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A Green Economy Needs More Than Subsidies

While carbon pricing and industrial policies may have enabled policymakers in the United States and Europe to avoid difficult political choices, we cannot rely on these tools to achieve crucial climate goals. Climate policies must move away from focusing on green taxes and subsidies and enter the age of politics.

PARIS – In recent years, many policymakers thought they had found the perfect formula for implementing climate-friendly policies without facing difficult political tradeoffs: massive subsidies. This strategy, often associated with US President Joe Biden’s Inflation Reduction Act (IRA), has influenced several Western countries.

Historically, mainstream economists believed that the best way to facilitate a green transition was to establish a carbon price through taxation or quotas and then leave the relevant economic decisions to private actors. Unsurprisingly, many economists have criticized the IRA as a less efficient method of allocating resources. But they missed important aspects of policies based on green industrial subsidies.

Such policies managed to overcome some of the political obstacles that have hindered climate policymaking. They raised hopes that industrial interests, security concerns, and environmental priorities could be aligned. They balance voters’ deep concerns about climate change and workers’ demands for reindustrialization, and even serve some purely economic objectives.