Green industrial policies are best deployed carefully and in concert with other instruments. Green or not, industrial policy requires carefully navigating the twin dangers of market and governance failure. It is a difficult instrument to wield well and one that is best deployed in concert with pricing policies, norms, regulations, and consumer mandates. A careful analysis of the economic and environmental costs and benefits of green industrial policies is needed to assess their desirability. Particular attention must be paid to avoid potential unintended negative effects, such as rebound effects (especially if prices are inappropriate), misallocation of capital, or capture and rent-seeking behaviors. Institutional design needs to ensure that (i) green industrial policies have clear and measurable objectives, (ii) support to non-performing firms or technologies is terminated rapidly, (iii) tools are adjusted regularly to account for changes in technology costs and potentials, (iv) transparency and accountability processes are in place.

Past experience – especially in Asia – provides support for the ability of industrial policies to encourage changes in economic structures, even though it is unclear whether they would have passed a cost-benefit analysis. But even if they fail to provide domestic economic benefits through their employment or GDP impact, green industrial policies can provide global environmental benefits through their impact on emissions and green technology costs. Their proven ability to affect the economic structure makes them good candidates for green policies, since their objective is to eventually transform the economic structure to make it sustainable.

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