Green industrial policy: How can we align consumption, production and innovation?
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Green industrial policy: How can we align consumption, production and innovation?

A three-dimensional taxonomy for designing and assessing green industrial policies for sustainable development.

By Guendalina Anzolin and Amir Lebdioui

Climate change is and will be at the forefront of policy priorities in the upcoming decades. Whether most countries can effectively address the challenge of mitigating climate change while simultaneously ensuring growth and poverty reduction remains debatable. As the pressure to meet sustainability goals grows, industrialisation as a development model faces rising scrutiny.

Manufacturing continues to be the main development driver due to its unique properties, such as employment creation, vertical and horizontal spillovers to other sectors, and the bedrock of technological innovations.1 But it is closely connected to climate change: energy use in industry accounts for 24.2% of global greenhouse gas (GHG) emissions, while the share of GHG emissions from direct industrial processes is 5.2%. While most of the general discourse has focused on shifting consumption towards “greener” products and cleaner energy sources, less attention has been paid to what measures are needed to promote the production of greener goods and services. Although recent events, such as geopolitical tensions and the Covid-19 pandemic, have brought attention back to production-related policies, a more fundamental shift towards industrial greening is indispensable in the context of a low-carbon future. 

A three-dimensions taxonomy for designing and assessing green industrial policies

In the paragraph above, two key dimensions of green industrial policy have already been mentioned: green consumption and green production. But these often rely on a third dimension: green innovation. In this complex landscape of green industrial policy, a taxonomy could serve as a useful tool for mapping existing policies, identifying gaps, and designing policies to complement and reinforce sustainability efforts (see figure below). The tool could also help analysts compare different measures, with different emphases on one or more of the three dimensions, across countries.

Green consumption measures

Consumption has been at the forefront of many policy measures, especially in developed economies. Such policies aim to steer consumers towards more eco-friendly choices using strategies like taxes on high-carbon goods and product bans. They tend to be most successful, though, when the productive structure of the country is able to offer greener alternatives to consumers. Green consumption policies, therefore, must be coordinated with domestic production processes.

The effectiveness of consumption policies is also influenced by factors like the additional cost associated with reducing emissions and “buying green”; the greener alternative is often the more expensive. This is just one of the reasons why product bans and higher taxes can face resistance, especially if the available alternatives don’t meet consumer expectations.

Green production measures

These measures seek to change corporate manufacturing habits by targeting high-emissions firms and sectors, and promoting more energy-efficient ways to produce comparable goods; these measures could include carbon pricing schemes, direct subsidies for green process innovations or incentives to promote circular economy initiatives.

On a global scale, and considering that global emissions are emitted by a small number of firms, such targeted measures can be highly effective. Yet, effectiveness varies by industry, especially considering that some sectors cannot easily adapt to alternative fuel sources, emphasising the need for innovative solutions.

Innovation measures

Measures targeting innovation in green technologies are some of the most powerful, yet complex, policies a country can implement. Such measures go beyond renewable energy adoption, focusing on the importance of producing key technologies for green industrial transformation. These policies are challenging because they rely on a wide set of complementary capabilities in terms of technical and organisational capacities, as well as the ability to scale technologies effectively. The innovation dimension pushes firms to produce goods and services that directly contribute to low-carbon technology creation. For instance, the USA, China, Brazil, India and the EU have initiated policies that promote green industrialisation. A notable example is China’s coordinated approach supporting local R&D and technological acquisitions, combined with demand and supply-side strategies, which have significantly advanced the country’s electric bus industry and wind sector.2

Three dimensions of green industrial policy

Source: Authors.

Investing in green technologies is critical for avoiding a concentration of power in key technologies

The third dimension – innovation – merits special attention, as it is critical for emerging economies to narrow the technology gap and avoid an over-reliance on imports. As shown in the figure below, renewable energy innovation is highly concentrated, with 74% of patents filed in only four countries, all of which have longstanding excellence in high-tech. To gain a competitive advantage in green technologies, then, developing countries need to invest domestically in green innovation – both in terms of technology, and in terms of related skills and capabilities within the workforce.3 The three-dimensions taxonomy can help these countries identify priorities for green industrial policy development.

Share of Patents filed in renewable energy technologies by country, 2014

Source: Authors’ based on data provided by IRENA, 2016.

Directions for green industrial policy in developing countries

The tools and institutional capabilities required for the effective design of green industrial policies are similar to those for “standard” industrial policy – careful planning and an active recognition of local economic, political and social contexts are always crucial. Some key considerations for effective green industrial policy design and implementation, however, should particularly include a fluid dialogue between stakeholders, resources for patient capital, stable demand-side policies and skilled human capital.

For this, all actors in the ecosystem, including public agencies, higher-education institutions, financial institutions and the private sector, should engage in effectively coordinated dialogue to promote a holistic approach to capability development at the institutional and productive levels. Additionally, long-term capital to support innovation around green technologies is essential, as it enables the building of productive and innovation capabilities, favouring investments in R&D, which are riskier and more long-term. Yet, they can also favour new areas of comparative advantage once developed. 

Public procurement is back on the policy agenda in both developed and developing countries. Policymakers need to make effective use of public procurement policies and incentives, both for consumers and for firms, to avoid demand volatility for domestically produced technology. Furthermore, the targeted development of skills in critical subjects, such as science, technology, engineering and mathematics (STEM) disciplines is vital to producing and scaling up low-carbon solutions.

Together, these policies can build a foundation for industrialization and economic development that is decoupled from environmental harms. Spreading green innovation to more regions around the world will also play a role in promoting economic security, international trade and a just transition that leaves no one behind.

  • Guendalina Anzolin is Research Associate at the Institute for Manufacturing at the University of Cambridge. 
  • Amir Lebdioui is Associate Professor of the Political Economy of Development at the University of Oxford.   

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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