Policy Tradeoffs in the Pursuit of Green Growth

Capturing share of the growing market for the products and services that are essential to decarbonizing the global economy presents countries with a rare opportunity for a win-win-win. Expanding markets for environmentally friendly industries such as solar and wind can create new jobs to offset those that will be lost in legacy industries. It can accelerate emissions reduction at home and abroad by scaling supply and driving down costs. And it can build national resilience by bringing the production of energy and critical industrial products closer to home.

The challenge for policymakers is making the right tradeoffs to turn the potential of green growth into reality. Should they focus on specific technologies and national champions or trust in competitive markets? Should they build capabilities for domestic growth or buy imports to speed decarbonization? And should they provide the policy assurance that underpins many investments in green production capacity or retain the flexibility to respond to new circumstances? These tradeoffs are particularly challenging because they require bold decision making that balances short-term pressures with long-term opportunities amid considerable uncertainty.

Pick Winners or Trust the Market

The long-standing objections to industrial policy are well known: policymakers are ill-equipped to “pick winners,” regulators can be slow to respond to change, and politics can distort decision making. Markets are often seen to be more effective at allocating resources.

And yet, private markets appear incapable of powering the energy transition at the pace and scale required to minimize the economic impact of climate change. In many countries, energy users must decide whether to pay a green premium that represents the difference in cost between high-carbon and low-carbon technologies, and they often are choosing not to. Even when willing, they must also assess the risk that any low-carbon technology they invest in will perform as expected or remain viable over the long term. These barriers reinforce the inability of markets to independently lead the transition.

In response, many governments have embraced green industrial policies to stimulate their domestic capabilities and, in many cases, have also made generous public investments. To successfully navigate the tradeoffs, governments should take three steps.

Build the foundation for green growth. Policymakers should start by establishing a strong foundation for green innovation that is agnostic of any technology, sector, or company. Implementing carbon pricing through taxes or cap-and-trade systems is essential to accelerate the green transition by making emissions costly and greener alternatives attractive. While roughly 23% of global emissions are covered by some form of a carbon pricing, a more robust pricing system is urgently needed. Adopting stringent product and technology standards (such as fuel efficiency standards for cars) and other complementary measures can expand a carbon pricing system.

On the supply side, policymakers should address the constraints to growth that affect green industries as much as any other. The difficulties include access to capital, skilled labor, export markets, and raw materials. Streamlining regulatory processes, particularly reducing the time for businesses to receive permits, is critical to accelerating the expansion of green industries.

In the end, establishing strong policies and regulatory frameworks minimizes the need for targeted interventions that try to pick winners, while weak foundations call for more intrusive—and potentially market-distorting—policies.

Consult widely when designing policy. To avoid the risk of undue influence from favored sectors or companies, governments should engage with stakeholders in ways that are broad, transparent, and rooted in facts. This approach ensures that policy interventions address the best opportunities and worst structural challenges facing the various stakeholders. For example, Malaysia’s $72 billion Green Investment Strategy engaged a broad variety of business leaders to develop transparent sector-specific roadmaps informed by evidence-based assessments of their potential for foreign direct investment.

Similarly, the UK’s Industrial Decarbonization Challenge has brought together research organizations, industry, government, nongovernmental organizations, trade groups, and the public to accelerate cost-effective decarbonization at scale. The engagement aims to identify whole-system, multidisciplinary solutions with partners such as Siemens, Unilever, Ineos, BP, and National Grid. Finally, India is electrifying its city bus fleet across five cities by coordinating collective actions across the value chain, working with private markets, and providing some targeted financial intervention to spur the ecosystem.

Invest with professional expertise. To make the required investments, governments should establish specialized entities to invest public funds in green initiatives that advance their country’s economic and environmental interests. These bodies should operate independently, with professional expertise in finance, energy, and industry, all while insulated from political influence. The UK’s National Wealth Fund, operating at arm’s length from the government, attracts significant private investment due to its credibility and independence. This independence allows the fund to achieve roughly a three-to-one ratio of private-to-public financing for its investments.

Similarly, Japan’s GX Acceleration Agency, with its focused mandate and substantial resources, plans to invest $950 billion over ten years in transformative technologies (such as those used for hydrogen and carbon capture) to advance the country’s long-term decarbonization goals. In Australia, the country’s Australian Renewable Energy Agency (ARENA) is staffed by energy and finance professionals who make targeted, high-quality investments in renewable energy technologies. Since 2012, ARENA has deployed $1.64 billion to support renewable energy development across nine key technologies. And India established the National Infrastructure and Investment Fund to support green investments and coordinate with other green funds internationally.

Build for Growth or Buy for Speed

Countries face a critical choice in their green transition: build their own capabilities for domestic growth or buy readily available imports to speed their decarbonization journey. Building green industries at home promises long-term economic benefits but requires significant time and investment, with no promise of success. Importing existing technologies offers a faster path to decarbonization but means depending heavily on foreign suppliers—particularly China, which leads many green technology sectors.

China’s majority market share in green technologies, including solar PV panels, heat pumps, and electric batteries, is undeniable, often offering prices significantly lower than those of EU or US producers. This price advantage makes importing from China an attractive short-term solution for many countries.

However, relying too much on imports can create vulnerabilities, including the kind of supply chain disruptions that were caused by the pandemic or that can be triggered by rising geopolitical tensions. A dependence on imports can also stifle innovation and job creation by a country’s legacy industries—undermining the political and economic case for the transition.

What’s more, importers expose themselves to rising prices as concentrated markets allow dominant exporters to leverage their position. That was the case in the US after Japan’s auto industry used its production efficiency to offer lower prices and grow market share in the 1980s. The industry then—quite rationally—capitalized on its dominant market position by raising prices in the 1990s.

Clearly, policymakers face a tough choice. We’ve identified three approaches that can help governments find a path forward.

Pick your battles. There are significant advantages for governments in picking their battles when considering which technologies and sectors to prioritize for domestic development and which to source through imports. Policymakers should consider their nation’s decarbonization goals, its competitive strengths, and the costs of building versus importing, as well as broader concerns such as energy security. Governments can then provide targeted support to the domestic sectors that meet their criteria.

For example, the EU has prioritized developing capabilities in batteries, wind technology, and hydrogen production—areas where it holds a competitive edge. At the same time, it has de-emphasized solar panels, which is an area where its domestic industries have struggled. And to protect its domestic auto industry, the EU has imposed additional tariffs as high as 35.3% on Chinese electric vehicles.

Similarly, South Korea has focused on building its domestic battery industry—investing $4 billion in 2024 and $5.5 billion in 2025, while reducing financial incentives for domestic wind turbine production given China’s market leadership. Japan, meanwhile, has concentrated on fuel cell technology, leveraging its strengths in this area to drive growth. However, in solar panels and other areas where its domestic industries lag, Japan has allowed low-cost imports to help it achieve its decarbonization goals.

Buy while you build. Some governments take the dual approach of using imports to achieve quick wins in reducing emissions while nurturing their domestic industries to compete over the long run. Germany adopted this approach with its National Hydrogen Strategy, which aims to double its domestic capacity in electrolyzer manufacturing, to 10 gigawatts by 2030. In the short run, Germany plans to import 100,000 tons of green ammonia from Norway beginning in 2026. Similarly, India imported solar panels from China as it ramped up its domestic production to support its ambitions of becoming a global exporter of solar panels. From 2022 through 2024, India expanded domestic production by 200% while reducing imports by 61%.

Avoid permanent protections. Many governments implement tariffs to protect their green industries from foreign competition so they take root. Of course, too much protection stifles efficiency and innovation. Shielding industries indefinitely from foreign competition also tends to raise costs for consumers and businesses. Therefore, governments should roll back tariffs as their domestic producers achieve critical mass—and should signal their plans to do so from the outset.

Another protection method requires foreign producers to meet set standards over time, which can give domestic producers a competitive edge. For example, the EU’s Carbon Border Adjustment Mechanism works in this manner. EU producers’ experience at operating within a robust carbon pricing system means that they have the established practices for tracking and managing their emissions that producers from other countries lack. Another example is the EU’s Batteries Regulation, which mandates sustainable battery production and easy recycling so that local producers reduce their imports of lithium, cobalt, copper, lead, and nickel. EU producers are better placed to comply with these standards, protecting them from competition.

Provide Assurance or Retain Flexibility

Policy plays a critical role in building the business case for green technologies. On the demand side, governments can penalize polluters by implementing carbon taxes and other policies, thereby fostering demand for cleaner alternatives. On the supply side, governments can address the inherent risks and higher initial costs (such as a green premium) associated with adopting sustainable energy technologies. In short, policy can make or break the market for green technology and the business case for individual investments.

Companies value consistency and stability in policymaking. Policy uncertainty—including the risk of tax credits being withdrawn or phase-out dates being postponed—can reduce investment, especially in projects requiring large upfront costs and long-term commitments. A lower but reliable carbon price often proves more effective than a higher but uncertain one. Yet policymakers need room to adapt to changing markets, emerging technologies, and shifting priorities. This tension between certainty and flexibility plays out differently at the strategic, policy, and project levels.

Demonstrate certainty of intent. To build confidence among companies, policymakers must clearly signal their long-term commitment to a green growth strategy. National emissions targets, programs to decarbonize specific sectors, and technology roadmaps can influence investment decisions, causing many companies to act even before policies are enacted. For example, some automakers are ramping up electric vehicle production before combustion engine bans take effect. Companies are willing to accept some uncertainty about specific policies if they believe policymakers are truly committed to the objectives.

The power of those signals depends on their clarity and credibility, which can be enhanced in three ways:

• First, evidence-based policymaking is less likely to be challenged or reversed. For example, Chile’s Green Hydrogen Strategy includes targets based on robust and transparent analysis of the country’s potential competitive advantage and long-term energy requirements.
• Second, legislative targets create institutional barriers that discourage policymakers from backtracking. The EU’s Net Zero Industry Act, for example, links domestic production capacity targets for green technologies to its broader emissions reduction goals, anchoring these objectives in law.
• Third, building broad coalitions that include diverse stakeholders, different political parties, and multiple levels of government takes time but significantly reduces the risk of backtracking. In Norway, bipartisan support for renewable energy policies has sustained the country’s commitment to 100% renewable power, even as the underlying laws and regulations have evolved.

Create predictable flexibility. While policymakers desire flexibility, they can reduce uncertainty by ensuring that the rationale, structure, and timing of policy changes are transparent. Understanding and predictability allow companies to plan effectively, even in dynamic policy environments.

Designing long-term policy frameworks is also an effective way to achieve predictability. For instance, the US government’s section 45Q tax credit for carbon capture provides a dependable framework that matches the lengthy investment horizons typical of these projects.

But to ensure stability and adaptability in policy frameworks, their design must allow for periodic adjustments. Programs such as California’s Renewable Market Adjusting Tariff, which offers fixed-price energy contracts with annual price adjustments, exemplify how policies can provide certainty while accommodating necessary updates. This approach helps energy producers anticipate changes and plan accordingly. Similarly, Australia’s Capacity Investment Scheme introduces flexibility by tendering new renewable energy projects every six months, thereby continuously adapting to the sector’s evolving needs and contributing significantly to the country’s energy capacity goals.

Having an ongoing dialogue with industry is equally important for policymakers. Most green policies have a long horizon, but given the rapid changes in technology, markets, and geopolitics, they can become outdated in just a few years. Governments can address any concerns that arise in advance by consulting with stakeholders when designing policies, by getting their input on the needed adjustments, and by conferring with them on major policy changes. This type of collaboration gives companies confidence that policies will remain stable and that they can invest for the long term. To shape its green energy policies, the UK’s new Energy Mission Board coordinates with regulators, state-owned enterprises such as Great British Energy, and private companies such as National Grid and EDF Energy. This approach has achieved early success in unblocking solar and onshore wind projects.

Insist on project performance. At the project level, policymakers must prioritize outcomes over intentions. They must monitor performance against clear expectations, make transparent adjustments if circumstances change, and be willing to withdraw support for failing projects.

To monitor performance effectively, policymakers can use external agencies and auditing firms. For example, Horizon Europe regularly runs independent audits and external reviews, which increase the credibility of its programs. Monitoring programs affords policymakers the opportunity to respond to the underperformance of specific projects, including by winding down support.

Decisions to continue or withdraw support should be driven by metrics that are transparent and fact-based so that firms can understand the terms of support and can prepare for changes. For example, India’s Production Linked Incentive Scheme sets clear criteria and targets for companies receiving incentives. Companies must meet the government’s criteria on production efficiency, sales, and product offerings to continue receiving financial support.

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Adopting a green growth strategy presents policymakers with a real chance to advance their domestic goals and competitive standing while building resilience to climate change. But significant tradeoffs must be managed successfully. The evidence suggests that clear-headed decisions and careful policy design can help governments address these tradeoffs.

The authors are grateful for the contributions of their colleagues John Badger, Tim Figures, Keith Halliday, Ashish Kulkarni, Varad Pande, Tommy Peto, Bérengère Sim, and Ahmed Ujjainwala.