HOW TO PHASE OUT?

Deliberately phasing out a sector is fraught with difficulties, particularly if it is entrenched and provides a significant contribution to the national or regional economy. The case studies of Jordan and Morocco demonstrate that reform is difficult–

in both cases it had been unsuccessfully tried before–but possible. China has a command econ-omy that makes it easier to phase out targeted sectors, but even there, compliance at the local level is a challenge. Ontario was fortunate in that it has no domestic coal production, but the restructuring was nonetheless a major effort, is still underway, and produces a case study in the political science of green economic transition (Harris et al. 2015). The programme faced signif-icant opposition on the grounds that it would increase electricity prices and stymie economic growth, and that it constituted inefficient envi-ronmental policy (McKitrick 2013). The prom-ise of new jobs from the promoted renewable energy sectors was critical in garnering public acceptance.

The process of adjustment in the face of disrup-tion, however urgent and necessary, should respect the principles of the International Labour Organization’s principle of Just Transition (ILO 2010). According to this principle, the need to respond to climate change is paramount and urgent; however, the process of transition that results needs to be planned with full under-standing of, and accommodation for, the massive consequences for industries, jobs and workers.

This is not only a moral stance, it is also prag-matic: Without the consensus that derives from a just transition, necessary reforms will not be polit-ically viable.

These are not challenges typically faced in the exercise of traditional industrial policy that seeks to build up new sectors but not to directly disrupt existing ones. But overcoming them will be para-mount to successful disruptive green industrial policy. Public support for disruption is crucial, especially if the phase out involves conflicts with powerful vested interests. There are a number of key elements to achieving necessary buy-in:

◼ Public education about the nature and magni-tude of the problem and the benefits of the planned reform:

People need to be convinced that the status quo is unsustainable, undesirable, and that the plan will work. This was a key element in the fossil fuel subsidy reform processes of Jordan and Morocco, as well as many others (IMF 2013a; IMF 2013b;

Vagliasindi 2012).

◼ Compensation for vulnerable affected popula-tions including under-represented groups in society such as women and youth:

The International Monetary Fund (2013b) describes the success of Indonesia at fossil fuel subsidy reform in 2005—after multiple unsuccess-ful attempts dating back to 1997—as due in large part to well-communicated social spending with the resulting savings, including on unconditional cash transfers and health insurance for the poor, and assistance in fuel switching away from subsi-dised kerosene for cooking. A number of coun-tries have also used a direct cash transfer system to ensure that the most vulnerable would not be negatively affected (IMF 2013b). When the primary consequence is job loss, the response might be training, relocation assistance and a strong social safety net. The precise form of the compensation scheme will vary with national circumstances, but the principle of ‘low net harm’ is important, and central to a just transition. Whether the shift takes the form of removing subsidies or levying charges, a portion of the resulting saving/revenue can be used to support this sort of compensation.

◼ The promise of prosperity:

If hard green industrial policy is being pursued, as in Ontario, governments can hold out the pros-pect of short-term pain from adjustment balanced off against long-term gain, typically in the form of jobs, from the advent of new green economic activity. The spending to support such measures achieves both the goal of cushioning adjust-ment and the goal of promoting green substitute sectors.

82 Support from the affected business community may also be vital to the success of the programme.

It is important to identify who will lose in the reform process, and to plan ways to minimise the loss as much as possible, consistent with achiev-ing the objectives of the programme.

◼ Impacts on the business community can be softened by:

◽ Consultation with the affected sectors well in advance of the policies, to garner input rele-vant to their final shaping:

This process may reveal ways to revise draft policies that reduce damage

◽ Transparent and timely announcement of policies and timelines, giving some measure of stability and predictability:

This allows for investments to be made with some certainty about future conditions.

◽ Gradual reform:

The more gradual the disruptive process, the less likelihood there is of stranded assets among the affected sectors, reducing the oppo-sition. A balance is needed here, though, such that the speed of the process is appropriate to the urgency of the environmental problems addressed.

◽ Support for affected non-targeted firms:

Those firms from outside the target sector that are threatened might be helped by measures to boost competitiveness, including via measures to increase energy efficiency and reduce waste.

This support can be funded by a portion of the savings or revenue generated by the phase out policies, whether they come in the form of subsidy removal or charges.

4. CONCLUSIONS

Disruptive green industrial policy poses several challenges that are not as salient for policymak-ers engaging in conventional green industrial policy. It forces governments to pick specific losers–firms and sectors that they wish to see restricted or phased out. Choosing those targets is a matter of assessing those sectors contrib-uting most to environmental damage, for which there is an obvious viable green substitute. If the target sector currently receives subsidies, so much the better: the shift can be financed in part by the savings. Ideally, substitute sectors align well with nationally enunciated development priorities and fit well with domestic capabilities.

The most difficult aspect of disruptive green industrial policy is orchestrating a just transi-tion, as illustrated by the chequered experience to date with one form, fossil fuel subsidy reform.

The sectors responsible for most environmental damage tend to be those with significant capi-tal investment and strong linkages throughout national economies in production and associated supporting activities. The transition away from such sectors, while necessary, will entail some level of stranded assets, obsolete infrastructure, direct and indirect job losses, and the attendant political battles against those negatively affected.

Impact assessment of the effects on the environ-ment, the industry and the economy at large–as well as social consequences for women and youth and other marginalized populations and whether or not gender gaps are further perpetuated by the proposed policy–should occur at every step of the transition. If the transition is not well managed, the desired disruption can be stymied or signifi-cantly delayed by popular opposition.

Fortunately, successful models are available, and some were discussed here. From them, it can be seen that it is crucial to get public buy-in, through extensive consultation and transparency combined with well-defined gradual timelines for change, and extensive efforts to ensure that there is support for those that might be nega-tively affected. Private sector buy-in is also key.

Here again the process is important, with a need for consultation, transparency and well-planned gradual efforts. Support can be offered to non-tar-geted firms that may be negatively affected. For both the public and the business community, it might help to be able to point to future growth created by new green domestic firms.

Not all disruptive green industrial policy will actually make efforts to foster domestic expertise

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in the sectors that arise from the disruption. Each country will need to identify appropriate poli-cies on a spectrum that runs from soft efforts—

restricting or phasing out sectors with no efforts to steer the resulting emergence of green substi-tutes—to hard efforts: restricting or phasing out sectors with specific green substitutes in mind, and fostering the growth of domestic players in those substitute sectors. For some countries, particularly those without the requisite tech-nical and fiscal capacity, hard disruptive green industrial policy may simply be infeasible. In this respect, disruptive green industrial policy does not differ from green industrial policy, or indeed from industrial policy.

Where it is feasible, however, striving to phase in substitutes for those sectors being targeted will offer greater potential to achieve the desired results of the transition. Simply getting the prices right, as China did by revoking value added tax refunds to undesirable sectors, may fail to

address a host of other obstacles to transition, and for these a suite of complementary measures may be needed. In fact, China implemented such policies, setting targets for renewable energy penetration, providing finance, and investing in education and research and development to foster cleaner high value added production (Altenburg et al. 2017, this volume).

The speed and scale of the transition needed to combat climate change, arguably humanity’s most pressing global environmental problem, demand a combination of phase out measures and phase in measures where it is feasible, even if our experience with industrial policy tells us that not all efforts to foster domestic capac-ity will succeed. In that sense, disruptive green industrial policy should be seen as a crucially important complement to other sorts of green industrial policy efforts, disrupting the status quo to create the space within which new green sectors can emerge.

84

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