246initiative to combat climate change while achieving global industrial leadership in clean energies. According to the narrative, this would have turned emissions reduction from a cost into an investment and, ultimately, an economic benefit: Europe would spur growth, promote innovation, and create jobs while curbing its environmental footprint. In order to meet these goals, Europe’s environmental policy of setting emissions-reduction targets was accompanied by other targets concerning the penetration of renewables and energy efficiency. Did this deliver?

Data suggest that yes, it was a successful strategy to reduce emissions, but no, it was not an efficient one. In fact, by setting renewable and energy efficiency targets on top of the carbon reduction one, the European Union and member states redirected investments toward potentially less effective technologies and behavioral changes, increasing the implicit cost of CO2 abatement—or, to put it another way, cutting emissions less could have been done with an optimal mix of interventions. In other words, Europe gave up—at least to some extent—environmental goals and policy in order to pursue other goals in the field of industrial policy.

Even from this point of view, though, the results are disappointing. As shown regarding the most important RES-E, i.e., wind power and solar photovoltaics, generous subsidies have only partially prompted European industry. In the case of wind, Europe was able to effectively breed its champions. However, it should be The Failures of the Entrepreneurial State: Subsidies to Renewable Energies. . .

247noted that the industry was already there. Moreover, it is not clear that the economic benefits (in terms of investments, innovation, and employment) exceed the cost from energy subsidization, even factoring in the environmental benefit.

Moreover, as global markets for wind power grow thanks to subsidies from third countries and the increasing economic competitiveness of wind turbines, new actors emerge that may (and do) compete with European producers. The policy was much less effective in the case of solar PV: Europe is far from being a powerhouse for this technology. Most panels in the European Union are imported from China, despite trade duties in 2013–2018 and subsequently other trade measures that limit the ability of foreign producers to engage in price competition with their European counterparts. The European Union does not seem to have fully learned from this experience, in any case. The Commission has launched a “battery strategy” aimed at “mak[ing] Europe a global leader in sustainable battery production and use” (European Commission, 2021a). The strategy allocates massive amounts of money to support Europe’s battery manufacturers both in their R&D efforts and in increasing the volume of their production. While R&D subsidies may be seen as part of a broader strategy that falls outside the scope of this chapter, direct subsidies to the use or the production of batteries provide a good example of how the entrepreneurial state works and, in the light of previous experiences, how it can fail to reach its targets. And similar initiatives are seen in the fields of the circular economy (European Commission, 2021b), hydrogen (European Commission, 2021c), and other environment-related technologies. Even more so, in the relief package from the Covid-19 crisis, the so-called Next Generation E.U. program, the European Union has directed a large share of the €750 billion recovery fund to investments in the “energy transition,” whereby precise areas for investments have been identified top-down (including clean technologies and renewables; energy efficiency of buildings; sustainable transport, and charging stations) (Darvas et al., 2021). Of course, investing in green transformation is a legitimate and desirable goal of environmental policy. Climate change poses major threats to developed and developing countries alike, but developed countries have greater historical responsibility and more resources and know-how. However, promoting the ecological transition is not the same as designing the ecological transition. In the process, the European Union also started to put pressure on the European Central Bank which, contrary to what the Fed did, explicitly introduced climate change issues into its monetary policy strategies. This sets a dangerous path for the independence of central banks and for the financial stability and the proper functioning of markets in allocating capital. Climate change is a major threat that governments, not central banks, should address. Central banks should support research and the circulation of information about this threat and promote more precise definitions and taxonomies, thus helping investors have the information needed to choose on the market. Until a few years ago, subsidies to the installation of RES-E and/or the production of renewable power was able to support a growing niche in European industry. From the perspective of free markets, they may have been questionable, but, in practice, C. Amenta and C. Stagnaro

248they entailed a limited amount of money and did not affect capital allocation beyond a certain limit. A few years after, though, green subsidies represent perhaps the greatest example of industrial policy in Europe, with a committed expenditure of dozens of billions of euros over 15 or 20 years. Before more resources are committed to the same or other technologies, a serious assessment of the program’s outcomes is much needed. Environmental policy and climate change are serious issues. They require significant changes in the way energy is produced and consumed. Nearly everybody would agree that pricing carbon is both necessary and long overdue. However, the European Union has adopted a policy of pricing carbon and directly subsidizing specific technologies. By so doing, it is messing up competition in electricity and other markets, profoundly distorting the allocation of capital and labor, and possibly negatively impacting GDP growth. That is, again, a legitimate policy choice if it reflects social preferences. Nevertheless, more transparency of the costs of such a policy is needed, and a better understanding of market-based alternatives—such as pure carbon pricing—would greatly benefit the public debate and a sound decisionmaking process. In designing future climate and monetary policies, the European experience may provide helpful hints. We have reviewed the policy of subsidizing the production of green electricity, particularly from wind power and solar photovoltaics, and asked