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Steering towards a low-carbon economic future

by David Nash
New Era Economics Thinking Post - 21 February 2011

Since the onset of the global banking crisis and the ensuing recession, politicians on both sides of the Atlantic have scurried desperately to save faltering manufacturing firms and inject billions of dollars into strategic sectors of the economy. Many have opted to stimulate new growth industries, chosen for their promise to enhance competitiveness and, in a number of countries, diversify output away from property and financial services.

Elsewhere, arguably not enough is being done. In the UK, disappointing GDP statistics are casting serious doubt on the Coalition’s ruthless pursuit of fiscal consolidation and strengthening calls for George Osborne and Vince Cable to set out a clear strategy for growth, investment and jobs.

Government intervention in the economy may then be back in vogue, but what can the lessons of industrial policy tell us about the role of government in responding to what Lord Nicholas Stern famously referred to as ‘the greatest market failure the world has seen’: climate change?

At the heart of the climate change challenge is the need for countries to decouple carbon dioxide emissions from economic growth and shift global markets and technological systems away from high-carbon to low and zero-carbon forms of production and consumption. Here I briefly discuss three ‘lessons’ that industrial policy teaches policymakers attempting this shift.   

Lesson one: The first is that to decarbonise growth governments will need to intervene in the economy by promoting new low-carbon sectors and climate-friendly industries – but on its own this is unlikely to be enough. In many countries, policymakers have introduced fiscal incentives for clean technology start-ups, are increasing public funding for research, development and demonstration (RD&D) in renewables, and upgrading infrastructure to support low-carbon manufacturing, energy transmission and distribution, and transport. All are classic instruments of industrial policy in the conventional sense and all have an important role to play.
 
Yet, to address fully the scale of the climate challenge, governments will need to cast their net wider and take action across all sectors of the economy, which will affect all industries and businesses, including and especially carbon-intensive firms. Low-carbon objectives will now have to be integrated into – rather than thought of as a footnote or a separate endeavour entirely to – wider economic objectives, including sustained GDP growth with high levels of employment, poverty alleviation (particularly in the case of developing countries) and export promotion. Forthcoming research by the Global Climate Network – the alliance of progressive think-tanks working on climate change issues which ippr founded – will explore what such ‘low-carbon industrial strategies’ might look like in practice in several major economies including the United States, China and India.

With this in mind, a low-carbon industrial strategy should not only be about helping to cultivate winners, but also about working with potential losers through the transition, by encouraging them to adapt their business models, clean up supply chains and retrain staff. Despite the determination of some in the environmental movement, it is not possible to simply wish away whole industries. Rather, governments need to bring conventional industry on board with, or at least ensure they are not obstructing, their industrial strategy – which necessarily must now be a low-carbon strategy – if it is going to succeed. The influence of big oil and coal over the demise of federal legislation to limit emissions in the United States last year would appear to support this assumption.

In countries where carbon-intensive firms make up a large proportion of national GDP, it is even more important that climate policy takes their transformation or managed decline into account. Jobs will inevitably be at risk, and this will run counter to the core objectives of most governments – if support for reducing emissions for climate reasons is shallow, then job losses in the name of a low-carbon transition will undermine the strategy. It will be up to government, working with the private sector, to support and re-skill these workers and, where necessary, prioritise worker re-deployment to new growth professions. 

Lesson two: The second lesson, which builds on the first, is that a full toolbox of policy measures – ‘industrial’ and others – will be needed in order to make the transition to a low-carbon economy happen.

Among the tools necessary, government investment in clean technology RD&D will be decisive in driving forward innovation and, in turn, bringing down the cost of deployment and increasing market competitiveness. It is often remarked that the private sector is reluctant to shoulder the risk of investing in unproven concepts because it considers the benefits of RD&D to the wider economy (jobs, knowledge acquisition by competitors) to outweigh the private returns to the original investor. There is little reason to believe this will change and so targeted government support at each stage in the innovation cycle – from initial research to commercialisation – will be critical. 

But carbon pricing is also likely to be important as a means to encourage both innovation and efficiency in high-carbon firms, to trigger changes in consumer behaviour, and generate new revenue, potentially for other climate measures. There is an argument to be made about whether putting a price on carbon would not be more effective if it were to happen once sufficient efforts have been made to crowd-in viable alternative low-carbon technologies, and then ratcheted up during the transition to lock out high carbon. Yet, sequencing aside, as Harvard environmental economist Robert N Stavins has argued, government support for clean technology RD&D and carbon pricing should be seen as complements, not substitutes.

This leads us, finally, to lesson three: Just as it would be mistaken to champion any single policy instrument as a silver bullet, it is also wrong to assume the existence of a ‘one size fits all countries’ solution. Indeed, the climate policy toolbox needs to be country-specific, grounded in domestic economic, social and political realities. What is more, any attempt to track and quantify progress at the international level through the United Nations Framework Convention on Climate Change – a prickly issue that came up again during the latest round of talks in Cancun – must be led by governments from the bottom-up. Top-down pressure on countries to measure their emissions may, as Navroz Dubash argues, turn out be counterproductive and encourage gaming – such as the inflation of emissions baselines – and creative accounting.

International cooperation will of course be critical. Despite the burgeoning narrative on how countries risk forfeiting competitiveness if they do not embrace the low-carbon technological race, not every country can be good at everything – for instance, Britain is simply not going to acquire the same number of solar panel manufacturing jobs as, say, India. Therefore, governments should be realistic when choosing where to place the emphasis – especially when their objective is export market breakthrough or expansion – and be ready to collaborate: for instance, by establishing regional innovation hubs, embarking on joint technology ventures, striking collaborative intellectual property agreements and harmonising energy efficiency and product-labelling standards.

If countries are on truly on board with this cooperation agenda – recent developments in the G20, the Major Economies Forum on Energy and Climate (MEF) and the Clean Energy Ministerial process are certainly positive – then there is reason to be optimistic. The challenge however will be to accelerate this collaborative process, particularly in areas where cooperation on low-carbon development can help countries achieve their overarching national economic objectives – whether that is economic diversification, job creation or energy access for the poor.

Going forward, this must be the focus for renewing international efforts on climate change.

 

David Nash is a Research Fellow at the Institute for Public Policy Research (IPPR)