14 Overcoming the political-economy bottlenecks to the green transition, Part 3

 From green political-economy principles to practice

So, given all these ideas, what could a green policy look like in practice? Detailed prescriptions are impossible, not least because context matters: not every country has the same problems, institutions, business and industries, organised actors or administrative capacity. History also matters, in the sense that legacies from previous political mobilisations may loom large, as obstacles and as tracks for adjustment paths. And democracy matters: people like me can, at best, present ideas and alternatives but decisions are and should be made by democratically elected officials. If that means things will go slowly, so be it. Ignoring democracy in the name of a ‘good’ idea can be a slippery slope – and probably unnecessary if we take distributive concerns seriously. Bearing in mind those caveats, there are some key principles that would help propel the green transition. The most important one is probably to invest publicly and invest heavily in the green transition. Three considerations feed this idea.

One, what you invest will come back as gains (or unrealised massive losses) in health, reconstruction of devastated areas, technological jumps, new infrastructure, etc. Green accounting will help: we must try to figure out likely returns (also, and particularly, against the costs of inaction; too much damage goes literally unnoticed because our accounting conventions seem unable to integrate them, as I pointed out in an earlier essay in this series). Find appropriate fiscal measures that combine green accounting and investment. Incentivise private investors to follow by nailing the government’s colours to the mast with big programmes. The short-term bonus is a rising short-term growth rate, which offsets part of the public borrowing, and that should alleviate at least some of the possibly emerging tensions. Moreover, since some of the green sub-programmes can quickly be turned on and off, we can avoid overheating the economy. If nations pool their green investment needs and issue national as well as international bonds, they will mutually insure each other, which ought to bring down the average interest rate. If climate change knows no borders, neither should its solutions.

Two, the radical uncertainty of the green transition requires governments to get involved in market-making, which allows the private sector to invest in risky sectors but without the debilitating technical, economic and political uncertainties that prevail today. Reducing that uncertainty is one of the key roles of governments in the green transition: they are, effectively, producing the public goods – tangible ones like robust energy grids or technical standards, and intangible ones like certainty – that will make the transition more likely to succeed. Biden’s IRA showed what can be accomplished: in August 2023, Paul Krugman reported in the New York Times that every public US Dollar generated two US Dollars in private investment.

Three, industrial policy will be a necessary part of the green transition. In part, this is tied up with the idea of governments as providers of public goods and passive and active adjustment plans. To some extent it also covers initiatives to foster skill acquisition, (green) innovation and recycling projects which will benefit all businesses, workers and households. Such horizontal industrial policies, with gains for all potential parties without discrimination by company or sector, are generally considered the most effective industrial policies, by producing a visible helping hand to support the invisible hand of private action. Ignore for a moment the usual Panglossian optimism of private considerations: we know that market failures exist, and governments usually are called upon to address those or clean up the mess that private actors have created. The deeper problem here is that the green transition is so revolutionary (and unique, as the historian Jean-Baptiste Fressoz has argued) that many of the frameworks we have used in the past and that offer templates for today, may not be as useful as we think. Put differently, while horizontal industrial policies will have their place, there are good reasons to believe that vertical industrial policies, which benefit individual sectors or companies, may be necessary again as well. The electrification of the car industry may require more than tough mandates and fines to succeed: skills, supply chains, charging grids, raw materials, etc. will be far more important than regulation, while simultaneously dismantling brown and constructing green plants will have massive destabilising effects on car industry-dependent regions. Energy, hydrogen, greening old and new housing all face the same problem that they will require regulatory and financial aid. In short, green industrial policies will probably be more like early developmental industrial policies (like those found in post-war France, Japan and Korea) than the quasi-mercantilist competitiveness-oriented ones that have prevailed since the neo-liberal revolution.

This raises one important problem: industrial policies require money, and larger economies have more of that. This matters less for a cross-border problem like climate change, where A’s efforts also benefit B’s, but one or two steps down the road, it may tilt the playing field towards larger countries, who can more easily subsidise more of their industries. Pooling funds and policies will go a long way towards a solution, as will Airbus-type cooperations for larger collective projects (the existing EPCEI could be repurposed for that), but it may make sense to rethink the single market in Europe, as well as international agreements on trade and cooperation, in light of its contribution to the green transition and related industrial policies.

By way of a short conclusion

Often it may seem as if the political will for a green transition is absent, despite the easy availability of technical solutions and our quite developed understanding of incentives and nudges to induce citizens to do the right thing. In this essay series I took a different line and argued that, in complex democracies, politics – the collective struggles over how to approach problems and solutions, and how to handle their distributive consequence – is an integral part of the adjustment process. Not only does the techno-economic optimism quickly reach its limits, but technocratic solutions are likely to produce a political backlash that sets us back more years (I wrote – ironically, perhaps – these words on 20 January 2025, the day when Biden’s green activism was replaced by Trump’s destructive eco-nihilism).

To support this key point on the centrality of politics, I reviewed a series of crucial political-economic problems linked to the start, development and effects of the green transition, followed by a broad mainly conceptual sketch of how these analyses can be turned into actual policies. While all of this is still quite schematic, I think this conceptual political economy of the green transition helps us understand better why we face problems and how to think about solutions. One lesson became clear to me as was thinking through these problems: even though some of the adjustment can be, and probably should be, carried by individuals and companies in markets, much of it requires governance solutions that address market failures: many instances of undersupplied yet necessary public goods, problems of collective action that lead to collective hold-ups, and time-inconsistency issues that put today’s adjustment costs in stark terms but discount future gains. Since market failures can, by definition, not be resolved through market mechanisms, we need public and private non-market actors and processes to step in. This may make the green transition a messier process than first-best world thinkers anticipate – but that’s because democracies are messy, not because we could not do any better. There are no magic bullets like cold nuclear fusion that will sort out all energy problems, and even if there were, their existence does not resolve the distributive problems that would follow an adaptation of our lives to those new energy sources. Not every problem has a technical solution that just requires getting some basic incentives right to be implemented.

This emphasis on politics as a central part of the green transition has one large advantage, however. Deliberation, negotiation and experimentation are, in complex democracies, all part of the toolbox that will guide our adjustment processes. While it may be impossible for all of us to agree fully on the exact nature of the problem, or on the solutions and the costs we will bear (and the likely benefits), we can discuss these and find ways forward that get us where we need to be with the smallest possible costs spread over the largest number of broader shoulders. Not everyone will be happy, but that is also a characteristic of democratic decision-making: majorities must respect minorities, but when all said and done, they also have to rule. Understanding the political economy of the adjustment in a green transition, with its emphasis on likely winners and losers, hold-ups, and structural systemic issues, is a necessary step when thinking about governance mechanisms that bring us closer to an inclusive net-zero future.