Without competition, the green transition will wither on the vine-politico

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

A transatlantic trade row has 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 that the EU’s executive branch is drafting a new law to boost the bloc’s greenness. Technology industry.

The promulgation of the law was a response to provisions of the US Inflationary Reduction Act (IRA) that threatened the competitiveness of European green technologies.

Momentum had been building for an initiative like the Commission’s proposed Net-Zero Industry Act since it became clear that the IRA bill included green subsidies that put European industries – particularly the continent’s carmakers – at a disadvantage. And von der Leyen and his colleagues 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 technology revolution.

Industrial policies and the subsidies they often entail have long been at the center of trade disputes between allies such as the US and Europe – one need only recall the 17-year slugging match over the support of planemakers Boeing and Airbus, over which a truce was called just 19 months ago. was done Indeed, as long as trade relations existed, such disputes between allies and adversaries were commonplace.

For the green transition to achieve lasting success, however, competition must be recognized as an integral component of the entire policy toolkit. Only in this way will green technology be able to be deployed on a scale that makes an impact, reduces its costs and makes it a no-brainer for both consumers and countries.

Industrial support measures such as subsidies are often the first lever governments reach for during periods of rapid and potentially destabilizing economic change. Direct, headline-grabbing, highly marketable to domestic constituencies, and often delivering quick results — their appeal is clear.

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

The COVID-19 pandemic provides a recent example, with direct and indirect subsidies flowing to other industries, including hospitality, health care, professional and business services, construction, transportation and manufacturing.

Meanwhile, as the war in Ukraine continues, especially when European governments have stopped short of providing funds to keep the lights on and homes heated in winter.

The IRA in Washington and last week’s proposed legislative response from Brussels have a similar dynamic to industrial policy priorities, focusing on harm reduction and hoping for beneficial outcomes.

The rationale behind such subsidies is often convincing—not to say politically compelling—especially when they advance goals such as increased economic efficiency, growth, and environmental sustainability. In the early stages of an industry’s technological development, they can provide invaluable support to market functioning and facilitate positive outcomes, such as the greening of energy supply, through growth financing mechanisms — unavailable from private sector sources.

But allocating such benefits to any industry requires a delicate balance, no matter how tempting their most obvious promised results.

It is often argued that the depth of the environmental crisis constitutes an untenable case for all green development subsidies. But the experience should serve as a reminder that how subsidies are implemented is a key determinant of whether the private sector actually signs up for future-focused financing, or whether funds earmarked for laudable environmental goals serve only to protect existing corporate heavyweights in certain markets. does

The Ministry of Industry and other agencies form a chorus of voices that, while effective within their individual mandates, offer a limited view of such monumental challenges. But subsidies and other forms of industrial support are instruments that defy such compartmentalized considerations, and they require a multidisciplinary approach to the principles underlying the functioning of the entire market system, making the role of competition authorities critical.

Part of any government’s essential job is to assess the situation and set economic and other priorities according to some notion of the public good, which is why state industry subsidies will never fade from the landscape. And the recognition of their potential impact beyond national borders is why the World Trade Organization exists and why countries form trade blocs, alliances and agreements.

The mere existence of such a system underlines the fact that governments need to formulate green industrial policy – ​​and indeed, all industrial policy – ​​fully informed by considerations of market competition and its impact on environmental sustainability.

It might be tempting to create a fanciful, state-sponsored industrial strategy with little regard for things like trade patterns, but it would be foolish to do so. Likewise, fashioning trade policy without considering its impact on innovation would be an exercise in folly.

These realities render the creation of industrial policy fraught with complexity, as it inevitably flirts with the law of unintended consequences. More than this, however, they demand recognition of the interrelationship between industrial strategy, innovation and energy greening, as well as the political will to ensure that the forces of market competition are harnessed to enable sustainable outcomes.

As U.S. President Joe Biden’s administration and other governments realize, state subsidies will play — and are already playing — a key role in transitioning to a sustainable economy. After all, the costs of bringing the necessary technologies to market cannot be so high that they deter private investment—a hard truth that demands a role for public finance.

Thus, against the backdrop of the climate crisis, a new economy is converging around three industrial pillars—increasingly affordable renewable energy, electric vehicles and new green technologies—that will not only affect industry but transform entire supply chains.

The result promises 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 environment commitments, clean-energy technologies will be worth $650 billion annually by 2030—triple their value today.

As this transition gains momentum, the consequences for governments, businesses and communities worldwide will be enormous. But ultimately, the goal of environmental sustainability and the preservation of the planet can only be achieved if industrial policy, innovation and trade are in line with the principles of competition, which govern the activities of all viable economies.

Embedding these principles at the center of policymaking is the only way in which the imperatives of economic growth and environmental responsibility can be reconciled and truly self-sustaining.