PETERSON INSTITUTE FORINTERNATIONAL ECONOMICSWORKING PAPER24-5 Powering the clean energyinnovation systemReinhilde VeugelersMarch 2024ABSTRACTThis paper focuses on the innovation angle in green industrial policy design.TheReinhilde Veugelers,innovation system,delivering new and improved technology solutions for thenonresident seniorfellow at the Petersonclean energy transition,can be the cornerstone of a successful transition thatInstitute for Internationalreconciles decarbonization,competitive value creation and jobs,and strategicEconomics,is afull professor inautonomy on a global scale.This,however,requires the innovation system to bethe department ofproperly directed.This paper first lays out the principles of a policy design thatmanagement,strategy andinnovation at KU Leuvenproperly steers the innovation system.It then documents the current performancein Belgium.She is also aon clean energy innovations and clean energy policymaking globally,with focussenior fellow at Bruegelon the Inflation Reduction Act (IRA)and the Net-Zero Industry Act (NZIA)trendsin clean tech policymaking in the United States and European Union,respectively.The evidence shows that the innovation system is not at full potential,andthere is still ample room to improve the current clean energy policymaking andinternational policy coordination.JEL codes:031,038,Q55Keywords:climate change,clean tech,innovation,green innovation policy,strategic autonomyNote:This paper was prepared for a conference on Macroeconomic Implicationsof Climate Action on June 5-6,2023,at the Peterson Institute for International1750 Massachusetts Avenue,NW Washington,DC 20036-1903 USA +1.202.328.9000 www.piie.comWP 24-5 MARCH 20242INTRODUCTIONShifting economies from fossil fuel-based to green energy represents oneof the most significant socioeconomic transformations in history.The greentransformation brings socioeconomic opportunities and challenges.Whilephasing out fossil fuel-based products,activities,and jobs,new green products,activities,and jobs are being created.Clean energy is key to fostering a deepdecarbonization process.The International Energy Agency (IEA)estimates thatif countries worldwide fully implement their announced energy and climate2030 pledges,the global market for key mass-manufactured clean energytechnologies will have tripled in size.Clean energy manufacturing jobs wouldmore than double from 6 million today to nearly 14 million by 2030 (IEA 2023a).Recognizing the opportunities and challenges of the transition from dirty toclean energy,all major economies have ventured into clean energy industrialpolicy and are competing for their share of the global economic opportunitiesfrom clean energy,reconciling their decarbonization and socioeconomictransformation objectives.The COVID-19 outbreak dramatically exposed economies to theirvulnerabilities,introducing a call for policies ensuring the resilience andsecurity of supply of inputs considered strategic.The war in Ukraine and the"weaponization"of Russian gas and Chinese minerals exacerbated concernsabout supply security,particularly for energy,especially in Europe.2 All majoreconomies are now combining their climate and clean energy industrial policieswith efforts to ensure the security of energy supply and strategic autonomyin clean energy value chains.In the absence of global policy coordination,thissets in motion a train of mutually reinforcing reactive pressures to further thestrategic autonomy angle in countries'clean energy industrial policies.3Countries are still figuring out how to reconcile the multidimensionalobjectives of a green industrial policy,particularly when these dimensionscounteract each other.What are the best ways to combine decarbonizationwith economic growth,jobs,and world competitiveness,and all this withresilience and security of supply?What is the socioeconomically best wayto achieve decarbonization and resilience?How and how far to go in movingtoward supply resilience and security,and what are the costs in moving awayfrom decarbonization and economic efficiency?How far to move away froma horizontal policy approach shaping framework conditions to ensure openFor example,in March 2020 the newly established European Commission under Ursula von derLeyen,with climate goals firmly anchored in its Green Deal and Fit for 55 package,presentedits New Industrial Strategy for Europe.centered around the twinning of its green and digitaltransitions.China's latest Five-Year-Plan (2021-25)has clean energy high on its radar.And theUnited States,with its Inflation Reduction Act (IRA)adopted in August 2022,introduced amassive package of support for clean tech technology deployment.The European Union in May 2022 launched its REPowerEU plan to transition faster to cleanenergy.diversify its energy supplies,and save energy to improve its "strategic autonomy"inenergy.3 The US IRA is a clear articulation of this,particularly its local content requirement stipulationswhich outlined Europe's response in March 2023 with its Net-Zero Industry Act(NZIA).Whilethe concept of "open strategic autonomy"was already presented in the 2020 New IndustrialStrategy for Europe,this had mostly China as a "systemic rival"on the radar (EC 2020).The NZIA takes its "strategic autonomy"in clean energy a few steps further,reacting to thedeepened geopolitical risks.