Countries representing more than 80% of the world economy have announced pledges to reach carbon neutrality by 2050. Meeting these targets implies transforming the economy towards the use of zero-carbon energy sources, which can only be done with a comprehensive set of policy instruments that trigger the necessary investments in green technologies and practices.

Green industrial policies can help tackle the barriers hindering decarbonisation: constraints on access to finance particularly to fund to research and development activities, access to skills and infrastructure, regulatory barriers for new entrants, lack of demand for green products, or first-mover disadvantage.

According to data collected as part of the Quantifying Industrial Strategies project, green industrial policy expenditures rose from 0.22% to 0.24% between 2019 and 2021 on average across the 9 countries covered, and represent around 15% of total industrial policy expenditure. In response to COVID-19, countries around the world – members of the OECD, the European Union and the G20 –announced USD 1.29 trillion of public spending for the development and deployment of low-carbon technologies. On average, OECD countries committed to spend the equivalent of 2% of one year of their GDP on low-carbon technologies.

In Covid-19 green stimulus packages, the energy and transportation sectors received the largest share of funding, 39% and 35% respectively. In contrast, only 4% of total funding was allocated to the industry sector. This appears small relative to the industry sector’s contribution to global annual greenhouse gas emissions (23%).

Most of the spending supports the deployment and adoption of mature technologies, while development of early-stage technologies receives a much smaller share, with only 6.6% of spending going towards research, development and demonstration (RD&D) and an additional 7.8% channeled towards the use of emerging technologies (hydrogen, smart grids and carbon capture, utilisation and storage). Subsequent rounds of fiscal spending might need to direct a larger share of low-carbon investment towards RD&D, which is crucial for long-term decarbonisation.

Green industrial strategies should not be limited to ramping up government support for R&D, innovation and technology deployment. They should also include green public procurement, re-skilling and up-skilling policies to reduce skill shortages in the future low-carbon industries, standards (e.g. on what constitutes green hydrogen), regulations (e.g.  energy-efficiency in buildings) and carbon pricing, which provides a technology-neutral incentive for low-carbon investment and consumption choices.

Industrial and competition policies have often been considered as antagonists, but there are important complementarities between them. Industrial and competition policies need to go hand in hand to continue to foster business dynamism, business entry and the efficient allocation of resources. Thus, targeted industrial policies should be competitive and, to the extent possible, technology neutral, which means that they should not discriminate between firms and technologies. This is complicated since some policy tools are by essence discriminatory (grants or loans, that are provided on a competitive basis).

Young firms, including innovative start-ups, are major contributors to the development of radically new technologies and are likely to play an important role in enabling the transition to a carbon-neutral economy. Yet, the contribution of young firms to innovation has decreased in recent years, in general as well as in green innovation.  Publicly provided financial instruments can support young and fast-growing firms, especially in downturns when capital markets are more risk averse.