On September 9th, Mario Draghi, former President of the European Central Bank (ECB), published the much-anticipated Competitiveness Report that had been commissioned by the European Commission. As one might expect, the high investment needs and the proposal to use co-financing for part of the investment took up a significant portion of the media space in Finland. However, as the President of the ECB understands quite well, financing is the easy part. The hard part is understanding what concrete changes are needed in Europe in order to meet climate goals and other targets, and how to bring about those changes. Draghi has spent a lot of time thinking about these very issues and is clearly trying to elevate the level of debate concerning them in Europe. Two thirds of the more than 300 pages of Part B of the report outline sectoral snapshots and propose sectoral measures. I will highlight some important aspects of the report and examine them from the perspective sustainability sciences. It would be a pity if the public discussion of the Draghi report were reduced to the knee-jerk reaction “A collective debt? — No”.

 

“Mario Draghi, European Parliament, Plenary session – The future of European competitiveness, 17/09/2024”, Source: European Parliament

In his opening words, Mario Draghi paints a powerful picture of a dwindling Europe at a time when the world is rapidly decarbonising its economy and technological progress is advancing by leaps and bounds. In the 21st century, the US has led the way in the most complex technologies and artificial intelligence, while China has invested in the value chains required for the electrification of energy and transport, ranging from raw materials to the finished products. Despite good starting points, such as high-quality research, Europe has been left behind. The war on Europe’s borders and the disruption of the flow of fossil fuels from Russia suddenly put Europe under much greater strain. The automotive industry, for example, which is so important for Europe, is struggling because it has not been able to modernise in time. In keeping with current fashion, Draghi is making his argument through macro-level abstractions such as economic growth and productivity, but this is not necessary. They are not essential if we want to understand the evolution of economic structures and the relationships between different economies.

Climate change, competitiveness and geopolitics play the same game – and then there’s AI

Draghi takes climate change, competitiveness and geopolitics seriously and discusses their interplay throughout the report. Draghi is firmly committed to Europe’s climate targets, which are more stringent than those of other countries and continents. But achieving these targets depends on international competition and other external relations, because Europe cannot decarbonise even its own economy, let alone the global economy, on its own. Some technologies and solutions are cheaper to buy from China than to make in-house, but Europe will be in trouble if it cannot design and manufacture a sufficient share of what it needs. In any case, Europe will have to source many raw materials elsewhere. If Europe’s own production is not competitive and if Europe does not have enough to offer to others, these purchases will become unacceptably expensive. Too strong dependence on other countries exposes Europe to large price fluctuations in normal times and to exploitation and blackmail in times of crisis. It is an important strategic question which kind of production Europe can manage, now and in the future. It will not be resolved without careful planning in the Member States and especially at European level.

The treatment of AI is more blurred in the report. Draghi sees AI and complex digital technologies and services in general as important drivers of productivity growth. But what does it mean to say that Europe should integrate AI into all sectors of its economy? So what do we do in practice? I have no doubt that Europe should be at the forefront of AI development, at least in the sense of understanding it, researching it, and developing new potential solutions. But the rush towards adopting and deploying something that we don’t quite see the benefits of is still worth a critical look. When you compare the clarity of the arguments, the difference with basic industry is striking: in the foreseeable future we will certainly need steel, cement and various chemicals, but the fossil fuels now required to make them and the greenhouse gas emissions from their manufacture must be eliminated. That is certainly worth investing in.

Modernising basic production and stretching technological frontiers require different policy measures

When I read the sectoral analyses, I see a background structure of industrial sustainability transition (see figure below, translated from Andersson, Bauer and Nilsson 2024). On the right-hand side of the structure is the production of basic materials, which is a major source of greenhouse gas emissions and requires large investments to decarbonise. There are no high expectations of increasing returns and productivity. In the middle are activities such as construction, transport and manufacturing. They do not generate as much direct emissions, but developments in them will affect the demand for basic materials. On the left are services and technological developments, which are the main focus of future economic expectations – the high yield -seeking investment world revolves around this (compare the development of the US in the 2000s relative to Europe as described in the Draghi report). Services and technological developments have little impact on emissions in their own right, but the impact on other sectors is considerable.

Figure: Classification of economic sectors and interactions in terms of greenhouse gas emissions and growth potential. Translated into English by DeepL from Andersson, F.N.G, Bauer, F. and Nilsson, L.J. (2024). Politikens roll för näringslivets klimatomställning, SNS Förlag.

Draghi is concerned that Europe has done rather badly on the left side of the structure in recent years, but he does not forget either the massive investments needed to upgrade the production of basic materials and to build, for example, energy, transport and defence systems in the coming years. Draghi recognises that achieving the objectives of these different sectors will require different policy measures (the proposed measures are partly horizontal, partly sectoral). Cutting-edge thinking and experimentation that pushes the technological boundaries cannot be guided by clear pre-set targets. Rather, support must be first given to diverse development, and only when promising starts are identified, more focused investment is viable. On the other hand, decarbonising energy-intensive industries and developing Europe’s energy, transport and defence systems require a strong emphasis on planning, collective choices and coordinated investment – and here the role of the public sector is absolutely essential (not forgetting, of course, the role of businesses and research institutions). I prefer to describe this with the term ‘infrastructure upgrade’ or ‘system upgrade’, although this is also a creative and innovative activity. And sometimes it also requires technological leaps. Take the electrification of a pulp mill, for example: you need to solve the problem of generating the necessary heat effect electrically and then processing the raw materials that are not burned into valuable battery materials, for example.

Is Finland listening? investments in upgrading energy-intensive industries often lack a “business case”

That different policy instruments are required to reform different sectors of the economy, is an important observation for Finland, which has the largest share of energy-intensive industry in the economy (in terms of value added) in the European Union, and an exceptionally large share of greenhouse gas emissions in the economy as a whole (about a quarter if the land use sector is excluded). Business and government also want to see more production facilities in Finland that benefit particularly from low-cost electricity, i.e. energy-intensive industry.

According to the Draghi report, the business case for investment in the renewal of energy-intensive industries is in many places poor or unclear (Part B, p. 99). In addition to the high direct capital costs, the operating costs are unclear when less well known technologies are introduced. Emissions trading and the future Carbon Border Adjustment Mechanism will help, but probably not enough. There is generally no significant additional market return available for green products compared to non-green products to cover the higher costs. In Finland (and Sweden), the situation is easier than in other European countries because the electricity required by the new technologies is available at relatively low cost. However, it is difficult to mobilise investment without significant public investment, even though it is recognised that emissions need to be brought down and industry needs to modernise to remain competitive in a remote corner of Europe. The required public investment is both financial and related to research, coordination and regulation (see also Löfgren and Rootzén 2021). In a recent research essay, Löfgren and colleagues (2024) outline how such state-level or EU-level industrial policy can preserve the useful features of technology neutrality while making clear choices about technology domains.

The European Union’s new economic rules, the so-called fiscal framework, look set to shrink Finland’s public investment capacity even further in the coming years – more than that of most other euro countries. Therefore, Draghi’s proposal that a significant part of public investment should be made through a Europe-wide shared financial instrument should be particularly attractive to Finnish policy makers and industry. A report authored by Raimo Luoma, published by the Confederation of Finnish Industries in February 2024, which sought to pave the way for the Finnish debate, tried to take the argument in this direction. However, according to public comments made when the Draghi report was published, Finland is still not ready for this.

The climate is really warming and natural resources are limited

Finally, a word from a slightly broader perspective. Namely, while the Draghi report takes global warming and the decarbonisation challenge seriously, it is still far from the reality where we will have to rapidly prepare for the increasingly dramatic effects of warming. We will have to cope with intensifying and more extreme weather events and invest an increasing share of our spending in climate disaster repair projects. We will also have to cope with the social unrest caused by these events. Deepening economic austerity measures and their essential element of ‘planned unplannedness’ (the political idea that we should not collectively think and decide at all about what we do, but only try to keep the market functioning properly) is probably not a very good starting point in such a world.

The picture of finite material resources created by the report is also confined rather tightly to the geopolitical perspective, where finiteness is conceived mainly as the ability to extract materials from the world for European use. In Draghi’s picture, the economy is not directly constrained by, for example, the limits to the sustainable use of natural resources and the maintenance of biodiversity. Including such factors would create considerable additional challenges for the rapporteur. If we go back to the classification proposed by Andersson, Bauer and Nilsson (2024), where the middle of the spectrum is, for example, construction and transport, both can be influenced enormously at the level of urban systems. If urban transport is largely public and buildings are repaired and modified rather than demolished and replaced by new ones, the climate and material burden will be at a completely different, i.e. lower, level. This will of course also have an impact on the factors of economic growth.

Draghi sometimes talks about the circular economy (for example, that because Europe has few virgin materials to mine for decarbonisation, increasing the recycling rate will give us comparative advantage), but this view misses the essential point that a high circular economy rate is impossible to achieve if absolute consumption levels keep rising.

Finally

All in all, Mario Draghi’s Competitiveness Report is very important reading across Europe. It is not (just) grey administrative rhetoric, but it also aims to reach a wider audience. One of the main merits of the report is its qualitative approach to the needs for economic change, rather than a ‘horizontal’ or ‘non-contextual’ approach. It also provides thoughtful advice on how to achieve these changes. In this paper I have highlighted only a few of the aspects covered in the report, and of the many sectors I have focused mainly on energy-intensive industry. As said, the Draghi report does not limit itself to these. I sincerely hope that the report will not just be read cynically from the perspective of the political campaigns of the day, but will be carefully studied and will form the basis of a broad social debate.

Paavo Järvensivu
Doctor of Business Administration, Associate Professor of Environmental and Social Policy

The “new” industrial policy – referring to the emerging political actions and wider policy programs around the Inflation Reduction Act in the US and the Green Deal Industrial Plan in the EU – has generated considerable enthusiasm, but also concern. For us, a multidisciplinary group of scholars studying the conditions for a rapid sustainability transition, the excitement relates to the way industrial policy operationalises the call to deeply and determinedly transform the infrastructures and activities of the economy. The new industrial policy seems to push political reality closer to a position from which it is possible to articulate and act on the huge, complex task of a sustainability transition.

BIOS organised a two-day pilot session for the science-driven planning of a sustainability transition at the Ateneum Art Museum. November 20, 2023. Photo: Juhani Haukka

Before the recent practical industrial policy innovations in the US and in Europe, there have been many expert-led initiatives and academic studies about sustainability transitions, such as the Green New Deal for Europe and the normative study of a Green State^[1], in a more place-based fashion for instance our plan of Ecological Reconstruction for Finland, but they have remained rather far removed from the political reality. Previous political attempts have either had too little effect on shaping the direction of economic development (e.g. the EU Green Deal, despite its many carefully designed disciplinary mechanisms, such as the emissions trading system and the obligations on land-use) or they have not passed through the political machinery into action (e.g. the 2019 Green New Deal in the US).

Now there seems to be a political opening toward actually steering structural changes in the productive capacity of the economy. The COVID-19 response was already an exercise for modern states in strongly guiding and supporting various sectors of the economy. Interestingly, the pandemic-related state action was also largely based on scientific deliberation. The measures were, of course, hasty reactions to a sudden crisis. In comparison, the new industrial policy is more long-term and more proactive, responding to creeping, slowly emerging crises rather than acute, rapidly evolving ones.

The innovations in real politics have lately generated a lot of useful interdisciplinary sense-making of industrial policy, both on the policy that is now being pursued and on the theoretical potential of industrial policy. Recent discussions and texts, in the Anglosphere particularly the Varieties of Derisking interview in Phenomenal World, the response of JW Mason, an associate professor in economics, to the interview, historian Adam Tooze’s posts one & two, Transitioning Systems? by Melanie Brusseler at Common Wealth in the UK, and a number of reports by the Roosevelt Institute, have basically created a new public around the topic. These outputs form a mosaic-like but still somewhat coherent lens through which to analyse different economic and industrial steering mechanisms in their real-world contexts.

While we are excited about this shift, we also see room for elaboration and enrichment in the debate. Hence, we want to contribute to the body of work from the perspective of multidisciplinary sustainability science, by examining a bit more deeply the ecological goals and constraints of industrial policy and by shedding light on what we term science-driven planning. We propose the framework of societal metabolism as a complementary analytical lens to thinking about industrial policy.

Societal metabolism

As far as we can see, the debate has yet to go deep enough into the relationship between industrial policy and the transformation needed for economies and societies to give up on the use of fossil fuels and the over-consumption of other natural resources. The questions asked have been too imprecise to be answered adequately. We believe that the concept of societal metabolism is useful in finding both the right questions and the initial answers to them, as we will demonstrate below.

For example, the introduction to “Varieties of Derisking” asks: “Do these policies target the right constraints and the most important barriers to rapid decarbonisation?” The question is reasonable for a policy analyst, but from a sustainability transition perspective, it is crucial to first examine what we really mean by rapid decarbonisation. What kinds of real-world changes does it refer to?

In the same discussion, economics researcher Chirag Lala poses more questions: “What do we expect investment to do? And why is investment not happening at the requisite speeds or the requisite volume in the areas we would need for decarbonisation? We need not just new generation systems, but new heating systems, industrial equipment, transportation equipment, and so on.” If we stick to this line of thinking, industrial policy narrowly points at the production capacity of zero-carbon technology and products. There’s a sense that decarbonisation requires massive amounts of new things, and we need to focus on boosting the production of these things.

But we need to ask “productive capacity for what?” (You need to know what war you will be waging.) We have to have a comprehensive understanding of the socio-technical systems that we aim to build and reconfigure. The point of industrial policy is that production is matched with consumption, and based on the international scientific consensus reports by IPCC and IPBES, among others, we know that it is not just production systems but interconnected production-end use systems that must change. It may be helpful to have in mind a basic image of societal metabolism:

Figure 1. Stylised depiction of societal metabolism.

The starting point in the simplified image is that all human activity builds on ecological systems that have their own limits and properties. Human societies take in energy and materials and give out waste and emissions. Take and give too much, and the ecological systems discontinue to function in ways modern humanity is accustomed to. Society is built to provide humans with shelter, nutrition, mobility, culture, and so on. This is accomplished through production systems and end-use systems, which co-determine each other. On the whole, it is this societal metabolism that we urgently need to transform away from fossil fuels and other types of over- and mis-use.

Seeking to decarbonise while holding on to current levels and ways of end use is senseless for at least three reasons. First, the energy system and other related systems are easier and faster to decarbonise the smaller the throughput is. And this is not just philosophy. The decarbonisation process goes on by still using fossil fuels, because of the systems we have inherited. Especially in the early phases, the process is inevitably “dirty”. In the meanwhile, we are within only years of blowing up our existing carbon budget for staying below 1,5 or even 2 Celsius global warming. If we are serious about rapid decarbonisation, we must lower the volume of energy production wherever possible. This means simultaneously upgrading also end-use systems (concretely e.g. cities and transport infrastructure and services but also ways of life) to enable good life with less energy consumption.

Second, it is dangerous to take on decarbonisation as a singular challenge without acknowledging the broader ecological crisis we are facing. Biodiversity loss is also driven by climate change, but we cannot reverse it without reducing and qualitatively improving material resource use. The energy system itself uses plenty of materials, but energy is also used to modify, shape and distribute materials that are used for other purposes. And this is where all types of industrial production come into play, not just the ones directly related to energy production. It is the whole of societal metabolism that needs to be transformed in order to stop the destabilisation of ecological systems.

Third, international trade and supply chains are already stressed. From this perspective, it is quite clear that we do not want to extract and distribute minerals and other materials any more than is absolutely necessary. Holding on to current levels and ways of end-use while seeking to decarbonise holds precisely this risk – the new industrial policy not diminishing global inequalities and pressures for resource conflicts but exacerbating them.

All of the three points converge in the observation that qualitative change of the metabolism (its provisioning systems and the needs that are provided for) needs to accompany the quantitative decrease of its footprint.

The industrial policy discussion has from time to time touched upon the systems perspective. Typically, the reference point is electricity grids: how to make different elements of renewable power work together, and how to ensure that the investments are coordinated. That is an important theme, but as said, it is just part of the bigger picture. Even the technical properties of the grid might leak to the side of end-use systems, namely the flexibility in the necessary balancing of intermittent electricity production with its use can be answered either within production or usage or through a combination of them. One path to follow would be to make our social practices compatible with varying energy use (a small Finnish example would be to learn to heat the electric sauna when the wind blows; a more universal one would be to sync the charging of batteries based on electricity production patterns). How utopian that is, is contestable, and depends on established cultural traits, among other things.

Practical issues

To further clarify and concretise the scope of industrial policy in relation to a sustainability transition, let’s take two prominent examples: EVs and hydrogen. In both cases, solely from a production capacity perspective, it might make sense to proceed at full speed, but in terms of urgently transforming societal metabolism, there are considerable threats.

It may be in the interests of car makers to sell and produce as many electric cars as possible, but from a sustainability standpoint, it does not make sense. Rather, the goal should be to enable sufficient mobility efficiently. The solution that stands out from the research literature is to transform systems of mobility so that walking and cycling is prioritised, electrified public transportation comes second, and a mix of shared and privately owned electric cars make up the rest. An industrial policy focused solely on ramping up zero-carbon production systems will miss the mark.

Green hydrogen is another ride that should be closely examined before jumping on it. It refers to the generation of hydrogen through electrolysis of water, using renewable zero-carbon power. From an efficiency point of view, replacing fossil fuel -based raw materials seems plausible, for example in steel-making or agriculture. But because of great energy losses in the production process and other issues, such as explosiveness and difficulty of distribution, it is unlikely that green hydrogen would take a very broad role for instance in transport systems. In the meanwhile, large infrastructure projects are being developed in Europe that are not just for green hydrogen but also allow carrying natural gas. The risk is that building “green hydrogen compatible” capacity actually prolongs fossil fuel use.

Both examples have direct geopolitical implications. If we again consider Europe, green hydrogen is something that might become more “European” than fossil fuels ever could (save for Norway). That seems to be part of its appeal. The response to the energy crisis which hit Europe after Russia’s 2022 attack on Ukraine was in major part based on LNG, liquified natural gas. New LNG ports were built, and Europe sought to secure LNG deliveries from all other places than Russia. That trajectory was not very satisfactory either in terms of climate emissions or the goal to reduce dependence on non-democratic countries. There seems to be a hope that only if we could switch natural gas to green hydrogen, all would be alright. Materially speaking, the hope seems to be highly inflated. Green hydrogen will likely be produced for certain usages – but for many other types of usage, electrification is a far better candidate.

But electrification has its limits and complications, too. Europe imports a majority of the materials for batteries and solar PV generation. There is a wish to become more self-sufficient in minerals, but new mines take ten plus years to open. And when a new super-sized battery factory was recently opened in France, the machinery came from China for the most part. Reducing the size of the car fleet in Europe that needs to be electrified reduces the strain on nature and people everywhere.

Science-driven planning

The previous examples and the concept of societal metabolism lead us to recognise that the premises for a new industrial policy are more complex than the recent international discussion has so far suggested. Before it is meaningful to start thinking about how industrial policy can accelerate economic processes, we need to answer the question of what these processes should be qualitatively, what they aim to achieve (materially), and on what scale and under what conditions they are possible.

In the light of the above, we see multiple needs for planning, which has received increasing attention both in academia^[2] and in politics in recent years. In our research (so far only in Finnish, articles in English forthcoming), we have looked at planning historically and explored what planning could be today, particularly in the context of a rapid sustainability transition. There are also illuminating pieces for non-academic audiences by Max Krahé, Yakov Feygin & Nils Gilman and Louis de Catheu & Ruggero Gambacurta-Scopello (in French).

We see two important roles for planning: first, it should indicate what are realistic and desirable future industrial paths, and second, it should provide a credible basis for critically evaluating whether policy and industry are going in the right (ecologically sustainable) direction and with enough speed.

Indicative planning needs to have an eye on both production and end-use systems and their interconnections – for example, in terms of their aims and temporal sequencing. Industrial policy must also have the best possible understanding, or situational awareness, on questions like what are the likely technological trajectories, what is the availability of sustainably sourced key materials, and what needs to happen on the whole-system level for individual elements of the system to proceed – and vice versa. This requires putting together information from multiple knowledge areas that typically remain isolated, such as natural systems, material resources, technologies, international trade, and social practices. To service decision-making, the planning also needs to balance between different rationalities, such as ecological resilience, economic competitiveness, geopolitical security, and human welfare.

Balancing between the sometimes conflicting rationalities calls for planning that is science-driven – referring above all to rising above individual interests but also to other scientific virtues such as transparency in data and methods. Planning should be science-driven also because of even a broader issue: it must form a legitimate and credible knowledge platform for public and private actors to anticipate and coordinate future changes in the economy. In this way, science-driven planning would enable three-way critical scientific and public evaluation: evaluation of the planning itself, of industrial policy-making, and of business decision-making.

One thing must be added: the planning, as a continuous process, is not just about the planners hired for the job, and the knowledge in their minds, rather it is about the way in which they can draw in information and understanding from multiple sources. The planning must form a respectful relationship not only to the scientific academic community but other knowledgeable communities as well, in businesses, technical consultancies, NGOs and elsewhere.

We believe that this is actually possible, even in today’s complex world. As we are yet unable to assess the lasting effects of the ecological planning put forward by Emmanuel Macron – and to our knowledge there are no better official attempts at indicative planning in Western contexts – our trust is based on our own work since 2015. The objective of our research unit has been to analyse the effects of environmental and resource pressures on Finland and to develop the anticipatory skills of decision-makers and citizens. One of our results is the plan of “Ecological Reconstruction” for Finland we published in 2019. In itself, the plan is not enough to form the basis for Finnish industrial policy, but by having gone through the process, we feel that we can grasp what kind of task it would be.

In the context of Finland, we have proposed the setting up of a new science-driven planning unit under the Prime Minister’s Office. As a high-profile unit, with transparent working methods and regular external communication, it would nationally become the central knowledge platform on the basis of which public and private actors could assess the realistic and desirable future paths of key production and consumption systems.

At the end of 2023, we organised a two-day pilot session that imagined and worked toward the processes of the would-be planning unit. We had some of the best experts in Finland taking part, and the results were promising. With a focus on the intertwined paths of clean electricity and forest, we achieved situational awareness that differs significantly from the recent public and political understanding in Finland and urges key actors to coordinate their actions under concentrated innovation and industrial policy. What became clear is that well-designed science-driven planning can achieve a solid critical assessment of existing industrial visions already in a short time-frame, but feeding into active innovation and industrial policy requires continuous adaptive planning in a dedicated unit.

Another study of ours took a look at existing plans, namely the low-carbon sectoral roadmaps in Finland that were initiated by the Ministry of Economic Affairs and Employment and realised by the different industries themselves. Our main finding was that although the roadmaps were a useful exercise in many ways, they pointed to directions that were ultimately dead-ends. The largest sectors all relied on greatly increased biomass use, and taken together, there is not nearly as much biomass available from sustainable sources. The roadmaps also remained sectorally isolated: the interconnections between the sectors were not considered.

Let’s go

The new industrial policy is very welcome for the potential capacity it gives to the state to transform the economy to collectively desired directions. Of course, industrial policy as a practice is ridden with contradictory goals and takes. There is a very real struggle to align geopolitical security with ecological sustainability interests, among others.

The practical policy innovations, especially in the US but to some extent also in Europe, have generated insightful discussions on the instruments and mechanisms of industrial policy. We have argued that there is a need for science-driven planning already before we can meaningfully choose the policy instruments. Achieving a deep sustainability transition requires getting many things right at the same time. Some of the things require well-targeted policies, others are adequately boosted through more broad-based support. Some things need discipline, others need cultivation. Private business is good at certain things, public organisations at others.

Planning is and is not something new. Scientific planning has a long history: its possibilities were intensively debated between and after the World Wars and some fruits of these debates materialised to planning that backed the success of post-war welfare states. But planning is new in the sense that after a few neoliberal decades we need to re-institutionalise it – in ways that work today –  as a strong part of the innovation and industrial policy system.  The test for ecological planning in France and potential attempts elsewhere is whether they produce meaningful shared understanding for the relevant actors, and whether the plans can be linked to the urgent but forward-looking industrial policy struggles.

Planning also exists everywhere already. Large international corporations are basically centrally planned economies. The EU is a large planning organisation for European single market rules. To complement the economic-technical planning of market rules, the new industrial policy demands substantive or qualitative planning, with a constantly updated outlook on industrial pathways that fit within ecological boundaries.

We are confident that industrial policy can become an important ally and a tool for a rapid sustainability transition. To succeed, industrial policy must be purposefully aligned with the best possible information and understanding, openly developed, on what it takes to transform particular economies with particular conditions.

Paavo Järvensivu, Tero Toivanen, Jussi Ahokas (BIOS Research Unit)

^[1] Eckersley, Robyn. The green state: rethinking democracy and sovereignty. mit Press, 2004.

^[2] For a recent overview, see Durand, Cédric, Elena Hofferberth, and Matthias Schmelzer. “Planning beyond growth: The case for economic democracy within ecological limits.” Journal of Cleaner Production (2023): 140351.

Text by Paavo Järvensivu and Jussi Ahokas, researchers at BIOS Research Unit, based in Helsinki, Finland. Both participated in the Beyond Growth 2023 conference at the European Parliament, Brussels, May 15–17. Järvensivu took part in the panel discussion on industrial policy chaired by Green MEP Ville Niinistö.

Beyond Growth 2023 Conference: Opening Plenary – (c) European Commission

During the high-level, three-day Beyond Growth 2023 conference at the European Parliament, leading scholars frequently emphasised that a sustainability transformation in Europe is (also) a massive investment project. To reconstruct basic socio-technical systems, such as energy, mobility, food, and cities, a lot of well-targeted economic activity needs to take place. Despite this sentiment, there was remarkable uneasiness around industrial policy – arguably an essential dimension of the broad ecological reconstruction of Europe. From a degrowth/post-growth perspective, it is easy to see industrial policy as a means for the government to boost economic growth and competitiveness at home, at the expense of the rest of the world. And from a more conservative position, industrial policy easily looks like an unwarranted deviation from rules-based free-market policy. In this text, we elaborate on an industrial policy that aligns with the goals of a rapid sustainability transformation. We also examine its tensions with the recent developments in the EU.

***

Industrial policy is the co-development of industry and other sectors under the guidance of public authorities. The government that pursues industrial policy sets the direction for industrial renewal and ensures that the necessary actors can find each other, that sufficient knowledge and skills are available, that the infrastructure and resources are in place and that the financial conditions are favourable. Where necessary, the government will also provide employment and investment itself. Historically, industrial policy was at its strongest during the few decades after WWII. This was a period of reconstruction and rapid industrialisation, which also created the institutions and other basic conditions for the welfare state.

One could say that industrial policy in the European Union has been actively rejected since the 1980s. The EU focused on creating rules for a competitive market. Important tools were competition law and restrictions on state aid. The active intervention of the state in the market – once markets and their rules had been created by the state – was significantly reduced. This was in line with broader global policy trends.

However, in the 2010s, and increasingly in the very recent years, the European Union has taken giant strides towards a new industrial policy (for details, we recommend Di Carlo & Schmitz 2023). The background to this is above all the concern that Europe is being squeezed in a geopolitical struggle. China has taken over production chains and in many areas has also overtaken Europe in terms of technological know-how, the United States is supporting its own industry with massive aid packages, and Russia is violently breaking up old geopolitical configurations and relations. The EU has woken up to a reality in which it feels the need to strongly boost its industrial capacities.

Under the European Commission led by Ursula von der Leyen, industrial policy is being tied to the ‘digital-green’ objectives of the European Green Deal. Despite its shortcomings, the Green Deal has clearly been the overarching policy that has steered Europe consistently towards climate and environmental goals. In Finland, too, political and industrial actors have been surprised by its strictness: we have not been able to succumb to the old, somewhat delusional idea that our industry is always greener than elsewhere, so the requirements of the EU’s transformation policies will not affect us that much.

No treaties in the EU have been reopened and re-signed. The IPCEI (important project of common European interest) legislation, which has been dormant for a long time, has been raised as an enabler of industrial policy. It allows countries to be flexible on competition and state aid rules, as long as the economic activity at hand can be seen to contribute to the common European interest. The same approach has been followed in relation to the EU’s economic policy rules, which have been interpreted creatively, especially during the COVID-19 pandemic and after Russia’s full-scale attack to Ukraine, but also already in the 2010s after the global financial crisis, for example, in the area of monetary policy.

***

Today, industrial policy needs to be thought of and crafted in particular in relation to the sustainability crisis. The global consensus view in the natural sciences is that there has been dangerously little progress towards sustainability in the world’s major economies. This is also the case in Europe: climate emissions must be reduced radically faster than has been possible so far, carbon sinks must be increased, biodiversity must be safeguarded and resource use must be renewed and reduced to sustainable levels. Otherwise, the conditions for human life on our planet will deteriorate and become highly unstable.

Hence the great controversy experienced at the Beyond Growth conference: natural science shouting ‘do all you can’ and political realism resignedly stating that ‘unfortunately, this is all we can do’. The European Green Deal, for all its merits, has not been able to change this situation in any meaningful way. So, at the conference, researchers from various disciplines and representatives of many organisations took the stage to challenge this political realism.

What do the scholars calling for a rapid sustainability transformation offer as a way forward? Above all, they emphasise the need to reconstruct the socio-technical systems (energy, transport, food, cities) that sustain people’s daily lives. A phrase frequently heard at the conference in this context was efficiency & sufficiency.

Efficiency refers to the use of less energy and materials to perform the same task. Electric cars, for example, are significantly more energy efficient than cars with internal combustion engines. Sufficiency, on the other hand, refers to the fact that people have and will have in the future the means to adequately meet the needs that are essential for a good life. The sufficiency perspective addresses both the question of “how much is enough” and “how this enoughness can be made available to all”. Combining the perspectives of efficiency and sufficiency leads to a reflection on what is adequate mobility and how to achieve it effectively. In other words: what kind of a transport system allows good and sufficient mobility without placing too much strain on the environment? To which we would like to add: how to build such a system from where we are now, with existing structures in place?

We see industrial policy as an essential part of such a reform of socio-technical systems. First of all, the reconstruction is clearly an industrial activity: the building of biking lanes, electric public transport, the electrification of the remaining private transport, digital services and the related equipment, and the production and use chains that underpin all this. Secondly, the modernisation of systems requires a huge amount of research, education, innovation and investment (to be sure, degrowth researchers at the conference also stressed on several occasions precisely this kind of ‘massive investment’ in efficiency and sufficiency). Thirdly, energy- and material-intensive economic activities that do not contribute to purposeful system reconstruction must be abandoned. There are two reasons for this: to reduce the total amount of activity that must undergo transformation to be sustainable, and to redirect the resources devoted to it, including workforce, to the necessary reconstruction work.

The role of industrial policy is to direct, coordinate and accelerate this extensive and complex process. For businesses and workers, industrial policy reduces uncertainty: the ability to see realistic paths for the future, the courage to innovate and invest, the courage to get (re)educated, the courage to take on jobs that build a sustainable future. Industrial policy will make the business and work required to modernise socio-technical systems understandable and economically viable – now, not in the distant future.

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The rapidly evolving European industrial policy faces major questions: How can we ensure that it really supports the sustainability transformation? How can we ensure that it does not slip into traditional anything-goes growth policy, Western protectionism or sheer extractive colonialism? From the perspective of small EU member states like Finland, there is an additional question: how to ensure that European industrial policy treats member states fairly?

In the industrial policy panel discussion at the conference, the perspective chosen by BIOS was one of knowledge production. We will deal with it next, and return to issues of power afterwards.

At the outset, we wish to highlight one major difference between setting up competitive markets and doing industrial policy. The former is concerned exclusively with market rules, while the latter, in addition to market rules, envisages concrete paths for the future of industry. Take the hydrogen economy, for example, now that so much is being fussed about it. Industrial policy requires that the public authorities understand, and in a democracy the public to a sufficient extent also understands, the basic elements and choices of the hydrogen economy. Is hydrogen seen as playing a key role in the reconstruction of transport systems? Will Europe or individual member states invest in the processing of so-called green hydrogen into fertilisers and other important raw materials, or will it aim to produce, distribute and use hydrogen as such on a very large scale?

We argue that in order to answer questions like these in a meaningful way, a “situation room” dedicated to the knowledge-needs of the industrial sustainability transition is needed. We call the process science-driven planning. It brings together typically disparate areas of knowledge, such as ecological boundary conditions, available material resources, infrastructure, social practices, technological trajectories, geopolitics and developments in international trade. It also balances different rationalities such as ecological resilience, economic competitiveness, geopolitical security and human well-being. Moreover, as industrial policy aims to (re)construct the conditions for “good enough” and sustainable living, like described above, the human, social and cultural dimensions are highlighted: issues such as sufficiency and the good life cannot be framed solely in technical terms. On the basis of all this, science-driven planning outlines realistic and attractive future paths that lead to a rapid and deep sustainability transformation.

Science-driven planning, thus, builds an overall picture of the required changes in socio-technical systems. It outlines the content of industrial policy that is in line with the sustainability transformation and treats the different actors fairly within and outside the EU. Planning is needed, but the best available information does not yet ensure that it is used properly. It must be insisted that the EU and its member states commit to the best multidisciplinary scientific knowledge when designing and implementing industrial policy. In practice, this kind of pressure comes from  the civil society. The obvious counterforce then is the established industries, demanding that no major changes should be made in the production of food, energy, chemicals, cars or, say, pulp, or at least not too quickly. Luckily, there are also a lot of industries and industrial actors that challenge the old fossil-fuelled regimes and systems.

The second major political counterforce arises from nationalism. The nationalistic reassurance is that as long as we do well, others do not matter so much. Of course, this makes no sense, even from a strictly instrumental point of view: in an era of climate and environmental disasters, no walls can hold back. Climate change and erosion of biodiversity must be prevented everywhere, and the most effective way to do this is through good cooperation, sharing material resources and knowledge fairly. At a time of intensifying geopolitical disturbances, the realistic conclusion for Europe is to build and maintain good partnerships wherever possible, with a particular focus on the Global South.

European and national industrial policies must go hand in hand. Here, too, science-driven planning has an important role to play. A realistic look must be taken at what are the sensible industrial development paths and what their roles are in different parts of Europe. This is influenced by geographical characteristics, natural resources, inherited industrial structures, etc. Science-driven planning helps to ensure that European industrial policy is not just a continuation of old industrial configurations, historically formed with and for fossil fuels.

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Monetary and fiscal policy rules determine the conditions for a sustainability transformation in the EU and its member states. Many smaller states have been concerned, quite rightly, that the big countries, especially Germany and France, can support their domestic industries on a completely different scale. In other words, smaller countries expect their industries to suffer if the rules regarding competition and state aid are relaxed in the name of industrial policy. The European Commission has proposed a sovereignty fund, a kind of common EU fund, as one way of balancing the conditions for public funding of industrial development among EU countries. The details of the proposal (for example, where the money will come from, and how it will be spent) are not clear, and so far the proposal has failed to convince the long-standing opposition of many member states.

However, now that Germany is also behind it, it is very likely that the EU’s more active industrial policy will move forward at a rapid pace. To be successful, European industrial policy must, firstly, really contribute to the sustainability transformation – otherwise we are merely reacting to acute crises while forgetting the existential ones. Secondly, it must treat all EU member states fairly. Thirdly, it must find a globally just geopolitical stance  which accelerates the pace and widens the breadth of sustainability transformation. In practice, all this means pragmatic, multilateral and long-term negotiating capacity – backed by solid science-driven planning.

We can start by acknowledging the reality that despite the rhetoric and all the rules, industrial policy has been pursued in Europe all along, but from the 1980s to the present day it has been done indirectly and largely hidden from public scrutiny. Now that the ecological reconstruction of societies means deep, rapid and interconnected transitions in almost all economic sectors and industries, industrial policy needs to be brought into the democratic limelight. Industrial policy must be based on multidisciplinary scientific knowledge and subjected to constant scientific and public critique.

Dashboard for transition politics now online at dashboard.bios.fi

Finland is committed to radically lowering its climate emissions and to stop biodiversity loss during the following years. Success requires abandoning the use of fossil fuels and the overconsumption of other natural resources. To be able to simultaneously secure the conditions for good human life, the key systems related to energy, transport, housing and food need to be thoroughly reconstructed. This massive task requires planning and systematic execution. It also determines the future of employment and industrial development.

The growth of gross domestic product, the level of public debt or the general rate of employment have very little to say about progress in the task. Nevertheless, they are the indicators that direct the government’s work and set the agenda for a major part of the public debate. At the same time, Finland risks missing the opportunity to make good use of the shock caused by the corona pandemic: instead of redirecting the economy toward a sustainable path, the aim seems to be to revive the economy back to its pre-corona state. The government does not have functioning indicators for a qualitative change of the economy.

To fill this gap, BIOS Research Unit has built a dashboard for transition politics. The dashboard consists of five indicators through which the government, journalists and citizens can follow the progress of ecological reconstruction in Finland. The indicators are carbon balance, total material requirement, fiscal sustainability, societal resilience and transition employment.

Carbon balance and total material requirement offer goals on the national level for emissions and natural resource use within a specific timeframe. Fiscal sustainability indicates the fiscal capacity of the state to finance public spending and investment during the reconstruction and afterwards – and does so without tying fiscal sustainability to economic growth. Societal resilience uses the traffic light metaphor to indicate if citizens feel that they are in the same boat during reconstruction; when green, participation is good, when yellow, there is reason to worry, and a red light means that societal resilience is breaking. Transition employment gathers information on how well employment in different sectors corresponds to the work that is needed for ecological reconstruction.

To check out the dashboard, please visit https://dashboard.bios.fi