Hamilton Decarbonization

In 1791, Alexander Hamilton, then-secretary of treasury, handed in his now-famous Report on the Subject of Manufactures to Congress. In this report, Hamilton proposed nothing less than the wholesale transformation of America—from agrarian outpost to industrial powerhouse. Two hundred and thirty years later, Hamilton’s blueprint for economic renewal is more relevant than ever. Biden "Build Back Better" plan to transition America from a twentieth-century carbon-intensive economy to a reindustrialized clean energy leader mirrors many of its proposals, and yet falls short of its sweeping vision.

According to the economic historian Doug Irwin, the report “is often heralded as the quintessential American statement against the laissez-faire doctrine of free trade and for activist government.” It is a remarkable text that has found new life and a new audience with each phase of U.S. history. Its developmentalist philosophy of government has played an important role in economic policymaking throughout the twenty-first century, from America’s westward expansion and the building of the transcontinental railroad to creating the “arsenal of democracy” that helped win the Second World War.

Hamilton’s ideas continue to be useful in thinking about today’s challenges. So much so that one could almost swap out a few words and let Hamilton do the rest. In fact, this is exactly what we’ve done. What follows is Hamilton’s original report — abridged, as the full text is over 25,000 words long and takes regular detours to address arcane political squabbles of the day—with only a few changes to link Hamilton’s eighteenth-century goal of industrialization to the twenty-first century challenge of decarbonization. Given the sheer scope and scale of actions required to decarbonize the economy by 2050, we feel this is all too appropriate a text to reconsider within that context.

A contemporary interpretation of Hamilton’s arguments as they pertain to green industrial policy and deep decarbonization is summarized below. Each summarized argument is then used as a sub-header within the full text of the report, providing context for each section., Beneath each sub-header, whole sections of the original are retained with a few select words and phrases substituted to show how the ideas can apply equally to decarbonization and green industrial policy.

We hope this format illustrates how our contemporary debates on economic and climate policy today are deeply reflective of an earlier time in our history. More importantly, in recalling the successes of these earlier policy prescriptions, we are reminded that we need not reinvent the wheel to reach our collective goals or wade into unchartered waters to create a zero-carbon future.

The Hamiltonian Case for Green Industrial Policy:

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Addressing climate change requires an urgent and ambitious green industrial policy. However, significant opposition to climate action remains , particularly from incumbent industries.

Yet, there are clear and present benefits to acting now :

  1. Our welfare is inextricably linked to that of the planet .
  2. Climate action could birth a green industrial revolution and spur long-term growth.
  3. There are millions of new jobs possible in a green future.
  4. A green, growing America will be a beacon to the world .
  5. Green jobs can be the good jobs of the twenty-first century .
  6. Green industrialization could cure decades of low productivity growth .
  7. Stimulating short-term demand is key to securing long-term prosperity .

For all these possible benefits, old arguments die hard . Especially that the market left to its own devices will yield socially optimal outcomes . This, however, fails to account for path dependency, risk aversion, or barriers to entry . Further, the world is not a level playing field, and the United States will have to act to compete . Other countries, and especially China, have a head start and will try to protect their lead .

We have more than enough fiscal space and private capital to be bold and ambitious . These public and private funds could be leveraged by founding a publicly owned national green bank . Meanwhile, the world is in a “savings glut,” and decarbonization could help put all this capital to work . The government can afford to take on more debt so long as it contributes to the real wealth of the nation .

The United States has always pursued industrial policy, in one form or another . However, industrial policy is not without risks, especially rent-seeking, corruption, and monopolistic behavior .

The government has many well-established tools at its disposal in conducting green industrial policy :

  • import tariffs
  • import bans or quotas
  • export bans or quotas
  • subsidies
  • prizes
  • local content rules
  • innovation policy
  • regulations and standards
  • infrastructure spending

The choice and extent of each intervention should depend on the specific industry’s progress toward decarbonization .

It is up to government to take the lead, and time is running out.

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of the
of the
United States
on the subject of
Decarbonization. According to economist historian, Doug Irwin: Issued in December 1791, the report not only provided theoretical justifications for the promotion of domestic manufacturing, but as a policy document made specific proposals for government action. . . . To this day, the report is often heralded as the quintessential American statement against the laissez faire doctrine of free trade and for activist government policies—including protectionist tariffs—to promote industrialization. Douglas A. Irwin, “The Aftermath of Hamilton’s ‘Report on Manufacture'," The Journal of Economic History 64 (2004): 800-21.
Presented to the
December 5, 1791.

Addressing Climate Change Requires Urgent and Ambitious Action

The expediency of addressing climate change in the United States, which was not long since deemed very questionable, appears at this time to be pretty generally admitted. The embarrassments, which have obstructed the progress of decarbonization "Decarbonization" throughout this report refers to economy-wide net GHG emissions reductions of 80 percent or more below 2005 levels by 2050. For more information, please see the US Mid-Century Strategy for Deep Decarbonization Strategy, submitted to the UNFCCC in 2016.
The White House, United States Mid-Century Strategy for Deep Decarbonization (White House, November 2016).
have led to serious reflections on the necessity of enlarging the sphere of our climate policies As noted by the International Panel on Climate Change: Pathways limiting global warming to 1.5°C with no or limited overshoot would require rapid and far-reaching transitions in energy, land, urban and infrastructure (including transport and buildings), and industrial systems (high confidence). These systems transitions are unprecedented in terms of scale, but not necessarily in terms of speed, and imply deep emissions reductions in all sectors, a wide portfolio of mitigation options and a significant upscaling of investments in those options (medium confidence). Headline Statements,” Intergovernmental Panel on Climate Change. [. . .]  the complete success, which has rewarded green industrial policy, According to a World Bank report, "Green industrial policies can be defined as industrial policies with an environmental goal—or more precisely, as sector-targeted policies that affect the economic production structure with the aim of generating environmental benefit." Stéphanie Hallegatte, Marianne Fay, and Adiren Vogt-Schilb, Green Industrial Policies: When and How, Policy Research Working Paper No. 6677 (Washington, DC: World Bank, October 2013). in some valuable countries See the recent CSIS report, Industrial Policy, Trade, and Clean Energy Supply Chains: The history of clean energy markets has been characterized by frequent use of tariff barriers and other policies specifically intended to protect and grow nascent industries. As demand for solar PV, wind, and lithium-ion batteries expanded, supply chains shifted to new countries but are now less diverse overall with the advent of China’s dominance as a manufacturer across the sector. Sarah Ladislaw et al., Industrial Policy, Trade, and Clean Energy Supply Chains (Washington, DC: The Center for Strategic and International Studies, February 2021).  [. . .] justify a hope, that the obstacles to climate mitigation are less formidable than they were apprehended to be, These obstacles are increasingly political, rather than technological. Aklin and Mildeberger provide evidence that “distributive conflict, not collective action” is the best framework for understanding these political obstacles. In their view, climate change is not a global collective action problem suffering from a free-rider problem, necessitating binding international treaties. Instead, “In the case of climate change, governments’ preferences are shaped by conflicts between pro– and anti–climate reform interests. Climate policy involves a dramatic renegotiation of the institutions that structure economic and social activity within each economy. Consequently, climate policies create new economic winners and losers.”
Understanding these obstacles leads to very different policy recommendations that “instead focus on empowering key pro-climate interest groups and neutralizing veto players, such as fossil fuel interests,” in a manner consistent with green industrial policy. Michaël Aklin and Matto Mildenberger, “Prisoners of the Wrong Dilemma: Why Distributive Conflict, Not Collective Action, Characterizes the Politics of Climate Change,” Global Environmental Politics 20, No.4 (July 2020): 4-27.
and that it is not difficult to find, in its further extension; a full indemnification for any external disadvantages, which are or may be experienced, as well as an accession of resources, favourable to national independence and safety.


Significant Opposition to Green Industrial Policy Remains

There still are, nevertheless, respectable patrons of opinions, unfriendly to decarbonization. The following are, substantially, the arguments, by which these opinions are defended.

“In every country (say those who entertain them) fossil fuels are the most beneficial and productive input to human industry. Fossil fuels here refer to hydrocarbon-containing material of biological origin that can be burned for energy, including coal, natural gas, and oil.
For a representative argument, see Daniel Yergin's book, The Quest: Energy, Security, and the Remaking of the Modern World: Were it not for what’s happened these last few years — we’d be looking at an oil crisis. We’d have panic in the public. We’d have angry motorists. We’d have inflamed congressional hearings and we’d have the U.S. economy falling back into a recession. If it were not for the U.S. oil boom, we would be in a world oil panic and spiraling into another global recession.

Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World  (New York: Penguin Press (Penguin Group (USA) Inc., January, 2011).

This position, generally, if not universally true, applies with peculiar emphasis to the United States, on account of their immense tracts of fossil fuel reserves. Globally, the United States has the 9th largest reserves of crude oil, 5th largest reserves of natural gas, and single largest reserves of coal, according to the BP Review of World Energy Statistics. For data visualizations and more, please see Hannah Ritchie and Max Roser, “Fossil Fuels,” Our World in Data, 2017. [. . .]

“To endeavor by the extraordinary patronage of Government, to accelerate the growth of green industries, is in fact, to endeavor, by force and art, to transfer the natural current of industry, from a more, to a less beneficial channel. Whatever has such a tendency must necessarily be unwise. Indeed it can hardly ever be wise in a government, to attempt to give a direction to the industry of its citizens. This under the quicksighted guidance of private interest, will, if left to itself, infallibly find its own way to the most profitable employment: and ’tis by such employment, that the public prosperity will be most effectually promoted. To leave industry to itself, therefore, is, in almost every case, the soundest as well as the simplest policy.”

This mode of reasoning is founded upon facts and principles, which have certainly respectable pretensions. If it had governed the conduct of nations, more generally than it has done, there is room to suppose, that it might have carried them faster to prosperity and greatness, than they have attained, by the pursuit of maxims too widely opposite. Most general theories, however, admit of numerous exceptions, and there are few, if any, of the political kind, which do not blend a considerable portion of error, with the truths they inculcate. Hamilton here is refuting an argument which we might today label as “neoliberalism.” For a contemporary extension of this argument, see Suresh Naidu, Dani Rodrik, and Gabriel Zucman's “Economics After Neoliberalism”: Many of the dominant policy ideas of the last few decades are supported neither by sound economics nor by good evidence. Neoliberalism—or market fundamentalism, market fetishism, etc.—is not the consistent application of modern economics, but its primitive, simplistic perversion. And contemporary economics is rife with new ideas for creating a more inclusive society. Suresh Naidu, Dani Rodrik, and Gabriel Zucman, “Economics After Neoliberalism," Boston Review, February 15, 2019. [. . .]

There Are Clear and Present Benefits to Acting Now

It is now proper to proceed a step further, and to enumerate the principal circumstances, from which it may be inferred—That green industrialization establishments not only occasion a possitive augmentation of the Produce and Revenue of the Society, This is what is today referred to as the “green growth” paradigm. In the Handbook on Green Growth, editor, Roger Fouqet, notes: The pursuit of ‘green growth’ offers the opportunity for economies to expand and develop while still protecting their environment. One example of the attempt to dovetail these two objectives is the Green New Deal, which has gained traction in the USA in the last year. This political movement seeks to create jobs in part through investment in green infrastructure. The combination of economic and electrical development wants to replicate Franklin D. Roosevelt’s stimulus package of the 1930s – this time trying to generate economic, social and environmental transformation.
For evidence on how these “Green Growth” ideas have become increasingly common within the climate policy discourse, see Meckling & Bentley, "The evolution of ideas in global climate policy”: From carbon pricing to green industrial policy, economic ideas have shaped climate policy. . . . We thus identify a major transformation from a neoclassical paradigm to a diversified policy discourse, suggesting that climate policy has entered a postparadigmatic period. The diversification of ideas broadened policy advice from market-based policy to green industrial policy, including deployment subsidies and regulation. Handbook on Green Growth, ed. Roger Fouqet (Cheltenham Glos GL & Northampton, MA: Edward Elgar Publishing Limited & Edward Elgar Publishing, Inc., 2019). Jonas Meckling and Bentley B. Allan, The evolution of ideas in global climate policy," Nature Climate Change 10 (2020): 434-8.
but that they contribute essentially to rendering them greater than they could possibly be, without such establishments. These circumstances are—

  1. Avoided impacts from climate change.NB: this change reflects the priority of avoided impacts, rather than a logical substitution for “the division of labor.” We believe that the number one reason for any climate action is to avoid its potential impacts. For further information on the range of social, economic and environmental damages from climate change, see the IPCC's Special Report on 1.5 Degrees: Climate-related risks to health, livelihoods, food security, water supply, human security, and economic growth are projected to increase with global warming of 1.5°C and increase further with 2°C.
    Myles Allen et al., “Summary for Policymakers,” in Global Warning of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty, eds., Valérie Masson-Delmotte et al. (Intergovernmental Panel on Climate Change, 2018).
    For a U.S.-centric perspective, see the U.S. Global Change Research Program, Fourth National Climate Assessment: Volume II Impacts, Risks, and Adaptation in the United States (Washington, DC: USGCRP, 2018): Climate change is transforming where and how we live and presents growing challenges to human health and quality of life, the economy, and the natural systems that support us.
  2. An extension of the use of new technologies.
  3. Additional employment to classes of the community not ordinarily engaged in the business.
  4. The promoting of emigration from foreign Countries.
  5. The furnishing greater scope for the diversity of talents and dispositions [. . .]
  6. The affording a more ample and various field for enterprize.
  7. The creating in some instances a new, and securing in all, a more certain and steady demand for
Each of these circumstances has a considerable influence upon the total mass of industrious effort in a community. Together, they add to it a degree of energy and effect, which are not easily conceived. Some comments upon each of them, in the order in which they have been stated, may serve to explain their importance.

Our Welfare Is Inextricably Linked to that of the Planet

I.   As to the mitigation of climate change impacts.Again, we have substituted “climate change impacts” for “division of labour,” not to reflect Hamilton’s ideas, but our own assessment that avoiding climate change impacts should be the first priority of green industrial policy.

It has justly been observed, that there is scarcely any thing of greater moment in the œconomy of a nation, than the preservation of our planet.This argument has been made across many fields in recent years. Of particular note was the Pope's Encyclical Letter, Laudato Si: The climate is a common good, belonging to all and meant for all. At the global level, it is a complex system linked to many of the essential conditions for human life. A very solid scientific consensus indicates that we are presently witnessing a disturbing warming of the climatic system. In recent decades this warming has been accompanied by a constant rise in the sea level and, it would appear, by an increase of extreme weather events, even if a scientifically determinable cause cannot be assigned to each particular phenomenon. Humanity is called to recognize the need for changes of lifestyle, production and consumption, in order to combat this warming or at least the human causes which produce or aggravate it. Encyclical Letter Laudato Si’ of the Holy Father Francis on Care for our Common Home,” Vatican, May 24, 2015.


Climate Action Could Birth a Green Industrial Revolution

II.   As to an extension of the use of technologies a point which though partly anticipated requires to be placed in one or two additional lights. There is considerable evidence supporting the claim that climate policies can boost technological innovation. For example, in Chapter 3 of the IMF’s October 2020, World Economic Outlook: A Long and Difficult Ascent, they write: [. . .] since the early 2000s . . . clean energy innovation (measured by patent applications) doubled in share of total energy innovation; and clean electricity innovation now accounts for half of total electricity innovation in the top five innovating countries (up from 15 percent in 1990). . . . The global share of solar and wind power in electricity generation has also increased substantially, from virtually zero in 2000 to 6 ½ percent in 2020, with much higher shares in some European Union countries.
They go on to estimate that 30% of the increase in innovation and 55% of the increase in the share of renewable electricity generation is due to environmental policies. International Monetary Fund, World Economic Outlook: A Long and Difficult Ascent (Washington, DC: International Monetary Fund, 2020).

The employment of technology forms an item of great importance in the general mass of national industry.Lord Nicholas Stern, for example, in a 2012 lecture, posits that there is potential for a new energy-industrial revolution where a wave of green technological innovation could “sustain two to three decades of dynamic, innovative and creative growth.” Lord Stern, “Lionel Robbins Memorial Lectures 2012: ‘How we can respond and prosper – the energy-industrial revolution’,” February 22, 2012. ’Tis an artificial force brought in aid of the natural force of man; and, to all the purposes of labour, is an increase of hands; an accession of strength, unincumbered too by the expence of maintaining the laborer. May it not therefore be fairly inferred, that those occupations, which give greatest scope to the use of this auxiliary, contribute most to the general Stock of industrious effort, and, in consequence, to the general product of industry?

[. . .]

III.   As to the additional employment of classes of the community, not ordinarily engaged in the particular business.

This is not among the least valuable of the means, by which green institutions contribute to augment the general stock of industry and production.As described in the 2014 report, Low carbon jobs: The evidence for net job creation from policy support for energy efficiency and renewable energy: there is a reasonable degree of evidence that in general, renewable energy and energy efficiency are more labour-intensive in terms of electricity produced than either coal- or gas-fired power plant. This implies that at least in the short-term, building new renewable generation capacity or investing in greater energy efficiency to avoid the need for new generation would create more jobs than investing in an equivalent level of fossil fuel-fired generation. Will Blyth et al., Low carbon jobs: The evidence for net job creation from policy support for energy efficiency and renewable energy (London: UK Energy Research Centre, November 2014). In places where those institutions prevail, besides the persons regularly engaged in them, they afford occasional and extra employment to industrious individuals and families, who are willing to devote the leisure resulting from the intermissions of their ordinary pursuits to collateral labours, as a resource of multiplying their acquisitions or [their] enjoyments. [. . .]

Besides this advantage of occasional employment to classes having different occupations, there is another of a nature allied to it [and] of a similar tendency. This is—the employment of persons who would otherwise be idle (and in many cases a burthen on the community), either from the byass of temper, habit, infirmity of body, or some other cause, indisposing, or disqualifying them for the toils of the Country. The potential to create new, green jobs is especially high during recessions or when there is "slack" in the labor market: A lesson from the [Global Financial Crisis] GFC is that green stimulus policies often have advantages over traditional fiscal stimulus. For instance, renewable energy investment is attractive in both the short and the long run. Renewable energy generates more jobs in the short run (higher jobs multiplier), when jobs are scarce in the middle of a recession, which boosts spending and increases short-run GDP multipliers (which are derived from expanding demand). Cameron Hepburn et al., “Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?" Oxford Review of Economic Policy 36 Issue 1 (May 2020): S359-81.  [. . .]


A Green, Growing America Will be a Beacon to the World

IV.   As to the promoting of emigration from foreign Countries. Men reluctantly quit one course of occupation and livelihood for another, unless invited to it by very apparent and proximate advantages. Many, who would go from one country to another, if they had a prospect of continuing with more benefit the callings, to which they have been educated, will often not be tempted to change their situation, by the hope of doing better, in some other way. [. . .] If it be true then, that it is the interest of the United States to open every possible [avenue to] emigration from abroad, it affords a weighty argument for the encouragement of new industries; which for the reasons just assigned, will have the strongest tendency to multiply the inducements to it.


Green Jobs can be the Good Jobs of the Twenty-First Century

V.   As to the furnishing greater scope for the diversity of talents and dispositions, which discriminate men from each other.

[. . .] it is thence to be inferred, that the results of human exertion may be immensely increased by diversifying its objects. When all the different kinds of industry obtain in a community, each individual can find his proper element, and can call into activity the whole vigour of his nature.Another way to describe this is the creation of “good jobs,” or as the MIT economist, Daron Acemoglu, puts it: Policymakers’ first priority should be creating ‘good’, high-wage jobs. ‘Good’ jobs are those that provide not only a wage consistent with a comfortable (sometimes referred to as “middle-class”) living standard but also some amount of stability and protection against harsh and dangerous working conditions and excessive power of employers.[7]A bountiful supply of good jobs is the best way to generate shared prosperity and also to cultivate civic and political participation from the broad cross-section of society. Daron Acemoglu, “Ít’s Good Jobs, Stupid,” Economic for Inclusive Prosperity, Research Brief, June 2019. And the community is benefitted by the services of its respective members, in the manner, in which each can serve it with most effect.


Green Industrialization Could Cure Decades of Stagnation

VI.   As to the affording a more ample and various field for enterprise.

This also is of greater consequence in the general scale of national exertion, than might perhaps on a superficial view be supposed, and has effects not altogether dissimilar from those of the circumstance last noticed. To cherish and stimulate the activity of the human mind, by multiplying the objects of enterprise, is not among the least considerable of the expedients, by which the wealth of a nation may be promoted. Even things in themselves not positively advantageous, sometimes become so, by their tendency to provoke exertion. Every new scene, which is opened to the busy nature of man to rouse and exert itself, is the addition of a new energy to the general stock of effort.Low demand growth in the years after the Great Recession showed that this is still true today. As Konczal and Steinbaum describe in their paper “Declining Entrepreneurship, Labor Mobility, and Business Dynamism”: evidence shows that employed workers are getting fewer offers to work at other firms, reducing their leverage to demand raises from current employers and leading to wage and earnings stagnation on the job. Mike Konczal and Marshall Steinbaum, “Declining Entrepreneurship, Labor Mobility, and Business Dynamism: A Demand-Side Approach,” Roosevelt Institute, July 21, 2016.

The spirit of enterprise, useful and prolific as it is, must necessarily be contracted or expanded in proportion to the simplicity or variety of the occupations and productions, which are to be found in a Society. It must be less in a nation of mere cultivators, than in a nation of cultivators and merchants; less in a nation of cultivators and merchants, than in a nation of cultivators, artificers and merchants.Otherwise known today as “productivity growth.” As Lindsey and Hammond note in their report, Faster Growth, Fairer Growth: The ultimate driver of long-term economic growth is rising productivity: technological or organizational changes that increase the amount of output that can be produced from a given level of inputs – in other words, innovation and its diffusion. Brink Lindsey and Samuel Hammond, Faster Growth, Fairer Growth: Policies for a High Road, High Performance Economy (Washington, DC: Niskanen Center, 2020).


Stimulating Short-Term Demand Is Key to Securing Long-Term Prosperity

VII. As to the creating, in some instances, a new, and securing in all a more certain and steady demand,

This is among the most important of the circumstances which have been indicated. It is a principal mean, by which the establishment of green industries contributes to an augmentation of the produce or revenue of a country, and has an immediate and direct relation to prosperity of the whole economy.Today we would refer to this as boosting “aggregate demand.” For further information see the Roosevelt Institute report, The Macroeconomic Case for a Green New Deal: The goal of the Green New Deal is not simply to redirect resources on the assumption that aggregate output is given—the framework of far too much economic analysis of climate change. Rather, it is premised on the idea that one of our most urgent macroeconomic problems is a chronic shortfall of aggregate demand. In a world suffering from secular stagnation, aggregate output is not limited by real resources but by spending. In this setting, increased spending leaves us collectively richer—both financially and socially. J.W. Mason, The Macroeconomic Case for a Green New Deal (Issue Brief) (New York: Roosevelt Institute, June 2019).


For All These Possible Benefits, Old Arguments Die Hard

The foregoing considerations seem sufficient to establish, as general propositions, That it is the interest of nations to diversify the industrious pursuits of the individuals, who compose them —That the establishment of green industries is calculated not [. . .] to increase the general stock of useful and productive labour; [. . .]
[. . .]
The remaining objections to a particular encouragement of decarbonization in the United States now require to be examined.


Counter Argument: That the Market Left to Its Own Devices Will Yield Socially Optimal Outcomes

One of these turns on the proposition, that Industry, if left to itself, will naturally find its way to the most useful and profitable employment: whence it is inferred, that green industries without the aid of government will grow up as soon and as fast, as the natural state of things and the interest of the community may require. Mariana Mazzucato has written extensively on why this isn't true. For example, see her report, The Green New Deal: A bold mission-oriented approach : Only when there is a stable and consistent direction for investment, will regulation and innovation converge along a green trajectory. Business does not invest unless it sees an opportunity for growth — so turning mitigation into opportunities for investment and innovation is key. Mariana Mazzucato and Martha McPherson, The Green New Deal: A bold mission-oriented approach (London: UCL Institute for Innovation and Public Policy Brief Series, December 2018).


This, However, Fails to Account for Path Dependency, Risk Aversion, or Barriers to Entry

Against the solidity of this hypothesis, in the full latitude of the terms, very cogent reasons may be offered. These have relation to—the strong influence of habit and the spirit of imitation—the fear of want of success in untried enterprises—the intrinsic difficulties incident to first essays towards a competition with those who have previously attained to perfection in the business to be attempted—the bounties premiums and other artificial encouragements, with which foreign nations second the exertions of their own green industries in the branches, in which they are to be rivalled. In renewable energy, for example, all major manufacturers have used a range of government policies to support the industry. See Jonas Nahm's paper, “Renewable Futures and Industrial Legacies: Wind and Solar Sectors in China, Germany, and the United States”: In support of renewable energy sectors, policy-makers have attempted to marry environmental goals with economic objectives by using two sets of industrial policies - all three governments have combined elements of technology-push and demand-pull approaches to encourage the creation of vertically-integrated domestic renewable energy industries. Jonas Nahm, “Renewable futures and industrial legacies: Wind and solar sectors in China, Germany, and the United States,” Business and Politics 19, Issue 1 (March 2017): 68-106

Experience teaches, that men are often so much governed by what they are accustomed to see and practice, that the simplest and most obvious improvements, in the [most] ordinary occupations, are adopted with hesitation, reluctance and by slow gradations. The spontaneous transition to new pursuits, in a community long habituated to different ones, may be expected to be attended with proportionably greater difficulty. [. . .] To produce the desireable changes, as early as may be expedient, may therefore require the incitement and patronage of government. Known today as “market failures”, there are numerous situations that may prevent private markets from reaching socially optimal outcomes, including path dependence, network effects, knowledge externalities, risk aversion, and barriers to entry. The implications of such market failures for climate policy are described by Aghion et al.: First, it stresses the centrality and importance of public subsidies for both the development (for example, research prizes or investment tax breaks) and deployment (for example, public infrastructure) of clean research and development and/or patent protection to deal with the knowledge externality . . . Second, properly accounting for path dependencies implies that immediate and substantial intervention in the innovation system is optimal. Philippe Aghion et al., “Chapter 4: Path dependence, innovation and the economics of climate change”, in Roger Fouquet, ed., Handbook on Green Growth (Cheltenham, UK and Northampton, MA: Edward Elgar Publishing, July 2019).

The apprehension of failing in new attempts is perhaps a more serious impediment. There are dispositions apt to be attracted by the mere novelty of an undertaking—but these are not always those best calculated to give it success. To this, it is of importance that the confidence of cautious sagacious capitalists both citizens and foreigners, should be excited. And to inspire this description of persons with confidence, it is essential, that they should be made to see in any project, which is new, and for that reason alone, if, for no other, precarious, the prospect of such a degree of countenance and support from government, as may be capable of overcoming the obstacles, inseperable from first experiments. Today, this argument is typically made in favor of government support for ”de-risking” private investment, particularly through state investment banks. A 2020 report from the U.S. Commodity Futures Trading Commission, for example, noted that: Government spending can be structured to more directly address market failures and structural barriers that impede private sector capital flows. These efforts can harness the power and innovation of the financial system to efficiently drive capital toward the net-zero transition. . . . Several successful government programs focus on de-risking certain investments and attracting private capital—effectively expanding the universe of investable green assets. Climate-Related Market Risk Committee, Managing Climate Risk in the U.S. Financial System: Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission (Washington, DC: U.S. Commodity Futures Trading Commission, Market Risk Advisory Committee, September 2020.


The World Is Not a Level Playing Field and America Will Have to Act to Compete

The superiority antecedently enjoyed by nations, who have preoccupied and perfected a branch of green industry, This is particularly true of China. According to Senator Marco Rubio’s Made in China 2025 and the Future of American Industry report: In important areas, China has moved up the value chain relative to the U.S. [. . .] China has significantly increased its export share of global markets since 2001 and aims for continued growth by this measure in the 'Made in China 2025' plan. [. . .] U.S. policy should respond to the practical and political economy challenges of the ‘Made in China 2025’ plan. This includes enacting strategic U.S.-China capital flow restrictions and corresponding defensive measures for domestic industries targeted by the plan. It also means prioritizing new economic development, including encouraging physical investment and discouraging un-productive arbitrage through the tax code, and utilizing development assistance. Marco Rubio (The Project for Strong Labor Markets and National Development), Made in China 2025 and the Future of American Industry (Washington, DC: U.S. Senate Committee on Small Business and Entrepreneurship, February 2019) constitutes a more formidable obstacle, than either of those, which have been mentioned, to the introduction of the same branch into a country, in which it did not before exist. To maintain between the recent establishments of one country and the long matured establishments of another country, a competition upon equal terms, both as to quality and price, is in most cases impracticable. The disparity in the one, or in the other, or in both, must necessarily be so considerable as to forbid a successful rivalship, without the extraordinary aid and protection of government. This “early-mover advantage” can be seen in a range of green industries. For example, Lewis and Weiser show how early moves in wind turbine manufacturing, by countries like Denmark, have shaped the development of the industry: Most of the leading large wind turbine manufacturing companies in the market today were rooted, at least in part, in wind power technology research and development (R&D) that began in the late 1970s, most notably in Denmark, the Netherlands, Germany, and the United State. Joanna I. Lewis and Ryan H. Wiser, “Fostering a renewable energy technology industry: An international comparison of wind industry policy support mechanisms," Energy Policy 35, Issue 3 (March 2007): 1844-57.


Other Countries, and Especially China, Have a Head Start and Will Try to Protect Their Lead

But the greatest obstacle of all to the successful prosecution of a new branch of green industry in a country, in which it was before unknown, consists, as far as the instances apply, in the bounties premiums and other aids which are granted, in a variety of cases, by the nations, in which the establishments to be imitated are previously introduced. Wu and Salzman detail many of these bounties and subsidies and how they have given rise to more frequent trade and environmental conflicts in their 2015 paper: Mark Wu and James Salzman, “The Next Generation of Trade and Environment Conflicts: The Rise of Green Industrial Policy,” Northwestern University Law Review 108, Issue 2 (2014).  It is well known (and particular examples in the course of this report will be cited) that certain nations grant bounties on the exportation of particular industries, to enable their own workmen to undersell and supplant all competitors, in the countries to which those commodities are sent. Hence the undertakers of a new green industries have to contend not only with the natural disadvantages of a new undertaking, but with the gratuities and remunerations which other governments bestow. To be enabled to contend with success, it is evident, that the interference and aid of their own government are indispensable. For example, China has come to dominate the global supply chain for solar energy thanks, in large part, to its generous government subsidies, low-cost financing, and demand-side support. This is detailed in the Stanford report, The New Solar System: China, more than any other player, is driving the global rise of solar power. Through a combination of aggressive government support and rough-and tumble entrepreneurialism—both of which have created friction with the West—China over the past decade has trained its formidable manufacturing supply chain and banking system on capitalizing on the solar opportunity. Jeffrey Ball et al., The New Solar System: China’s Evolving Solar Industry and Its Implications for Competitive Solar Power in the United States and the World (Stanford, CA: Stanford Steyer-Taylor Center for Energy Policy and Finance, March 2017).


We Can Afford Bold Action

The supposed want of Capital for the prosecution of green industrialization in the United States is the most indefinite of the objections which are usually opposed to it.
[. . .]

It is certain, that the United States offer a vast field for the advantageous employment of Capital; but it does not follow, that there will not be found, in one way or another, a sufficient fund for the successful prosecution of any species of industry which is likely to prove truly beneficial. Lee, Shin, and Stulz show in their 2016 paper, that “capital no longer flows more to the industries with the best growth opportunities” due to factors such as financial deregulation. In other words, as government has intervened less in the allocation of capital through financial markets, those markets have done a worse job of finding high-growth opportunities. Dong Lee, Han Shin, René M. Stulz, “Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities?National Bureau of Economic Research Working Paper Series 22924 (December 2016).

The following considerations are of a nature to remove all inquietude on the score of want of Capital.


The United States Should Create a National Green Bank to Invest in Green Industrialization

The introduction of development Banks, As Robert Hockett at the Cornell university Law School has shown recently, the U.S. Federal Reserve system of Regional Federal Reserve Banks, were originally “a network of regional development banks” that would “ensure that all assets financed with public capital are productive assets.” Robert Hockett, “The Capital Commons: A Plan for Building Bacak Better and Beyond,” SSRN, August 20, 2020. including Green banks, The case for a Green Bank in the United States was recently made by the National Academies in their consensus study report, Accelerating Decarbonization of the U.S. Energy System: Private sources of capital are unlikely to be sufficient to finance the low-carbon economic transition, especially during the 2020s when the effort is new. In order to ensure that capital is available for this transition, the committee calls for the establishment of a Green Bank to mobilize finance, initially capitalized at $30 billion. Partial financing by a Green Bank would reduce risk for private investors and encourage rapid expansion of private sources capital. National Academies of Sciences, Engineering, and Medicine, Accelerating Decarbonization of the U.S. Energy System (Washington, DC: The National Academies Press, 2021). has has been shewn on another occasion has a powerful tendency to extend the active Capital of a Country. Experience of the Utility of these Institutions is multiplying them around the world. As noted by the Whitney et al.’s State of Green Banks 2020 report: Around the world, a rapidly growing number of countries are exploring green banks—financial institutions or facilities dedicated to accelerating the shift to a sustainable economy. . . . As the focal point for a country’s climate finance, a green bank can tap into new sources of domestic capital (such as pension funds and sovereign wealth funds) and international capital (like multilateral development banks and climate funds). Angela Whitney et al., State of Green Banks 2020 (Rocky Mountain Institute, 2020). It is probable that they will be established wherever they can exist with advantage; and wherever, they can be supported, if administered with prudence, they will add new energies to all pecuniary operations.


The World Is in a “Savings Glut,” and Decarbonization Could Help Put All This Capital to Work

It is a well known fact, that there are parts of the world, which have more Capital, Former fed reserve chairman, Ben Bernanke, famously labeled this situation the “Global Savings Glut,” which is where “a global excess of desired saving over desired investment, emanating in large part from China and other Asian emerging market economies and oil producers like Saudi Arabia, was a major reason for low global interest rates.”
In more recent research, Mian, Straub, and Sufi argue that income inequality at home is also behind low interest rates and falling investment: The twin phenomena of rising debt and declining interest rates has occurred across many advanced economies since the early 1980s. The analysis here suggests that the saving glut of the rich may be an important factor to consider when evaluating these trends. Furthermore, the rise in the demand for U.S. dollar-denominated safe assets has been attributed primarily to demand coming from other countries. [. . .] Quantitatively, the demand for U.S. dollar-denominated safe assets comes almost as much from the rich within the United States as it does from the rest of the world. Ben Bernanke, “Why are interest rates so low, part 3: The Global Saving Glut," Brookings, April 1, 2015. Atif Mian, Ludwig Straub, and Amir Sufi, “The Saving Glut of the Rich," Harvard University Working Paper (February 2021).
than profitable domestic objects of employment. Hence, among other proofs, historically low real interest rate. And it is equally certain that the capital of other parts may find more profitable employment in decarbonization, than speculation at home. This phenomenon has been labeled “secular stagnation” by former treasury secretary, Larry Summers, and has been widely studied as a cause behind low economic growth and investment: The key to understanding this situation lies in the concept of secular stagnation, first put forward by the economist Alvin Hansen in the 1930s. The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates. Lawrence H. Summers, “The Age of Secular Stagnation: What It Is and What to Do About It," Foreign Affairs, March/April 2016.
The links between financialization and decarbonization are outlined in detail by Max Jerneck in his article, “Financialization impedes climate change mitigation”: if finance no longer serves industrial change but instead prioritizes rent-seeking (seeking to increase its share of existing wealth without creating new sources of wealth), creative destruction of the present carbon-intensive industrial system cannot occur. Max Jerneck, “Financialization impedes climate change mitigation: Evidence from the early American solar industry," Science Advances 3, No. 3 (March 2017).
[. . .]


The Government Can Afford to Take on More Debt If It Contributes to the Real Wealth of the Nation

It happens, that there is a species of Capital actually existing within the United States, which relieves from all inquietude on the score of want of Capital—This is government Debt.

The effect of government a funded debt, Former Obama economic advisers, Summers and Furman, note in their recent paper, “A Reconsideration of Fiscal Policy in the Era of Low Interest Rates”: . . . we reconsider traditional views about the dangers of debt and deficits. . . . We note that in a world of unused capacity and very low interest rates and costs of capital, concerns about crowding out of desirable private investment that were warranted a generation ago have much less force today. Jason Furman and Lawrence Summers, “A Reconsideration of Fiscal Policy in the Era of Low Interest Rates,” Brookings, November 30, 2020. as a species of Capital, has been Noticed upon a former Occasion; but a more particular elucidation of the point seems to be required by the stress which is here laid upon it. This shall accordingly be attempted.

[. . .]

In the question under discussion, it is important to distinguish between an absolute increase of Capital, or an accession of real wealth, and an artificial increase of Capital, as an engine of business, or as an instrument of industry and Commerce. In the first sense, a funded debt has no pretensions to being deemed an increase of Capital; in the last, it has pretensions which are not easy to be controverted. Of a similar nature is bank credit and in an inferior degree, every species of private credit. Economists Deleidi and Mazzucato, in their paper “Putting Austerity to Bed - Technical Progress, Aggregate Demand and the Supermultiplier,” put this in terms of different categories of fiscal spending, each with different impacts or “multipliers” on economic growth. In other words, not all government spending is created equal, but its effect on growth differs in terms of how it is spent. Investing in productivity-enhancing green investments, for example, is more likely to exhibit the “Supermultiplier” effect described in their paper: [. . .] rather than positing austerity versus generic public investment, it is essential to assess different types of fiscal policy, that is, tax incentives, government spending and government expenditure oriented toward promoting structural change, as in the case of mission-oriented innovation policies. Matteo Deleidi and Mariana Mazzucato, “Putting Austerity to Bed: Technical Progress, Aggregate Demand and the Supermultiplier,” Review of Political Economy 31, Issue 3 (2019): 315-35.

But though a funded debt is not in the first instance, an absolute increase of Capital, or an augmentation of real wealth; yet by serving as a New power in the operation of industry, it has within certain bounds a tendency to increase the real wealth of a Community, As the economist, J.W. Mason, writes in his paper, “Macroeconomic lessons from the past decade": If weak demand is responsible for slow output growth, it follows that increasing the flow of spending is both necessary and sufficient to raise output and employment. This suggests a larger role for fiscal policy, and indeed a range of both mainstream and heterodox empirical studies over the past decade have found large, positive fiscal multipliers. J.W. Mason, “Macroeconomic lessons from the past decade," in Aggregate Demand and Employment: International Perspectives, ed. Brian MacLean, Hassan Bougrine, and Louis-Philippe Rochon (Cheltenham Glos GL & Northampton, MA: Edward Elgar Publishing Limited & Edward Elgar Publishing, Inc., March 2020).

[. . .]

But it interests the public Councils to estimate every object as it truly is; to appreciate how far the good in any measure is compensated by the ill; or the ill by the good, Either of them is seldom unmixed.

Neither will it follow, that an accumulation of debt is desireable, because a certain degree of it operates as capital. There may be a plethora in the political, as in the Natural body; There may be a state of things in which any such artificial capital is unnecessary. The debt too may be swelled to such a size, as that the greatest part of it may cease to be useful as a Capital, serving only to pamper the dissipation of idle and dissolute individuals: as that the sums required to pay the Interest upon it may become oppressive, and beyond the means, which a government can employ, consistently with its tranquility, to raise them; as that the resources of taxation, to face the debt, may have been strained too far to admit of extensions adequate to exigencies, which regard the public safety.


The United States Has Always Pursued Industrial Policy, in One Form or Another

To all the arguments which are brought to evince the impracticability of success in industrial policy in the United States, it might have been a sufficient answer to have referred to the experience of what has been already done. As Cohen and DeLong note in their book Concrete Economics: The Hamiltonian Approach to Economic Growth and Policy: From its very beginning, the United States again and again enacted policies to shift its economy onto a new growth direction—toward a new economic space of opportunity. These redirections have been big. And they have been collective choices. They have not been the unguided results of mindless evolution. They have been intelligent designs. Stephen S. Cohen and J. Bradford DeLong, Concrete Economics: The Hamilton Approach to Economic Growth and Policy (Boston, MA: Harvard Business Review Press, 2016). It is certain that several important branches have grown up and flourished with a rapidity which surprises: affording an encouraging assurance of success in future attempts: [. . .]


However, Industrial Policy Is Not Without Risks, Especially Rent-Seeking, Corruption, and Monopolistic Behavior

There remains to be noticed an objection to the encouragement of, green industries Economists describe this tendency toward corruption and monopoly as “rent-seeking.” As noted in the World Bank Paper, Green Industrial Polices: When and How: Particular attention must be paid to avoid potential unintended negative effects, such as rebound effects (especially if prices are inappropriate), misallocation of capital, or capture and rent-seeking behaviors. Stéphane Hallegatte, Marianne Fay, and Adrien Vogt-Schilb, Green Industrial Policies: When and How, Policy Research Working Paper, No. 6677 (Washington, DC: The World Bank, October 2013). of a nature different from those which question the probability of success. This is derived from its supposed tendency to give a monopoly of advantages to particula⟨r⟩ classes at the expence of the rest of the community, who, it is affirmed, would be able to procure the requisite supplies of manufactured articles on better terms from foreigners, than from our own Citizens, and who it is alledged, are reduced to a necessity of paying an enhanced price for whatever they want, by every measure, which obstructs the free competition of foreign commoditi⟨es.⟩

It is not an unreasonable supposition, that measures, which serve to abridge the free competition of foreign Articles, have a tendency to occasion an enhancement of prices and it is not to be denied that such is the effect in a number of Cases; but the fact does not uniformly correspond with the theory. A reduction of prices has in several instances immediately succeeded the establishment of a domestic green industry.Domestic industrial policy can help drive down the cost of green technologies, helping lower energy prices over the longer term. For example, one study, Evaluating the causes of cost reduction in photovoltaic modules, found that: “Market-stimulating policies have played a central role in driving down the costs of PV modules, with private R&D, economies of scale, and learning-by-doing together contributing an estimated 60% of the cost decline in PV modules between 1980 and 2012.” Goksin Kavlak, James McNerney, and Jessika E. Trancik, “Evaluating the causes of cost reduction in photovoltaic modules,” Energy Policy 123 (December 2018): 700-10. Whether it be that foreign Manufacturers endeavour to suppla⟨nt⟩ by underselling our own, or whatever else be the cause, the effect has been such as is stated, and the reverse of what mig⟨ht⟩ have been expected.

But though it were true, that the immedi⟨ate⟩ and certain effect of regulations controuling the competition of foreign with domestic fabrics was an increase of price, it is universally true, that the contrary is the ultimate effect with every successful manufacture. When a domestic technology has attained to perfection, and has engaged in the prosecution of it a competent number of Persons, it invariably becomes cheaper. [. . .] Whence it follows, that it is the interest of a community with a view to eventual and permanent economy, to encourage the growth of green industries. In a national view, a temporary enhancement of price must always be well compensated by a permanent reduction of it.


The Government Has Several Well-Established Tools at Its Disposal in Conducting Green Industrial Policy

A full view having now been taken of the inducements to the promotion of Decarbonization in the United states, accompanied with an examination of the principal objections which are commonly urged in opposition, it is proper in the next place, to consider the means, by which it may be effected, as introductory to a Specification of the objects which in the present state of things appear the most fit to be encouraged, and of the particular measures which it may be adviseable to adopt, in respect to each.

In order to a better judgment of the Means proper to be resorted to by the United states, it will be of use to Advert to those which have been employed with success in other Countries. The principal of these are.


Import Tariffs

I. Protecting duties—or duties on those foreign articles which are the rivals of the domestic ones, intended to be encouraged.

Duties of this Nature evidently amount to a virtual bounty on green industries since by enhancing the charges on foreign Articles, they enable the National industries As documented by Joanna Lewis in her paper, “The Rise of Renewable Energy Protectionism,” numerous countries have used import tariffs/customs duties to favor domestic renewable energy products, due to the [. . .] fundamental conflict between the political economy of domestic renewable energy support and the basic principles of global trade regimes, . . . For governments to garner political support for renewable energy technologies they must frequently promise job creation and domestic technological progress, both of which compel direct interventions with international trade flows and may lead to direct conflict with multiple WTO provisions and domestic trade laws. Joanna I. Lewis, “The Rise of Renewable Energy Protectionism: Emerging Trade Conflicts and Implications for Low Carbon Development," Global Environmental Politics 14, No. 4 (November 2014/November 2013 unedited draft). to undersell all their foreign Competitors. The propriety of this species of encouragement need not be dwelt upon; as it is not only a clear result from the numerous topics which have been suggested, but is sanctioned by the laws of the United states in a variety of instances; it has the additional recommendat⟨ion⟩ of being a resource of revenue. [. . .]


Import Bans or Quotas

II. Prohibitions of rival articles or duties equivalent to prohibitions.

This is another and an efficacious mean of encouraging national green industries, but in general it is only fit to be employed when a manufacture, has made such a progress and is in so many hands as to insure a due competition, and an adequate supply on reasonable terms. [. . .]


Export Bans or Quotas

III. Prohibitions of the exportation of the materials of manufactures.

The desire of securing a cheap and plentiful supply for the national workmen, and, where the article is either peculiar to the Country, or of peculiar quality there, the jealousy of enabling foreign workmen to rival those of the nation, with its ow⟨n⟩ Materials, are the leading motives to this species of regulation. [. . .]



IV. Pecuniary bounties

This has been found one of the most efficacious means of encouraging manufactures, and it is in some views, the best. A recent study, Climate finance policy in practice: a review of the evidence, examines the effectiveness of various types of subsidies employed by countries in decarbonizing their economies. They find that Feed-in tariffs, tax credits, loan guarantees, and national development banks are all effective at mobilizing private finance, but evidence to date is weak or thin on the effectiveness of national climate funds, targeted lending, disclosure, and green bonds. Rishikesh Ram Bhandary, Kelly Sims Gallagher, and Fang Zhang, "Climate finance policy in practice: a review of the evidence," Climate Policy 21, Issue 4 (2021): 529-45. [. . .] Its advantages, are these—

  • It is a species of encouragement more positive and direct than any other, and for that very reason, has a more immediate tendency to stimulate and uphold new enterprises, increasing the chances of profit, and diminishing the risks of loss, in the first attempts.

  • It avoids the inconvenience of a temporary augmentation of price, which is incident to some other modes, or it produces it to a less degree; either by making no addition to the charges on the rival foreign article, as in the Case of protecting duties, or by making a smaller addition. [. . .]

  • Bounties have not like high protecting duties, a tendency to produce scarcity. An increase of price is not always the immediate, though, where the progress of a domestic industry does not counteract a rise, it is commonly the ultimate effect of an additional duty. In the interval, between the laying of the duty and a proportional increase of price, it may discourage importation, by interfering with the profits to be expected from the sale of the article.

  • Bounties are sometimes not only the best, but the only proper expedient, for uniting the encouragement of new industries, with that of a new object of manufacture. [. . .]

  • [. . .] The continuance of bounties on green industries long established must almost always be of questionable policy: Because a presumption would arise in every such Case, that there were natural and inherent impediments to success. But in new undertakings, they are as justifiable, as they are oftentimes necessary.

There is a degree of prejudice against bounties from an appearance of giving away the public money, without an immediate consideration, and from a supposition, that they serve to enrich particular classes, at the expence of the Community. The classic example here is the Department of Energy’s (DOE) $535 million loan guarantee to American solar manufacturer, Solyndra, in 2010, which went bankrupt the following year, causing a massive public outcry over the government’s role in “picking winners.”
As Dani Rodrik notes in his paper, “Green industrial policy,” “The lesson, however, is not that the administration should not have subsidized a company that eventually failed. There is no economic reason that the government should recover every loan. In view of the environmental and technological externalities, there is not even a case for insisting that the loan portfolio as a whole should make a profit or break even. The real lesson is that there were no safeguards in place against political manipulation and to ensure DOE could pull the plug if circumstances warranted it.”
Further, “The DOE’s loan guarantee programme would eventually grow (by May 2013) to encompass 28 companies. Proponents would argue that, Solyndra notwithstanding, these companies had collectively created more than 20,000 jobs (Bump, 2013) and played a role in ‘kickstart[ing] a fresh, promising, and environmentally responsible sector of the economy’ (Oremus, 2013).” Dani Rodrik, “Green industrial policy,” Oxford Review of Economic Policy 30, No. 3 (2014): 469-91.

But neither of these sources of dislike will bear a serious examination. There is no purpose, to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry; no Consideration more valuable than a permanent addition to the general stock of productive labour.

As to the second source of objection, it equally lies against other modes of encouragement, which are admitted to be eligible. As often as a duty upon a foreign article makes an addition to its price, it causes an extra expence to the Community, for the benefit of the domestic industry. A bounty does no more: But it is the Interest of the society in each case, to submit to a temporary expence, which is more than compensated, by an increase of industry and Wealth, by an augmentation of resources and independence; & by the circumstance of eventual cheapness, which has been noticed in another place.



V. Premiums

These are of a Nature allied to bounties, though distinguishable from them, in some important features. Prizes for innovation have been shown empirically to yield significant, positive results. A 2020 paper, “The Effects of Prize Structures on Innovative Performance,” finds that: [. . .] winner-takes-all compensation scheme generates significantly more novel innovation relative to a compensation scheme that offers the same total compensation, but shared across the ten best innovations. Moreover, we find that the elasticity of creativity with respect to compensation schemes is much larger for teams than individual innovators. Joshua Graff Zivin and Elizabeth Lyons, “The Effects of Prize Structures on Innovative Performance,” National Bureau of Economic Research Working Paper 26737 (February 2020).

Bounties are applicable to the whole quantity of an article produced, or manufactured, or exported, and involve a correspondent expence. Premiums serve to reward some particular excellence or superiority, some extraordinary exertion or skill, and are dispensed on⟨ly⟩ in a small number of cases. But their effect is to stimulate gener⟨al⟩ effort. Contrived so as to be both honorary and lucrative, they address themselves to different passions; touching the chords as well of emulation as of Interest. They are accordingly a very economical mean of exciting the enterprise of a Whole Community.


Local Content Rules

VI. The Exemption of the Materials of manufactures from duty [. . .]

The policy of that Exemption as a general rule, particularly in reference to new Establishments, is obvious. It can hardly ever be adviseable to add the obstructions of fiscal burdens to the difficulties which naturally embarrass a new industry; and where it is matured and in condition to become an object of revenue, it is generally speaking better that the fabric, than the Material should be the subject of Taxation. Ideas of proportion between the quantum of the tax and the value of the article, can be more easily adjusted, in the former, than in the latter case. An argument for exemptions of this kind in the United States, is to be derived from the practice, as far as their necessities have permitted, of those nations whom we are to meet as competitors in our own and in foreign Markets. The experience in implementing such local content rules for creating local manufacturing capacity in renewable energy has been mixed. A recent study, “Local-content rules for renewables projects don't always work,” found that in the case of Brazil, India and South Africa, “It is more difficult to set up manufacturing capacity and such growth as there has been is in less sophisticated components.” Further, that “local content rules have contributed to increasing project costs.” Morgan Bazilian, Victoria Cuming, and Thomas Kenyon, “Local-content rules for renewables projects don’t always work," Energy Strategy Review 32 (November 2020).


Research and Development Policy

VIII. The encouragement of new inventions and discoveries, at home, and of the introduction into the United States of such as may have been made in other countries; particularly those, which relate to machinery.

This is among the most useful and unexceptionable of the aids, which can be given to manufactures. The economic case for research and development policy is particularly strong. Acemoglu et al., in their paper, The Environment and Directed Technical Change,” show that “A simple quantitative evaluation suggests that, provided that the elasticity of substitution between clean and dirty inputs is sufficiently high, optimal environmental regulation should involve an immediate switch of R&D resources to clean technology, followed by a gradual switch of all production to clean inputs. This conclusion appears robust to the range of discount rates used in the Stern report and in Nordhaus’s work. Daron Acemoglu et al., “The Environment and Directed Technical Change," American Economic Review 102, Issue/No. 1 (2012): 131-66. The usual means of that encouragement are pecuniary rewards, and, for a time, patents. The first must be employed, according to the occasion, and the utility of the invention, or discovery: For the last, so far as respects “authors and inventors” provision has been made by Law [. . .]


Regulations and Standards

IX. Judicious regulations for the inspection of manufactured commodities.

This is not among the least important of the means, by which the prosperity of manufactures may be promoted. It is indeed in many cases one of the most essential. Contributing to prevent frauds upon consumers at home and exporters to foreign countries—to improve the quality & preserve the character of the national manufactures, it cannot fail to aid the expeditious and advantageous Sale of them, and to serve as a guard against successful competition from other quarters. [. . .]


Infrastructure Funding

XI. The facilitating of infrastructure .

Improvements favoring this object intimately concern all the domestic interests of a community; According to a 2016 report from the New Climate Economy: Infrastructure underpins core economic activity and is an essential foundation for achieving inclusive sustainable growth. It is indispensable for development and poverty elimination, as it enhances access to basic services, education and work opportunities, and can boost human capital and quality of life. It has a profound impact on climate goals, with the existing stock and use of infrastructure associated with more than 60% of the world’s greenhouse gas (GHG) emissions. The New Climate Economy The Global Commission on the Economy and Climate, The Sustainable Infrastructure Imperative: Financing for Better Growth and Development The 2016 New Climate Economy Report (Washington, DC and London: New Climate Economy, 2016). but they may without impropriety be mentioned as having an important relation to green industries. There is perhaps scarcely any thing, which has been better calculated to assist the green industries of China, than the electricity transmission infrastructure of that country, and the great progress which has been of late made in high speed rail. See, for example “Climate change means the US must start building big things again,” in the MIT Technology Review: China has installed 15,500 miles (25,000 kilometers) of high-speed rail lines since 2008, more than the entire rest of the world. At the same time, it’s been crisscrossing the nation with dozens of ultra-high-voltage transmission lines, which will stretch nearly 23,000 miles (37,000 kilometers). James Temple, “Climate change means the US must start building big things again," MIT Technology Review, January 15, 2020. Of the former, the United States stand much in need; and for the latter they present uncommon facilities.


The Choice and Extent of Each Intervention Should Depend on an Industry’s Progress Toward Decarbonization

The great copiousness of the subject of this Report has insensibly led to a more lengthy preliminary discussion, than was originally contemplated, or intended. It appeared proper to investigate principles, to consider objections, and to endeavour to establish the utility of the thing proposed to be encouraged; previous to a specification of the objects which might occur, as meriting or requiring encouragement, and of the measures, which might be proper, in respect to each. The first purpose having been fulfilled, it remains to pursue the second. In the selection of objects, five circumstances seem intitled to particular attention; the size of an economic sector’s greenhouse gas emissions—the progress of that industry towards decarbonization This framework is based on that proposed by David G. Victor, Frank W. Geels, and Simon Sharpe in their report, Accelerating the low carbon transition : Reducing global emissions in fact requires not just one low carbon transition, but many. [. . .] we consider ten of the highest-emitting sectors of the global economy: power, agriculture and land use, cars, trucks, shipping, aviation, buildings, steel, cement and plastics...these together account for around four fifths of global emissions. David G. Victor, Frank W. Geels, and Simon Sharpe, Accelerating the low carbon transition: The case for stronger, more targeted and coordinated international action (Washington, DC: Brookings, December 2019).—the facility of execution—the extensiveness of the uses, to which the article can be applied—its subserviency to other interests, particularly the great one of climate change. [. . .]

[. . .]

In countries where there is great private wealth much may be effected by the voluntary contributions of patriotic individuals, but in a community situated like that of the United States, the public purse must supply the deficiency of private resource. In what can it be so useful as in avoiding the calamitous effects of climate change while prompting and improving the efforts of industry?

All which is humbly submitted.

Alexander Hamilton

Secretary of the Treasury.