WORKING PAPER 24-5 Powering the clean energy innovation system Reinhilde Veugelers March 2024 ABSTRACT 20 w 30 w 6 w 0双 .2 03 碳 06 文 0. 库 vi p This paper focuses on the innovation angle in green industrial policy design. The innovation system, delivering new and improved technology solutions for the clean energy transition, can be the cornerstone of a successful transition that reconciles decarbonization, competitive value creation and jobs, and strategic autonomy on a global scale. This, however, requires the innovation system to be properly directed. This paper first lays out the principles of a policy design that properly steers the innovation system. It then documents the current performance on clean energy innovations and clean energy policymaking globally, with focus on the Inflation Reduction Act (IRA) and the Net-Zero Industry Act (NZIA) trends in clean tech policymaking in the United States and European Union, respectively. The evidence shows that the innovation system is not at full potential, and there is still ample room to improve the current clean energy policymaking and international policy coordination. JEL codes: O31, O38, Q55 Keywords: climate change, clean tech, innovation, green innovation policy, strategic autonomy Note: This paper was prepared for a conference on Macroeconomic Implications of Climate Action on June 5-6, 2023, at the Peterson Institute for International Economics (PIIE). 1750 Massachusetts Avenue, NW | Washington, DC 20036-1903 USA | +1.202.328.9000 | www.piie.com Reinhilde Veugelers, nonresident senior fellow at the Peterson Institute for International Economics, is a full professor in the department of management, strategy and innovation at KU Leuven in Belgium. She is also a senior fellow at Bruegel. 2  WP 24-5 | MARCH 2024 INTRODUCTION 20 w 30 w 6 w 0双 .2 03 碳 06 文 0. 库 vi p Shifting economies from fossil fuel–based to green energy represents one of the most significant socioeconomic transformations in history. The green transformation brings socioeconomic opportunities and challenges. While phasing out fossil fuel–based products, activities, and jobs, new green products, activities, and jobs are being created. Clean energy is key to fostering a deep decarbonization process. The International Energy Agency (IEA) estimates that if countries worldwide fully implement their announced energy and climate 2030 pledges, the global market for key mass-manufactured clean energy technologies will have tripled in size. Clean energy manufacturing jobs would more than double from 6 million today to nearly 14 million by 2030 (IEA 2023a). Recognizing the opportunities and challenges of the transition from dirty to clean energy, all major economies have ventured into clean energy industrial policy and are competing for their share of the global economic opportunities from clean energy, reconciling their decarbonization and socioeconomic transformation objectives.1 The COVID-19 outbreak dramatically exposed economies to their vulnerabilities, introducing a call for policies ensuring the resilience and security of supply of inputs considered strategic. The war in Ukraine and the “weaponization” of Russian gas and Chinese minerals exacerbated concerns about supply security, particularly for energy, especially in Europe.2 All major economies are now combining their climate and clean energy industrial policies with efforts to ensure the security of energy supply and strategic autonomy in clean energy value chains. In the absence of global policy coordination, this sets in motion a train of mutually reinforcing reactive pressures to further the strategic autonomy angle in countries’ clean energy industrial policies.3 Countries are still figuring out how to reconcile the multidimensional objectives of a green industrial policy, particularly when these dimensions counteract each other. What are the best ways to combine decarbonization with economic growth, jobs, and world competitiveness, and all this with resilience and security of supply? What is the socioeconomically best way to achieve decarbonization and resilience? How and how far to go in moving toward supply resilience and security , and what are the costs in moving away from decarbonization and economic efficiency? How far to move away from a horizontal policy approach shaping framework conditions to ensure open 1 For example, in March 2020 the newly established European Commission under Ursula von der Leyen, with climate goa