The future of our planet depends on the world economy’s rapid transition to “green growth” – modes of production based on clean technologies that significantly reduce emissions of carbon dioxide and other greenhouse gases. Yet carbon remains badly mispriced, owing to fossil-fuel subsidies and the absence of tax revenues needed to address the global externalities of climate change.
In this context, subsidies that promote the development of green technologies – wind, solar, bio-energy, geothermal, hydrogen, and fuel-cell technologies, among others – are doubly important. First, they nudge pioneers to invest in uncertain, risky ventures, with the resulting research-and-development efforts generating highly valuable social benefits. Second, they counter the effects of carbon mispricing on the direction of technological change.
These two considerations provide mutually reinforcing reasons for governments to nurture and support green technologies. Such support has, in fact, become extensive, both in advanced and emerging economies. Look around these economies and you will find a bewildering array of government initiatives designed to encourage renewable-energy use and stimulate green-technology investment.
Although full pricing of carbon would be a far better way to address climate change, most governments apparently prefer to rely on subsidies and regulations that increase the profitability of investments in renewable energy. Often, the authorities’ motive seems to be to give domestic industries a leg up in global competition.
Normally, we would consider these competitive motives to be beggar-thy-neighbor in nature. Market-share considerations are zero-sum from a global standpoint in traditional industries, and any resources invested in generating national gains come at the cost of global losses.
In the context of green growth, national efforts to boost domestic green industries can be globally desirable, even if the motives are parochial and commercial
But in the context of green growth, national efforts to boost domestic green industries can be globally desirable, even if the motives are parochial and commercial. When cross-border spillovers militate against taxing carbon and subsidizing technological development in clean industries, boosting green industries for competitive reasons is a good thing, not a bad thing.