1. Industrial Policy for a Green Economy Johannes Schwarzer WTO Public Forum 2015

2. Motivation
Failure to develop sound industrial bases has sparked renewed interest in IP
Environmental stress mandates the promotion of green industry
Decades of experience with traditional IP should provide lessons learned
To what extent do these lessons apply to green IP?
National economic welfare perspective

3. Definitions Industrial Policy (IP):
A set of policies that selectively favors the development of certain industries over others
Green Industrial Policy (GIP):
Extension to those industries with a relatively less harmful effect on the environment

4. Economic Rationale for (G)IP
Optimal production patterns and comparative advantage
Distorted or incomplete markets warrant government intervention
In IP context (non-exhaustive):
Marshallian externalities
Coordination Failures
Self-Discovery and Diversification
Credit Market Imperfections
Learning-By-Doing
Environmental Externalities
Economies of scale: Silicon Valley, technology parks
Profitability requires simultaneous investments
Underinvestment by pioneer entrepreneurs
Environment: Climate change biggest example for scale. Commitment problem (profitability depends on future gov policy). Endogeneity (Future policy depends on current investments)
IMPOR)TANT to keep in mind Gip is not only justified by environmental concerns!!!

5. IP Impact Evaluation Challenges
Attribution problem: eg subsidies and TFP
Opportunity costs, even if attribution solved
Benchmark for success: What’s the objective?
Economy-wide vs. sectoral
Mill (1848): ultimate viability of sector
Bastable (1904): cumulative net benefits > costs
Data problems  focus on trade related IP

6. Lessons learned Transparency, periodic review, performance criteria
Trade Protection: Theory vs. Practice
Openness: Trade volumes vs. trade measures
Don’t tax input goods!
GVCs
Trade Promotion:
Evidence for causal link to growth
Export subsidies may be coupled with protection
“competition-friendly”
FDI:
Most flows in growing sectors (reverse causality?)
Foreign equity raises productivity (joint-venture)
No horizontal, but vertical spillovers (LCR’s)

7. Which sectors to promote?
Comparative Advantage vs
Product Space ]

8. Implications for Green Industrial Policy
Scale of intervention: development of industry is endogenous to policy, in terms of market creation (e.g. future emissions ceilings). At the same time, creation of future market depends on current investment level (e.g. carbon taxes)
Depending on the nature of the market failure, industrial policies might be required for as long as market-based policies cannot be implemented.
The absence of a competitive market makes performance-based evaluation of GIP much harder in practice. Immaturity of the sector and uncoordinated GIPs worldwide contribute to various distortions, such that export data and world prices are less useful indicators than they were for rapidly industrializing Asian nations.