International Monetary Fund
Europe, And the World, Should Use Green Subsidies Cooperatively

Green subsidies: further international coordination and cooperation, greater benefits for all

Alfred Kammer, Director of the IMF's European Department, writes about the need for a coordinated approach to climate change and green transition. Subsidies to address these challenges can be useful especially regarding carbon emissions and the use of clean technologies; but they can also have unintended consequences if not well designed, creating competitive distortions between companies and countries, and incurring higher costs for public accounts. The author provides some recommendations for an optimal development of the Green Deal Industrial Plan.

Main highlights of the article:

  • Green subsidies unintended effects: In an environment of increasing protectionist policies on both sides of the Atlantic (European Green deal Industrial Plan and the Inflation Reduction Act in the United States), countries with a better fiscal position and greater resources could end up being winners in a hypothetical race for subsidies, which, for example, would make it difficult to attract investment in emerging countries, increasing the technological gap between countries and raising the cost of the green transition

  • Recommendations for an optimal development of the "European Green deal Industrial plan":
    Working towards a cooperative approach to stop climate change, collaborating multilaterally with other countries to ensure nondiscriminatory plurilateral initiatives in green subsidies. For example, an international carbon floor price or open multilateral green grants could be adopted.
    Preserving the integrity of the EU’s single market. This is crucial to ensure level playing field and prevent bigger countries from providing biggest support to their companies, which would alter competition for smaller countries. An option could be coordinating fiscal support for clean-tech industries across EU countries under a centrally funded scheme; a climate investment fund would help coordinate and finance the additional public investment needed to achieve emission-reduction goals.
    Focusing subsidies on activities with large climate benefits, especially on clean technologies, with less polluting impact and lower costs.
    - Reinforcing free flow in the single market, of capital, labor and knowledge. There EU Commission estimates that an additional 4 trillion euros in investment will be needed between 2021 and 2030 to meet the EU’s 2030 emission-reduction goals, three-quarters of which need to be privately financed. A strong Capital Markets Union would help ensure sufficient private-sector financing for the green transition. Further integration of labor markets and more training will also be necessary to meet the demand for skilled workers in new industries, critical to ensuring a successful transition.

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