Green Industrial Policy and the World Trading System, a brief paper from the International Institute for Sustainable Development (IISD), shares lessons for policy makers in the context of supporting green industries, as well as adjustments to trade rules and green industrial policies that address climate change and provide public goods.
The author of the paper, Aaron Cosbey, posits that industrial policies and special trade rules that support emerging green sectors, including those that provide global goods such as mitigating climate change or fostering development in least-developed countries, may be warranted.
However, Cosbey also cautions policy makers that:
- Industrial policy must be designed with care. The tools must address a specific market failure that can be implemented in existing reality,
- Industrial policy requires technical and sector-specific knowledge, and it is subject to intense pressure from prospective beneficiaries, and
- Subsidies may be an appropriate tool, but rules that ensure sensible use and avoiding their misuse will be required.
Some lessons the author shares that I found most interesting include:
- Entities are not fully compensated for investments or innovations that provide societal benefits such as the fiscal impact of mitigating climate change. Governments can incentivize investments by providing subsidies for investments in efforts such as research and development or worker training. Governments can also facilitate financing with loan guarantees and direct financial support, or create subsidies, feed-in tariffs or purchase mandates (e.g. renewable energy, biofuels).
- Established businesses or industries may have a more competitive position, especially those that have reached a scale that provides optimal efficiencies. Governments can help new companies or industries enter a market at a more competitive position and support their growth to a more competitive size.
- Investors can be risk averse. As a result, they often invest in incremental change to an existing technology over one that is not yet developed. Governments could help lower the cost of investing in new technologies – and minimize risks.
- As seen with electric cars and their need to have a network of charging stations, some innovations may require a supporting infrastructure that the government should support.
- Existing subsidies that create more competition to new green technologies or innovations should be removed if possible. If counter subsidies are required, unintended effects should be avoided.
Cosbey also cautions that trade barriers or protections tend to be the least desirable instruments. While subsidies can be appropriate, they can also be difficult to phase out or eliminate because vested interests can put enormous pressure to keep them in place in perpetuity.
The author agrees with Harrison and Rodriguez-Clare’s conclusion in a 2010 paper that so-called “soft” industrial policies that provide broad improvements to the investment climate are more effective than “hard” industrial policies that target specific sectors and activities.
Examples of “soft” policies include:
- Creating special economic zones with lower infrastructure costs
- Investing in transportation-related infrastructure designed to increase trade
- Providing credit and insurance specifically for exporters, and
- Promoting export clusters (without sectoral discrimination).
- Protective import tariffs on final goods
- Lower tariffs on specific inputs
- Subsidies to specific sectors: outright grants, land grants, low-interest loans, R&D support, tax holidays, etc., and
- Domestic-content requirements.
 Harrison, AE and Andres Rodriguez-Clare (2010), Trade, Foreign Investment, and Industrial Policy, Handbook of Development Economics.