Clean energy: Revisiting the challenges of industrial policy

Abstract

Large public investments in clean energy technology arguably constitute an industrial policy. One rationale points to market failures that have not been corrected by other policies, most notably greenhouse gas emissions and dependence on oil. Another inspiration for clean energy policy reflects economic arguments of the 1980s. It suggests strategic government investments would increase U.S. firms' market share of a growing industry and thus help American firms and workers. This paper examines the reasoning for clean energy policy and concludes that:•While a case can be made that subsidizing clean energy might help address market failures, the case may be narrower than some assert, and turning theory into sound practice is no simple feat.•An appropriate price on greenhouse gases is an essential precondition to ensuring efficient incentives to develop and deploy cost-effective emissions-abating technologies. However, efficient prices alone are unlikely to generate efficient levels of basic research and development by private firms.•Government investments in clean energy are unlikely to produce net increases in employment in the long run, in part because pushing home-grown technologies at taxpayers' expense offers no guarantee that the eventual products ultimately would not be manufactured somewhere else.•Spending on clean energy technologies is not well suited to fiscal stimulus.The authors recommend that:•Federal energy spending should invest in technologies with the lowest expected cost of abatement and highest probability of market penetration.•Funding decisions ought to be insulated – as much as possible – from rent-seeking by interest groups, purely political distortions, and the parochial preferences of legislators.