How inefficient climate policies can build support for efficient ones

Debates over policy often proceed in a kind of vacuum, ignoring the political forces that shape the trajectory and character of policymaking. A new analysis in Science tries to counter this tendency in the area of climate policy, urging analysts to strategically consider the political effects of various policy alternatives.

More to the point: it asks them to get over their obsession with carbon pricing.

The economic argument for carbon pricing

There's a long-running dispute in climate circles between those who support economy-wide carbon pricing as the best and perhaps only legitimate climate policy and those who (also) support targeted "green industrial policy" that boosts specific industries or technologies (think renewable energy standards, feed-in tariffs, or technology subsidies).

The argument for economy-wide climate pricing — articulated frequently by economists, economist wannabes, and the Washington Post editorial page — is simple: Rather than "choosing winners and losers" by favoring this or that technology, putting an equal price on every ton of carbon emissions allows the invisible hand of the market to work its magic, making the cheapest emission reductions first and working up from there. It is perfectly economically efficient. In theory.

Green industrial policy, by focusing on particular sectors or technology, inevitably excludes some methods of reducing carbon and favors others. Consequently, it is less economically efficient — it costs more per ton of carbon reduced. And it raises the danger of "regulatory capture," by which beneficiaries of a targeted policy influence regulators to continue the policy.

That's the argument for carbon pricing uber alles, which is the default position of Very Serious People these days (when they think about climate change at all). And as long as the argument takes place on the plane of economic abstraction, it's difficult to counter.

(Shutterstock)

The argument for green industrial policy

But when the argument leaves the realm of economic abstraction and moves into the world of political economy, it's a different story. The two types of policy have very different political profiles and different political effects.

A carbon tax is a paradigmatic wide policy — it sends a weak signal to the entire economy. The damages are concentrated in carbon-heavy sectors (which also concentrates political opposition) while the benefits are spread broadly over the populace (which diffuses political support). Green industrial policies are narrow — they send a strong signal to a particular economic sector. Their benefits are concentrated, while their costs are diffuse or hidden. This lends them roughly the inverse political valence and makes them difficult to uproot once they are passed, as the resilience of state renewable energy standards shows.

I wrote the other day about the dawning realization among (some) economists that green industrial policy might be necessary as a way of building political support for carbon pricing. Now a new analysis in the journal Science helps put a little flesh on the bones of that idea.

Jonas Meckling and a group of fellow political scientists at UC Berkeley note that green industrial policy, by targeting its benefits, helps create industries and coalitions that support future policy. The classic historical example here is Germany:

German policies began with funding for research and development, then subsidies for demonstration projects during the 1970s and 1980s, and continued to larger-scale market formation programs, including a feed-in law after the 1986 Chernobyl disaster. These policies led to industrial expansion in wind and, later, solar energy production; these developments helped create and expand a coalition of interests that fought to defend existing measures and supported further measures.

For all the hassle Germany sometimes gets from wonks, it has sequenced its climate policies brilliantly. Each one creates more industries and constituencies that support further policy expansion.

This slow ramping up of policy holds in most places that have achieved carbon pricing, as this graphic shows:

(Science)

Here's the key takeaway:

Economists view [green industrial policies] as third- or fourth-best options for efficiency. But research in political science and law suggests that green industrial policy nurtures a political landscape of interests and coalitions that benefit from a transformation to low-carbon energy use—even when polluting industries might oppose it.

Targeted policies create the "political landscape of interests and coalitions" necessary to pass more ambitious policies like carbon pricing. With that in mind, the authors recommend a three-pronged strategy to policymakers.

The argument for strategic sequencing of climate policies

First, start with "targeted sector-specific policies," which concentrate benefits in a visible way. The very specificity that wonks hate is what gives green industrial policies their power. The benefits are easy to see and understand, unlike broader policies like carbon pricing, which are more abstract and less salient to normal voters.

Also, targeted policies can be linked with co-benefits that answer other policy concerns, thus opening up the space for coalition-building. (One example: reducing carbon pollution also tends to lower local pollutants like smog, which creates space for climate hawks to ally with health and social justice groups.) As long as political will for climate policy per se is limited, which it is likely to be for the foreseeable future, these coalitions will be important.

Second, "send direct, high-leverage policy signals rather than broad, shallow ones." Again, this is roughly the opposite of the economist's advice. But the weak, economy-wide signals economists support will tend to produce changes at the margin, within the paradigm established by status quo industries.

Serious political change requires more than that; it requires that the status quo be substantially disrupted. That in turn requires "concrete, meaningful changes in industry investment or structure" that can only be achieved with the strong, direct incentives created by green industrial policy.

Third, "sequence policies strategically." Done right, targeted policies can plant seeds that grow into political coalitions. Policymakers should be conscious about implementing laws and programs that grow those coalitions, with an eye toward eventually moving from targeted, specific policies to more general policies like carbon pricing.

Unfortunately, the authors don't say much about this strategic sequencing, other than to urge further research, to answer questions like these:

[W]hat type of policy sequences work in different types of political or energy systems? How can policy-makers avoid dead ends and maintain flexibility for adjusting policy measures? How can policy-makers best balance needs for politically salient and economically efficient policy interventions? When are policy-makers likely to retrench from decarbonization trajectories? How will opposing "brown" coalitions adapt over time to strategies based on these concepts?

Good questions! These are exactly the sort of inquiries I had in mind when I called for more attention to political economy among climate researchers.

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Real policy is still better than imaginary policy

On an economist's blackboard, carbon pricing is the most efficient policy, assuming it can be a) passed and b) raised to the right level.

It turns out, however, that those are heroic assumptions. Because its costs are concentrated and its benefits diffuse, carbon pricing is politically difficult. And it is not economically efficient if it takes 50 years to implement it and raise it high enough to work.

If targeted green industrial policy can help create political coalitions that support carbon pricing and get pricing implemented in, say, 10 years, then a portfolio of policies that begins with green industrial policy is more efficient. Real policy is better at reducing emissions than imaginary policy.

Thinking through policy this way — not just how many tons of carbon it reduces, but how much it helps build or grow political coalitions — is a much-needed shift in the climate community. Policy ideas are inert in the absence of political strategy.

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