Beyond the ‘Grow Now – Clean Up Later’ Logic

Historically, the common approach to economic development in the context of sustainability has consisted of focusing on getting rich first and hoping to have the resources to fix the environment later (Reference Ekins and ZenghelisEkins and Zenghelis, 2021). Recent evidence also suggests that industrialised nations with higher export sophistication have a higher ability to lower greenhouse gas (GHG) emissions (Reference Romero and GramkowRomero and Gramkow, 2021), with considerable path dependence between manufacturing capabilities and low-carbon technologies. For instance, Brazil’s pre-existing aerospace sector helped to develop a wind turbine industry (Reference HochstetlerHochstetler, 2020); Malaysia and China’s existing electronics capabilities supported the domestic production of solar cells, while Norway’s offshore oil production helped the country develop an offshore wind energy industry. Policymakers may also want to pursue the ‘grow now, clean up later’ strategy to wait until environmental solutions have been developed elsewhere and incremental improvements, learning by doing, and economies of scale have brought costs down, rather than incurring development costs themselves (Reference Arrow and RowleyArrow, 1972; Reference Guo and FanGuo & Fan, 2017). Lastly, delaying environmental action may also be preferred to avoid political resistance (Reference Pegels and AltenburgPegels and Altenburg, 2020).

However, this strategy presents severe limitations:

1. (1) Delaying action to embark on a green transformation implies high risks, not only of ecological damage but also of losses from asset stranding and lock-in in carbon-intensive economic, innovation, and institutional pathways, especially because energy systems are subject to long-lived path dependence (Reference Aghion, Hepburn, Teytelboym, Zenghelis and FouquetAghion et al., 2019; Reference FouquetFouquet, 2016).

2. (2) Delaying greening can also incur extra costs of having to pursue more radical restructuring measures if they are delayed to the future (Reference Acemoglu, Aghion, Bursztyn and HemousAcemoglu et al., 2012; Reference Pegels and AltenburgPegels and Altenburg, 2020; Reference SternStern, 2007).

3. (3) There is an element of game theory in the economics of decarbonisation, as the actions of others influence one’s optimal development strategy. If the world’s major consumer markets go green, there are high risks for economies that remain carbon-intensive, regardless of their income status. In anticipation of new green trade regulations and sustainability standards, countries will have to shift their productive capabilities towards the export of green goods and services to retain access to the largest consumer markets. The European Union’s (EU) recent Carbon Border Adjustment Mechanism (CBAM) is a case in point, as it is estimated to cause losses of up to $31 billion across the African continent (Reference Aggad and LukeAggad and Luke, 2023).

4. (4) Delaying greening can hinder a country’s ability to seize market and investment opportunities that decarbonisation provides, thereby missing out on thegaining first-mover advantage in some strategic industries.

If we understand development as being about opening pathways to prosperity rather than locking in non-viable growth, which is the view that this Element takes, then early greening (including in developing and fossil-fuel-dependent economies) can help bring about a range of benefits and open up new entry doors for industrialisation by gaining a foothold in the markets of the future (Reference Pegels and AltenburgPegels and Altenburg, 2020). As best phrased by Reference Perez, Jacobs and MazzucatoCarlota Perez (2016), ‘increasingly, the greatest window of opportunity of the present day is the possibility of overcoming the contextual legacy of the previous paradigm; in this case, the environmental degradation and resource scarcity brought about by the age of oil and mass production.’ And in many ways, the global green transformation also provides a new direction for techno-economic development (Reference Lema and PerezLema and Perez, 2024). The synergies between economic development and sustainability are further explained in what follows, with specific reference to the green reconfiguration of industrialisation.

Industrialisation is Dead. Long Live (Green) Industrialisation?

The role that industrialisation can play in the context of ecological sustainability is often overlooked and misunderstood. Both neoclassical and degrowth economics (or at least part of it) can be accused of a methodological fixation on consumption, with much less attention devoted to what sustainability entails in terms of the transformation of productive structures. Humanity does have a consumption problem, but the challenge of ecological sustainability goes beyond consuming less or differently, as it also involves an ancillary shift towards low-carbon manufacturing, given the important potential that new technologies and manufacturing transitions have in drastically reducing the material and energy content of consumption patterns (Reference Anzolin and LebdiouiAnzolin and Lebdioui, 2021; Reference Okereke, Coke and GeebreyesusOkereke et al. 2019; Reference Perez, Jacobs and MazzucatoPerez, 2016). Nonetheless, industrialisation as we know it has to change. Historically, industrialisation has had a pernicious ecological impact (industry currently accounts for 30 per cent of GHG emissions globally). However, we must not throw the baby with the bathwater: climate-compatible industrialisation model is possible but needs to be based on new principles of resource efficiency and durability. In the following, I describe three main channels in which sustainability and industrialisation goals mutually reinforce each other.

1. (1) Seizing ‘green windows of opportunity’ for industrialisation: It is increasingly evident that the large-scale deployment of low-carbon technologies opens a new wave of opportunity for industrialisation, the so-called ‘green window of opportunity’ (GWO) (Reference Lema, Fu and RabellottiLema et al., 2020). Though there are blocked routes to standard industrialisation given intense competition (Reference Morris, Kaplinsky and KaplanMorris et al., 2012), nations can still be early movers in ‘industries without smokestacks’ (Reference Newfarmer, Page and TarpNewfarmer et al., 2019), which hold considerable potential for jobs creation and technological innovation (see Section 4). Opportunities exist to industrialise not only by integrating key segments of low-carbon technology supply chains (e.g. the manufacturing of electric batteries) but also by taking advantage of abundant clean energy generation as feedstock to develop competitive energy-intensive services and manufacturing activities.

2. (2) Clean energy transitions as enablers of the Fourth Industrial Revolution (4IR): Energy transitions are a backbone pillar to sustain the 4IR, which is defined as the advent of ‘cyber–physical systems’ involving entirely new capabilities for industrial production. Whether it is digitalisation, automation, artificial intelligence, 3D printing, blockchains, the Internet of Things (IoT), or Big Data, the 4IR technologies are highly energy-intensive and can consequently generate a high carbon footprint. Estimates suggest that the energy demand of the Information and Communication Industry is already higher than the aviation sector (Reference Freitag, Berners-Lee and WiddicksFreitag et al., 2021).Footnote ³ Given the already increasing calls by the international community to reduce the environmental impact of artificial intelligence systems and data infrastructures (Reference Balsameda, Melguizo and MunozBalsameda et al., 2022; UNESCO, 2022), the 4IR will have to go hand in hand with clean energy deployment and broader ecological sustainability. In that perspective, failure to ensure access to cheap, reliable, and clean energy sources in some nations may hinder their ability to uptake a state-of-the-art industrialisation strategy. In those contexts, the 4IR may not offer the anticipated ‘leap’ forward (Reference Mazibuko-Makena and Kraemer-MbulaMazibuko-Makena and Kraemer-Mbula, 2021).

3. (3) Value addition through environmental upgrading and circular economy: The classic understanding of economic upgrading has been linked to improvements in the ability of firms to move into more profitable and/or technologically sophisticated economic niches (Reference Gereffi, Ponte, Gereffi and Raj-ReichertGereffi, 2019). However, over the past decade, the environmental dimensions of value addition have started gaining attention, which has led to the concept of environmental upgrading, whereby value is created by adopting environmental measures in value chains (Reference Marchi, Maria and MicelliDe Marchi, Di Maria, and Micelli 2013; Reference PontePonte, 2019; Reference Khan, Ponte and Lund-ThomsenKhan et al., 2020).

   Environmental upgrading can generate process, product, as well as intersectoral upgrading. Process upgrading occurs by increasing production efficiency either through better organization of internal processes or the use of superior technology (Reference Humphrey and SchmitzHumphrey and Schmitz, 2000). Circular economy approaches, which involve careful management of material flows and aim to decouple economic growth from the consumption of finite resources by reducing and reinserting waste into production processes (Reference MacArthur Foundation.Ellen MacArthur Foundation, 2015), are particularly relevant for process upgrading as they can entail considerable net material cost savings for manufacturing sectors. Increasing resource efficiency can lead to higher cost competitiveness, as firms require less inputs to produce the same amount of outputs.Footnote ⁴

   Sustainability measures can also generate intersectoral upgrading (also known as chain upgrading), which denotes the entry of a firm into a completely new value chain using capabilities acquired through the production of another good. In contrast to linear production systems, where growing trade in non-valuable scrap and waste exacerbates environmental damage and leads to the dumping of waste from developed to developing regions which often have weaker regulations (as illustrated by the case of dumping of used apparel in Chile, Reference Al JazeeraAl Jazeera, 2021), circular production systems present an opportunity to use these materials as valuable input for production processes in other industries (Reference MacArthur Foundation.Ellen MacArthur Foundation, 2015). Indeed, synergies exist in terms of demand and supply of waste material and its re-use across different supply chains across countries, which can help improve productivity and provide new opportunities for firms to enter new value chains. For instance, in Uruguay, dairy farmers who began to reuse organic waste from their cows to produce biofuels were able to generate as much as 40% additional revenues from biofuel production, besides milk production.Footnote ⁵

   Lastly, sustainability measures can help achieve product upgrading, that is increasing the competitiveness and value of products by increasing their durability and/or lowering their environmental impact. To remain competitive in the context of sustainability trends and increasing consumer preference for products that have a lower carbon and material footprint, firms can capture market premiums through product differentiation for goods and services whose eco-friendliness either lies in their production (e.g. clothes made out of recycled material) or their consumption (e.g. re-usable cups, electricity-saving gadgets, or durable/easily repairable products). Beyond the expectations of direct monetary returns (as eco-friendly options tend to have a higher price tag than regular products), firms may also adopt sustainability measures to reap reputational value. Recent studies even show that a firm’s reputation for being committed to sustainability is an intangible resource that can increase the value of a firm’s expected cash flows. (Reference Lourenço, Callen, Branco and CurtoLourenço et al., 2014)

For all the aforementioned reasons, we must go beyond an unproductive confrontation between the sustainability and the industrialisation agenda. However, not all countries are equally well-positioned to benefit from green industrialisation opportunities, and some have already taken a head start.

Conforming or Defying Comparative Advantage to Acquire Green Productive Capabilities?

Why is China better than everyone else at producing solar panels? Why is Denmark so good at producing wind turbines? Why is Austria one of the largest exporters of hydropower equipment? Can the performance of these countries be solely explained by the idea that they have a comparative advantage in producing those goods?

For understanding how countries acquire new productive capabilities required for green industrialisation, it is worth going back to the longstanding debate on whether state interventions should conform or defy comparative advantage (see Reference Lin and ChangLin and Chang, 2009). The concept of comparative advantage, one of the core concepts of economics invented by Ricardo over 200 years ago, stipulates that nations can gain an international trade advantage when they focus on producing goods that produce the lowest opportunity costs as compared to other nations. However, many countries have industrialised successfully by developing capabilities and learning by doing in sectors in which they did not have comparative advantage (Reference ChangChang, 2006). In that sense, static interpretations of the concept of comparative advantage tend to be path-dependent upon established capabilities, thereby consolidating the status quo as they have been mostly unfavourable to industrial development in poor countries where pre-existing capabilities often lack and have tended to condemn them to export unprocessed natural resources that they dispose of (which can be quite problematic in the context of climate change as explained in Section 2).Footnote ⁶

As shown in Figure 1, most countries with a revealed comparative advantage in low-carbon technology products and environmental goods tend to be already industrialised, mostly high-income nations (especially in East Asia, the EU, and the USA). If the transition to a low-carbon economy enables high green industrialised prospects for already industrialised nations while renewing the limited role of most developing countries as sources of raw materials, the status quo is likely to increase economic disparities within countries, which casts doubts on the central promise of the UN sustainable development goals to leave no one behind. Some distinctions must also be drawn between ‘developing countries’, which, as a category, lump together countries facing very different situations, ranging from China, Malaysia, and Mexico, which have developed green industrial capabilities, to low-income commodity-based nations such as Suriname, Togo, and Papua New Guinea. For this reason, this Element will often refer to industrialised and latecomers, or specially refer to commodity-dependent developing nations in the context of acute exposure to climate risks (see Section 2).

Figure 1

Revealed comparative advantage in low-carbon technology products and environmental goods (2019–2021)Footnote ⁷

Source: Elaboration based on the IMF climate dataset

Rather than accepting that countries have gotten where they are by exploiting their existing comparative advantages, the key question we should ask is how they have developed new productive capabilities and acquired new comparative advantages. In that sense, dynamic approaches to comparative advantage (which feature more prominently in the structuralist, neo-Schumpeterian, developmentalist, and institutionalist schools of economics) feature a wider scope for the role of the state, responsible for shaping productive transformation away from ‘low-quality activities’ towards ‘high-quality activities’ that are characterised by economies of scale, technological upgrading, high productivity and wages (see Reference ChangChang, 2003; Reference Cimoli, Dosi and StiglitzCimoli et al., 2009; Reference MazzucatoMazzucato, 2016; Reference Nurkse and EllisNurske, 1961; Reference PerezPerez, 2010, Reference Perez, Jacobs and Mazzucato2016; Reference Salazar-Xirinachs and SunkelSalazar-Xirinachs, 1993). As further explored in Section 4, such an approach is better suited to explain the role that state interventions have had in stimulating the acquisition of green productive capabilities in several developed and developing countries (Reference Altenburg and RodrikAltenburg and Rodrik, 2017; Reference Anzolin and LebdiouiAnzolin and Lebdioui, 2021; Reference Lema and LemaLema and Lema, 2012; Reference Mazzucato, Scoones, Leach and NewellMazzucato, 2015, Reference Newfarmer, Page and TarpNewfarmer et al., 2019, Reference PegelsPegels, 2014).

The rationale for comparative advantage-defying policies is even stronger in the case of developing nations, where substantial market imperfections are more likely to persist in hindering industrial activities, technology transfer, adoption, innovation, and learning-by-doing. Rather than implying that those conditions make industrial policies too risky (which is the common critique of industrial policy in developing countries), they justify why government interventions are needed in the first place to efficiently reorient scarce capital towards priority areas with high spillover effects. This, of course, requires appropriate governance mechanisms and institutional structures to avoid inefficiencies, distortions, elite capture, and corruption. However, such governance mechanisms can be built. Our focus should therefore turn to how to improve the quality of government interventions to acquire new areas of comparative advantage, rather than accepting the status quo as a fait accompli. It is through such an approach that this Element will explain the dynamic process of green industrial development and its implications for developing nations.

Varieties of Green Economic Transformation and the Slippery Slope of Isomorphic Mimicry: It’s Not Just about Producing Low-Carbon Tech

When it comes to green economic transformation, isomorphic mimicry must be treated with great caution.Footnote ⁸ In biology, isomorphic mimicry refers to how different organisms evolve to look similar without actually being related, in order to gain an evolutionary advantage. In public policy, it refers to the tendency of governments to mimic other governments’ successes, replicating processes, systems, and strategies, and often ends in ‘successful failure’ (Reference Andrews, Pritchett and WoolcockAndrews et al., 2017).

There is a growing tendency to mimic other governments’ green industrialisation strategies. For instance, over twenty governments have implemented local content requirements in renewable energy sectors, following China’s successful experience with that instrument, but none of them reached a similar outcome (see Section 4). While it can be useful to learn and emulate others, it must be stressed that green economic transformation can take various forms, whose suitability depends on local contexts and capabilities, but this is also due to the multifaceted nature of our sustainability challenge. We tend to equate sustainability with decarbonisation, but there are other critical aspects of sustainability that also have implications for economic transformation, such as dematerialisation given the threat posed by material pollution to nature and human health, the sustainable exploitation of renewable resources such as fishing, forests, and water, as well as the alarming rate of biodiversity loss.

In practice, green economic transformation can also take the form of four distinct – albeit not mutually exclusive – processes (Reference Chang, Lebdioui and AlbertoneChang, Lebdioui, and Albertone, 2024). The first process (which is what we often have in mind when referring to green industrialisation) consists in the production of ‘green’ technologies (often those at the heart of the transformation of the global energy matrix) that replace conventional technologies.

The second process consists in improving resource efficiency (both energy and material) in existing production, which can be achieved by:

1. (1) Adopting cleaner production processes (i.e. by shifting to clean energy sources to power industrial operations for green steel production)

2. (2) Improving the durability of products and allowing for easier repair, reuse, and longer product lifespan (e.g. durable and repairable consumer electronics)

3. (3) Reorganising production processes in a way that reduces resource needs (adoption of circular economy principles)

The third one consists in mitigating the negative externalities from industrial activities that are already taking place. This process involves industries related to pollution control, geoengineering, and resource management (such as industrial air filters, carbon capture, utilisation and storage technology, and equipment for wastewater treatment).

The fourth process (which we can dub the Khaby processFootnote ⁹) consists in the production of ‘old’ environmentally friendly goods that may not involve complex technology but that can nonetheless offer obvious ecological and economic spillovers (such as bicycles, organic agriculture, or multi-use products to replace single-use plastics). This process of sustainable industrialisation is often neglected, as it may not capture the attention of techno-optimists, but holds considerable value for sustainable industrialisation (see the discussion on the exclusion of bicycles as part of the environmental goods agreements in Section 6).

In sum, green economic transformation is a multi-dimensional process that extends beyond low-carbon technology production. The optimal path to green economic transformation will also vary significantly across different countries and regions based on their own circumstances, possibilities, and constraints. Pursuing deforestation in biodiverse areas or arable lands to make room for solar panel factories goes against principles of sustainable development, and other pathways to green economic transformation exist (as further explained in Section 5).

Outline of this Element

This Element is structured as follows. Section 2 explains the disproportionate economic impact that climate change and global decarbonisation will have on developing countries, before drawing theoretical and practical implications on how to rethink the concept of climate resilience and its implications for productive economic transformation.

Section 3 evidences the uneven industrial geography of decarbonisation by showing how most of the jobs, trade, innovation, and value derived from low-carbon technologies have been captured in a handful of industrialised economies. This has considerable implications for the ‘leaving no one behind’ agenda, as countries that are the most exposed economically to climate and transition risks are not those poised to benefit from emerging green industrial opportunities.

This brings us to the role of governments in Section 4, which emphasises the role of green industrial policy, its factors of success, its different ‘styles’ (whether escorting or disciplining), and its political economy constraints and institutional requirements. This section explains that although there are some universal lessons that can be applied, green industrial policy needs to be adapted to local circumstances, and its objectives will differ across countries.

Furthermore, if all countries aim to industrialise simultaneously by manufacturing low-carbon technology, global demand may not support such a rapid expansion of production, leading to reduced overall growth and development. This is why, to better illustrate the varieties of green economic transformation pathways that exist beyond traditional manufacturing-led industrialisation, Section 5 examines different contexts and their implications for development strategies (including climate-smart agriculture in regions dominated by arable land, value-added nature-based services in biodiverse regions, fossil-fuel producers, and small nations/nations with a limited domestic market size).

Section 6 explores some of the international hurdles to green economic transformation, such as the rise of green protectionism in major markets, double sustainability standards, and the broken climate financing pledges, which weaken the ability of developing nations to promote their own green economic transformations. I argue that rich nations are effectively ‘kicking away the green ladder’ before discussing recent initiatives to reclaim policy space for green industrial policy.

Section 7 provides concluding remarks and identifies key trends that may influence the future of research at the intersection of development economics and ecology.

How Climate Affects Trade and Financial Stability

Across the globe, precipitation patterns are shifting, temperatures are rising, and some areas are experiencing changes in the frequency and severity of weather extremes such as floods and droughts. However, not all areas are affected equally by the economic effects of climate change, and developing regions are particularly disadvantaged. African nations already suffered economic losses of approximately USD 38 billion because of climate change effects in 2020 alone (World Meteorological Organization, 2021a). In Latin America, it is estimated that climate change-induced damages could cost as much as USD 100 billion annually by 2050 (Reference Vergara, Rios and PalizaVergara et al., 2013).

One of the reasons why climate change is likely to disproportionately impact developing countries lies in their higher reliance on the exports of commodities that are sensitive to climatic conditions. Fluctuations in precipitation and temperature threaten the long-term productivity of several agricultural goods that many (mostly developing) countries depend on as a source of revenue, jobs, and exports (see Figure 2). To note just a few obvious examples, climate change may pose a serious risk to salmon farming in Chile, coffee bean production in Vietnam and Colombia, cacao production in Cote d’Ivoire and Ecuador, or wine production in South Africa (see Reference ConwayConway, 2020; Reference Macías Barberán, Cuenca Nevárez and Intriago FlorMacías Barberán et al., 2019; Reference Soto, León‐Muñoz and DresdnerSoto et al., 2019). The increased frequency of extreme meteorological events has already led to devastating effects on tradable sectors such as agriculture and nature-based tourism in many parts of the world.Footnote ¹⁰ For instance, in the Caribbean, the hurricane season resulted in an estimated loss of more than 800,000 visitors, which would have generated USD 740 million for the region and supported about 11,000 jobs in 2017 (Reference Saget, Vogt-Schilb and LuuSaget et al., 2020). In Guatemala, drought conditions throughout Reference Saget, Vogt-Schilb and Luu2020 led to the destruction of 80 per cent of maize grown in the highlands (World Meteorological Organization, 2021b).

Figure 2

Mapping commodity-dependent economies

Source: UNCTAD

Economic vulnerabilities to climate change also pose risks to countries’ ability to borrow capital. Developing countries already suffer from difficult financing conditions, with an average interest cost on external borrowing three times higher than that of developed countries.Footnote ¹¹ Such excessive interest rates often prevent poorer countries from accumulating public savings (least developed countries (LDCs) dedicate an average of 14 per cent of their domestic revenue to interest payments, compared to only around 3.5 per cent in developed countries) (Reference Volz and AitkenVolz and Aitken, 2022). This gap is worsening with climate change because developing countries are more exposed to environmental risks that are increasingly considered by financial rating agencies that give those countries lower credit ratings, which translates into even higher interest rates.Footnote ¹² Soon, for every USD 10 paid in interest by developing countries, an additional dollar will be spent due to climate vulnerability (Reference Buhr, Donovan and KlingBuhr et al., 2018). To reduce the vulnerability of their financial systems to climate change, countries should not only adopt policies to reduce their exposure to environmental risks but also lobby for more stringent international action as many of those risks are beyond their national sphere of control.

Climate change knows no borders, and the adjustments that have to be made to avoid it are greater for some than for others (Reference StiglitzStiglitz, 2015). Furthermore, the impact of climate change crosses not only national borders but also socio-economic ones. While most analyses of the economic impact of climate change (including this Element) consider regional or national economies through macroeconomic aggregates such as gross domestic product, or nationwide productive capabilities, such an approach can shadow some of the very important distributional impacts of climate change within countries (see Reference Hallegatte and RozenbergHallegatte and Rozenberg, 2017).Footnote ¹³ Climate risks exacerbate inequalities not only among countries but also within them.

The Impact of Global Decarbonisation: Transition Risks against the Right to Extract

Besides climatic risks, many countries are also exposed to transition risks, which refer to the financial and economic challenges that countries might face because of changes in policies, technology, market dynamics, and societal preferences aimed at addressing climate change (see Reference Semieniuk, Campiglio, Mercure, Volz and EdwardsSemieniuk et al., 2021 for a comprehensive review of the various drivers of low-carbon transitions risks for finance). One of the biggest transition risks derives from the drop in fossil-fuel demand. As the world draws closer to net-zero emissions, it is estimated that over 2.7 million jobs in fossil-fuel industries will be lost globally by 2030 (IEA, 2021). Although the use of petroleum in our societies will not completely disappear given the use of petroleum products for a wide range of non-energy products such as pharmaceuticals, cosmetics, and plastic goods, it can nonetheless be expected that the demand for petroleum will considerably decrease. For countries that consume a lot of fossil fuels, this implies an important shift in consumption and infrastructure towards low-carbon solutions, but for countries that depend on the exports of fossil fuels as a source of income (most of which are in the developing world, as shown in Figure 2), the prospects of global decarbonisation call for a more radical transformation of productive structures to avoid economic decline. In Africa, for instance, fossil fuels currently represent around 40 per cent of total exports (sometimes reaching as much as 60 per cent in recent years).Footnote ¹⁴ In such contexts of fossil-fuel dependence and high carbon-intensity of productive structure, one major preoccupation concern lies in asset stranding, which is the unexpected devaluation of assets from the balance sheets of economic agents (Reference CaldecottCaldecott, 2018; Reference van der Ploeg and Rezaivan der Ploeg and Rezai, 2020).

An important argument often put forward concerns the right to extract fossil fuels by communities that are not responsible and did not benefit from extraction in the past. If Africa were to use all its known reserves of natural gas, its share of global emissions would rise from a mere 3 to 3.5 per cent (Reference BuhariBuhari, 2022). This is why indiscriminate calls for developing countries to keep fossil fuels in the ground can be misguided, especially considering that countries typically considered leaders in climate finance are extracting some of the most carbon-intensive petroleum in the world. On average, a barrel of Canadian oil is twice as carbon-intensive as a barrel of oil from Colombia and Ecuador, three times more carbon-intensive than a barrel of oil from Norway, and almost four times more carbon-intensive than a barrel of oil from Saudi Arabia!Footnote ¹⁵ There is therefore a fair claim by global south nations to continue producing fossil fuels, while richer nations begin their phase-out.

However, the legitimate right to produce fossil fuel must be met with developmental pragmatism. Firstly, if current and future fossil fuel extraction is destined for exports, the profitability of such activity remains conditioned by the world demand for fossil fuels, which is influenced by the speed at which the global economy is decarbonised. Secondly, the rise of cross-border carbon taxes and sustainability standards may lower the competitiveness of activities produced with fossil-fuel-based energies. Lastly, even in developing countries, early greening, rather than relying on the extraction of fossil fuels, can help bring about co-benefits while gaining a foothold in the markets of the future, avoiding asset stranding (Reference Pegels and AltenburgPegels and Altenburg, 2020). As a result, even in countries that have not historically contributed to global GHG emissions, a forward-looking development strategy often implies favouring a green industrialisation pathway to avoid the risks of stranded assets and the risk of locking their economies onto energy-intensive pathways.

Meanwhile, we can expect the demand for the so-called critical minerals (that are essential inputs of low-carbon technologies) to significantly increase over the next two decades, which causes great sources of optimism in countries that produce them. For instance, the Democratic Republic of Congo is one of the world’s largest cobalt producers, Rwanda is the world’s largest exporter of tantalum, and South Africa is the world’s largest producer of platinum and manganese. In Latin America, Chile, Argentina, and Bolivia collectively hold most of the world’s lithium reserves, while China dominates the production of rare earth. Today, these so-called ‘critical minerals’ represent a growing market.Footnote ¹⁶ However, risks also exist. The long-term outlook for these minerals is still dominated by uncertainty and risks of technological disruption, given the considerable R&D efforts globally to generate alternative technologies that rely on substitute materials (such as phosphate-based or hydrogen-based batteries to replace lithium-ion batteries, or substitutes to cobalt in electronics) (Reference Manley, Heller and DavisManley et al., 2022). Furthermore, mined resources (and by extension their associated fiscal revenues) are non-renewable, at least from a producing nation perspective.Footnote ¹⁷ The economic decline of Nauru, a small island-country located in the Central Pacific, provides a cautionary tale: Nauru possessed one of the highest GDP per capita in the world (around $27,000) in the 1970s due to the rents generated by the extraction of its rich phosphate deposits (Reference TrumbullTrumbull, 1982). Nevertheless, a few decades later, the country was on the brink of economic collapse, as a result of the exhaustion of its phosphate deposits but also because phosphate extraction activities had damaged the island’s arable land. In this context, one could argue that Nauru’s phosphate reserves had a negative value considering its considerable opportunity costs and if we discount the lost agricultural value. Nauru’s experience holds valuable lessons for governments today that are betting on the rising demand and value of their fossil fuels or critical minerals.

Productive Diversification as a Pathway to Climate Resilience

In light of the severe exposure to both climate and transition risks that some nations face, a radical shift is needed in terms of how we think about economic resilience in the twenty-first century. The global discourse remains dominated by an unhelpful dichotomy between climate adaptation and climate mitigation, with far less consideration for the core concept of climate resilience. Climate resilience has various definitions, but broadly entails the ability to anticipate, prepare for, and respond to hazardous events and trends related to climate, as well as to taking steps to better cope with – and avoid – new risks posed by climate change.Footnote ¹⁸ The absence of a coherent resilience paradigm (with shared definitions, problems, and methods) is a broader problem in economics and development studies as recently found in Reference ParkPark (2023). If the language of resilience is to advance collective prospects for development cooperation and climate action, then it will help to know precisely what we each are talking about (Reference ParkPark, 2023)).

In the context of climate change, the concept of resilience should cut across both climate mitigation and adaptation. Mitigation is a historical responsibility for rich industrialised nations that have disproportionately emitted GHGs, while climate adaptation measures often focus on the symptoms of climate change without necessarily addressing the structural roots that make some communities vulnerable to climate change in the first place. A more sustainable response to the climate crisis would emphasise policy and financial support for productive diversification, climate-resilient crop production, and early integration in low-carbon technology value chains as key enablers of the development of resilient and dynamic economies. For all the reasons mentioned in this section, diversification strategies should be closely linked to a green structural transformation towards more sustainable production models in the long run to reduce the productive vulnerability to climate change and transition risks in resource-dependent countries. A wide range of new opportunities for green industrialisation exist. However, as the next section shows, those are mostly seized by a handful of industrialised economies, rather than countries that are the most exposed to climate and transition risks.

The Socio-Economic Benefits and Industrial Spillovers of Low-Carbon Transitions

The benefits of the low-carbon transition spread far beyond the environmental domain. This is embodied in the notion of co-benefits, which can shape public opinion by lowering trade-offs among the diverse set of societal goals, such as economic welfare and environmental sustainability (see Reference Anadon, Chan and HarleyAnadon et al., 2016; Reference Sovacool, Martiskainen, Hook and BakerSovacool et al., 2020). Beyond their effects on ecological sustainability, there are three main ways in which low-carbon technologies support economic welfare, which is further discussed in the following.

Firstly, clean energy technologies can help reduce the energy access gap for communities suffering from energy poverty. In Africa, close to 600 million people were still without access to electricity in 2018 (IEA, IRENA, UNSD, World Bank and WHO, 2021). This situation reinforces socio-economic inequalities and impedes progress in widening access to basic health services, education, and modern machinery and technology (IRENA and AfDB, 2022). In Latin America, businesses suffer 2.8 electrical outages on average per month, and nearly 40 per cent of firms in the region have identified the power sector as a major constraint for developing its full potential (World Bank Enterprise Surveys, 2023). Power outages also tend to exacerbate inequalities, as low-income households tend to experience more blackouts and power surges than high-income households (Inter-American Development Bank, 2014).

Secondly, low-carbon technologies can have an important employment generation effect. For instance, investing in energy transition technologies creates close to three times more jobs than fossil fuels do per million dollars invested (Reference Garrett-PeltierGarrett-Peltier, 2017). Jobs in renewable energies have steadily increased over the past decade to reach 12.7 million in 2021 and could reach 38 million jobs by 2030 under the 1.5 °C scenario (IRENA, 2021). In Latin America, while it is estimated that 360,000 jobs in fossil-fuel extraction and fossil-fuel-based electricity generation will be lost by 2030, the transition to a green economy can create as many as 15 million net new jobs in the region, especially in solar and wind power (Reference Saget, Vogt-Schilb and LuuSaget et al., 2020).

Lastly, the expansion of low-carbon technologies also generates opportunities for industrial development, which matters because manufacturing is key to sustained economic development (Reference ChangChang, 1994; Reference KaldorKaldor, 1967). As of 2021, Africa’s average manufacturing value-added per capita (of about USD 207) was eight times lower than the world average (USD 1,683), because Africa’s economic growth and employment generation have relied heavily on low-value-added sectors, such as raw commodity exports (Reference Chang, Hauge and IrfanChang et al., 2016; ILO, 2019). To avoid replicating patterns of commodity dependence in the context of low-carbon transitions, developing countries can attempt to integrate higher value-added segments of low-carbon technology value chains (whether upstream or downstream), rather than sticking to the provision of raw materials and low value-added installation and maintenance activities. For instance, developing countries could take advantage of cheap and clean energy sources not only to decarbonise electricity generation but also as feedstock to attract investments in value-added energy-intensive services and manufacturing. However, as we will see in what follows, most of the industrial opportunities arising out of low-carbon transition have been captured by a handful of already industrialised economies, which evidences the reproduction of core/periphery relations and the contemporary relevance of the dependency theory (Kvangraven, 2021).

The Uneven Industrial Geography of Global Decarbonisation

The economic benefits of low-carbon transitions may be vast, but who is capturing those benefits? By analysing employment, innovation, and export data, this section provides evidence of the extent to which the industrial geography of global decarbonisation is highly concentrated and shows that the communities that are most vulnerable economically to climate change and transition risks are not those where green industrial activities are taking place.

Jobs

The employment landscape in the renewable energy sector is concentrated in a handful of countries. Over 42 per cent of renewable energy jobs are in China, followed by the EU, Brazil, the USA, and India, which altogether account for three-quarters of renewable energy jobs. Meanwhile, the entire African continent has only captured about 2.4 per cent of jobs created in the sector globally, as shown in Figure 3. In Latin America, excluding Brazil, less than 500,000 jobs have been created in the sector to date (IRENA, 2020).

Figure 3

Global (uneven) distribution of jobs created in renewable energies

Source: Author’s elaboration using data from the World Bank, IRENA, and UN Comtrade

Besides the quantity of jobs created, there is also the matter of the quality of job gains that arise from the energy transition, where we can observe further unevenness. Decent jobs, that is, with good wages and safe work conditions, are necessary to ensure a just transition. However, most of the jobs created in Brazil, for instance, are in sugarcane plantations for biofuel production and in construction, operations, and maintenance activities, which tend to be temporary, low-paid, and low-skilled (Reference HochstetlerHochstetler, 2020).

Furthermore, as also shown in Figure 3, most of the job creation in renewable energy sectors has not occurred in low-income and/or fossil-fuel-dependent countries, where renewable energy jobs are arguably most needed to ensure a just transition. Looking ahead, compensating for the expected job losses in the fossil-fuel sector implies that more needs to be done in those countries to capture the potential job gains in the renewable energy industry. Policies aimed at facilitating the reallocation and retraining of fossil-fuel workers in other activities with quality job gains deserve particular attention (see Section 4).

Innovation

The capacity to innovate matters for making the most of the energy transition as an industrial opportunity and as a source of value quality job creation. Innovation and R&D play an essential role in the development, adaptation, and deployment of renewable energy technologies (Reference Lema, Iizuka and WalzLema et al., 2015). Spillovers from low-carbon innovation are over 40 per cent greater than convention technologies in energy production and transportation sectors (Reference Dechezleprêtre, Martin and MohnenDechezlepretre et al., 2013). Here again, the low-carbon innovation landscape appears particularly concentrated. As shown in Figure 4, three-quarters of the patents in renewable energy technologies originate from only four countries (which are also among the countries with the largest employment generation in renewable energy sectors, see Figure 2).

Figure 4

Distribution of patents filed in renewable energy technologies, by country, in 2014

Source: IRENA database

This is not to say that some developing countries have not achieved key successes around low-carbon innovation.Footnote ¹⁹ Latin American countries have spearheaded several R&D activities around renewables, including the development of short-term forecast tools for wind generation, hydrokinetic turbines for use with marine currents, smart mini-grids for electrification of isolated and rural communities, and biofuel production from microalgae (IRENA, 2015). Among those, one case worth highlighting is the R&D efforts that underpinned the successful development of biofuels in Brazil, which turned Brazil into the second-largest producer of liquid biofuels for transport in the world. Brazil’s R&D capabilities around biofuels were supported by a range of governmental programmes (including the Network for Research and Technological Development on Biodiesel and the National Program of Production and Use of Biodiesel). Since 2006, Brazil’s state-owned oil company, Petrobras, has also played a key role in supporting the production of – and R&D around – biofuels through its subsidiary, Petrobras Biocombustível, which led several R&D initiatives, mobilising nineteen public agricultural research centres (Reference Nogueira and CapazNogueira and Capaz, 2013).Footnote ²⁰

However, notwithstanding some sporadic successes, patents filed in low-carbon technologies and R&D shares around low-carbon technologies remain extremely low in developing countries, mirroring a larger trend across sectors. This is not only due to limited public R&D efforts but also to an inability to attract private spending on R&D. For instance, more than half of the existing R&D expenditure is financed through public funds in Latin America, where the share in Europe, the USA, and Canada tends to be lower than 35 per cent. In Argentina, Ecuador, Cuba, and Costa Rica, the share of public funding in R&D exceeds 70 per cent (IRENA, 2015).

Export markets

It is a well-accepted fact among development economists that the ability to export is a critical feature of economic development. In the context of global decarbonisation, the exports of carbon-intensive products will face increasing constraints, while considerable market opportunities arise for low-carbon technologies and environmental goods.

Similarly, to the job and innovation landscapes, the trade of low-carbon technologies is highly concentrated. Three countries (China, Germany, and the USA) account for almost half of all low-carbon technology exports (Figure 5). China’s performance has been spectacular in that regard. Since 2000, China has increased its low-carbon technology exports tenfold and positioned itself as the uncontested exporter of low-carbon technologies (see Figure 6). As the next section will show, this was in large part due to the use of green industrial policies.

Figure 5

Export market shares of low-carbon technology products (average 2019–2021)

Source: Author’s elaboration based on data provided by the IMF climate dataset

Figure 6

China’s ascension in terms of environmental goods exports, 2000–2021

Source: Author’s elaboration based on data provided by the IMF climate dataset

As shown in Figure 7, China’s dominance spans different low-carbon technologies, such as solar cells, electric batteries, and hydropower equipment, where it holds 41 per cent, 30 per cent, and 19 per cent of global export market shares, respectively (see Figure 8). Meanwhile, Denmark and Germany are the two leading wind equipment exporters. Together with the Netherlands and Spain, they accounted for more than three-quarters of global exports in 2020. In the biofuels sector, the USA is the leading exporter (24.1 per cent), followed by the Netherlands (13.2 per cent) and Brazil (11.8 per cent).

Figure 7

Export market shares of various low-carbon technologies by country in 2020

Source: Author’s elaboration based on multiple sources, including OEC, UN Comtrade, IMF Climate data monitor and EurObserver’ER, and ITC databases

Figure 8

Distribution of planned investments in announced hydrogen projects until 2030

Source: Based on Hydrogen Council and McKinsey & Company (2022)

Breaking Out of Renewed Trade and Technological Dependencies

What can governments do to increase their country’s share of global low-carbon technology investments, jobs, innovation, and exports? The global low-carbon technology market is far from having reached saturation. It is estimated that by 2030, the market for low-carbon goods will be worth more than USD 1 trillion a year – an increase of seven to twelve times compared to today (Reference VieiraVieira, 2017).

As the global low-carbon economy increases, a radical policy shift is needed for developing countries to avoid being left – or even pushed – behind. Proactive public policies (and industrial policies in particular), which influence land, energy, capital, and labour costs are extremely important instruments in shaping the geography of low-carbon technology manufacturing supply chain (Reference HochstetlerHochstetler, 2020; Reference LebdiouiLebdioui, 2022a; US Department of Energy, 2022). Indeed, most countries that have become large exporters of low-carbon technologies are not necessarily the most endowed in terms of land and energy resources, nor do they have the lowest labour costs, but they have relied on proactive government interventions to develop the productive capabilities required to produce those goods. Understanding the policy tools underlying green economic transformation is the focus of the next section.

Greening Development with More Markets … or More State Interventions?

Despite the widespread consensus among economists that climate change is the biggest market failure that the world has seen (see Reference SternStern, 2007), a key source of contention is the degree of government intervention required to fix climate change and transition towards a low-carbon economy.

On the one hand, some economists advocate for market-based adjustments (such as carbon taxes, carbon permits, and tradable rights) over interventionist policies. Market-based mechanisms aim to increase the cost of products that rely on carbon-intensive production processes by manipulating prices and, according to their advocates, these mechanisms should create the space for entrepreneurs to develop lower carbon alternatives (see Reference WeitzmanWeitzman, 2007). According to Nobel laureate William Reference NordhausNordhaus (2007:29), ‘raising the price of carbon is a necessary and sufficient step for tackling global warming. The rest is largely fluff.’

On the other hand, others have argued that carbon taxes and other market-based solutions are far from sufficient, putting forward a range of reasons:

1. (1) Carbon prices can be an ineffective signal for the uptake of unfamiliar technologies because of imperfect information. So far, carbon tax rates have been too low, do not internalise all externalities, and therefore do not correspond to the social cost of carbon, the estimation of which may vary considerably (Reference Semieniuk and YakovenkoSemieniuk and Yakovenko, 2020; Reference Smith and BraathenSmith and Braathen, 2015).

2. (2) Even if the carbon price signal allows the market to adjust, pricing might not be sufficient to achieve on its own the scale and speed of decarbonisation required to stabilise global temperature at safe levels (Reference ZenghelisZenghelis, 2016).

3. (3) While it is often assumed that carbon taxes are progressive because richer people consume more CO2 on average (Gore, 2020; Knight et al., 2017), carbon market-based mechanisms can have a deeply regressive and discriminatory effect on low-income groups in practice, while paradoxically potentially allowing others to maintain their carbon-intensive consumption patterns and lifestyle by ‘buying’ their right to pollute. This is especially the case when alternatives to carbon-intensive services are too costly or inconvenient (for instance, the cost and length of train journeys are often higher than flights to the same destination). By making carbon-intensive services more expensive in an indiscriminate manner – rather than making greener alternatives cheaper and more attractive by subsidising them – carbon taxes can be quite regressive.Footnote ²¹

4. (4) Market-based mechanisms offer no guarantee that the socio-economic spillovers from green transitions will be localised where they are the most needed – that is, where communities are the most vulnerable to job losses due to decarbonisation, unemployment, and poor living conditions. Green transitions indeed provide an opportunity to diversify economies, but this requires appropriate policy interventions, especially considering the scale of investments that green activities need.Footnote ²²

A growing body of literature is therefore advocating for stronger government interventions in the context of the green transition. The remainder of this section reviews some of the key arguments put forward in favour of green industrial policy, its shortcomings, political economy constraints, and critical factors of success.

New Paradigm for Industrial Policy in the Context of Climate Change

An industrial policy can be broadly defined as the strategic effort by the state to encourage the structural transformation of an economy to enhance efficiency, productivity growth, and competitiveness (Reference ChangChang, 2011). More specifically, it refers to ‘any type of selective government intervention or policy that attempts to alter the structure of production in favour of sectors [or activities] that are expected to offer better prospects for economic growth in a way that would not occur in the absence of such intervention in the market equilibrium’ (Reference Pack and SaggiPack and Saggi, 2006). Industrial policy can also be used to balance regional growth and assist workers to retrain or relocate, and consequently ‘defuse the resistance to economic change likely to come from those who would be the hardest hit’ (Reference ReichReich, 1982), which holds particular relevance in the context of low-carbon transition (Reference LebdiouiLebdioui, 2022a).

From the 1980s until the early 2020s, industrial policy had lost popularity due to the ideological dominance of free market economics, a selective interpretation of failures in various regions (especially in Africa and Latin America), and the implementation of structural adjustment programmes, which led to the minimisation of the role of the state and premature deindustrialisation in many cases (Reference AlbaladejoAlbaladejo, 2020). But the tide is turning: industrial policy has witnessed a revival in popularity around the world, based on an acknowledgment that they have been necessary ingredients of the acquisition of new comparative advantages in the past but also essential in seizing the so-called ‘green windows of opportunities’.Footnote ²³ Even in nations such as the United States where the term industrial policy has been taboo in recent decades, there is now an explicit acknowledgement by the Biden administration of the need for an industrial policy to compete in low-carbon technologies. One could argue that industrial policy had never left (Mariana Mazzucato’s work shows how the United States has proactively stimulated industrial development through state interventions and a vertical R&D policy), but the change in the narrative is important and reveals how the sustainability agenda is shaping the legitimacy of state interventions.Footnote ²⁴

Some of the key drivers for current comparative advantage, such as human, institutional, and technological capabilities, are policy-induced. Sector-neutral (also called horizontal) interventions to improve general education, infrastructure, and the business climate are important, but they rarely suffice to promote export diversification, which requires the use of (vertical) industrial policies (Reference Cherif and HasanovCherif and Hasanov, 2019; Reference LebdiouiLebdioui, 2019, Reference Lebdioui2020). Historically, governments have had a key role in the acquisition of new comparative advantages by catalysing targeted human capital accumulation; solving collective action problems in knowledge creation through R&D support; manipulating market signals through price control mechanisms; providing specific public goods such as infrastructure investment; and crowding-in private capital in strategic areas through national development banking and public venture capitalism (Reference AmsdenAmsden, 1989; Reference LebdiouiLebdioui, 2019, Reference Lebdioui2020; Reference MazzucatoMazzucato, 2016; Reference RodrikRodrik, 2004; Reference Wade, Gereffi and WymanWade, 1990).

In the context of green industrial policy, there are various instruments in the toolbox, both on the demand-side and supply-side (see Table 1). Those policies have been extensively used across the globe, but especially in the USA, China, the EU, and Brazil. China features one of the most remarkable cases of successful green industrial policy, enabling it to become the world’s largest exporter of low-carbon technologies, which include solar cells, electric batteries, and wind energy equipment. Green industrial policy in China has comprised a comprehensive set of tools (including R&D support, the establishment of national-level innovation centres focused on clean technologies and local content requirements) with effective coordination of demand-side and supply-side policies (Reference Lema and RubyLema and Ruby, 2006).

Table 1The green industrial policy toolbox

Another instance of a successful green industrial policy is offered in the case of Brazil, where over 1.2 million renewable energy jobs have been created. The Brazilian National Development Bank has played a crucial role in financing the wind turbine manufacturing industry, providing loans and credit lines (at rates well below market levels) to incentivise value addition around renewable energy projects, especially for local wind turbine manufacturing, while imposing local content requirements (Reference HochstetlerHochstetler, 2020). The various local content requirements slowed the actual introduction of wind power until after 2009 but eventually contributed to a substantial national industry as they became ‘the most effective guarantor of ongoing localised production of electricity components’ (Reference HochstetlerHochstetler, 2020). Brazil has also established itself as a global leader in biofuel production, notably thanks to proactive R&D support and coordinated demand-side policies (Reference Szklo, Schaeffer, Schuller and ChandlerSzklo et al., 2005). In other parts of the world, to date, the use of green industrial policies has been more limited and much less effective. Understanding how to adapt green industrial policymaking to the context of latecomers therefore deserves much more emphasis, which is the focus on the following subsections of this section.

Not All Green Industrial Policies Are Ecologically Sound or Good Policy

Most successful instances of green industrial policy are found in countries with a very large population size (such as China, the USA, Brazil) that could rely on demand-side policies to generate economies of scale. The challenge for countries with smaller domestic market sizes is that they face different challenges, and therefore replicating the same green industrial policy tools that work somewhere else might not be advisable (see Section 6). For instance, on the African continent, most green industrial policy tools implemented to date consist of local content requirements in solar and wind energy projects (especially in Algeria, Nigeria, and South Africa).Footnote ²⁵ However, especially in countries with a small domestic market, local content requirements rarely work on their own, and their poor implementation can reduce the attractiveness of investments in renewables, or even worse, they can increase the levelised cost of energy (LCOE), thereby reducing the cost competitiveness of downstream industries. In fact, to date, only two out of seventeen countries globally (namely China and Spain) that implemented local content requirements (LCRs) in the solar and wind sector managed to develop export-oriented sectors. To stand a chance, different green industrial policy tools (especially local content requirements) must be integrated into a wider strategic vision of industrial development, adapted to the existing domestic capacity, and oriented towards long-term competitiveness.

Some so-called ‘green’ industrial policies may also generate more environmental damage without proper environmental appraisal capabilities. A narrow focus on carbon footprint reduction by extracting more resources from our planet may lose track of the broader view on sustainability and ecology and may generate higher material pollution, or even biodiversity loss (Reference Chang, Lebdioui and AlbertoneChang, Lebdioui and Albertone, 2024). For instance, it would be unacceptable if scaling up mining to facilitate the low-carbon transition results in large environmental and social costs around mine sites and for local populations (Reference Addison, Addison and RoeAddison, 2018). Electric cars are the best example, given that their broadly ecological impact is not only determined by the source of energy in the electricity matrix their batteries are charged in but also their high material footprint given their very high consumption of lithium, copper, iron ore and other materials (see recent work contrasting lithium needs of electric cars and electric buses by Reference Riofrancos, Kendall and DayemoRiofrancos et al., 2023). Another example is provided by green hydrogen production, which may be an emissions-free energy carrier, but can be quite ‘un-ecological’ in some areas given its water-intensive production, potentially drawing scare water resources away from agriculture and other sources of livelihoods for local populations. Therefore, for green industrial policies that truly aim to support the transition to a healthier planet, governments must also build strong environmental appraisal capabilities to integrate life-cycle analysis of environmental impact in their green industrial policy design. Social impact appraisal capabilities can also help government assess the social benefits and cost analysis of their green industrial policies, paving the way for a socio-environmental approach that can be complemented by the use of conditionalities – standards and guardrails – that can be deployed through industrial policies to advance social welfare goals and the broader common good (Reference EstevezEstevez, 2023; Reference Mazzucato and RodrikMazzucato and Rodrik, 2023).

Aligning Industrial Policy within a Joined-Up Market-Shaping Policy Approach

The development of green industries has often been hindered by inconsistencies of objectives across various policy realms, as shown by a large body of literature on the importance of ‘policy mixes’, that is, the coherence, combination, and complementarity of various policy instruments to stimulate low-carbon transitions (e.g. Reference Bahn-Walkowiak and WiltsBahn-Walkowiak and Wilts, 2017; Reference Palage, Lundmark and SöderholmPalage et al., 2019; Reference Rogge, Kern and HowlettRogge et al., 2017). Green Industrial policies are more likely to be effective if they are part of a joined-up policy approach and careful coordination with energy, environmental, skills, labour market, and fiscal policies (see Table 2).

Table 2Multidimensional and overlapping policy tools for green economic transformation

Source: Author’s elaboration

The call for better coordination between related policies for green economic transformation should not stop at being an intellectual argument, as it also entails some changes in the organisational structure of governments. For instance, in contrast to conventional industrial policy, which has been historically led by a ministry of international trade and industry (the almighty MITI) in several countries, green economic transformations require coordination across a much larger variety of actors. The new set of institutional capabilities required for green economic transformation can include a coordinating body between the relevant ministries (finance, industry, trade, energy, environment, science and technology, education) as well as other entities, especially the central bank (Reference Dikau and VolzDikau and Volz, 2021), so that policies do not work at cross-purposes but instead amplify synergies.

As further explained in the following subsections, the value of a joined-up policy approach also derives from the need to address transversal challenges in the transition to a low-carbon economy, such as the social inclusion dimension of green industrial policy as well as the excessively high cost of capital for clean energy projects in developing countries.

External Financing Hurdles and Constraints for Green Industrial Policies

The High Cost of Capital for Renewable Energy Projects as a Major Obstacle

Some of the most important pathways to green economic transformation (e.g. the low-carbon production of goods and services) rely on the local availability of clean energy sources. However, quite paradoxically, despite significant labour, land, and construction cost advantages, developing countries must often pay more for renewable energy projects than in Europe and North America (see Figure 9). In Africa, for instance, the cost of capital for renewable energy projects is even higher than for fossil-fuel investments and implies that the continent may miss out on 35 per cent additional green electricity production under a 2°C transition pathway (Reference Ameli, Dessens and WinningAmeli et al., 2021). This of course leads to distortions and lock-in into carbon-intensive economic pathways, while constraining the ability of low-income countries to seize some of the green windows of opportunities. The extent to which unequal access to financing can consolidate existing disparities in terms of energy access is well illustrated by the fact that in 2021, which had been a record year for global renewable energy investment (with around $420billion invested), renewable energy investment per capita was below $1 in sub-Saharan Africa, and over $100 in the USA, Canada, Japan, China, and the EU (see Figure 10). Indeed, while it is often assumed that renewable energy investments are first and foremost driven by natural conditions, it becomes evident that capital has not moved towards areas with the highest potential for renewable energy production, where they are the most needed (in terms of energy access gap), and that, in contrast to non-renewable resources, renewable energy investment is influenced by criteria that go beyond resource availability.Footnote ²⁷

Figure 9

Weighted average cost of capital for solar PV projects at 2017 interest rates

Source: Based on Steffen (2020)

Figure 10

Renewable energy investment per capita in 2021

Source: Based on Wood Mackenzie, BNEF, and IRENA data

There is an important debate on how to best lower the cost of capital for renewable energy projects in developing countries. Broadly speaking, the standard response has consisted of de-risking mechanisms, which can take two basic forms: measures that transfer risk (‘financial de-risking’) and measures that reduce risk (‘policy de-risking’). Financial de-risking implies reducing the financial impact of a negative event by transferring large portions of the impact to other parties (often public institutions and taxpayers), while policy de-risking entails removing barriers in the investment environment and improving local institutions (Reference SchmidtSchimdt, 2014). As further explained in the following, each of those policy mechanisms presents pros and cons, different political economy implications, with different winners and losers.

Overview: Green Industrialisation Is Not All About Manufacturing

Countries across the globe find themselves at different starting points and circumstances in terms of productive capabilities, resource endowment and geography. Manufacturing low-carbon technologies is an important pathway to green economic transformation, but it is not feasible for every nation, not least due to a fallacy of composition. This fallacy posits that if all countries attempt to industrialise simultaneously, global demand may not support such a rapid expansion of production, leading to reduced overall growth and development. This is particularly the case when countries try to industrialise through the same industries and producing the same goods.

With the increasing scepticism of the universal suitability of manufacturing to serve as the driver for economic transformation, several scholars have argued that the modern services sector can instead act as an engine of structural transformation, given that it features many characteristics historically associated with manufacturing, such as tradability, knowledge and technology spillovers (Reference Baldwin and ForslidBaldwin and Forslid, 2019; Reference GollinGollin, 2018; Reference Nayyar, Cruz and ZhuNayyar et al., 2018, Reference Nayyar, Hallward-Driemeier and Davies2021). The role of the service sector is also receiving increasing attention in the context of the transition to low-carbon economy. As the digital economy faces a sustainability challenge to reduce energy consumption and electronic waste of digital services, more opportunities for disruptive and skilled tradable green services are opening (including in terms of rental, repair and recycling services to guarantee product durability, see Perez, forthcoming). However, two points can be made. Firstly, Reference SenSen (2023) draws important distinction between business and non-business services, and shows that treating the service sector in a monolithic manner does not take into account the differences that different types of services play in structural transformation. Secondly, the extent to which countries can leapfrog to value-added business services without first establishing a domestic manufacturing base can be questioned, as historically, value-added services are ancillary to existing manufacturing activities (Reference ChangChang, 2006; Reference HaugeHauge, 2023).

This is why imported solutions do not often work, and nations should pursue development strategies that align with their contexts and priorities. A country’s unique assets, such as its natural resources, biodiversity, agricultural potential, existing productive capabilities, and domestic market size, largely influence the available pathways to development. To better illustrate the different varieties of green economic transformation that exist beyond traditional manufacturing-led industrialisation, this section examines different contexts and their implications for development strategies (including climate-smart agriculture in regions dominated by arable land, value-added nature-based services in biodiverse regions, fossil-fuel producers, and small nations/nations with a limited domestic market size).

Climate-Smart Agriculture and the ‘Industrialisation of Freshness’

In some countries, especially low-income ones, agriculture is the main pillar that sustains livelihoods but can also turn into the foundation for their future economic development. The role of agriculture for structural transformation has often been debated in the literature and is often misunderstood. On the one hand, a key insight from the structuralist school (and the Prebisch–Singer hypothesis in particular) is that the price of primary commodities relative to those of manufactured goods was bound to decline over time, dooming poor countries to poverty unless they industrialised (Reference PrebischPrebisch, 1950; Reference SingerSinger, 1950). Indeed, the share of agriculture in a country’s GDP and employment tends to decline with economic growth (Reference AndersonAnderson, 1987). But on the other hand, several agricultural economists have argued that agriculture is a catalyst for economic development (Reference Eicher and StaatzEicher and Staatz, 1998; Reference MellorMellor, 1995; Reference SchultzSchultz, 1968). In fact, as of 2019, the highest agricultural value-added per worker figures can be in industrialised countries such as the Netherlands, Canada, the USA, and Australia (World Bank, 2023).

These contrasting perspectives on the causal relationship between agriculture and the structural transformation of an economy are best explained by John Reference MellorMellor (1966): ‘The faster agriculture grows, the faster its relative size declines.’ Reference MellorMellor (1995) explained that the role that agriculture plays in the structural transformation of the economy is determined by several factors, including (i) how productivity is affected by technological change, (ii) how the increased income is spent, and (iii) what other sectors of the economy undergo expansion as a result of agricultural development and its linkages. Besides those three mechanisms, it can be argued that agriculture’s continued relevance for long-term development is also determined by a country’s ability to add value to its agricultural goods. Defining value-added agriculture is no easy task, as processing does not always equate value addition, and fresher products can be far more technologically sophisticated and generate higher returns than processed food (e.g. a fresh orange versus a carton of orange juice, or fresh fish versus canned fish). At the heart of this process is what Cramer and Sender (2019) call the industrialization of freshness’, which matters for developing countries because of the considerable scope for productivity growth, export revenue growth and employment creation.

However, the aforementioned mechanisms are now heavily threatened by climate change, given that some types of crops are profoundly vulnerable to climate change (see Section 2) and the fact that current agricultural practices also exacerbate climate change (about one-third of GHG emissions are generated from agriculture) (Reference RitchieRitchie, 2021). This is why climate-smart agricultural strategies emerge as an important agenda to help farmers protect their income and livelihoods while improving food security by enhancing the ability of agricultural systems to adapt and thrive under changing climatic conditions and reducing their environmental impact. Broadly speaking, we can understand climate-smart agriculture from a mitigation, an adaptation, and a productivity angle (Reference Palombi and SessaPalombi and Sessa, 2013). The last two angles are those that hold the most relevance from a development perspective. From the adaptation side, climate-smart agriculture consists in enhancing the resilience of agricultural systems to climate-related risks. For instance, the diversification towards climate-resilient crop varieties can help protect farmers’ livelihoods from climate risks and ensure food security. From a productivity-side, climate-smart agriculture entails sustainable intensification, which consists in increasing agricultural productivity (through sustainable land and water management practices such as precision agriculture, integrated nutrient management, intercropping, as well as circular economy practices) while minimising negative environmental impacts (Reference Campbell, Thornton, Zougmoré, Van Asten and LipperCampbell et al., 2014). For instance, studies have shown that Banana-coffee intercropping in East Africa helps reduce Arabica coffee’s vulnerability to higher temperatures by provide shade, but also reduces incidence of coffee leaf rust, leading to an increase in plot revenue by more than 50 per cent (Reference van Asten, Wairegi, Mukasa and UringiVan Asten et al., 2011). Improving resource reuse within agriculture production can also at times support product diversification and linkages towards other supply chains (intersectoral upgrading). For instance, improved cattle manure management by dairy farmers in Uruguay has led to the production of fertilisers and biogases that help generate higher revenues for farmers and productivity gains (Personal communication with Manuel Albaladejo, Head of UNIDO representative for Argentina, Chile, Uruguay and Paraguay, April 2021).

Another important question is that of the scope for state interventions in the process of climate-smart agriculture development. Valuable lessons can be drawn from the range of interventionist agricultural policies that were used in today’s rich countries, both in terms of inputs policy (i.e. land policy, knowledge policy, credit policy, and physical inputs policy) and outputs policy (measures intended to increase farm income stability and the measures intended to improve agricultural marketing and processing) (Reference ChangChang, 2009). The Brazilian experience in terms of climate smart agriculture also offers insightful lessons in terms of the role of policy instruments such as R&D policies and financial incentives. For instance, the Brazilian Agricultural Research Corporation (Embrapa) has been a critical public actor in the development of new crop varieties and farming techniques adapted to Brazil’s diverse agro-ecological zones, which has helped improve productivity, reduce the environmental impact of agriculture, and increase resilience to climate change (Reference Parente, Melo, Andrews, Kumaraswamy and VasconcelosParente et al., 2021). Other flagship programmes include the Amazon Fund (launched in 2008) and Low-Carbon Agriculture Plan (launched in 2010), which included financial incentives for farmers to adopt practices such as integrated crop-livestock-forest systems, no-till farming, and the restoration of degraded pastures. Notwithstanding remaining challenges, Brazil’s experience around climate-resilient agriculture bears high relevance that could form the basis of policy lessons for nations aiming to increase the resilience of their agriculture or diversify towards climate-resilient crops as part of a green economic transformation strategy.

Biodiverse Nations: Varieties of Nature-Based Services and Their Development Impact

For biodiverse nations, greening economic development faces an additional important consideration: the preservation and maintenance of local natural ecosystems. This issue is particularly relevant in Latin America, Central Africa, and Southeast Asia, which contain most of the planet’s biodiversity hotspots. The interplay between a nation’s biodiversity and economic activity has historically tipped in favour of resource extraction. Nevertheless, there are several ways in which the conservation of a country’s biodiversity can support economic development, which explains the increasing attention devoted to bioeconomy strategies.Footnote ³² This section explores the extent to which different types of nature-based activities provide alternatives to deforestation and environmentally damaging extractive activities in regions seeking development while protecting their natural assets.

Biodiversity-Based Innovation Ecosystems: Overcoming the Northern Exploitation of Southern Biodiversity

Several economists have described the R&D process as one of information utilisation, application, and diffusion (e.g. Reference Arrow and RowleyArrow, 1972) and dependent upon a stock of ‘information’ for its generation of useful innovations (Reference StonemanStoneman, 1983). Natural ecosystems also hold considerable value as a source of information that can feed into innovation processes (see Reference Pearce and PearcePearce and Pearce, 2001; Reference Simpson, Sedjo and ReidSimpson et al., 1996; Reference SwansonSwanson, 1996). As illustrated in Figure 11, there are two main ways in which the conservation of biodiversity holds value for innovation processes: as a provider of genetic material, through a process known as bioprospecting; as a source of inspiration for innovation, through a process known as biomimicry.

Figure 11

The value of biodiversity as an input into R&D processes

Source: Lebdioui (2022)

Northern-based industries heavily rely on southern-based biodiversity for R&D processes in various industries (Reference SwansonSwanson, 1996). However, the informational value of biodiversity has often been extracted by foreign firms without recognition or compensation, which has given rise to an astonishing number of biopiracy cases in developing nations. Meanwhile, the biodiversity-based innovation sector has so far remained at an embryonic stage across biodiverse developing nations. There have been laudable efforts to leverage the innovation value of biodiversity, but those have mostly been limited to bioprospecting, which can be defined as a systematic and organised search for useful products derived from bioresources including plants, microorganisms, animals, and so on, which can be developed further for commercialisation and overall benefits of the society (Reference Oyemitan and KueteOyemitan, 2017). The most well-known initiative took place in the 1990s in Costa Rica, with the creation of the National Biodiversity Institute (InBio), which worked under the premise that a country will be able to conserve a major portion of its wild biodiversity if this biodiversity generates enough intellectual and economic benefits to make up for its maintenance (Reference Mateo, Nader and TamayoMateo et al., 2001). Nevertheless, serious doubts have been raised regarding the relative economic and developmental benefits of bioprospecting. This is well illustrated by some of the celebrated deals between InBio and foreign pharmaceutical companies, in which the royalties to be earned by Costa Rica should commercial drugs be developed are believed to be less than USD 1.1 million (Reference Barrett and LybbertBarrett and Lybbert, 2000). As a result, after three decades of activity, InBio ceased to operate due to the dried-up funding sources – 80 per cent of which came from the international community – and its inability to become financially sustainable.Footnote ³³

In contrast to using nature for extracting genetic material, biomimicry involves learning from and emulating biological forms, processes, and ecosystems tested by the environment and refined through evolution (Reference BenyusBenyus, 1997). It marks a radical shift from the Industrial Revolution, which was ‘an era based on what we can extract from nature’ (Reference BenyusBenyus, 1997), but it also helps overcome the scalability problem that often hinders nature-based solutions that require the availability of primary material extracted from nature (e.g. volcanic rocks for carbon capture).Footnote ³⁴ The field of biomimicry has been booming with a twelvefold increase in biomimicry patents and research grants over the past twenty years (see Fermanian Business & Economic Institute, 2020) and offers interesting prospects for leveraging local biodiversity as a factor endowment for innovation to ‘leapfrog’ towards high value-added sectors. However, very few public policies support its development in the developing world, which is paradoxical given that this is where most of the world’s biodiversity is. As a result, the benefits of the biodiversity-based innovation sector (in terms of job gains and value creation) have mostly been captured by a handful of high-income industrialised economies in the Global North (Germany, South Korea, the United States, as well as France) where a range of publicly funded R&D programmes and grants have been implemented (see Reference LebdiouiLebdioui, 2022b).

Governments have a critical role to play in encouraging the transition towards knowledge-intensive biodiversity-based activities beyond mere rent maximisation from resource exploitation, in line with the theoretical insights from the literature on national innovation ecosystems (Reference LeeLee, 2013; Reference LundvallLundvall, 2016; Reference MalerbaMalerba, 2002; Reference Nelson and WinterNelson and Winter, 1982). Policy interventions in the biodiversity-based innovation sector are indeed justified given the existence of market imperfections and coordination failures (Reference LebdiouiLebdioui, 2022b). Those include financing for physical, digital, and legal infrastructure to provide agents with more opportunities for both strategic and serendipitous nature-based innovation (i.e. through the creation of ‘eco-labs’ in biodiverse areas and digital repositories); streamlining of administrative processes for research permits to study biodiversity; and the promotion of integral and interdisciplinary education programmes in bio-innovation processes. Unlike many other ‘traditional’ sectors, biomimicry heavily relies on a strategy mix of skills (such as biological knowledge but also chemistry, design, and engineering skills) to abstract biological strategies into applicable design to solve human challenges (Reference Kennedy, Fecheyr-Lippens, Hsiung, Niewiarowski and KolodziejKennedy et al., 2015), and which the standard curriculums generally do not provide.

The Context of Fossil-Fuel Producers: Repurposing Capabilities for Green Diversification

Fossil-fuel producers are facing the headwinds of the global decarbonisation agenda, but this does not mean that they are condemned to be the losers of the global energy transition. To meet their dual energy transition and economic diversification needs, fossil-fuel-dependent economies may not necessarily need to ignore their non-renewable resources as they can leverage them towards green economic transformation. This may sound counterintuitive, but fossil-fuel producers have acquired productive capabilities that can be repurposed in a wide range of green industrial sectors, especially with the help of the right policy tools. Here, I want to discuss three main stages (which we identify in Al Saffar and Lebdioui, forthcoming) that underpin developmental green economic diversification from the perspective of fossil-fuel-producing countries.

Many fossil-fuel-producing developing economies that have resisted the deployment of clean energies are consuming an increasingly large share of their fossil-fuel production, limiting their export capacity and associated rents. This is particularly relevant in the MENA region where oil and gas account for almost 95 per cent of electricity generation and where thermal plants consume more than one-third of gas production (Reference Al Saffar and WannerAl Saffar and Wanner, 2022). Indonesia provides a cautionary tale: because of a surge in its domestic oil consumption, and though it is among the twenty-five largest oil producers worldwide, Indonesia became a net oil importer in 2004, which prompted its exit from the Organization of the Petroleum Exporting Countries .

In such contexts, deploying clean energies and improving energy efficiency (through the use of more efficient gas turbines, or by reducing gas flaring, for instance) can help reduce domestic oil and gas consumption, and therefore free up more fossil-fuel resources for exports (without the additional risk of stranded assets associated with upstream investment). This strategy represents a low-hanging fruit to generate more capital that can be invested for diversification in fossil-fuel-dependent economies, without even requiring an increase in fossil-fuel production.

Fossil-fuel producers, particularly those with high fossil-fuel rents per capita, generally have access to greater financial resources compared to resource-poor countries, which could, in theory, help them finance productive investments for climate-resilient economic diversification and overcome hurdles such as the high cost of capital for clean energy investment. However, the decision to invest in green industrialisation is influenced by a combination of factors that go beyond fiscal capacity alone, and include political will, strategic foresight, external pressures, as well as institutional capabilities for domestic investments.

In that sense, the standard policy advice of resource wealth management, which has been dominated by a short-term fiscal stabilisation agenda, will not suffice in the face of the pressing need for economic diversification (Reference Chang and LebdiouiChang and Lebdioui, 2020). To stimulate a long-term, climate-resilient structural transformation that also reduces exposure to transition risks, resource revenue management strategies need to tackle the root causes of fossil-fuel dependence (insufficiently diversified productive structures) rather than solely addressing its symptoms (e.g. vulnerability to commodity price volatility). Therefore, rather than solely sticking to investing fossil-fuel rents in a fiscal stabilisation fund, policymakers may find it more effective to capitalise sovereign development funds or a national development bank, provided they have clear mandates, strong governance, legislative oversight, and – not least – proper investment analysis, monitoring, and evaluation (Reference Addison and LebdiouiAddison and Lebdioui, 2022).

Though economically sensible, the idea of reinvesting fossil-fuel rents for green economic transformation is paved with several political challenges, including resistance from powerful elites that have a vested interest in maintaining the status quo, and institutional inertia, which explains why countries might not have managed to diversify in the first place. A productive management of resource rent can be quite politically challenging as it disrupts the traditional dynamics of the rentier state model. For instance, in most of the MENA region, the political economy of oil rents has been characterised by weak productive constituencies and institutional arrangements entirely predicated on the uninterrupted flow of oil rents rather than resilient governance mechanisms (Reference Malik, Mohaddes, Nugent and SelimMalik, 2019). Reinvesting fossil-fuel rents therefore requires new elite bargains and carefully crafted incentives for fossil-fuel actors by making alternatives more viable and competitive, as well as an acute understanding of the role that they can play in the transition, which relates to the stage 3 strategy.

Throughout history, nations and firms have kept up with technological disruptions by repurposing their capabilities transversally, from Nokia repurposing its logging industry expertise towards telecommunications; Slack Technologies leveraging the internal communication platform they developed while in the gaming industry to enter the business communication industry; or 3 M evolving from a small-scale mining venture to a highly diversified conglomerate with innovative products such as Post-it Notes and Scotch tape. The technological linkages between different products might not always be obvious. For instance, producing rifles creates a capacity for producing other things such as sewing machines, bicycles, and automobiles (Reference RosenbergRosenberg, 1976).

In the fossil-fuel sector, the ability to leverage transversal capabilities bears considerable implications for economic diversification and macroeconomic resilience. For instance, in Malaysia, several suppliers in the oil and gas sector have managed to acquire transversal skills that contributed to sectors beyond the petroleum industry.Footnote ³⁵ Such transversal skills have proven particularly useful after the collapse in oil prices in 2014, which incentivised Malaysian suppliers to mitigate their reliance on the broader fossil-fuel sector (Reference LebdiouiLebdioui, 2019). In the context of the dual challenge of diversification and energy transition, a repurposing agenda entails the exploitation of existing knowledge, infrastructure, and technologies involved in fossil-fuel production towards integrating value chains that are central to the green economy. At the corporate level, many oil and gas companies have already started to reposition themselves to take advantage of new opportunities arising out of the low-carbon economy, both to improve their financial resilience and corporate image.

Analysing how those businesses have started to repurpose some of their in-house capabilities towards clean energy operations, it is possible to identify a range of technological, organisational and infrastructure linkages between petroleum extraction and clean energy production (see Lebdioui and Bilek, forthcoming). To name a few examples, activities such as chemical and temperature engineering services can be easily repurposed towards green hydrogen production, oil and gas reservoirs can be reconverted for carbon storage, and the construction and maintenance of offshore oil platforms involve a range of technological capabilities that can serve the construction of offshore wind platforms, while petroleum refineries can be repurposed as biofuel refineries (Lebdioui and Bilek, forthcoming).

However, not all activities have the same scope for repurposing. For instance, capabilities such as drilling expertise and equipment do not offer great degrees of linkages with clean energy production, implying that workers with those skills will require considerable retraining as part of a low-carbon energy future, making the role of reskilling and labour market policy interventions particularly important. Promoting a socially inclusive repurposing of capabilities from fossil fuels to hydrogen supply chains development requires a multi-dimensional and proactive policy approach, along with careful coordination of energy policy, fiscal policy, industrial policy, skills development policy, as well as labour market policy. Policymakers may find it useful to create a national agency with a skills repurposing mission and retraining capacity to help acquire the skills and know-how required for local integration in different green industries, and the creation of a national readiness framework in the context of the energy transition.

Though they refer to very distinct processes and policy strategies, the three stages are mutually reinforcing. However, the combination, sequencing, and scale at which those pathways can be pursued differs from country to country depending on the local context.

Size and Neighbourhood Matters: Economies of Scale, Market Piggybacking, and Supply Chain Regionalisation

Not all countries can achieve green industrialisation through demand-led growth. To date, some of the most successful adopters of green industrial opportunities have been extremely large economies (in terms of domestic market size), such as China, the USA, Brazil, the EU, and India. In smaller economies where the domestic market demand is often not large enough to reach economies of scale, green economic transformation requires access to another country’s larger market demand, but also multilateral coordination towards regional developmentalism.

The idea of ‘piggy-backing’ on a larger and/or more economically prosperous neighbouring country’s demand as an industrial development strategy is not new: Vietnam, Poland, and Mexico have provided useful cases over the past few decades.Footnote ³⁶ It is also in that perspective that Mexico stands to benefit from the recent low-carbon technology market push in the United States. The IRA, which took effect in 2022, provides generous tax credits for electric vehicles sold in the United States and mandates that a certain percentage of the battery components be assembled or manufactured in North America (or countries with whom the USA has a free trade agreement). Such policies have already led to new investments in Mexico, whose ability to benefit from the IRA is not only a function of geographic proximity but also the market access allowed by the United States-Mexico-Canada Agreement, the presence of low-wage skilled labour as well as domestic capabilities to attract investments in low-carbon technology supply chains (especially in the automotive sector). The ability to tap into another country’s market is indeed conditioned by several factors (including signed trade agreements, domestic capabilities, geographic proximity, and transportation costs). But in the long term, a country’s success in seizing opportunities stemming from another country’s market demand also hinges on the use of industrial policies to improve supply-side industrial capabilities, such as the development of a skilled local workforce capable of engaging in high-value-added industries to move beyond the mere assembly and processing activities, and implementing improvements in logistics and infrastructure (both digital and physical) that are essential to attracting investments in high value-added industries.

However, this strategy is not without its risks. Heavy dependence on a single market can expose a country to economic vulnerabilities if there’s a downturn or radical policy change in the larger country. Diplomatic tensions can also affect the ability of a country to rely on another country’s demand as an engine of growth. Market diversification and strategic planning are essential to mitigate these risks. It is also crucial to ensure that this strategy aligns with the long-term domestic developmental goals, rather than locking countries in unsustainable development routes (e.g. water-intensive industrial or agricultural production in areas at high risk of water stress to cater to external demand, such as avocado production in Chile or green hydrogen production in North Africa). Furthermore, not all nations have access to large neighbouring markets to bolster their green economic transformation (for instance, most Central and Latin American nations do not benefit from the same conditions as Mexico in terms of privileged and low-cost access to the vast U.S. market). Recent evidence reveals that, except in Mexico, limited nearshoring to the region has taken place so far (Reference Pietrobelli and SeriPietrobelli and Seri, 2023). Countries surrounded by smaller economies therefore face a collective demand-side challenge. In regions like Africa, the Caribbean, and Central and South America, where individual markets may be limited (except for Brazil), relying on external demand might not always be viable as a development strategy, and regional integration is critical to ensure the coordination and perennity of demand-side policies.Footnote ³⁷

That said, regional integration is not an easy task (see Reference HeineHeine, 2012; Reference OcampoOcampo, 2006). Political and ideological differences, external influences, and gaps in physical infrastructure connectivity, as well as disparities in economic development levels among neighbouring countries, can generate resistance to regional integration. Latin America is a case in point, where the numerous efforts to promote regional integration have mostly failed in previous decades (Reference Merke, Stuenkel and FeldmannMerke et al., 2021). Despite these challenges, many regions around the world have successfully pursued various levels of integration (such as the EU, Association of Southeast Asian Nations (ASEAN), and the African Union, among others), which can serve as the basis for useful lessons. One of those is that regional integration is not just about trade but about increased social and economic development (Reference StiglitzStiglitz, 2016). For instance, an important step towards regional integration in Africa has been taken with the signing of the African Continental Free Trade Area (AfCFTA) in March 2018, but in many ways, the challenge of regionalising supply chains and increased demand-side coordination remains.

To understand the full scope of regional cooperation in the context of green economic transformation, it is useful to go beyond the linear approach to regional integration as developed by Reference VinerViner (1950), which consists of a trade liberalisation approach to integration whereby countries first adopt free trade areas, then customs unions, and then common markets. In contrast to the linear approach, several scholars have put forward the notion of ‘developmental regional integration’ (or at least different variations of the concept, see Reference Adejumobi, Kreiter, Adejumobi and ObiAdejumobi and Kreiter, 2020; Reference DaviesDavies, 1996; Reference IsmailIsmail, 2018; UNCTAD, 2013). This approach to regional integration emphasises macro- and micro-coordination in a multi-sectoral programme embracing production, infrastructure, and trade, notably to build regional value chains that can foster industrial transformation, especially for small economies (Reference DaviesDavies, 1996; Reference IsmailIsmail, 2018). Adopting a ‘developmental regionalist’ approach in the African context, Reference IsmailIsmail (2022) outlines how the AfCFTA can be implemented in a manner that supports the transformative industrialisation of Africa and facilitates a ‘climate-resilient developmental regionalism’.

Building on the idea of ‘climate-resilient developmental regionalism’, we can put forward different mechanisms that help coordinate demand-side and supply-side policies at the regional level. Besides the mere existence of regional free trade agreements, ‘climate-resilient developmental regionalism’ can take the form of regional strategies for specific low-carbon industries to help align demand-side policies to create larger and more stable regional market demand. On the supply-side, developmental regional integration mechanisms span a wide spectrum: from knowledge-sharing on critical material supplies and region-wide certification for low-carbon products to pooling limited R&D resources for joint innovation to shared challenges (such as high-altitude mining in the Andean region or developing solar plant equipment that is resilient to the Sahara’s extreme temperatures).

It is also worth highlighting that, besides building a larger common market, the potential of regional integration is more than the sum of its parts. This is why ‘green’ regional developmentalism is also based on the idea that neighbouring countries leverage their complementary assets (whether it is critical mineral abundance, manufacturing capacity, renewable energy potential, as well as proximity to important trade routes) to develop an efficient regional industrial ecosystem around climate-related technologies.

In practice, achieving green regional developmentalism remains paved with challenges, especially in terms of financing and political alignment (and particularly so in Africa and Latin America), but surmounting such challenges is necessary, given the significant development opportunities and challenges that arise in the twenty-first century for some of the world’s regions.

The Rise of Green Protectionism in Industrialised Nations

Climate change knows no borders. A few countries are disproportionately responsible for causing it by appropriating more than their fair share of the atmospheric commons, while those that suffer the worst consequences tend to be developing nations that contributed the least to climate change (Reference HickelHickel, 2020). However, as explained in Section 3, instead of honouring their climate responsibilities, the world’s major economies’ response to climate change has mostly consisted in providing a competitive advantage to domestic firms to capture the industrial benefits that arise from decarbonisation. The green resurgence of industrial policy, even in the United States, is motivated by the recognition that the low-carbon transition offers significant green windows of opportunity that must be seized by moving early (Reference Lema, Fu and RabellottiLema et al., 2020), but also by geostrategic interests to reduce China’s low-carbon technology dominance (White House, 2023).

The US is not alone in promoting green protectionism. In 2023, the EU also implemented its CBAM, which initially applies to imports of certain goods (such as cement, iron, and steel, aluminium, fertilisers, electricity, and hydrogen). While it has been framed as a climate action, concerns have arisen that it is a de-facto import constraint, which can be interpreted as violating several provisions under the General Agreement on Tariffs and Trade (GATT). Regardless of its legality, the EU’s CBAM is a source of concern for developing countries as it could impose costs on their exporters, including in Africa, where it could cause a GDP loss of $31 billion (Reference Aggad and LukeAggad and Luke, 2023; Reference Usman, Abimbola and ItuenUsman et al., 2021).

The main defence in terms of the development impact of green industrial policy tools used in the global north has consisted in the idea that those interventions will reduce the cost of low-carbon technologies, making low-carbon transitions more attractive in poor countries. There is validity in this argument, but the policy strategies currently undertaken by the world’s major economies (whether it is the United States, the EU, or China) mostly constrain the role of developing regions as sources of raw materials to fuel the low-carbon technological revolution, thereby reproducing the trade dependencies that have undermined global development in the past century (see Radley for an analysis in the case of the Congo).

Some parallels can therefore be drawn between the emergence of green industrial policy and the past, and it comes to the international division of labour and the international political economy of catching-up. Reviving some of the ideas of the nineteenth century German economist Friederich List, Ha-Joon Reference ChangChang (2002) argued that rich nations have a tendency to ‘kick away the ladder’ by which they climb up, in order to deprive others of the means of climbing up after them. This seems to remain true in the context of green economic development models. While green protectionism might seem like a reasonable response to safeguard domestic industries in their low-carbon transition, the way ‘green’ industrial policies have been enacted by the world’s major economies fails to address the fundamental challenge of a just transition. Through their green protectionism, rich nations are effectively breaking the central promise of the UN sustainable development goals of leaving no one behind.Footnote ³⁸ This begs the questions: is green industrial policy inevitably protectionist and discriminatory? How to balance the regained popularity of industrial policy as an opportunity for global development while avoiding the pitfalls of green protectionism from the Global North? Is green industrial policy fairer when it focuses on the creation of markets (see Reference Mazzucato, Scoones, Leach and NewellMazzucato, 2015, Reference Mazzucato2016; Reference Perez, Jacobs and MazzucatoPerez, 2016) rather than import constraint measures? The rest of this section looks at the ways the tensions between the green industrial policy and international trade rules, the uneven financing landscape for green economic transformation, before exploring some ways forward.

Double Standards of the International Trade System and the WTO’s Contested Relevance

Developing countries need adequate policy space to pursue industrial policies to accelerate their green economic transformation and ensure the sustainability of their development. But to what extent is the pursuit of green industrial policy possible within the current rules of the world trade system? Already in 2014, Mark Wu and James Salzman had anticipated the next generation of trade and environmental conflicts as a result of the emergence of green industrial policy (Wu and Salzman, 2014). The attempt by some countries to pursue green industrial policies has at times violated World Trade Organization (WTO) rules and international trade agreements, especially around tariffs, local content requirements, and intellectual property rights. This was the case for India in 2013, when the United States government (ironically using the same policy tools today) filed a complaint regarding the domestic content requirements under the Jawaharlal Nehru National Solar Mission for solar cells and solar modules (WTO, 2018). Governments, in responding to negative rulings, either find legal work-around solutions (especially those with more technical resources to navigate or bend trade rules) or sever only the quasi-protectionist elements of their green industrial policies (while trying to keep the environmental benefits in place in most cases) (Wu and Salzman, 2014). Furthermore, the policy space for trade-related environmental measures is safeguarded under GATT Article XX(b) where ‘WTO members may adopt policy measures that are inconsistent with GATT disciplines, but necessary to protect human, animal or plant life or health or relating to the conservation of exhaustible natural resources’.Footnote ³⁹

However, in practice, the use of this article is far from straightforward and has rarely been effective due to a two-step evaluation weighing the legitimacy of the environmental policy challenged against its potential negative impact on trade and the extent to which it constitutes a discriminatory or disguised restriction on international trade (Wu and Salzman, 2013). When measures overtly favoured domestic products over imports, WTO panels and the Appellate Body (which has ceased to function since 2019 after the appointment of its new members was blocked by the United States) have generally declined to uphold the defendants’ invocation of the so-called environmental and other public interest exceptions (Reference Tucker, Meyer, Tienhaara and RobinsonTucker and Meyer, 2022).

However, some governments have been resourceful at circumventing trade rules, especially by disguising their industrial policies under the umbrella of climate action. The EU is a case in point, revealing the extent to which protectionist motives can trump ecological goals in trade negotiations. Seeking to promote its biofuel production by preventing the imports of lower-cost biodiesel from Southeast Asia and South America, the EU has implemented duties on biodiesel imports that were later deemed illegal by the WTO (Reference Tucker, Meyer, Tienhaara and RobinsonTucker and Meyer, 2022:125). The EU subsequently resorted to using environmental regulations arguing that palm oil-based biofuel did not comply with its renewable energy targets, prompting disputes from Indonesia and Malaysia on the grounds that the EU’s palm oil restrictions are discriminatory). However, at the same time, the EU has often also restricted the imports of goods that could enable it to meet its climate targets. A famous sticking point in the negotiations on the Environmental Goods Agreement (a multilateral effort within the WTO to liberalise tariffs on environmental goods) was the case of bicycles. While the Chinese government argued that a bicycle constitutes an environmental good because it is an emissions-free form of transportation, the EU negotiators were reluctant to liberalise tariffs on bicycles for fear that a large influx of foreign-produced lower-cost bicycles would damage EU bicycle producers (Reference BensonBenson, 2023). The Environmental Goods Agreement negotiations have broken down as a result. More recently, concerns have been raised regarding the legality of the EU’s CBAM, which several developing nations are planning to challenge at the WTO.

If powerful nations can bend – or deliberately not comply with – trade rules, the purpose of the WTO in the age of ecological crises must be questioned. In many ways, the rise of green industrial policies and green protectionism complicates the balance between trade liberalisation and environmental protection agendas. There are reasons to believe that the recent adoption of explicitly protectionist policies in the United States (such as the IRA and the CHIPS Act) may make global trade rules obsolete, leaving some policy space to late industrialisers. As rich nations often manage to bend trade rules to their advantage, it also provides precedents for developing countries to pursue the same strategies. The future relevance of the WTO may depend on its ability to adapt to – and address – this challenge. At the same time, notwithstanding the restrictions that the WTO places, they also leave governments some degree of flexibility to adopt some green industrial policies, with various exceptions and special treatments. In contrast, regional, multilateral, and bilateral agreements are typically even more restrictive on industrial policy space than WTO rules.

Of particular concern is the Investor-State Dispute Settlement (ISDS) scheme, which is included in many trade and investment agreements and represents a major obstacle to green economic transformation as it enables transnational corporations to use legal action against governments in courts outside of the national legal system over the implementation of sustainability measures that threaten their profits. Fossil-fuel companies are therefore taking advantage of the ISDS scheme to sue over fossil-fuel phase-out plans and have sued governments across the world for £18 billion as climate policies threaten their profits (Global Justice Now, 2021). The ISDS scheme is particularly threatening to the implementation of sustainability measures and broader green economic policy in developing countries (Tienhaara, 2018), where foreign polluting industries have been relocated and have much fewer resources to fight legal battles outside of their jurisdictions. Countries such as South Africa, India, New Zealand, Bolivia, Tanzania, Canada, and the US have all taken steps towards getting rid of ISDS (Reference LimbLimb, 2022). But more efforts are needed in that direction to put an end to the use of ISDS in contexts in which it jeopardises the global fight against climate change and the achievement of sustainability goals more broadly.

Bridging the Financing Gap to Support Green Economic Transformation: How Credible are Rich Nations?

Green economic transformation and industrial policy require a mobilisation of resources, especially in least income countries that face higher infrastructure gaps, external borrowing costs, and stricter financial constraints to spend on productivity-enhancing assets. In theory, climate financing can help bridge this gap. However, despite the rhetoric used by world leaders summit after summit, the climate financing landscape is appalling and exacerbates the impact of green trade protectionism. Rich nations have even broken their promise (made at the 2009 UN climate summit in Copenhagen) to channel a total of USD 100 billion a year to poor nations by 2020 to help them adapt to climate change and mitigate further rises in temperature. The United States provided less than a fifth of what they should have paid ($7.6 billion out of $40 billion), while Australia, Canada, and the UK also fell far short of what they should have contributed (Reference TimperleyTimperley, 2021). This was not even a hard target to reach: $100 billion represents a fraction of what governments spent to bail out banks in the aftermath of the 2008–2009 financial crisis.Footnote ⁴⁰ To further put things into perspective, while failing to fulfil its $40 billion climate financing pledge, the United States government spent a staggering $1.5 trillion to manufacture the rarely used F-35 Fighter jet, one of the most expensive weapons systems in history. Meanwhile, the EU has allocated over 1 trillion euros in sustainable investments over a decade, but the amount of climate funds from the European Commission and the European Investment Bank (EIB; the EU’s lending arm) to developing countries has not increased from an average of around 5.7 billion euros ($6.7 billion) since 2018 (Reference Usman, Abimbola and ItuenUsman et al., 2021).

Beyond the missed targets in terms of climate financing, attention must also be drawn to the type of climate finance provision to date. Rather than supporting green economic transformation, most climate financing has consisted of non-concessional loans over grant financing and focused on funding climate mitigation initiatives over climate adaptation and resilience (Reference Colenbrander, Cao and PettinottiColenbrander et al., 2022; Reference Usman, Abimbola and ItuenUsman et al., 2021). Considering their economic needs and different responsibilities in the context of the climate crisis, developing countries need a lot more financing not merely to import low-carbon technologies but to support local climate-resilient economic transformations.

Reclaiming Policy Space for Green Economic Transformation

Several initiatives have emerged in recent years to redraw the global finance and trade landscape in a way that brings equity to the climate and development agenda. The one that has received the most attention to date is the Bridgetown Initiative, put forward by the Prime Minister of Barbados, Mia Mottley, which proposes the rechannelling of unused International Monetary Fund (IMF) special drawing rights to developing countries; adding climate resilience debt clauses in new loans by the IFIs; and providing $100 billion in foreign exchange guarantees to help reduce currency risks and, by extension, the cost of capital for renewable energy projects in developing countries.

Notwithstanding the major improvements of the global financial system that the Bridgetown Initiative entails, the agenda of promoting productive resilience to climate and transition risks also requires revisiting trade rules that are restricting the use of green industrial policies in developing nations and consolidating the technological dependence of the global south to the global north. Rather than seeing global decarbonisation as an economic race, rich industrialised nations must recognise the value of inclusive green industrial policies in developing nations and actively support their efforts. Rather than relying on punitive measures, Reference IsmailIsmail (2022) suggests that developed economies such as the EU and the United States that are considering applying CBAMs against imports from developing countries should rather support a positive trade agenda to encourage and assist developing countries to implement their mitigation commitments and adaptation development strategies. An alternative could also be for the EU and the US to share some of the income earned through applying this levy with the countries negatively affected by it and do so in a way that supports the latter’s climate resilience.

This support can take various forms, such as technical and financial assistance for green productive capabilities accumulation and resilience (in other words, climate financing beyond palliative solutions and climate mitigation); further commitment for low-carbon technology transfer (which is at the core of the UNFCCC), notably by increasing support to institutions such as the Global Environment Facility, which, since its inception in 1991, has been financing the transfer of climate change-related and other environmentally sound technologies to developing countries.Footnote ⁴¹ International agreements should also further encourage cooperation with – and accountability from – the private sector to support low-carbon technology transfer and innovation cooperation in developing countries.

To expand their shrinking policy space for greening their productive structures, developing countries could also benefit from ending the use of the ISDS system against environmental regulations (which 400 civil society organisations are already calling for, Reference LimbLimb, 2022). Furthermore, to ensure that the development agenda of developing countries is not overburdened with a cost of carbon that exceeds their climate responsibilities, we must move towards a fair differentiation of carbon prices so that rich nations pay much more per CO2 emitted than developing countries. Differentiated prices of carbon must not be solely based on purchasing power parity (as suggested in Reference LenainLenain, 2023) but also reflect different climate responsibilities based on a country’s historic contribution to GHG emissions. To further support the notion of the principle of common but differentiated responsibilities, the WTO could also use the example of the Doha Ministerial Declaration on the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement and Public Health to also expand TRIPS flexibilities for developing countries to climate-related goods (Reference IsmailIsmail, 2022).

Those measures should not be considered a handout to developing nations. If we are to successfully fight against climate change, developing countries (which represent 99 per cent of projected global population growth but have much lower responsibility to mitigate climate change) will also need serious incentives to embark on more ecologically sustainable pathways. However, as is the case with climate and green industrial policy (which spans across various issues such as trade, climate, energy, and finance), institutional gridlocks arise where there are no effective means for coordinating all the bodies that can contribute to dealing with interconnected issues (Reference Hale, Held and YoungHale et al., 2013).Therefore, to move the needle and push for reforms in global trade and environmental rules that typically favour developed nations, developing nations and their international partners will need to build strong coalitions and engage in strategic collective actions in various fronts and forums, such as the WTO, and the Conference of the Parties, and International Finance Institutions.

Furthermore, in the era of a bipolar world, opportunities exist to leverage heightened geopolitical competition between the United States and China. As both superpowers seek to increase their spheres of influence, developing countries can strategically position themselves to leverage this rivalry to their advantage, especially in terms of low-carbon technology transfer. In Malay folklore, this is what is often referred to as the mouse-deer strategy, and it has defined ASEAN diplomacy in recent decades.Footnote ⁴² While China has already embarked on a global infrastructure development strategy through its Belt and Road Initiative with projects in Africa, Asia, and Latin America, there is scope for opening avenues for low-carbon technology transfer and cooperation for low-carbon technological innovation, adaptation, and diffusion, especially in light of China’s technological dominance in this area (see Section 3). Meanwhile, the United States, in its efforts to counterbalance China’s influence and catch up in low-carbon technology sectors, might be persuaded to offer more favourable terms for technology transfers, productive investments, and capacity-building programmes in developing countries. The recent U.S.-DRC-Zambia memorandum of understanding is a case in point as it demonstrates how the United States aims to counter China and bolster its clean energy supply chains by deepening ties with African nations (Reference SouléSoulé, 2023).

In sum, the road to socially inclusive and developmental global decarbonisation is paved with obstacles and cannot be achieved without expanding policy space for green economic transformation in developing nations. Important conversations on how to reform the global financial architecture to foster climate solidarity and resilience have begun, but progress has been slow. Furthermore, this agenda cannot happen without a parallel major rethinking of the global trade rules. And for the multilateral system to provide the coordination needed for shared prosperity and to fight climate change, we need better collective action and honest conversations about green industrial policy and green protectionism.