Without competition, the green transition will wither on the vine

Ruben Maximiano is a senior competition specialist at the Organization for Economic Co-operation and Development,

A transatlantic trade row had been brewing since late last summer, and it found expression at the World Economic Forum in Davos, when European Commission President Ursula von der Leyen Confirmed The European Union’s executive branch was preparing a new law to promote the bloc’s green technology industries.

The proclamation of the law was a response to the provisions of the United States anti-inflation law (IRA) which is a threat to the competitiveness of European green technology.

The momentum for initiatives such as the Commission’s proposed Net-Zero Industry Act is symbolic of what was building as it became clear that the landmark IRA bill included green subsidies that would harm European industries – most prominently the continent’s cars. puts the manufacturer at a loss. And von der Leyen and his allies are now lobbying EU governments to approve a package of clean-technology objectives, hoping to level the playing field for EU companies in the green-tech revolution. Are.

Industrial policies and the subsidies that often accompany them have long been at the center of trade disputes between allies such as the US and Europe – one need only remember 17 year old slugging match With the support of planners Boeing and Airbus, an armistice had been called just 19 months earlier. Indeed, as long as trade relations have existed, such disputes have occurred between allies and adversaries alike.

For green change to achieve lasting success, competition must be recognized as an integral part of the full policy toolkit. Only in this way will green technology be deployed at a scale that makes an impact, reduces its cost and makes it a no-brainer for both consumers and countries.

Industrial support measures such as subsidies are often the first lever governments take during periods of rapid and potentially destabilizing economic change. Direct, headline-grabbing, highly marketable to domestic voters, and often quick to deliver results – his appeal is clear.

For example, the bank bailouts of the 2008 global financial crisis may not have passed the sniff test among enthusiastic free marketers, but it is hard to argue that the alternative would have been better.

The COVID-19 pandemic offers a more recent example, with direct and indirect subsidies flowing to businesses in industries including hospitality, healthcare, professional and business services, construction, transportation and manufacturing.

Meanwhile, as the war in Ukraine continues, European governments are falling short, especially when it comes to providing funds to make sure the lights stay on and homes are heated during the winter. .

Last week’s proposed legislative response from Washington’s IRA and Brussels fits a similar dynamic to industrial policy prioritization, which focuses on harm reduction and the hope of beneficial outcomes.

The reasoning behind such subsidies is often persuasive – not to say politically compelling – especially when they advance goals such as economic efficiency, growth and environmental sustainability. In the early stages of an industry’s technological development, they can give invaluable support to the functioning of markets and facilitate positive outcomes, such as the greening of energy supplies, through the provision of development financing – which can be sourced from the private sector. unavailable from

But the allocation of such benefits to any industry requires a delicate balance, no matter how tempting their most obvious promising results.

It is often argued that the depth of the environmental crisis is an impenetrable case for all green growth subsidies. But the experience should serve as a reminder that how subsidies are implemented is a major determinant of whether the private sector actually signs up for future-focused financing, or simply funds allocated to laudable environmental goals. Whether or not it serves to protect existing corporate giants in certain markets.

Industries ministries and other bodies form a chorus of voices, which, effective within their individual mandates, offer only a limited view of such vast challenges. But subsidies and other forms of industrial support are tools that defy such fragmentary views, and they require a multidisciplinary approach based on the underlying principles of the functioning of the entire market system, while centralizing the role of competition authorities. is required.

Part of the essential function of any government is to assess circumstances and set economic and other priorities according to some notion of the public good, which is why state industrial subsidies will never disappear from the scene. And recognition of their potential impacts beyond national boundaries is part of the reason why the WTO exists and why countries form trade blocs, alliances and agreements.

The mere existence of such arrangements underscores the fact that governments need to make green industrial policy – ​​and indeed, all industrial policy – ​​fully aware of market competition considerations and its effects on environmental sustainability.

It may be tempting to craft an imaginative, state-sponsored industrial strategy with little regard for issues such as trade patterns, but it would be unwise to do so. Similarly, formulating trade policy without due consideration of its impact on innovation would be an exercise in folly.

These realities render the formulation of industrial policy fraught with complexity, as it inevitably juggles with the law of unintended consequences. More than that, however, they demand recognition of the interplay between industrial strategy, innovation and the greening of energy, as well as the political will to ensure that the forces of market competition are harnessed to enable Goes – not a permanent result.

As the administration of US President Joe Biden and other governments understand, state subsidies will play – and are already playing – an important role in the transition to a sustainable economy. Ultimately, the costs of bringing the necessary technologies to market may not be high enough to deter private investment – ​​a harsh reality that demands the role of public funding.

Thus, against the backdrop of the climate crisis, a new economy coalescing around three industrial poles – increasingly affordable renewable energy, electric vehicles and new green technologies – will impact not only industry but transform entire supply chains.

The fruits of this promise to create millions of new jobs as well as new markets worth hundreds of billions of dollars. For example, the International Energy Agency estimates that if countries fully implement their climate and environmental pledges, clean-energy technologies will be worth $650 billion annually by 2030—triple their value today.

As this change gathers pace, the consequences for governments, businesses and communities around the world will be enormous. But ultimately, the goal of environmental sustainability and the protection of the planet can only be achieved if industrial policy is consistent with the principles of innovation and business competitiveness, which underpin the operation of all functioning economies.

Incorporating these principles at the heart of policy making is the only means by which the imperatives of economic growth and environmental responsibility can be reconciled and truly self-sustaining.