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«Green industrial policy Dani Rodrik* Downloaded from at Princeton University on February 5, 2015 Abstract Green ...»

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I contend in this paper that the first of these arguments—about lack of omniscience— is largely irrelevant, while the second—about political influence—can be overcome with appropriate institutional design. Good industrial policy does not rely on government’s omniscience or ability to pick winners. Mistakes are an inevitable and necessary part of a well-designed industrial policy programme; in fact, too few mistakes are a sign of underperformance. What is needed, instead, is a set of mechanisms that recognizes errors and revises policies accordingly. This is a much less demanding requirement than that of picking winners. The chief argument of this paper is that an explicit industrial policy that is carried out self-consciously and designed with pitfalls in mind is more likely to Green industrial policy 473 overcome the typical informational and political barriers than one that is implemented, as is so often the case, surreptitiously and under the radar screen.

III. A snapshot of green industrial policies in selected countries It is generally accepted that governments have been timid in reducing GHG emissions and instituting other steps that would avert catastrophic climate change. Yet there has been Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 plenty of government activism in the area of ‘green growth’. Look around most developed and emerging market economies and you will find a bewildering array of government initiatives designed to encourage renewable energy use and stimulate green technology investment. Even though full pricing of carbon would be a far better way to address climate change, it appears most governments would rather deal with the problem through subsidies and regulations that increase the profitability of investments in renewable energy sources.

As Steer (2013) points out, the concept of ‘green growth’ has spawned the idea that policies that promote environmentally friendly technologies are actually advantageous from a national standpoint. Such policies are viewed as providing broad-based technological capabilities, a head-start, and, in new industries, competitive advantage in global markets, and well-paying jobs. In other words, green growth has become ‘sexy’. Steer (2013) notes that more than 50 developing countries have now instituted practices such as feed-in tariffs or renewable energy standards to foster green technologies—costly policies ‘that at first sight seem not to be in their country’s narrow interest’ (Steer, 2013, p. 18). Fankhauser et al. (2012) review what they call the ‘green race’ and provide an empirical analysis of the determinants of relative success across countries.

It would take too much space to cover the full range of these policies. Here I provide a quick overview of existing programmes in two advanced countries and two emergingmarket economies: the United States, Germany, China, and India. The relevant information is summarized in Tables 1–4. The tables list for each of the countries the key pieces of legislation, policy tools used, and illustrative programmes. The information has been compiled from national and international sources.

Among the countries shown, Germany and China have the most aggressive policies.

But even the others make use of a wide range of policy instruments. While some of the instruments listed do not qualify as industrial policies (e.g. cap-and-trade policies, mandated energy efficiency standards), many others clearly are (R&D grants, government procurement, subsidized loans and loan guarantees, direct subsidies).

In addition to a 40 per cent GHG reduction target, Germany has an extensive array of initiatives. These include R&D support of several billions of euros (focusing on wind energy, PV renewable energy systems, integration of renewable energies, geothermal, solar thermal power plants, and low-temperature solar thermal energy installations), long-term low-interest loans (for solar PV, biomass, wind energy, hydropower, or geothermal, and electricity or heat from other renewables), an energy and climate fund (spent on various support programmes relating to energy efficiency, renewable energy, energy storage and grid technology, energy-efficient renovation, national and international climate protection, as well as electro-mobility), a climate protection initiative (with projects in areas such as refrigeration technology and biomass research), and a 474 Dani Rodrik

Table 1: United States’ green growth policies

Important laws and policies Clean Air Act; National Energy Conservation Policy Act; Energy Policy Act of 2005 Energy Independence and Security Act of 2007; Energy Improvement and Extension Act of 2008 Food, Conservation, and Energy Act (2008 Farm Bill) Executive Orders 13423 and 13514 American Recovery and Reinvestment Act of 2009: over $80 billion to support clean energy R&D and deployment Environmental Protection Agency (EPA)’s Final Greenhouse Gas Tailoring Rule (2010) and proposed Carbon Pollution Standard for New Power Plants

Tools used

Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 Federal Production Tax Credit (PTC; about to expire) and Investment Tax Credit (ITC; or direct grants): the PTC reduces the federal income taxes of renewable energy facility owners per kWh produced, and ITC reduces federal income taxes for investments in renewable energy projects Tax credits for energy efficiency upgrades (both for commercial entities and individuals) and purchases of electric vehicles EPA standards for GHG emissions from mobile and stationary sources under the Clean Air Act (in process of being implemented but facing legal challenges) Loan guarantees and concessional lending for projects that reduce GHG emissions Grant funding for R&D in renewable energy, energy efficiency, carbon capture and storage, electric vehicle, fuel cell technologies Grants to support training of ‘green-collar’ workers Government procurement policies (e.g. purchasing energy-efficient vehicles) Renewable fuel standards, fuel efficiency standards (Corporate Average Fuel Economy, or ‘CAFE’, standards), and a ‘gas guzzler tax’ on new cars Accelerated deductions for renewable energy investments Energy efficient mortgages Qualified Energy Conservation Bonds Manufacturing Tax Credits for manufacturers of energy efficient appliances; tax credits for gas stations/fuelling centres that install alternative fuel pumps; tax credits for alternative fuels Federal appliance standards Cap-and-trade (at the state level) State-level Renewable Portfolio Standards Significant government programmes Federal Department of Energy (DOE)’s Office of Energy Efficiency and Renewable Energy programmes, including: Wind (including Wind Powering America), Solar (including SunShot Initiative), Bioenergy, Geothermal Technology, Hydrogen & Fuel Cell Technologies, Vehicle Technologies, Buildings, Energy Efficiency and Conservation Block Grant, and Weatherization and Intergovernmental programmes Renewable Fuel Standard Program DOE Section 1703 and Advanced Technology Vehicles Manufacturing Loan Programs Energy Star Federal support to states for renewable energy and energy efficiency programmes: DOE’s State Energy and EPA’s State Climate and Energy Partnership Programs Renewable portfolio standards (RPS) in a majority of states (at least 33 have RPS standards or goals in place) California cap-and-trade programme created regulations and market mechanisms to reduce the state’s GHG emissions to 1990 levels by 2020, with mandatory caps beginning for significant emissions sources Regional Greenhouse Gas Initiative (RGGI): mandatory cap-and-trade programme for fossil-fuel-fired power plants, consisting of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont.

California’s Alternative and Renewable Fuel and Vehicle Technology Program; California Solar Initiative, Go Solar California New York State Energy Plan; Western Climate Initiative Green industrial policy 475 climate technology initiative (aiming to mobilize bilateral technology cooperation with countries that have German export potential).

Chinese efforts have gone heavily into PV projects, mainly directed for the world market. This was a key source of Solyndra’s financial difficulties, discussed in the next section. Under the second phase of its Golden Sun Program, the Chinese government allocated a total of 13 billion yuan (US$2 billion) to support the domestic PV market in 2012, with 7 billion yuan ($1.1 billion) earmarked to subsidize solar PV demonstration projects. Since 2009, a parallel programme provides financial incentives of up to 20 yuan per watt. China Development Bank provides billions of dollars in concessional lending to renewable energy. In 2010 the Development Bank had credit lines worth Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 RMB 282 billion (around US$45 billion) available for the renewable energy industry.

Some Chinese provinces and municipalities are particularly active and have their own fiscal incentives to promote new plant investment in the solar industry. Beijing, for example, provides upfront subsidies for qualified demonstrative PV projects.5 In the US, many of the incentives for investment in green technology were put in place (or strengthened) with the American Recovery and Reinvestment Act of 2009. The Act contained loan guarantees, tax incentives, and other subsidies amounting to $20 billion for research and investment in green technologies. In June 2013, President Obama announced an ambitious Climate Action Plan, which included an additional $8 billion in loan guarantees for advanced fossil energy projects that reduce GHG emissions.6 India employs a range of tax incentives (tax holidays, accelerated depreciation, reduced VAT), low-interest loans, and pilot projects. One thing that is common across all these countries is the prevalence of policies that encourage the use and development of new technologies instead of protectionist trade policies that close off markets to foreign companies. On balance, therefore, these policies aim to move incentives in the right direction.

How well do these programmes work in practice? The short answer is that we do not know. There are concerns that the ambitious policies in Germany and China have not been well designed, encouraging excessively solar power in Germany and solar cells in China. Policy-makers do not seem to be paying enough attention to designing policy instruments targeted on offsetting externalities in the most effective way. Unlike carbon pricing, which is easy to do in view of the nature of the GHG externality, encouraging innovation spillovers is complicated and requires considerable care. In many countries, policy focuses more on subsidizing supply of renewable energy than boosting R&D spending or improving the national innovation system. Similarly, principal–agent problems present a huge challenge to policy design.

In the next section, I review a celebrated failure, Solyndra, as a prelude to a discussion of appropriate design for green industrial policies.

IV. Solyndra: economics and politics In May 2010, President Obama visited a company in Fremont, California, praising it as a ‘symbol of progress’. The company was Solyndra, a solar cell company founded in 2005 5 The financial incentives in solar energy have led to over-capacity, and China’s PV sector was facing severe

–  –  –

Table 2: Germany’s green growth policies Important laws and policies Energy Transition (2011): policy document phasing out nuclear energy by 2022, renewable energy and energy efficiency targets Energy Concept (2010): road map and commitment to reduce GHG emissions by 40 per cent by 2020 and 80–95 per cent by 2050 Integrated Energy and Climate Programme (IEKP, 2007): defined primary and secondary legislation and support programmes for GHG reduction

Adherence to EU Energy and Climate Package (20/20/20), including:

- EU Emission Trading Directive

- EU Effort Sharing Decision: binding annual GHG reduction targets for sectors not covered by the EU Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 Emissions Trading System (ETS)

- EU Renewable Energy Directive: binding national targets for raising the share of renewable energy in energy mix by 2020

- EU Energy Service Directive

- EU Energy Efficiency Directive 2007 Biofuels Quota Act (mandates minimum percentage of biofuel-petroleum blend) and the 2011 Fuel Quality Ordinance Renewable Energies Heat Act (2009) Energy Saving Ordinance (2009): regulates energy performance of new buildings and provides energy certification of buildings Energy Industry Act (2005) Tools used Direct funding to R&D in renewable energy and energy efficiency Feed-in tariff for renewable energy, together with ‘market premium’ allowing plant operators to sell renewable energy directly back into the grid and keep the premium Concessional lending/subsidies for renewable energy projects and energy efficiency improvements Insurance against non-discovery risk for geothermal energy Quotas for minimum percentage of biofuel in fuel New vehicle tax depending on vehicle carbon-dioxide emissions and type/size of engine Energy performance standards for buildings, appliances Participation in EU ETS Taxes on electricity and fuel use, but controversial exemption of energy-intensive industries if they commit to annual energy efficiency improvements State (Länder) support to renewable energies (varies by state) Significant government programmes Sixth Energy Research Programme (€3.5 billion for research on low-carbon technologies) German Special Fund on Energy and Climate (‘EKF’) KfW Renewable Energies Programme KfW Offshore Wind Energy Programme Energy Efficiency Fund and the first to get funding under an expanded loan-guarantee programme to develop green technologies, part of Obama’s 2009 American Reinvestment and Recovery Act.

‘The true engine of economic growth will always be companies like Solyndra,’ Obama said (Greene, 2012). The Obama administration would eventually sign off on $535m in loan guarantees to Solyndra, to supplement $450m raised from private investors.

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