Green Industrial Policy and the World Trading System

The document analyzes green industrial policy—policies supporting industries that produce environmentally preferable goods—within the context of the global trading system. It identifies various market failures, such as environmental externalities and capital market imperfections, that justify government intervention. However, it warns of governance failures, including rent-seeking and the risk of picking unsuccessful 'winners.' The author argues that while traditional industrial policy is often mercantilist, green industrial policy can provide global benefits, potentially justifying special trade rules or exemptions for climate-related measures and least-developed countries.

• Green industrial policy is defined as any policy that selectively favors industries producing goods with better environmental performance, those that directly address environmental problems, or those produced in an environmentally preferable way.
• There are multiple market-failure rationales for green industrial policy, including knowledge spillovers, capital market imperfections, learning by doing, increasing returns to scale, and coordination failures.
• Environmental externalities provide a unique and powerful justification for green industrial policy because the global benefits of mitigating climate change are not captured by private investors' returns.
• Industrial policy carries significant risks of governance failure, specifically the potential for 'rent-seeking' where supported firms lobby to maintain subsidies even when they are no longer necessary.
• Subsidies are generally viewed as more versatile and potentially more effective than trade barriers like tariffs, as they can be tailored to specific failures and can force firms to face international market discipline if linked to exports.
• The author suggests that the critical nature of climate change may justify the creation of special WTO rules or exemptions for green industrial policies, even if such policies are only sometimes effective.

APA

Cosbey, A. (2013). Green Industrial Policy and the World Trading System. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/entwined_brief_green_industrial.pdf

Chicago

Cosbey, Aaron. Green Industrial Policy and the World Trading System. International Institute for Sustainable Development, 2013. https://www.iisd.org/system/files/publications/entwined_brief_green_industrial.pdf.

Wikipedia

{{cite report |last1=Cosbey |first1=Aaron |title=Green Industrial Policy and the World Trading System |publisher=International Institute for Sustainable Development |date=30 October 2013 |url=https://www.iisd.org/system/files/publications/entwined_brief_green_industrial.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{cosbey2013green, author = {Cosbey, Aaron}, title = {{Green Industrial Policy and the World Trading System}}, institution = {International Institute for Sustainable Development}, year = {2013}, month = oct, url = {https://www.iisd.org/system/files/publications/entwined_brief_green_industrial.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }