- July 28, 2021 Energy
Can Industrial Policy Work for Climate Technologies?
In recent years, climate technology industries, including batteries, electric vehicles (EVs), and wind turbines, have benefitted significantly from industrial policy in numerous countries. And it now looks like US climate technology industries may benefit from the current US administration’s industrial policy plans.
Debates are far from settled on how to execute such policies, however. So the timing seems right to provide context on the role of government in promoting innovation and industry competitiveness, particularly by evaluating some of China’s efforts in climate technologies.
Defining Industrial Policy
Industrial policy is defined in many ways and takes many shapes, but it is often simplistically identified with protectionism. For the purpose of this analysis, I define industrial policy as a set of state initiatives to support designated strategic sectors that may not otherwise compete effectively (see Figure 1).
Figure 1. Industrial Policy Toolbox Source: Author.
Industrial policy often does rely on discriminatory practices, such as trade bans that amount to protectionism. But if a domestic industry is so challenged as to require protection from international competition, it is unlikely that protectionist policies will turn it around. Instead, it may require the deployment of incentives and other forms of support to promote the growth of the industry (see policy tools on the right side of Figure 1), including policies to expand demand that are especially effective in countries with large markets.
There are a variety of tools that can target the supply side: for example, countries have and continue to capitalize on foreign direct investment to enhance domestic supply chains and promote industry learning (either by attracting foreign investors or by enforcing some level of tech transfer to access the local market).
Successful industrial policy, then, depends on the combination of policies implemented and the nature of the industry that the policies target, including its level of maturity and the technologies in question. But industrial policy also carries with it the risk of high costs and outright failure.
Industrial policy is neither a silver bullet nor a one-size-fits-all panacea. It’s a diverse toolbox, as illustrated above, that contains a wide gamut of initiatives and options on both the demand and supply sides.
To better understand how these policies have been deployed in practice, China’s efforts to promote climate technology industries are instructive. Finally, I will also consider what these experiences might mean for the United States.
China’s performance suggests that strong central efforts to support manufacturing, combined with demand-side policies to create a domestic market for climate technologies, can be effective in creating competitive firms. Although Beijing engaged in forms of protectionism as part of its industrial policy, they would have likely amounted to little in these emerging industries without the policies on the right side of Figure 1.
Take Chinese companies’ success in climate technologies from solar to batteries. Existing policies to bolster manufacturing and trade competitiveness, as well as advanced infrastructure, gave the country an initial advantage. Additional policies have provided targeted support for companies in these industries, both at the local and national levels. This has in some cases led to overcapacity and waste but has also spurred high levels of domestic competition that have helped to drive down costs and promote innovation.
On the demand side, it’s no surprise that the lithium-ion battery supply chain is so concentrated in China. The country has been the largest EV market for years thanks to policies supporting the industry. Similarly, Chinese wind power companies’ impressive performance is reflective of their home market’s growth. Chinese solar manufacturers are more internationalized, but they too continue to benefit from the large domestic market (see Figure 2).
Figure 2. Cumulative Solar and Wind Installed Capacity by Country (MW) Source: IRENA.
Where Does the United States Go?
Under the Biden administration, federal support for climate technology industries is poised to become more robust than it has been in decades. High-level political commitment to reduce emissions and support renewable energy industries signal policy stability and growth opportunities to investors.
From the demand-side, if the current US administration follows through on pledges to boost areas such as the offshore wind market or support the purchase of electric school buses, this could lead to a virtuous cycle of attracting investment in local supply chains and R&D in these areas.
It is still early days to assess the scope and effectiveness of US industrial policy on climate technologies. But the extent of its success, however defined, will require an approach that targets manufacturing as well as creating domestic markets for such technologies.
An excessive focus on domestic ownership of companies can have a deleterious effect when trying to build up supply chains. If taken too far, discriminatory practices to benefit local firms can undermine investment from foreign companies with advanced technologies that can help expand local manufacturing.
Ultimately, the prospect of climate technology industries, at the heart of the global decarbonization effort, will likely depend as much on the savviness of state policies as it does on market dynamics.
Ilaria Mazzocco is a Senior Research Associate at MacroPolo. You can find her work on energy and climate here.
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