Is Industrial Policy Undermining the Fight against Climate Change?
Todd Tucker has a new JIEL piece called "Towards a post-Trump order for the climate crisis." It has been a couple years since I've engaged with something from Todd, so I'm going to use this piece to try to revive our decades-long debates. Fingers crossed that I can goad him into a response (and the provocative post title I chose was designed for that purpose!).
Todd starts off this way:
For nearly as long as scientists have known about the climate change problem, economists have advocated for their preferred ‘first best’ solution: carbon pricing, whether through taxes or cap-and-trade schemes. Libertarian economist Milton Friedman and conservative pundit William F. Buckley saw in such fees a market-friendly (or the least market-unfriendly) way of encouraging entrepreneurs to reduce pollution, without the government attempting to dictate what technological pathway would get society there.6 As recently as March 2024, scholars at the International Monetary Fund (IMF) continued to insist that carbon pricing will be the ‘centerpiece of an efficient mitigation policy’.7 For decades, this carbon pricing consensus operated as a closed loop, where economists loudly proclaimed the superiority of carbon pricing, shifted responsibility to politicians to figure out how to advance it, and then denounced them when they failed to do so.8
Just a quick reaction here: I can't speak to William F. Buckley's views, but it sounds like these economists think climate change is a real problem and want to do something about it!
Now we get into the politics. Todd raises concerns about the political viability of carbon pricing:
Yet carbon pricing ran into numerous real-world obstacles: by raising costs for consumers and industries in a highly visible manner in the short term, it became a political target. First, major jurisdictions like the USA tried and failed to pass carbon pricing, due in large part to concerns about international competitiveness. The high-water mark in the USA before the Biden administration was the 2010 Waxman–Markey Act, which failed to even get a vote in the US Senate.9 Secondly, other jurisdictions enacted and later repealed carbon prices (Australia, Ontario) or provided emissions allowances that lessened their bite (European Union (EU), South Africa).10 Thirdly, even in a jurisdiction like Canada that followed the more political economy-sensitive path of pairing a carbon price with dividend rebate checks to citizens, carbon pricing was rolled back (in 2025).11 Finally, studies showing the benefit of carbon pricing focus overwhelmingly on two jurisdictions that have pronounced democratic deficits (the EU) or are not democracies at all (China)—suggesting carbon pricing may be easier to implement in polities less responsive to public opinion.12
I think it should be pretty obvious to anyone who pays even the slightest bit of attention to politics that raising people's taxes (or imposing similar costs) is generally a tough sell with voters. Carbon pricing is no different. To prevent a taxpayer revolt in response to carbon pricing, my suggestion would be to take these actions in the form of a revenue neutral carbon tax, through which you raise taxes on carbon emissions but reduce them elsewhere. If most people come out roughly neutral, that will lessen their concerns.
I can imagine Todd might say in response that in his Canada example, they tried something like that and it didn't have much success. I'd have to look into exactly how those dividend rebate checks worked, but I would just note that Canada is a country with lots of oil, and in countries where oil is such an important part of the economy, carbon pricing is going to be particularly difficult.
Now Todd gets into his preferred alternative, which is industrial policy (including subsidies):
Clearly, then, carbon pricing is not politically optimal. But at the same time, scholars began to question whether it was even necessary or sufficient policy. Economists noted that getting firms to internalize the externality of carbon emissions was only one piece of the puzzle. On their own, the schemes are inflationary on the fossil economy, without necessarily building the clean energy economy to replace it. Equally significant market failures came in the form of identifying the right mix of carrots and sticks to nurture infant industries,13 solving the coordination failures that require multiple industries to scale up production collectively (or fail individually),14 and navigating complex (re)distributional problems.15 As a result, industrial policy that addressed this wider set of market failures may be better seen not as a second-best alternative to carbon pricing, but as a first-best strategy that may result in more credible international climate commitments.16
It is thus not surprising that policymakers and advocates began gravitating towards industrial policy. On the left, this was explicitly climate-coded in the form of Rep. Alexandria Ocasio-Cortez’s Green New Deal (GND), released in February 2019.17 On the right, that same month, then-Senator Marco Rubio put out a major report documenting how China had come to dominate clean energy supply chains, and advocated for industrial policy to allow America to catch up.18 Across the political spectrum, climate became less foregrounded as an ecological concern, and more centred on economic development, jobs, and security aspirations. Thirty months after the GND’s release, by August 2022, the USA had passed three major industrial policy bills: the Inflation Reduction Act (IRA), the CHIPS and Science Act, and the Bipartisan Infrastructure Law. The latter two were passed on a bipartisan basis, while the former passed with only Democratic votes, but was subsequently embraced by substantial numbers of Republicans whose districts benefited from the federal spending.19
The results were objectively impressive, with over a year and a half of record-breaking manufacturing construction, hundreds of new facilities across the country, and an almost doubling of clean energy investments—felt most extensively in poor and fossil-dependent communities, as well as those that suffered the worst impacts from the China shock.20 Ironically, while concerns that China would pollute and grab market share if the USA shackled its domestic industries with a carbon price had deterred the USA from taking climate action before 2015, China staking out clean technology targets post-2015 finally enabled it.21
Todd seems to be trying to make the case that the Biden administration's clean energy industrial policy worked, but did it? Let's evaluate this in three ways.
Starting with the fundamental issue, has this industrial policy led to reduced carbon emissions in the U.S.? I don't think Todd is arguing that it has done so yet, so on that metric we'll have to wait and see where things stand in a few years.
As to the economics of the policy, Todd points to high levels of investment in factories that produce clean energy products, which of course is a good place to start. But if this investment doesn't lead to financially viable companies, I'm not sure you can call the policy a success. Will the factories that are being built be able to sell their products in the market and make a profit? If not, they will either go out of business or require long-term taxpayer support. Again, we'll see how things go.
And then there is the politics. As I see it, Biden did much of what Todd wanted on clean energy industrial policy, but the Democrats lost the 2024 election to Trump, someone who -- to put it mildly and blandly! -- doesn't believe in taking action to reduce carbon emissions. Biden was way behind in the polls, and then Harris came back a bit when she stepped in, but she still lost. And the Republicans took over the Senate too. So, voters do not seem to have embraced this high profile clean energy industrial policy effort, and currently Republicans are both rolling back Biden's clean energy industrial policies and pushing forward on a wide range of policies that are likely to increase carbon emissions. While assessing the causes of political outcomes can be difficult, it is possible that the big push for clean energy industrial policy under Biden contributed to a backlash that is taking us in the wrong direction on reducing carbon emissions. This is something industrial policy supporters probably need to grapple with a bit more than they have.
Todd says one last thing I want to comment on, where he makes his case for a new approach to the trade related aspects of global coordination on reducing carbon emissions:
A new approach could help a balance between the reality that global emissions are what matter for the planet, and the practicality that policy response must come first and foremost from national governments (and so must have domestic buy-in and legitimacy). New generations of trade agreements could liberalize the rules for the use of green subsidies, allowing governments to spend the $4 to 6 trillion a year needed to get emissions on a lower trajectory.41 In lieu of MFN, a new deal architecture would allow carbon clubs that discriminate between countries and products on the basis of climate policies and embedded emissions. New rules could also allow greater recourse to local content requirements, which are often per se prohibited in trade deals,42 provided some level of contribution to domestic green economic development goals is met. Moreover, negotiators should take stock of the types of subsidies that countries have used over the last decade to promote clean energy transitions, and cross-reference them with relevant trade agreement carve-outs to see whether the latter conflict. For example, the most effective subsidies might be available on a repeated basis, or might cover more than 20 per cent of the cost of adaptation for a firm or industry—either of which could cross thresholds between non-actionable and actionable subsidies in trade agreements.43 Given the complexity of such product- and emissions-specific rules, it is likely that the first generation of these new trade agreements would need to be industry- and sector-specific.44
The question I would ask here is, would any of these actions lead to a reduction in carbon emissions? I'm not sure how they would do so. If your goal is to have countries around the world reduce their carbon emissions, it's important to think about how your proposals might get us there.
In this regard, one of Todd's proposals is a discriminatory climate club. But it's not clear how a discriminatory climate club led by a country on the higher end of the carbon emissions per capita continuum will convince countries with lower carbon emissions per capita to reduce their carbon emissions. I'm curious how Todd thinks this approach would convince countries such as India to reduce their carbon emissions.
Another possibility he mentions is "liberaliz[ing] the rules for the use of green subsidies, allowing governments to spend the $4 to 6 trillion a year needed to get emissions on a lower trajectory." But of course, you could spend that amount already by giving subsidies to consumers without a component that discriminates based on the nationality of the product, which would be an effective way to encourage the transition to clean energy. (And if, on the other hand, you include some sort of discriminatory element in the subsidies, then you reduce the effectiveness of the measures and open yourself up to trade conflict.)
As for the local content requirements Todd mentions, they, too, limit the effectiveness of government efforts to reduce carbon emissions, and lead to trade tensions as well.
Overall, I'm very skeptical that the approach he sets out here will lead to a reduction in carbon emissions around the world. Maybe there are other goals, and maybe the approach achieves them. But if the focus is reducing carbon emissions, I don't think this is the way forward on international coordination.