The role of the state in green transition based on active industrial policy

The state plays a potentially important role in the processes of industrial renewal by adopting an active “green” industrial policy, since different types of market failures or system weaknesses can prevent the growth of new and more environmentally friendly technology. All too often, however, attempts to address such failures give rise to new problems and additional cost because the shaping of the policy fails to achieve the goals set and/or it creates unintentional repercussions in the economy. The role of the state in the development of new technology is therefore difficult and complex.

This report discusses and reviews the role of the state in the green transition of industry whereby it adopts a so-called green industrial policy. Our purpose has been to look specifically at the role of the state in connection with sustainable capital-intensive investment, a typical example of which is the possibility of a lithium-ion battery factory in Sweden. This report is based on an analysis of the existing research on the pros and cons of green industrial policy.

A first step is to discuss the various arguments for and against green industrial policy. One argument overriding the others in favour of such a policy is that high investment risks mean private-sector actors are not sufficiently keen to invest in new and untried technology. Their level of keenness may also be adversely affected by the fact that knowledge about new technology is a collective benefit; i.e. the knowledge developed “spills over” to other actors, which means any investment return will be lower for the private-sector actor than for the economy as a whole.

The risks associated with green industrial policy include the fact that it could be “hijacked” by special interests which do not have the ability to develop the new technology by effec­tive means, and the fact that the insufficient amount of information available would make it difficult for state actors to invest in the right technology. There are, moreover, diffi­culties associated with shaping a policy that can accurately pinpoint the most important risks and gaps in knowledge, including the risk that the different positive effects of the industrial policy will be realised outside the country’s borders.

In a further step the report identifies and discusses the basis on which to shape green industrial policy. There needs to be clear accountability and transparency on the part of the state in the sense that there are clear visions, goals and ideas about which specific role the state ought to play in order to promote the desired development. In addition, the industrial policy ought to be based on a good understanding of the process of technological develop­ment; i.e. the stages of development, feedback mechanisms and the specific obstacles encountered by new technology in the innovation system. In the case of capital-intensive green investment with a long life it is also especially important that a consistent, far-sighted policy is in place to make the transition. Furthermore, no decisions regarding the shaping and implementing of the policy ought to be done independently of the skills and experience available in the industry in question, although this should involve making sure at all times that it does not compromise the independent standing of the state.

Different types of specific instruments have different purposes, and as a rule what is needed is a “mix” of different instruments for implementing a green industrial policy that is fit for purpose. The report makes a distinction between technical, market-driving and system-wide instruments. In the context of this categorisation, the report concludes with a brief review of which specific instruments could be used for realising the policy chosen. The analysis here is not exhaustive, but the report provides a number of examples of how the choice of instruments can influence the conditions for implementing a green industrial policy that is fit for purpose.

The role of the state in green transition based on active industrial policy

Serial number: PM 2018:10

Reference number: 2016/236

Download the report in Swedish Pdf, 958.1 kB.


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