70
1. INTRODUCTION
Industrial policy, broadly cast, can be defined as, “a set of policies that selectively favours the development of certain industries over others”
(Schwarzer 2013). Green industrial policy, more specifically, is defined as (Altenburg and Rodrik 2017, this volume):
"comprising any government measure aimed to accelerate the structural transformation towards a low-carbon, resource-efficient economy in ways that also enable productivity enhancements in the economy".
Cosbey (2013) describes green industrial policy as supporting the development of domestic indus-tries that produce green goods, or goods that:
◼ have better environmental performance in operation than their competitors including electric vehicles, renewable electricity-gener-ating equipment, energy-efficient appliances
◼ directly address environmental problems such as environmental remediation technologies
◼ are produced in a way that is environmentally preferable to their competitors as in the case of organic agriculture.
By far the majority of green industrial policy over the last decades–in China, India, Germany and Denmark, for example–target the development of new low-carbon energy technologies, such as solar photovoltaics, wind turbines and power stor-age (Buen 2006; Lewis and Wiser 2007; Wang et al.
2010; Zhang and He 2013; Lütkenhorst and Pegels 2014; Ganesan et al. 2014; Vidican Auktor 2017, this volume). This is understandable, given their significant recent growth in demand and enor-mous near-term potential for further growth (IEA 2015a; IEA 2015b; BNEF 2016). But green industrial policy goes beyond renewable energy to cover a wide range of environmental sectors such as transportation technologies, especially electric and low-emission vehicles and batteries; low-GHG emission waste management operations; drought- and salt-resistant plant varieties; water-saving technologies; and technologies for heating, cooling and energy conservation in buildings.
The case studies in this volume, and most of the broader discussion around green industrial policy, are concerned either with measures taken to enhance the business environment in which new domestic industries might flourish, or with more targeted assistance for particular sectors. In both cases, the green industrial policy mechanisms employed are positive measures, encouraging the development of specific sectors through support, incentives and complementary enabling measures.
This chapter deals with industrial policy of a different type. It explores the ways in which governments might support green industrial development by primarily negative measures–
that is, by measures that seek to diminish the role of certain sectors within the economy, phasing them out and thereby fostering space for green sectors to operate and compete. Lütkenhorst et al. (2014) and Altenburg and Pegels (2012) discuss this sort of green industrial policy strategy as
‘pathway disruption’: the dismantling of key pollut-ing sectors of the economy to allow the growth of greener alternatives. These authors argue the importance of disruptive green industrial policy: it targets sectors that are environmentally harmful, and thus need to be phased out.
The harmful sectors most in need of active disrup-tion are locked in, and have the financial power and political clout to frustrate urgently needed restructuring. As well, these sectors merit atten-tion because they tend to be deeply embedded in the social and economic fabric—the oil and gas industry and associated transportation and power sectors are good examples. As such, their eventual dissolution implies significant transition costs that should be anticipated and appropriately managed.
This is especially important to avoid particularly negative effects on already disadvantaged groups such as the women and youth in a society.
The following section defines what is meant by
‘disruptive green industrial policy’, describing some of the tools that can be used to achieve it and offering a spectrum on which various green industrial policy efforts might be focused. Section 3 offers several case studies of green industrial policy, aiming to draw from them lessons that can be applied more broadly. Section 4 then uses those lessons to generate policy guidance that should be useful to decision-makers. Section 5 concludes.
71
In With The Good, Out With The Bad: Phasing Out Polluting Sectors as Green Industrial Policy
2. DEFINING DISRUPTIVE GREEN INDUSTRIAL POLICY
What we will call disruptive green industrial policy is defined as: measures to restrict or phase out environmentally undesirable sectors in such a way as to provide opportunity for greener sectors to prosper. Like the other forms of green industrial policy discussed within this volume, disruptive green industrial policy seeks to promote green industrial development within the implement-ing jurisdiction. It is properly understood as a complement to the more familiar positive sort of green industrial policy insofar as it facilitates the desired growth in green sectors by making room for them to flourish.
There are many tools that might be used in the practice of disruptive green industrial policy, to help phase out targeted sectors:
Environmental taxes, charges, levies, fees: Any sort of financial burden placed on firms and sectors will decrease their competitiveness rela-tive to other actors in the economy. If the burden is aimed at correcting negative environmental externalities, then the effect is to encourage econ-omy-wide structural change toward a greener state, and to enhance the economic viability of competing green firms and sectors. As such, disruptive green industrial policy bears some resemblance to fiscal reform, when it seeks to increase taxes on those things that society wants less of and reduce taxes on those things that soci-ety wants more of, preferably in a revenue-neu-tral fashion. In the case of green industrial policy, society wants less pollution and resource waste and more employment and income (Stoianoff et al.
2016; Hanna et al. 2012; UK Green Fiscal Commis-sion 2009; Schlegelmilch et al. 2017, this volume).
Elimination of incentives: Another set of tools removes incentives granted to sectors targeted for phase out. These might be financial incentives or subsidies such as cash grants, low-interest loans, loan guarantees, limits on liability, price supports, purchase mandates, various types of tax breaks.
They can also include free or low-cost inputs
such as land, grants of dedicated infrastructure or support of research and development efforts.
Incentives might also be regulatory, as when specific firms are granted exclusive marketing rights or concessions. Removing these sorts of incentives to targeted firms or sectors has the same effect as imposing taxes, charges, levies or fees: it renders them less viable relative to greener competitors, and moves the economy toward a greener mix of economic activity. Removing fossil fuel subsidies, for example, makes renewable energy substitutes more competitive and guides the economy toward consumption of less pollut-ing final goods through price signals. Removpollut-ing tax advantages for energy- and material-intensive sectors amounts to restructuring the economy in favour of greener, high-value added firms.
Mandated phase out: The most powerful set of tools force a mandated phase out of the targeted sector or firms. This is demonstrated by the mandated phase out of coal-fired electricity generation in Ontario, Canada. Where, as in the Ontario case, the targeted sector is the domain of government agencies, the phase out involves a policy decision to end the operation of the sector’s operations. Where private interests operate the sector, a phase out will involve regulatory and legal bans or restrictions on sales or operation, as in the phase out of lead as a paint additive in most OECD countries.
There is a spectrum of types of disruptive green industrial policy, with the differentiating factor being the level of effort devoted to promoting the sectors that will benefit from the diminished role of the phased out activities. As noted above, disruptive green industrial policy is characterized by the intent to not only reduce undesired types of activity, but to also promote more desired types of domestic economic activity. Figure 5.1 illustrates this spectrum.
72 Figure 5.1: Spectrum of Types of Disruptive Green Industrial Policy
At the left end of the spectrum, representing soft policy, exist policy options that diminish the role of undesirable activities with the explicit under-standing that simply by doing so some green sectors will be enabled. An example of this type of policy is a carbon tax, which by itself would benefit a broad variety of green firms and sectors, but which attempts to neither identify particular targets for phase out, nor chart the course of the transition in the direction of particular domestic champions. Further across the spectrum would be the reduction or elimination of fossil fuel subsi-dies. These tend to be targeted at specific firms and sectors, and the resulting beneficiaries will
also be specific: for example, renewable energy generators and the related input manufactur-ers and services. But these beneficiaries may be domestic, or they may be foreign exporters of green goods. At the right end of the spectrum, corresponding to what we have called hard disruptive green industrial policy, are policies that combine deliberate phasing out of target sectors with deliberate cultivation of substitute domestic sectors. An example of this is the phase out of coal-fired electricity generation in Ontario, Canada and the concurrent promotion of domes-tic renewable energy sectors.
3. EXAMPLES OF DISRUPTIVE GREEN INDUSTRIAL POLICY
This section relates four examples of disruptive green industrial policy, aiming to both illustrate the types of approaches described above, and to draw lessons from specific cases that might be useful guidance in a more general context. It covers fossil fuel subsidy reform, including brief case studies of subsidy reforms in Jordan (Box 5.1) and Morocco (Box 5.2), China’s reform of value added tax refunds to polluting and resource-in-tensive sectors (Box 5.3), and policies in the
Canadian province of Ontario to phase out coal and promote renewables (Box 5.4).
3.1. FOSSIL FUEL SUBSIDY REFORM
Fossil fuel subsidy reform has been on the inter-national agenda since the 2009 G20, when those countries committed to phasing out inefficient fossil fuel subsidies (G20 2009). A number of similar declarations have followed, including Charges, or removing incentives,
with revenue recycled to green sectors. Or bans/regulations with complementary policies to
foster greener substitutes. But no discrimination against foreign producers. (See the Morocco case
study below.)
Charges, or removing incentives, with revenue recycled to green sectors. Or bans/regulations with complementary policies to foster greener substitutes. Discrimina-tion aimed at fostering domestic
capacity. (See the Ontario case study below.)
Charges, removing incentives, or bans/regulations to restrict targeted sector, without
comple-mentary policies to foster the emerging substitutes. (See the
Jordan case study below.) Pollution charges, taxes, aimed at greening a targeted sector, but
not at creating a new substitute sector.
hard disruptive GIP soft disruptive GIP
73
In With The Good, Out With The Bad: Phasing Out Polluting Sectors as Green Industrial Policy
Sustainable Development Goal 12, Target C, where the signatories committed to “rationalise ineffi-cient fossil-fuel subsidies that encourage wasteful consumption” (UN 2015).
Fossil fuel subsidies can be broadly divided into two types: those delivered to consumers through artificially low retail prices and those delivered to producers of fossil fuels as grants, low-in-terest loans, preferential tax treatment or other such measures.
While the World Trade Organization’s Agreement on Subsidies and Countervailing Measures has a legal definition of subsidies in general, more useful here is the definition of fossil fuel subsi-dies offered by Kojima and Koplow (2015) “meas-ures that target fossil fuels, or fossil fuel-based electricity or heat, and cause one or more of the following effects: a reduction of net energy costs, a reduction of energy production or distribution costs, and an increase in the revenues of energy suppliers”.
There are a number of estimates for the magni-tude of global fossil fuel subsidies, ranging from US$ 250 million to US$ 5 trillion, depending on the definition used (Kojima and Koplow 2015). The high end of those estimates comes from the Inter-national Monetary Fund (2013a) based on a defini-tion that includes external costs of fossil fuel use such as the social cost of carbon and health costs of air pollution.
While the precise figure is difficult to determine–
given the different ways of defining subsidies–
there is no disagreement about the resulting environmental impacts. Consumer subsidies arti-ficially lower the price of fossil fuels, encourag-ing over-consumption. This lowers incentives for conservation or for efficiency investments, as well as reducing the viability of investment in substi-tutes such as renewable energy sources. That viability is already impaired by the fact that fossil fuel power sector investments are locked in for many decades. Producer subsidies lower produc-tion costs, enhance profits, and invite further investment in fossil fuel exploration and extrac-tion, as well as for the research and development that produces technologies that further lock in the fossil fuel power sector.
Eliminating fossil fuel subsidies would have a palpable effect on global GHG emissions. Terton et al. (2015) note that 13 countries included fossil fuel subsidy reform in their Paris Agreement commitment to Intended Nationally Determined Contributions. Burniaux and Chateau (2014) esti-mate that eliminating fossil fuel subsidies would cause an 8 per cent reduction in GHG emissions by 2050. Schwanitz et al. (2014) estimate a 6.4 per cent decrease by 2050. Merrill et al. (2015) model subsidy removal in 20 countries and find an average GHG emissions reduction of 11 per cent by 2020. It is worth noting that all these figures likely understate the true extent of effects, since they focus only on a demand response to price increases and do not consider the effects of producer subsidies or investment distortions.