simultaneously ensuring growth and poverty reduction remains a challenging question. In particular, the extent to which developing countries will bene?t from energy transition has been seriously overlooked. This research aims to answer some of these pressing concerns by investigating the interplay between green consumption and green production, and addressing the role of industrial policy in maximizing the developmental spillovers from energy transitions, thereby bringing a productionist developmental approach into climate change and sustainable development agenda. While the general discourse has focused on the urgency to shift consumption towards "greener" products and cleaner energy sources, we observe that surprisingly scant attention has been given to what shifting to greener consumption would entail in terms of the transformation of productive structures. The challenge of climate change mitigation goes beyond "consuming less", as it also involves producing di?erently to sustain low-carbon consumption patterns. Green industrial policy is of central importance in that perspective. In an attempt to build on the scholarly work that recognizes the importance of green industrial policy in the context of climate change. The climate agreement reached the Paris COP21 called for an acceleration of the transition towards a more sustainable and greener growth model. However, how to achieve a green growth model? Green growth can be de?ned as "economic growth that is e?cient in its use of natural resources, clean in that it minimizes pollution and environmental impacts and is resilient. The notion of green growth is based on the underlying view that growth and environmental sustainability do not need to be dissociated from one another and can be compatible, and that conventional growth is unlikely to be sustainable in the long run. The notion of green growth is rooted in a broader and growing literature that attempts to bridge the environmental urgency with economic and industrial development. More recently, other authors found a positive effect of the national energy e?ciency programme on total factor productivity. Most argue that environmental policies and industrial policies may not be rivals, but provide suggestive evidence that environmental market policies may trigger the development of local industrial capabilities. Renewable energies have gained particular attention in the green growth discussion not only due to their positive impact on the environment but also due to their economic impact, especially in terms of the potential for technological innovation in those sectors and their contribution to jobs creation. Several studies con?rm that regions with green specialization have already achieved a critical mass of high value, knowledge-intensive activities in green industries. The International Renewable Energy Agency (IRENA 2019) shows that 11 million people were employed across the renewable sector in 2018, with solar photovoltaic ranking as the largest employer amongst renewable energies. However, it is worth highlighting the heterogeneous geographical distribution of such jobs. IRENA (2016) has raised awareness on the uneven consequences of renewable energy deployment globally by showing that doubling the share of renewable energy by 2030 would mostly lead to increased employment in a handful of countries that already dominate the sector. A more optimistic view by a researcher suggests that building a clean energy economy will be a positive source of net job creation in all regions. With a series of studies using input-output statistical tables both in developed and developing economies, the author concludes that this is true even considering the job losses generated by polluting industry retrenchments. Recent scholarly work has argued that green industrial policy is central to driving the structural transformation towards a more sustainable and greener economic system. However, while the term "green industrial policy' has gained popularity in recent years, it has been interpreted in various ways. To contribute to this rapidly growing body of literature, we have identi?ed three dimensions of green industrial policies (GIPs), which are classi?ed according to their policy objectives and challenges for climate change mitigation. These three dimensions are

1) The consumption-centred dimension, which focuses on shifting consumer behaviour.

2) The ?rm-level sustainability dimension, which focuses on incentivizing ?rm improve resource e?ciency in their production processes

3) The productionist and innovation-centred dimension, which aims to shift the productive structure of an economy through low-carbon innovation.

Before further delving into di?erent components of our green industrial policy matrix, it is worth explaining the relevance of our matrix for categorizing existing policy instruments. Against the backdrop of a cacophony of one-size-its-all climate change mitigation measures, our matrix can help disentangle and go beyond the emphasis of single instruments that have dominated the debate. Broadly speaking, climate mitigation measures can take the form of government regulations or market-based mechanisms. Market-based mechanisms (such as carbon taxes, carbon permits and tradable rights, feed-in tari?s) are the standard neoclassical economics response to climate change, which explains why it has gained increasing popularity amongst economists in recent decades. According to the Nobel laureate William Nordhaus, "raising the price of carbon is a necessary and su?cient step for tackling global warming. The rest is largely ?u?". Market-based mechanisms aim to increase the cost of products that rely on carbon-intensive production processes by manipulating prices and, according to their advocates, these mechanisms should create the space for entrepreneurs to develop lower-carbon alternatives For instance, carbon credits provide an incentive to cut emissions because frms can sell the remaining permits that they do not use. It is very di?cult to assess the impact of instruments such as carbon taxes and GHG-trading systems both due to lack of data and to the fact that emissions are afected by other multiple exogenous factors; nonetheless, there is a general agreement that they were at least able to afect business as usual emissions (Haites 2018). Two important market-based measures have become popular as environmental demand-pull policies (Noailly and Smeets 2012): feed-in tari?s (FIT) and renewable energy certi?cates (RECs). The former are subsidies that allow renewable energy producers to sell at a guaranteed price per KWh generated over a given period (Couture and Gagnon 2010). The latter are legal instruments proving that electricity comes from a green energy source. Their impact depends on di?erent factors, including the type and maturity level of the technologies they use. For instance, in Germany, through the Renewable Energy Source Act (2000), the government sets up FITs and RECs that incentivized the consumption and production of solar energy, which expanded the market scale of solar energy and consequently increased the pro?tability of the technology. However, such solutions have also received a lot of criticisms over the years. Moreover, carbon tax rates have been too low, do not internalize all externalities, and therefore do not correspond to the social cost of carbon, of which estimation may vary considerably. Our main contribution is, therefore, to shed light on three main dimensions that can help compartmentalize the wide array of "green" policy instruments, their objectives, time horizon, strengths, and limitations. This further shows that both market-based mechanisms and regulations cut across these three di?erent dimensions, as they can be used to achieve different policy goals, but that they need to be accompanied by broader and complementary policies to ensure their sustainability.