Industrial policy—that is, government efforts to promote growth in specific sectors of the economy—has become increasingly popular with American policymakers. The latest example of industrial policy in action is President Biden’s $3 trillion American Jobs Plan. This plan will be one of the largest federal efforts ever to address climate change and is being lauded as essential to compete with China’s low-carbon transition. But while Biden’s aim is to increase competition with China, many of his policies are copying its top-down playbook. Before supporting this approach, U.S. policymakers should recognize some complex realities about Chinese economic statecraft to avoid adopting similar efforts that may be unnecessary and even counterproductive.
First, governments cannot provide subsidies and increase spending forever. China has been offering subsidies for renewable energy since 2006. Yes, China has become the world’s largest producer of wind and solar energy, but its policy has resulted in $42 billion in clean-energy debt. To address this growing burden, the Chinese government recently proposed that renewable energy developers cancel part of the debt if they want to keep building new projects.
Biden claims his plan will avoid debt burdens because it raises taxes on corporations and closes existing loopholes. However, the direct industry subsidies Biden intends to provide via the plan are unlikely to help the United States in the long run. Proponents of industrial policy often argue that it drives down clean energy costs. On the contrary, innovation lowers costs. Industrial policy is not a replacement for natural demand. China is arguably the best case study of this reality to date. It is currently demonstrating how costly moving toward a heavily subsidized low-carbon economy can be at this point in history. Its advantage is that the Communist Party can force certain people to pay the bill.
Second, there are limitations to establishing arbitrary timelines and targets. President Xi Jinping announced last year that the world’s largest emitter of greenhouse gases would reach net-zero emissions by 2060. Then in March 2021, China released the 14th iteration of its five-year plan that essentially dilutes these grand aspirations. The lesson here is that China’s climate ambitions are tied to its economic growth levels. The Chinese government needed to make adjustments because of the economic distress caused by COVID-19. There is no reason to expect it will not do so when future downturns occur, and it may even produce misleading measures of success when needed.
This is typical behavior in centralized governing systems. Failing to reach established goals simply invites new plans, and individuals and businesses are forced to follow along because there is no alternative. Their success is tied directly to the state. In this sense, China’s climate ambitions will be as successful as the Communist Party sees fit.
President Biden’s decision to pursue a national clean energy standard to make electricity carbon-free by 2035 mirrors this top-down approach and will likely require similar adjustments over time to avoid what could be perceived as unjust outcomes. As states shift toward new national standards, regional fairness concerns will be raised. Some utilities will not scale clean technologies as quickly due to limitations in existing energy fleets and available resources. This could result in a “wealth transfer” from states more reliant on carbon-intensive fossil fuels to states reliant on cleaner sources. The treatment of small utilities is another concern. Many will likely seek an exemption from the national standard. If obtained, these exemptions would foster inequities among electricity consumers and perversely incentivize the growth of small utilities that qualify for the exemption.
Such challenges arise with a national one-size-fits-all policy because that approach ignores inherent complexities and heterogeneity. Unintended consequences will occur. Federal and state governments will need to adjust, and businesses and consumers will bear the costs of those adjustments. While there have been a few successes, Washington has a long record of failed energy industrial policies that should inform any future approach.
If the goal is to lower emissions as efficiently and effectively as possible, ideal policy levers include a carbon tax coupled with regulatory reform and an increased international R&D effort to fund technologies, preferably those with the lowest abatement cost and highest probability of penetrating the market. This combination of policies avoids the pitfalls associated with centralized command while still driving consumers toward clean energy.
Biden’s plan should get some credit for supporting more R&D and for its efforts to build more resiliency into the electric grid, but more information from the administration is required to determine the potential success of these initiatives. In the meantime, it is essential to remember that the U.S. is not just competing with China to produce and install clean energy technologies; it is competing against China’s philosophy and method of governance.
President Biden would be wise to avoid the innovation mercantilism and centralized authoritarianism practiced by China. The U.S. can pursue another course, one bolstered by strong incentives, less bureaucracy and more American ingenuity.
Pasquale DiFrancesco is a graduate student in the Master’s in Economics program at George Mason University and a 2018 Clean Energy Leadership Institute Fellow.