According to James Joyce, “mistakes are the portals of discovery”. Yet some mistakes are simply too big to be made. We may all find ourselves today in a ‘Climate Casino’, as William Nordhaus titles his latest fascinating book - but surely, this is not an invitation to gamble away our future. So, with temperatures, sea levels, ocean acidification, weather extremes and resource scarcities all on the rise, what can be done to bring economic development in line with planetary boundaries?
Essentially, this is a question about policies and politics. Let us assume – as I should like to believe – that the rationale of industrial policy as such has meanwhile been accepted among enlightened economists and policy-makers. Its concrete manifestations and instruments may differ but the fact that elected governments have a role to play in providing a long-term vision for societies, in directing structural change and diversification of economies, in reconciling productivity gains with a basic notion of fairness or distributional justice, can hardly be questioned. It would help to leave the stale debates around ‘the state vs. the market’ behind and acknowledge that governments have to be change managers in the best sense of the term, i.e. set goals, take risks, drive innovation and stimulate creativity. Recently, this has been summed up beautifully by Mariana Mazzucato in her adcocacy of what she calls the ‘entrepreneurial state’.
Now enter climate change – and the job of what then becomes green industrial policy is certainly not getting any easier. At the German Development Institute, we have asked ourselves what the additional complications really are. In a Discussion Paper 'Green industrial policy: managing transformation under uncertainty' which was just issued, we focus on four dimensions: the pervasiveness of market failures (which, when dealing with environmental issues, become the norm rather than the exception); the need to consider long time horizons and implement policies under high uncertainty; the formidable task to define new low-carbon development pathways; and the often underestimated challenge to disrupt old pathways, i.e. actively phase out brown, unsustainable technologies.
Of course, this is all more easily said than done. In the transition phase to a sustainable decarbonized future, the composition of policy rents is changing (e.g. from coal subsidies to feed-in tariffs for renewables), resistance from vested interests is strong and traditional jobs are at stake. Against this backdrop, the delicate job of green industrial policy is to manage complex trade-offs, balance the interests of different stakeholders, define incentive levels that stimulate innovation without creating inordinately high policy rents and at the same time, build on competitive market mechanisms wherever possible. And, not to be forgotten, all of this in the context of a limited global ‘carbon budget’ (implying that a lot of existing carbon has to remain unburned!) coupled with national freeriding behavior and with intricate ethical issues of inter-generational and inter-country justice.
This leads me to the basic point to be driven home. We will not get very far if we approach green industrial policy merely from a technical perspective, if we frame it in terms of just correcting a couple of market failures. Fundamentally, the questions to be asked are about societal norms and goals, how to reach consensus among various groups of stakeholders, how to build supportive change coalitions and how to stay the adopted course in the long run. These are fundamental questions of ‘political economy’ and not technicalities of economic models, questions pointing to the limitations of markets and the primacy of societal objectives.
The triple challenge of promoting economic growth, avoiding environmental disasters and keeping inequality and poverty levels in check – in other words: making development sustainable – calls for more than just improving allocative efficiency through internalizing environmental costs. No doubt, the latter is necessary yet, in and by itself, it will not suffice. This is both the predicament and the potential of green industrial policy: to rise to the genuinely political challenge of shaping a sustainable future.