Industrial Policy Synergies: Industrial Policy + Climate Policy

The fundamental industrial and societal challenge of this century is to leave carbon behind while creating a better and more equitable world. This is an economic and geopolitical imperative as much as an environmental one: The costs of inaction are significant, the economic opportunities of the transition to a net-zero economy are enormous, and the importance of secure supply chains for energy—the lifeblood of the modern economy—has never been clearer.

The good news is that the global shift to clean energy is well underway. Costs have fallen precipitously in the last decade, support for climate action is growing, and countries around the world are increasing their climate ambition. These trends have been driven largely by strategic government investment and regulation in key clean energy industries across governments, rather than market fundamentalism.¹ The challenge in front of us is to accelerate and broaden these trends. Climate industrial strategy—or, deliberate interventions by the government to alter the structure of an economy, encouraging resources to move into particular sectors (including, but not limited to, manufacturing)—is up to the task of building the political and technological momentum to lock in climate action for decades.²

The Case for Climate Industrial Strategy

The case for climate industrial strategy is strong as a theoretical and political matter. Climate change is more than a market failure; it is a complex systems challenge, entailing profound transformations in sociotechnical systems that relative shifts in prices alone will not solve, in part due to how entrenched carbon is in the functioning of our economy and society.³ Pursuing a climate industrial strategy is also a growth opportunity and a critical mission for achieving our economic and national security objectives. Even if one did adopt the narrow market failure frame for climate, there is a long list of market failures that pricing alone is unable to address, including inefficient markets for innovation and spillovers from learning-by-doing. Moreover, research and practical experience repeatedly demonstrate the political difficulties of enacting an effective carbon price and the disappointing effects of carbon pricing in practice.⁴ Finally, energy markets have never been free of government steering and subsidy. The unconventional gas revolution, often lauded by conservatives and proponents of a laissez-faire approach to climate, was itself a product of large-scale government investment and coordination with the private sector.⁵

While there has been progress on climate mitigation, societies have a long way to go. We will have to build clean technologies and infrastructure at an unprecedented pace and scale in the next few decades: To achieve the emissions benefits of the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA) in the US alone, wind and solar capacity additions through 2030 must average double the peak annual rates achieved to date, and then must accelerate to about 3.5 times peak rates from 2031 to 2035. Electricity transmission must expand at double the rate of the past decade. We must also drive decarbonization beyond the power sector, to include industry, transportation, and agriculture, and we need to enable rapid decarbonization globally. Achieving this will require the rapid build-out of infrastructure and supply chains, and the cultivation of a well-trained and well-compensated workforce. This will be a multi-decadal challenge requiring broad political support: Action today needs to enable more aggressive action tomorrow. Deliberate climate industrial strategy—investments that shift the material interests of key industries, reduce the costs of clean energy, and generate political buy-in—can lock in climate action, and ensure that the US captures an advantage in the market for new technologies while building resilient supply chains and reliable energy systems.

The Biden administration has secured the most ambitious climate laws in history: The IIJA and IRA are estimated to reduce cumulative greenhouse gasses to roughly 37 to 41 percent below 2005 levels by 2030.⁶ This estimate may even undercount the emissions reduction impact of the laws, because it does not not include feedback loops that can increase ambition, but it could also overestimate emissions reductions if obstacles to deployment (e.g., permitting challenges, supply chain issues, political opposition to building) materialize and are not overcome swiftly. In either case, our work is not done. For sustained emissions reductions on the road to net zero by 2050, we need to pursue a holistic strategy that ensures these laws have the greatest practical impact and build support for future, more aggressive, action.

Catalyzing a Green Spiral

The case for climate industrial strategy is strong on the merits, and critical for climate politics. Practical experience and academic research suggest that the key to ratcheting up climate ambition over time is to catalyze a “green spiral”: leveraging investment and standards to create a positive feedback loop that accelerates decarbonization.⁷ Achieving positive feedback loops in climate technology and policy requires a powerful, enduring, and cross-partisan political coalition, which in turn requires a strategy capable of: (1) making clean technologies cheap and reliable; (2) delivering concrete benefits to communities today, including a place-based focus on fossil fuel-dependent and overburdened communities; and (3) strengthening the power of a supportive climate coalition. None of these objectives can be achieved with conventional environmental pollution policy (e.g., regulations and/or pricing) alone, or by letting markets decide.

For substantive and political reasons, there will be no effective, durable climate action without industrial strategy. Market fundamentalism is simply not up to the task of catalyzing the political and technological feedback loops necessary to sustain climate action over decades.

The Biden administration’s efforts to weave climate, economic, and trade policy together in a coherent industrial strategy will go a long way toward accelerating this green spiral: If successful, its incentives and standards will cultivate strong domestic climate industries across geographies; support high-quality, family-sustaining jobs; and build bipartisan political demand for more decarbonization in the future—all while rapidly decreasing the costs of energy for individuals and businesses.

Make clean technologies cheap and reduce the costs of energy

Climate industrial strategy can and must make all clean technologies cheap. The cheaper climate action is, the smaller the amount of political will necessary to overcome barriers. The good news is that battery, solar, and wind costs have plummeted in the last 10 years, falling roughly 90 percent for solar and batteries and 70 percent for wind. The administration is building on this success, using a variety of incentives to accelerate cost declines even further and drive costs down across all the technologies we need to achieve net zero economy-wide by 2050—from advanced nuclear and geothermal, to clean hydrogen, to long-duration energy storage.

Furthermore, the IRA will reduce energy costs for households and businesses, demonstrating that climate action is in the economic self-interest of individuals and our country today. Analysis shows that as a result of the IRA, annual US energy expenditures will fall at least 4 percent in 2030, which will lower electricity costs by $100-200 per household per year.⁸ The IRA will also lower oil and gas consumption by 13 percent and 8 percent, respectively, which will lower global oil and gas prices (5 percent reductions in global oil prices, and 10-20 percent in North American gas prices from 2030 to 2035).⁹ These policies will also lower upfront costs for individuals and businesses to purchase things that will lower their energy costs even further over time (e.g., heat pumps, electric vehicles, etc.).

Deliver concrete, tangible benefits to communities today

Making clean energy cheap is a necessary but insufficient condition for climate policy that will endure. Industrial strategy has to deliver concrete and near-term benefits (e.g., economic investment and diversification, jobs, improvements to public health, decreases in energy costs) to communities across the country. That’s one reason the administration’s approach includes support for the development of American manufacturing of solar, wind, battery, and electric vehicle components and assembly, as well as critical minerals processing. We need these things to reach our climate goals: Brittle supply chains could imperil the transition (as evidenced by COVID’s impact on supply chains, for example) and manufacturing capacity must expand rapidly to meet climate goals. But as importantly, we need to create high-quality jobs in clean energy industries to give communities a direct stake in the transition. As a result of the new climate industrial strategy, companies have committed over $200 billion for clean energy, electric vehicle, and battery projects in the US, making the economic benefits of the clean energy transition real to communities across the country.¹⁰ Within the decade, 1 million jobs could be supported in manufacturing solar photovoltaic (PV) and wind components, and hundreds of thousands more in battery and electric vehicle manufacturing. And this economic activity is happening across the country: A recent analysis shows that, as a result of the IRA, US states could secure as much as $130 billion in investment per state cumulatively between now and 2030.¹¹ The administration’s strategy also includes historic environmental justice provisions, such as providing at least $60 billion to reduce harmful pollution in overburdened communities. These investments are both a clear moral imperative and wise political strategy, generating support for climate action among communities who have understandably been distrustful of the climate movement and industrial policy more generally. According to one estimate, the IRA and IIJA will prevent more than 35,000 premature deaths in the next decade alone.¹² These benefits will accrue to communities today, and can build public and political support for climate action.

Strengthen—and broaden—the power of the climate coalition

To sustain the climate transition over time, society needs a strong political coalition that will benefit from more aggressive action. The solar and wind industries have gone from small, niche, “alternative” technologies to multitrillion dollar industries in the last decade—with a corresponding increase in political clout and influence that played a key role in the passage of the IRA and IIJA. We need to accelerate this trend and drive growth in new climate-aligned industries. These coalitions can pressure governments to act more aggressively to mitigate climate change.

We also need to design policies that weaken existing and future opposition to ambitious climate action. In part for this reason, the IRA includes hundreds of billions of dollars of investment in fossil fuel-dependent communities, including support for regional economic diversification to ensure that no one gets left behind in the climate transition. The IIJA and IRA both include incentives related to the full host of climate-relevant technologies, including nuclear and carbon capture, which often have greater appeal in rural states. They also include non-energy investments in regional diversification strategies that can weaken the strength of climate opposition by reducing the power of fossil fuel interests. By attending to the distributional effects of climate policy and targeting investments in places that might lose in the transition to net zero, the administration’s industrial strategy may help limit partisan pushback to climate action.

Manage Trade-Offs in Implementation

The Biden administration’s strategies will—if implemented well—drive a positive feedback loop that reduces emissions and builds American economic and political resilience. This should put climate action on stronger footing to endure in the face of future political and economic changes and/or shocks. Nevertheless, like all areas of policy, there will be tensions and challenges in the implementation of climate industrial strategy. Several criticisms have already been made by commentators across the political spectrum, all of which are worthy of deeper examination:

• “Industrial strategy for climate is all carrots and no sticks”: It is widely asserted that limiting climate change in line with science will require regulations and/or carbon pricing, not just incentives. It is true that the IRA is heavily focused on incentives—but this is for good reason. First, practical experience and research demonstrate that climate policy mixes evolve over time, with green industrial policies often preceding sticks.¹³ Second, the IRA does include standards, including a new methane fee. Third, through executive action, the administration is linking incentives and regulations in new and creative ways: for example, coupling industrial decarbonization investments with demand-pull mechanisms (like “buy clean”) to ensure that federal procurement of products like cement and steel value low-embodied emissions goods. Furthermore, incentives can increase the ambition of regulatory actions: Because regulations require an analysis of compliance costs, and because clean solutions are now subsidized, agencies can pursue more ambitious regulations. For example, the regulation of greenhouse gas emissions from existing power plants should be more ambitious, because carbon capture is economically viable as a result of incentives. Ultimately, industrial strategy can include standards and create the political conditions for more aggressive climate policies in the future.
• “Good industrial policy requires a focus on one clear goal; programs cannot and should not solve for multiple objectives”: In recent months, commentators have been critical of the administration’s attempts to solve for multiple goals as it implements industrial strategy programs. But the history of industrial policy shows that not only is solving for multiple issues at once possible, it is a prerequisite. This is because good industrial policy is about economic development, not just maximizing the production of bits of technology.¹⁴ While it’s important to be clear-eyed about tensions and trade-offs, it is entirely reasonable for a publicly supported subsidy program to use its leverage to steer the behavior of firms along multiple dimensions. Governments should invest in mechanisms to identify and transparently track performance of these programs over time, ensuring that governments can be held to account for whether they are succeeding.
• “There is an unavoidable conflict between making clean energy cheap and making it in America with strong labor standards”: Relatedly, there has been no shortage of headlines about the incompatibility of “Made in America” with cheap, clean energy. However, analysis suggests that increased labor compensation and domestic manufacturing shares across wind and utility-scale solar PV supply chains result in relatively modest increases in total capital and operating costs, which are partially or fully offset by increases in labor productivity. Cost premiums associated with high-road labor policies have a minimal effect on the pace and scale of renewable energy deployment and the total cost of transitioning to a net-zero emissions economy.¹⁵ There is a moral and political imperative to deliver some benefits of the energy transition to US workers and to sustain political will for future climate action, and a national security imperative to cultivate secure and resilient energy supply chains. Investing in the workers and supply chains that will be necessary to deliver a global net-zero economy is smart economic policy and good politics.
• “Domestic industrial policy is inherently protectionist and threatens global cooperation on climate”: There has been some criticism of national climate industrial policy as inherently protectionist. While one should not diminish the importance of global action to tackle climate, a uniform carbon price is not the only—or even most likely—way to accelerate global decarbonization.¹⁶ Instead, we see highly uneven adoption of a wide range of climate policies that are responsive to unique national political and economic dynamics—this trend is reflected by and reinforced in the bottom-up framework of the Paris Agreement. Second, technology competition can be constructive, facilitating cross-national adoption of green industrial policies.¹⁷ Third, industrial policy in one country can facilitate global environmental cooperation, by reducing the adjustment cost for other countries.¹⁸ Fourth, public investments can lead to cost reductions in low-carbon technologies.¹⁹ Beyond reducing the technology cost itself, sector-specific technology cooperation can lead to technical standards that accelerate global decarbonization. Scholars have argued for sector-specific “climate clubs,” or small groups of cooperating governments and firms that can develop and test solutions in each sector of the economy.²⁰ National climate industrial policy, if well designed, can enable these clubs. The US-EU agreement to negotiate the world’s first climate-based trade agreement for clean aluminum and steel (the Global Arrangement on Sustainable Steel and Aluminum [GASSA]) is an example of this approach.
• “A lack of administrative capacity means government will fail”: Decades of intentional efforts to hollow out state capacity have resulted in skepticism about the government’s ability to execute climate industrial strategy. This is a self-fulfilling prophecy: If we agree that climate industrial strategy is important for achieving our climate, national security, and economic objectives, we should all be laser focused on how to do it well (not whether to do it at all). In recognition of this fact, Congress and the Biden administration have supported novel institutional arrangements to better coordinate across government and with the private sector. This includes a new Joint Office of Energy and Transportation to support the deployment of $7.5 billion from the IIJA to build out a national EV charging network, as well as a new Office of Clean Energy Demonstrations at the Department of Energy. The administration should continue to learn from examples of institutions that have done industrial policy well, including by implementing milestone-based approaches and ending projects quickly when they are not succeeding (e.g., Advanced Research Projects Agency-Energy [ARPA-E]).²¹

For the first time, the full power of the US federal government is being marshaled to accelerate the clean energy transition. The challenge now is to take affirmative measures to overcome potential obstacles to implementation—from planning and permitting, to lack of administrative capacity, to workforce development, to supply chains—so that the US and world realize the promise of this historic investment.