The low-carbon transition presents opportunities for economic growth and development as well as risks of losing strong competitive positions as industries undergo structural change.
There is a risk of stranded regions, communities, and industries as well as stranded assets, with negative consequences for productivity, taxes, social spending, and well-being. Countries cannot opt out of these risks by not decarbonizing, as the transition is global and the economic context changing, but governments can decide how to respond.
- If a government decides to take action to increase national competitiveness in the context of the low-carbon transition, two main policy questions arise: (1) In which technologies, sectors, or areas of economic activity should these efforts be focused? (2) Which policies are likely to be most effective in increasing national competitiveness in these areas? These are strategic questions, and their answers are inherently uncertain.
- Analytical tools for identifying areas to focus on include technology learning curves, input-output analysis, the revealed comparative advantage, economic complexity analysis, and gravity models. However, all these tools have limitations and should be complemented by qualitative knowledge of national industries, skills, resources, and places.
- Conceptual frameworks for understanding the role of policy include market failure, market-shaping, smart specialization strategy, green industrial policy, and mission-oriented industrial strategy. These frameworks can indicate the kinds of policies likely to be successful in building competitiveness but not the specific policies that are likely to succeed in any given situation.
- There is a foundational difference between market-failure and market-shaping frameworks. The former is concerned with removing obstacles to the efficient allocation of economic resources (Pareto optimality) at a fixed point in time and presumes policy intervention is only justified if it addresses a market failure. The latter is appropriate when the aim is to achieve economic change in a particular direction and presumes an intervention can be justified if it prepares for change that is likely, creates change that is desirable, or avoids change that is undesirable.
- Models that simulate processes of change in the economy can to some degree inform the selection of policies intended to build low-carbon competitiveness. Technology diffusion models can indicate which policies are likely to grow domestic markets for clean technologies. Agent-based models can test industry’s or investors’ reaction to policy, or show the effect of different countries’ policies within the global market.
Overreliance on quantitative models can be risky as the outcomes of any innovation and industrial policy are subject to substantial uncertainties. Analysts can sense-check and complement model outputs through comparison with other forms of information, and scenario analysis can be used as a structured way of exploring uncertainty.
Keywords
analytical toolscompetitivenessindustrial strategytechnologytransition
