Varieties of Green Growth Policies

Green growth policies have taken many forms. Some hold more promise than others

Scene from Miyazaki’s Nausicaä, 1989

Over the past few decades, we’ve seen a proliferation of new policies that claim to protect the environment and promote economic growth. After the 2008 financial crisis, countries like South Korea and the U.S. used fiscal stimulus to jumpstart green sectors and create green jobs. Others, such as Denmark and Germany, have leaned into strategies like carbon pricing and promoting energy efficiency. Still others, such as China and, more recently, the U.S., have taken a more direct approach by directly supporting the manufacturing of renewable energy sources and green technology. 

Michael Jacob’s 2013 chapter on Green Growth in The Handbook of Global Climate and Environment Policy provides a helpful framework for thinking about green growth policies.¹ Green growth policies fall into three broad categories: market-oriented interventions, green stimulus, or green development. In this post, I’ll go into each category and illustrate that green development, which focuses on the productive capacity for green technologies, offers the most potential.

Green growth policies

Market-oriented approaches. The first approach is the strategy of correcting market failures. The theoretical argument underpinning this approach is that current patterns of economic growth are suboptimal because they do not account for the environment as a factor of production and so resources are not allocated in an optimal way. The environment is not traditionally accounted for because it is unpriced and a collective good, giving private actors few incentives to value them properly in economic terms. This is a market failure because production and consumption decisions become distorted when the environment is not properly valued. One commonly referenced market failure is that economies under-invest in R&D for green technologies and over-invest in activities that degrade the environment.² By correcting these market failures, green policies can generate growth rather than hinder it. The solution is to enact policies that “price in” the environmental cost of energy consumption (e.g., carbon pricing/taxes) to incentivize firms to innovate and improve energy efficiency. This market-based approach culminated in the Kyoto Protocol, which attempted to build carbon markets as its core policy intervention.³

Green stimulus. The second approach draws on Keynesian economics, which advocates for fiscal spending to sustain aggregate demand during economic downturns. Green Keynesianism proposes investment in environmental projects to stimulate the economy and create new jobs. The idea is that during an economic slump, lost private sector demand would be replaced by public investments, specifically in sectors like energy efficiency, renewable energy, and environmental restoration. These sectors can offer opportunities for employment growth while simultaneously improving the environment and lowering emissions.

After the 2008 financial crisis, governments across the globe adopted this approach, with many fiscal stimulus packages containing substantial “green” components. South Korea led the charge, allocating 79 percent of its total stimulus spending to environmental programs, while China injected $219 billion and the U.S. $118 billion to green initiatives.⁴ What made Green Keynesianism particularly compelling was that green spending could be more effective for employment than non-green fiscal spending, even in the short term. Environmental projects, such as making buildings energy-efficient or improving water quality, were labor-intensive and required a wide range of workers, including unskilled labor. These projects were also location-specific and could not be offshored, making them especially appealing to rich countries where blue-collar work had incrementally been sent abroad since the 1970s.

Green development. The third policy approach is for government agencies to actively promote innovation and expand production capacity in green sectors like solar panels, wind turbines, batteries, and other green technologies using industrial policy. By doing so, states can create new jobs and induce a productivist revival. Several countries are already pursuing industrial policies to bolster green manufacturing. Danish and Spanish states were early supporters of manufacturing wind turbines. Germany was a first mover in the solar industry manufacturing. With the passage of the Inflation Reduction Act, the U.S. has also become a major player in green development. More so than any other country, China has prioritized green manufacturing, dedicating three of the seven strategic sectors in its 12th Five-Year Plan to alternative energy sources, electric vehicles, and energy-saving technologies.⁵ 

The case for green development

Although presented equally in the section above, these three policy approaches emerged sequentially. The market-based approach emerged first, leading to the implementation of international emissions trading schemes, which became effective with the Kyoto Protocol's entry into force in 2005. The green stimulus approach emerged next as a response to the 2008 financial crisis. Finally, the green development approach emerged last, originating in developing countries like China, which pursued greater energy independence and economic growth. The disruption of global supply chains during the COVID-19 pandemic and rising geopolitical tensions have also elevated the importance of energy and national security, driving the adoption of more green development policies.

Although each policy approach was shaped by its specific context, this chronology also suggests that each emerged, in part, as a response to the inadequacies of its predecessors and to the fact that throughout these years, we’ve continued to fall behind on our emission goals. If earlier policies had fixed the problem, later ones may not have been put into place. Luckily, the last policy approach in this sequence—green development—offers tremendous potential. Here's why.

First, green development policies offer the greatest potential for accelerating the transition to renewables. While market-oriented and green stimulus approaches offer incentives to reduce energy consumption and ensure that energy consumption is done efficiently, these approaches don’t do a particularly good job of directly increasing the productive capabilities of renewable energy production, without which green growth wouldn't be possible. On the other hand, green industrial policy is all about decreasing renewables' costs and making them a viable alternative. For instance, if it were not for green industrial policy in China, solar energy prices would not be competitive with traditional energy sources, making it prohibitive to transition given the cost-sensitivity of energy.

Second, the green development approach also offers the greatest potential for broad-based economic growth. Its most optimistic proponents say it can spark a "green industrial revolution" and unleash entirely new innovations that can transform production methods, products, and even lifestyles, reshaping the global economy as profoundly as the steam engine, railroads, and microprocessors did in previous eras. In other words, it has the potential to drive broad-based economic growth.⁶ In this way, the green development approach also has the greatest egalitarian (both within- and across-country inequality) potential because it focuses on strengthening a country’s productive capabilities—specifically, the capacity to develop and manufacture green technologies. 

For advanced economies, particularly in countries where manufacturing has been hollowed out, revitalizing the sector could reduce domestic inequality. This trend is evident in the U.S., where new place-based industrial policies aim to uplift economically disadvantaged regions. Manufacturing also holds the potential to bring back stable, well-paying jobs. This starkly contrasts the gigified and precarious employment regime that has become prevalent in the knowledge economy. The evidence supports this. In the U.S., the rise in income inequality has closely tracked the decline of manufacturing jobs.⁷ Research that looks at panel data for a range of countries between 1960 and 2012 also suggests that the movement of employment into the manufacturing sector reduces income inequality regardless of a country’s stage of development.⁸ 

Wouldn’t Keynesian green stimulus policies also reduce inequality? Admittedly, they can address within-country inequality by creating jobs and stimulating economic activity. However, for developing countries, Keynesian policies fall short. The primary challenge developing countries face is resource constraints, not a lack of demand.⁹ As a result, Green Keynesian policies can do little to address inequality between countries.

Instead, reducing across-country inequality will depend on the growth of developing economies, and for developing countries, reducing energy consumption is not an option. Demanding they do so would be robbing them of their opportunity to industrialize and uplift their population from poverty. The green development approach would allow developing countries to contribute to the green transition while prioritizing their own economic development by building domestic manufacturing capabilities in green technology, which, as I’ve written about in a previous post, is critical for economic development.

Concluding thoughts

Green development has the most potential among the three categories of green growth policies. However, whether or not there is a political will to implement green industrial policies isn't guaranteed. Even though it may promise growth, green development policies will inevitably create losers (e.g., energy incumbents like oil companies) who will resist such a policy agenda. How strong these incumbents are and whether or not policymakers can push through green industrial policy will vary country by country. This, however, will have to be the topic of a post for another day.

1. Jacobs, Michael. 2013. “Green Growth.” In The Handbook of Global Climate and Environment Policy, John Wiley & Sons, Ltd, 197–214.

2. Rodrik, D. 2014. “Green Industrial Policy.” Oxford Review of Economic Policy 30(3): 469–91.

3. Allan, Bentley, Joanna I. Lewis, and Thomas Oatley. 2021. “Green Industrial Policy and the Global Transformation of Climate Politics.” Global Environmental Politics 21(4): 1–19.

4. Jacobs (n 1)

5. Hopkins, Matthew, and Yin Li. 2016. “The Rise of the Chinese Solar Photovoltaic Industry.” In China as an Innovation Nation, eds. Yu Zhou, William Lazonick, and Yifei Sun. Oxford University Press, 306–32.

6. Jacobs (n 1)

7. Charles, Kerwin Kofi, Erik Hurst, and Mariel Schwartz. 2019. “The Transformation of Manufacturing and the Decline in US Employment.” NBER Macroeconomics Annual 33: 307–72.

8. Baymul, Cinar, and Kunal Sen. 2020. “Was Kuznets Right? New Evidence on the Relationship between Structural Transformation and Inequality.” The Journal of Development Studies 56(9): 1643–62

9. Hirschman, Albert O. 1981. “The Rise and Decline of Development Economics.” In Essays in Trespassing: Economics to Politics and Beyond, Cambridge [Eng.] ; New York: Cambridge University Press.