policy aims at discovering and developing the appropriate new technologies and products, and cannot be expected to succeed in all cases. There is thus a real potential for costly failure and waste of scarce public resources, as illustrated by well-known examples (e.g., the large support of Norway to Norsk Data, which went bankrupt in 1993).

**Table 2: Situations in which industrial policies can represent a useful** **<u>complement or alternative to price instruments</u>**

||Effectiveness<br>|of price instrument<br>|
|---|---|---|
|Ability to change prices|**High**<br>_Market failure_: Only the environmental<br>externality|**Low**<br>_Market failure_: Environmental externality, and<br>economies of scale, learning by doing,<br>knowledge externality, coordination failure,<br>missing markets, or lack of long term<br>credibility of carbon price|
|**High**<br>_Political economy_<br>_failure:_<br>_N_one|_Examples_:<br>-Acid rains caused by sulfur and<br>nitrogen oxides<br>-Power generation reliant on coal while<br>cheap alternatives (e.g. gas) are available.<br>_Challenge/objective:_internalize<br>environmental externality<br>_Policy instruments:_<br>- Classical market-based instruments:<br>environmental tax, allowance market.<br>(e.g. US Acid Rain Program, EU-ETS)|_Example_: Offshore wind power stuck in the<br>“valley of death”* (despite the carbon price<br>given by the EU-ETS)<br>_Challenge/objective:_accelerate technology<br>development and diffusion<br>_Policy instruments: sunrise_industrial policies_:_<br>- R&D subsidies,<br>- Feed-in-tariffs and tenders<br>- Forward contracts and market “making” (e.g.<br>Pilot large-scale offshore wind projects,<br>France 2011-2013)|
|**Low**<br>_Political economy_<br>_failure:_<br>Limited social<br>acceptability of higher<br>prices<br>Competitiveness<br>concerns<br>Lobbying power of<br>losing industries|_Example_: Low energy cost leads to high<br>energy consumption and environmental<br>costs<br>_Objective_: Reform energy subsidies<br>_Challenge:_improve social/political<br>acceptability of higher energy prices<br>_Policy instruments:_complement tariff<br>increases** with:<br>-<br>targeted cash transfer to the poor<br>delinked from energy consumption<br>(e.g. unconditional cash transfers in<br>Indonesia, Iran)<br>-<br>improve social safety nets (e.g.<br>energy subsidy reform in Armenia)<br>-<br>Support to urban mass transit (e.g.,<br>subsidized loans for bus purchase in<br>Nigeria) and vulnerable firms (Iran).|<br>_Example_: private transport dependent on<br>energy-inefficient cars<br>_Objective:_increase fuel prices_and_introduce<br>new transport technologies<br>_Challenge:_improve social/political<br>acceptability of higher fuel prices, manage<br>competitiveness issues; trigger R&D into new<br>car technologies & allow for large scale<br>deployment to exploit economies of scale.<br>_Policy instruments:_<br>- CAFE standards to reduce energy intensity of<br>new cars without negatively affecting owners of<br>energy-inefficient vehicles<br>-“feebates“ programs and other incentives to<br>subsidize learning by doing in favor of high<br>potential technologies (hybrid and electric<br>vehicles)|

_(*) The “valley of death” refers to the fact that many technically viable technologies never take off usually due to the inability of their creators to make them commercially viable._ _(**) see_ (IMF, 2013)) _._ 18