Western society has traditionally been characterised as a market economy, a system in which the market is meant to correct itself. It stands for liberalisation, not regulation. Yet the market is not an end in itself, but rather an instrument. As such, it should subordinate itself to societal goals such as fairness and prosperity for all. In light of climate change and environmental damage, environmental protection has become a part of our societal norms.
And yet this is precisely where the market fails in its current form. Since environmental costs are not usually included in the market, they do not appear in company balance sheets. The conventional market does not work according to the 'polluter pays' principle, and whether a particular company makes an effort to nurture a green image or not, the incentive to abide by new environmental standards is simply too low.
Thus, it is down to policy, and specifically industrial policy, to ensure that the market serves societal goals again. Green industrial policy is not just a minor amendment to traditional industrial policy – it goes far beyond. It is expanding its list of objectives, from economic success alone to creating an economically successful as well as ecologically sustainable society.
Why is it so difficult to transform the market?
We have been well aware of the ecological challenges for several electoral terms now, and environmental consciousness is rising. So why is the transformation so difficult?
- Because the market fails in so many ways.
There is a whole range of costs that are still not yet part of the market. Policy needs to change this situation, e.g. through the introduction of emissions trading schemes with sufficiently tight caps. At the same time, there is a great deal of insecurity regarding exactly how the market can and should change. Individual companies struggle to decide if they should invest in one technology or another, because they do not know what tomorrow's markets will look like. Policy can help here by shaping the direction to take. And ultimately the focus is on public goods: climate, air, biodiversity and so forth. Policy plays a key role in ensuring that all of us take responsibility.
- Because great uncertainty meets time pressure.
Policy operates in uncertain terrain. It needs to cater for societal demands of today and reach the correct conclusions for tomorrow – without knowing what tomorrow will even look like. Policy therefore has to cover an extremely broad period of time. At the same time, time pressure is high. We know that we have to lay the groundwork now if we are to stay within safe environmental operating space.
- Because new paths have to be explored.
The current path is familiar and has been tested, but we now need to actively explore the unknown. Green industrial policies must create new industries and new patterns of demand. Take renewable energies: German policy stipulated that producers of electricity from renewable sources will receive guaranteed compensation for 20 years. Left to the market alone, the renewable energy revolution – with its rapidly decreasing costs and global investments in the billions – would never have occurred. At the same time, we cannot simply start over from scratch. We are heavily invested in conventional sources of energy, and we must take active steps to phasing them out.
The transformation is also about power
And this is why we are facing a critical political challenge. Market transformation implies highly potent interests; the energy sector in particular is central to any economy. Green industrial policy is about shifting profit opportunities, risking that companies seek to influence policy rather than looking towards the customer. Experience shows that policy is not always able to resist. But we can do something to limit this risk:
- Transformational policy requires broad support and a mandate for the direction to take. In other words, we need a social contract for sustainability. Civil society must hold policy responsible for its part of the contract.
- A strategic coalition of key stakeholders is required. This includes new stakeholders, such as renewable energy businesses. But support can come from unexpected places, too, for instance when energy-intensive companies realise that renewables can quickly ease supply constraints.
- Policy must invest in systematic learning. Green industrial policy evolution means testing and adjusting policies, and learning from experiences of other countries. It also means that mistakes are allowed – so long as we learn from them.
- The market should remain the key instrument for policy. Once the direction and rules are clear, it must be fully used as an efficient tool.
This blog was originally published in German at Kreutz & Partner.