Making Industrial Policy Work
for Decarbonization
(cid:129)
Jonas Meckling*
Abstract
Industrial policy has begun to move into the center of debates on climate policy. This
represents a shift away from climate policy as we know it—as classic environmental pol-
icy. Industrial policy and environmental policy differ in their policy goals, policy instru-
ments, and distributional effects, one primarily concerned with economic development,
the other with cutting greenhouse gas emissions. This raises questions about policy in-
teractions between industrial and environmental policy in broader climate policy mixes
and how these affect global decarbonization. This article identifies complementary and
conflictual dynamics between industrial policy and environmental policy in both domes-
tic and international climate politics. It shows how green industrial policy can advance
climate goals and cooperation but can also present challenges to deepening climate
cooperation and reducing greenhouse gas emissions. Developing an understanding of
policy interactions is central to leveraging the potential of industrial policy to accelerate
global decarbonization.
The European Union’s Green Deal and the Green New Deal agenda in the United
States have moved green industrial policy into the center of climate and eco-
nomic policy making. Green industrial policy is not new. At least since the early
2000s, most countries have adopted some kind of green industrial policy, with
China and European economies in the lead. And governments’ stimulus re-
sponses to the 2008–2009 financial crisis included green investments. However,
the current moment is one of scaling up the policy effort and making it more
central to climate policy. Global investments in low-carbon technologies grew
fifteen-fold between 2004 and 2020 (BloombergNEF 2021).
Climate policy writ large is a broad policy mix of economy-wide and
sector- and technology-specific policies (Rogge and Reichardt 2016). Within this
broad policy mix, the rise of industrial policy represents a qualitative shift
* I gratefully acknowledge funding from the USDA National Institute of Food and Agriculture,
Hatch Project Accession Number 1020688, and valuable feedback from Bentley Allan and the
anonymous reviewers.
Global Environmental Politics 21:4, November 2021, https://doi.org/10.1162/glep_a_00624
© 2021 by the Massachusetts Institute of Technology
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Jonas Meckling
(cid:129) 135
Table 1
Industrial Versus Environmental Logics in Climate Policy
Industrial Policy
Competitiveness/growth +
GHG abatement
Targets, regulation, investments,
focus on “public investment +
standards”
Concentrated benefits
Environmental Policy
GHG abatement
Targets, regulation,
investment, focus on
“pricing + standards”
Concentrated costs
Goals
Instruments
Distributional effects
GHG = greenhouse gas.
away from climate policy as we know it—as classic environmental policy. It
reflects a diversification of policy goals and instruments in climate policy
making, a greater focus on sectoral policies, and a stronger role of the state in
driving low-carbon transitions (Cullenward and Victor 2020; Mazzucato 2021).
Industrial policy and environmental policy differ in their policy goals,
policy instruments, and distributional effects. One is primarily concerned with
economic development, the other with cutting greenhouse gas (GHG) emissions.
At the same time, they are highly interrelated in the context of policy mixes for
low-carbon transitions. This raises questions about policy interactions and how
these affect global decarbonization. In this Forum article, I identify complemen-
tary and conflictual dynamics between industrial policy and environmental
policy in both domestic and international climate policy making. Developing
an understanding of policy dynamics is central to identifying the opportunities
and challenges for industrial policy in advancing decarbonization.
This Forum unfolds in three steps. First, I compare industrial policy and envi-
ronmental policy in terms of goals, instruments, and distributional effects. Second,
I identify complementarities and conflict across four arenas of climate policy. The
last section assesses emerging policy challenges and related research questions.
Policy Features: Similarities and Differences
The similarities and differences of green industrial policy and environmental
policy come into perspective along three dimensions: policy goals, policy instru-
ments, and distributional effects (Table 1).
Green industrial policy is primarily economic policy that seeks to advance
national competitiveness and economic growth. It can do so through different
paths. Supply-side industrial policy focuses on developing new technologies
and industries for export or import substitution.1 Demand-side industrial policy
1. Supply-side green industrial policy can further be differentiated in more upstream innovation
policy focused on research, development, and demonstration and more downstream policy
support for manufacturing.
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136 (cid:129) Industrial Policy for Decarbonization
aims to promote the deployment of low-cost technologies, for example, to re-
duce the cost of electricity for domestic production and consumption (Matsuo
and Schmidt 2019). Unlike macroeconomic policies, such as monetary policy,
industrial policy alters “the structure of an economy, encouraging resources to
move into particular sectors that are perceived as desirable for future develop-
ment” (Altenburg and Rodrik 2017, 2). Historically, industrial policy was
thought to target sectors with the greatest potential for productivity gains (Vogel
2021). Industrial policy has also, however, long been used to achieve secondary
policy goals, such as reducing regional disparities in economic development and
advancing environmental protection. In contrast, environmental policy has the
primary goal of reducing pollution, in our case, GHGs.
In terms of policy instruments, industrial policy and environmental policy
have some overlap. Both realms of policy making employ similar policy instru-
ments, including targets; regulation; and public investment, including subsidies.
Yet different policy instruments feature to varying extent in industrial policy ver-
sus environmental policy. Both realms of policy making use policy targets. In
green industrial policy, targets tend to be deployment targets for clean technol-
ogies, as opposed to emissions targets in climate policy. For example, a number
of jurisdictions have adopted deployment targets for electric vehicles. Both fields
of policy deploy command-and-control regulation, such as deployment (e.g.,
renewable portfolio standards) and performance mandates (e.g., fuel economy
standards). Meanwhile, market-based policies, such as carbon pricing, are cen-
tral to environmental policy, while they play a marginal role in green industrial
policy. Finally, public investment in the form of subsidies, tax rebates, and gov-
ernment procurement is particularly widely used in green industrial policy
mixes. This also includes investment for technology demonstration projects
(Nemet et al. 2018). Put simply, the formula for green industrial policy is “pub-
lic investment + standards” compared to “pricing + standards” in environmental
policy. Importantly, industrial policy occurs at the sector or firm level, suggest-
ing a higher level of direct government intervention than, for instance, broader
carbon pricing policies.
The two sets of policies differ most with regard to distributional effects
(Hughes and Urpelainen 2015). In terms of its direct effects, green industrial
policy tends to provide concentrated benefits to a specific industry. Environ-
mental policy, by contrast, tends to impose concentrated costs on emitting in-
dustries. Policies, however, also have secondary effects, such as green industrial
policies leading to a loss of market share for some firms and industries, such as
incumbent electric utilities losing out to independent power producers of re-
newable electricity. These are then concentrated benefits. As a first approxima-
tion, however, green industrial policies are more likely to mobilize some
political support from economic groups than costly climate policies.
Historically, industrialized countries largely abandoned explicit industrial
policy in the 1980s–1990s, while late industrializers pursued industrial policy
strategies to develop globally competitive industries (Amsden 1989; Johnson
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Jonas Meckling
(cid:129) 137
1982). The rise of China, the economic crisis of 2008–2009, and emerging
problems, such as climate change, have since led to a revival of industrial policy
in OECD countries, including the United States (Aiginger and Rodrik 2020;
Wade 2012). Green industrial policy emerged in the discourse on global climate
policy in the mid-2000s, becoming a prominent set of ideas over the last de-
cade, next to classic policy ideas on carbon pricing (Meckling and Allan
2020). The domestic politics of the United States also reflects this shift. For ex-
ample, the emerging climate policy platform of the Democratic Party in the
United States centers on industrial policy and infrastructure investment (Roberts
2020). While green industrial policy has been on a slow rise for two decades, the
stimulus responses to the 2008–2009 and 2020–2021 economic crises led to a
particular focus on green industrial policy (Hepburn et al. 2020). While some
have criticized green industrial policy approaches for picking winners and being
vulnerable to rent seeking (Morris et al. 2012), others have shown how central
industrial policy is to technological innovation and how good industrial policy
can manage the challenges its critics raise (Hepburn et al. 2020; Rodrik 2014;
Schmitz et al. 2015).
Lastly, a word on terminology. While the term green industrial policy is gain-
ing traction, the terms innovation policy and technology policy have referred to sim-
ilar policy activities. The term innovation policy tends to relate mostly to research,
development, and demonstration policies, rather than the deployment of tech-
nologies (Edler and Fagerberg 2017; MacNeil 2017).
Policy Dynamics: Complementarity and Conflict
The empirical reality is that industrial policy and environmental policy coexist
in climate policy approaches. Thus, the central question arises how these two
sets of policies—with their respective differences in goals, instruments, and dis-
tributional effects—interact and how these interactions affect decarbonization.
To get a heuristic handle on these interactions, I introduce the notion of four
games, adapting Robert Putnam’s notion of a two-level game (Putnam 1988).
In climate policy making, green industrial policy and environmental policy are
separate policy realms and processes with distinct logics. These policy games
unfold at both the domestic and international levels (see Figure 1). The inter-
actions across these four games, I posit, condition decarbonization outcomes
(arrows in Figure 1). Either conflict or complementarity characterizes these inter-
actions, thus hindering or facilitating decarbonization. In the following, I dis-
cuss conflictual and complementary dynamics along several of the axes across
the four games of climate policy making.
Complementarity
Research has shown that broader climate policy mixes evolve over time, with
green industrial policies often preceding more ambitious environmental policies.
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138 (cid:129) Industrial Policy for Decarbonization
Figure 1
The Four Games of Climate Policy Making
Green industrial policies can facilitate environmental goals (arrow 1, Figure 1),
such as GHG targets, and the adoption of environmental policies, such as carbon
pricing (Meckling et al. 2015). Two central mechanisms are at play in policy
interactions over time. First, industrial and technology policies can reduce the
technology cost for achieving emission reduction targets. This may reduce the
opposition to adopting climate targets by powerful groups, given the lower com-
pliance cost. Second, industrial policy nourishes economic beneficiaries that may
form advocacy coalitions for climate goals. The evolution of climate policy mixes
in California and Germany reflects such dynamics. Such positive spillovers on
decarbonization are, of course, subject to successful green industrial policy. Green
industrial policy success hinges on a range of conditions as international experi-
ence shows, including lessons learned from the 2009 stimulus packages (Aldy
2013; Carley 2016; Hart 2018; Rodrik 2014).
While we know that industrial policy can support environmental policy
goals, the other direction of policy interactions may also play a role. For exam-
ple, the more ambitious GHG targets get, the more achieving these goals may
depend on the adoption of green industrial policies. As I discuss later, countries
have adopted more industrial policy–type measures to achieve their Paris com-
mitments than classic environmental policy instruments. Climate policy may
thus lead to a deepening and/or sectoral broadening of green industrial policy
interventions. For instance, Germany’s failure to reach its 2020 climate target
has precipitated a broader policy strategy that includes industrial policy inter-
ventions in transport, heating, and industry. Similarly, environmental policies
focused solely on GHG emission reductions may be important backstop or di-
rectional correctives for industrial policy measures. In California, for example,
the emissions trading system is primarily a backstop policy to prevent backslid-
ing of emissions reductions achieved through sectoral industrial policies.
Internationally, green industrial policy can affect environmental policy
cooperation through the same mechanisms as in domestic politics: reducing
technology costs and mobilizing interest groups. In addition, demonstration
effects may play an important role. These policy interactions can unfold along
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Jonas Meckling
(cid:129) 139
several axes: first, industrial policy (country A) → environmental policy (country B)
(arrow 1); second, industrial policy (country A) → global environmental cooper-
ation (arrow 2); and third, global industrial cooperation → global environmental
cooperation (arrow 3). I explain each of these dynamics in the following.
First, the adoption of green industrial policy in one jurisdiction may incen-
tivize the adoption of green industrial policies and subsequently environmental
goals and policies in other countries, notably competitor countries. Thus, indus-
trial policy and technology competition facilitate the cross-national adoption of
green industrial policies (Myllyvirta 2021). This process is best understood as a
strategic sequence of policy adoption, rather than cross-country diffusion of the
same policy (Meckling and Hughes 2018). Countries leverage competitive advan-
tages in industrial policies (Anadón 2012), and follower countries may not adopt
the same policy as first movers. The classic example is the global development of
the solar photovoltaics industry (Nemet 2019). Innovation policies in the United
States helped develop the technology; deployment policies in Japan created a
niche market; large-scale subsidies in Germany led to the emergence of a mass
market; and manufacturing policy in China scaled global production, helping
to reduce prices. Depending on technology complexity, follower countries may
engage more in policies targeted at “scaling up,” such as subsidies to expand
manufacturing capacity, or “innovating up,” such as R&D policies (Hughes and
Meckling 2018). The mechanisms at work are likely based on interest groups
and/or demonstration effects. For example, local governments in China re-
sponded to foreign markets for solar photovoltaic (PV) by supporting the expan-
sion of manufacturing capacity, engaging in regional competition (Hochstetler
and Kostka 2015). Importantly, such spillover effects through technology compe-
tition depend largely on the existence of global supply chains that transmit incen-
tives to join global technology competition as illustrated in the PV case (Nahm
2017). Ultimately, such domestic–domestic spillovers in green industrial policy
may then affect the ambition of GHG targets and related environmental policies
in follower countries as these countries develop economic strategies focused on
clean energy technologies.
Second, green industrial policy in one large country can help facilitate
global environmental cooperation, primarily by reducing the adjustment cost
for other countries (Hale and Urpelainen 2014). This works only if lead markets
are large enough to drive down technology cost through economies of scale.
Historical evidence on wind and solar PV technologies as well as electric vehicles
suggests that a small group of lead markets can facilitate such cost reductions.
For example, industrial policies by countries such as Germany and Denmark
helped reduce the cost of renewable energy technologies, which facilitated
European climate cooperation (Kim and Urpelainen 2013). Furthermore, a
comparison of the outcomes of the climate summits in Copenhagen (2009)
and Paris (2015) suggests that the same dynamic applies to global climate coop-
eration. Copenhagen is widely seen as a relative failure in its climate policy
ambition, whereas Paris was more successful. Over this six-year time period,
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140 (cid:129) Industrial Policy for Decarbonization
the cost of solar PV and wind technology dropped precipitously. In the Intended
Nationally Determined Contributions (INDCs) that countries submitted to the
Paris summit, the deployment of renewable energy was the most frequently
mentioned priority area: 90 percent of all INDCs listed it. One caveat remains:
when states have significantly different capabilities to capture new technology
markets through industrial policy—as between industrialized and developed
countries—climate cooperation may fail (Kim and Urpelainen 2013).
Third, apart from technology competition, global technology cooperation
may also facilitate global environmental cooperation. Here, the mechanism is
again public investments that lead to cost reductions in low-carbon technolo-
gies. Scott Barrett (2006) argued early on that global cooperation should focus
on technology development. Beyond reducing the technology cost itself, global
green industrial cooperation can also support climate cooperation by reducing
the transaction costs in global technology markets. This includes, for example,
cooperation on technical standards, such as plugs for electric vehicles. Empiri-
cally, multilateral cooperation on technology cooperation is a limited phenom-
enon focused primarily on information sharing and target setting. Mission
innovation is a plurilateral initiative that seeks to expand public investments
in research and development of low-carbon technologies (Sanchez and Sivaram
2017). The United States–China Clean Energy Research Center is an instance of
bilateral R&D cooperation (Lewis 2014a). Theoretically, this can lead to signif-
icant technological breakthroughs and cost reductions in the long term. Other
forms of cooperation, such as the International Solar Energy Alliance, focus
more on the near-term deployment of technologies. Beyond cooperation on
investment, countries can also work together to reduce other barriers to global
market development, such as different technology standards. The Electric
Vehicles Initiative under the umbrella of the International Energy Agency is such
an example. So, to date, technology competition, rather than technology coop-
eration, has been the dominant force of complementary dynamics between
industrial policy and climate cooperation.
The predominant direction of complementary international policy interac-
tions is from green industrial policy to environmental policy: technology devel-
opment and diffusion enable emission reduction targets. However, emerging
evidence suggests that climate policy can also incentivize greater adoption of
green industrial policies. Many of the signatories of the Paris Agreement had
some form of green industrial policy in place. Others, especially developing
countries, had not yet adopted industrial and technology policies. Committing
to emission reduction activities in international negotiations then incentivized
the adoption of domestic green industrial policies. Research has shown that,
in particular, for developing countries, participation in international climate
agreements leads to greater adoption of renewable energy policies (Cia Alves
et al. 2019). In other words, if countries commit to GHG reduction targets, they
may follow up with policies that offer the greatest economic cobenefits, such as
green industrial policies.
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Jonas Meckling
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Conflict
In national climate policy mixes, industrial policy and environmental policy can
also exhibit conflictual dynamics. Arguments relate to cost-effectiveness and
political dynamics.
Some economists have argued that renewable energy policies undermine
the prices in a carbon pricing system, as they shift emission reductions to
outside the pricing system (Fankhauser et al. 2010) (arrow 1, Figure 1). As
renewable energy policies are understood as second-best policies in terms of cost-
effectiveness compared to pricing policies, they thus increase the overall cost of
abatement. Other economists, instead, suggest that the combination of renewable
energy policy and carbon pricing leads to a more effective design of the pricing
scheme and enhances overall efficiency of climate policy (Gawel et al. 2014;
Lehmann and Gawel 2013).
Politically, green industrial policy can mobilize industries in support of
more ambitious emissions reduction targets as it grows clean energy industries.
Sometimes this also translates into support for carbon pricing, but not necessarily
so. For clean energy firms, subsidies and standards may offer much greater
benefits in terms of increasing demand for their products and services than
low-level carbon pricing. This preference may only lead to political conflict if
other major constituencies prefer carbon pricing over green industrial policy.
Polluting industries in both Europe and the United States have shown some level
of support for carbon pricing, while opposing industrial policy measures like
renewable energy mandates and subsidies ( Vormedal 2011). For example, in
US climate politics, the oil industry–backed Climate Leadership Council advo-
cates a carbon pricing scheme along with rollback of various “complementary”
policies, meaning subsidies and standards.
Internationally, industrial policy and technology competition can also
lead to conflict between economic and environmental goals (arrow 2). The rise
of trade disputes in emerging clean energy technologies reflects international
conflict that can challenge global climate cooperation. Since about 2010, the
number of trade disputes in clean energy technologies has been growing (Lewis
2014b). These are trade remedy cases directed against subsidies, local content
rules, and price dumping, in particular in the solar PV industry but extending
to wind and general renewable energy support schemes.
We are only beginning to understand the potential ramifications of green
trade disputes for climate negotiations. They can slow down the global diffusion
of clean technologies by increasing technology costs and undermine diplomatic
efforts to advance global climate cooperation. For instance, tariffs imposed by
the United States in the United States–China solar trade dispute, the largest conflict
to date by trade volume, increased the cost of solar PV deployment, thus potentially
slowing down deployment in the United States. The dispute was also in full swing
when the United States and China negotiated a bilateral deal prior to the 2015 Paris
summit. The deal succeeded, but trade tensions presented a diplomatic challenge.
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142 (cid:129) Industrial Policy for Decarbonization
Efforts to mitigate the rise of green trade disputes have failed so far. Nego-
tiations on the Environmental Goods Agreement under the World Trade Orga-
nization (WTO) have stalled. Eighteen participants representing forty-six WTO
members started negotiations in 2014 but have failed to come to an agreement.
Developing countries did by and large not participate in negotiations (de Melo
and Solleder 2020). The failure to negotiate the agreement reflects the magni-
tude of the challenges to developing an open trade regime for green goods and
services.
While trade disputes in green industries are a salient and prevalent form of
conflict, other forms, such as competition over standards, exist as well. For
example, a dispute over standards for charging plugs has challenged the devel-
opment of the global electric vehicle industry. European and US car makers
developed their own standards to slow down Japanese producers, which had
a market lead (Hughes 2020). The extent to which economic and technology
competition in clean energy industries challenges global cooperation on climate
remains inconclusive. For now, it is important to highlight the potential for
negative feedback on climate negotiations as the economic stakes increase in
green industries and economic nationalism is on the rise.
Policy Challenges and Research Questions
Managing the relationship between industrial policy and environmental policy
requires enabling complementary dynamics, while mitigating conflict. Here, I
discuss emerging policy challenges at the domestic and international levels
and propose related research questions.
In domestic politics, the rise of green industrial policy raises questions on
what makes good green industrial policy and how even more complex interac-
tions will play out as social policy and macroeconomic policy begin to be tied
to climate goals. First, the rise of green industrial policy in both industrialized
and developing nations is likely to be a persistent trend. At the same time, we
know very little about what makes for good green industrial policy in different
institutional and economic settings. The question pertains to the performance
of green industrial policy with regard to both productivity goals and environ-
mental goals. In a recent special issue, the economists Karl Aiginger and Dani
Rodrik suggest that modern-day industrial policy is different from its 1970s pre-
decessor in at least several ways, including a more systemic approach, designed
to be a search process and tied to societal goals (Aiginger and Rodrik 2020). A
central question is how to design green industrial policy to avoid rent seeking
and policy paths that do not contribute to or undermine emission reduction
goals. The case of continued government support for early-generation biofuels
despite increasing evidence of the lack of climate benefits continues to echo as a
warning.
Responding to the economic crisis in the wake of the COVID-19 pandemic,
governments have adopted stimulus packages that include green spending to
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Jonas Meckling
(cid:129) 143
varying extents. These are industrial policy efforts intended to scale up invest-
ments in low-carbon technologies. Some governments have begun to embed
environmental policy goals into industrial policy through “climate conditional-
ities.” For example, the French government tied its bailout of Air France to the
condition that the company develop an emission reduction strategy. This may
only be the beginning of a new field of creative policy making where industrial
efforts are more clearly tied to decarbonization goals, thus further blending
industrial and environmental policy.
Second, emerging trends foreshadow even more complex policy dynamics,
going beyond industrial policy–environmental policy interactions. The US
debate on a Green New Deal has tied green industrial policy to social policy
goals. Furthermore, while industrial policy has been the realm of economic
policy making where we have witnessed the greatest amount of climate-related
policy activity, it is but one type of economic policy. Climate goals are also be-
ginning to feature in macroeconomic policies, including fiscal, financial, and
monetary policies (Krogstrup and Oman 2019). For instance, central banks
are beginning to engage in financial regulatory policies to tackle climate risks.
In other words, as climate policy becomes more embedded in central policy
fields, its scope broadens to economic and social policy making. This cross-
policy integration reflects, on one hand, the mainstreaming of climate mitigation,
while it increases the complexity of policy dynamics and raises coordination
challenges across policy goals, on the other hand. At its core, the question, then,
is how and when such broad policy packages and underlying political bargains
advance emission reduction goals, and when they do not.
In international politics, there is considerable uncertainty on how the rise
of industrial policy in general and green industrial policy in particular will
unfold. The re-emergence of industrial policy along with economic nationalism
could result in a mercantilist green technology race. This could end up in
protectionist policies that challenge the global development and diffusion of
clean technologies. An alternative scenario envisions a global division of labor
(Lachapelle et al. 2016), in which industrialized nations in the West shift from
engaging with China in trade wars to leveraging economic opportunity (Ball
2019). The path to such a scenario is likely contingent on macro developments
in global politics, in particular the United States–China rivalry.
Yet opportunities exist to foster technology competition and cooperation
that advance global clean technology diffusion and climate policy development.
This includes firm-to-firm cooperation across global supply chains, government-
to-government cooperation in international fora, and hybrid forms of coopera-
tion that bring together governments and firms (Gallagher 2014; Victor et al.
2019). For example, some analysts also see potential for a cross-sectoral global
forum for industrial policy coordination to capitalize on positive spillovers and
mitigate negative spillovers. Such a forum could facilitate coordination around
trade and investment rules, securing property rights, social standards, and the
promotion of low-carbon technologies (Aiginger and Rodrik 2020).
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144 (cid:129) Industrial Policy for Decarbonization
Taken together, the rise of green industrial policy has broadened the
climate policy repertoire in essential ways, most importantly moving structural
economic change into the center of climate policy. This broadening has intro-
duced industrial policy logics next to environmental policy logics in climate
policy making. Overall, this offers a large upside to advancing decarbonization
through the many complementary interactions discussed herein. The potential
for conflictual policy interactions is more limited but needs to be on the radar
of policy makers and scholars to avoid misguided green industrial policies that
fail to advance decarbonization.
Jonas Meckling is an associate professor at the University of California, Berkeley,
where he leads the Energy and Environment Policy Lab. He studies the compar-
ative and international politics of climate and clean energy policy. He has
published the book Carbon Coalitions (MIT Press, 2011) and various articles,
including in International Studies Quarterly, Governance, Nature Climate Change,
Nature Energy, and Science. Previously, he served as a senior advisor to the
German minister for the environment, was a research fellow at Harvard Univer-
sity, and worked at the European Commission. He holds a PhD in international
political economy from the London School of Economics.
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