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The economics of climate change: a joint agenda between US and Europe

Digital format, 07/04/2021, Aspen Transatlantic Dialogue

Policies for waging the battle against climate change and for and managing the phenomenon are central to both the post-pandemic economic recovery and to transatlantic relations at this new stage of opportunity for Euro-American cooperation. The slogan adopted by Joe Biden’s 2020 electoral campaign – “Build Back Better” – can be considered overall a highly appropriate approach to the international circumstances that distinguish 2021. These include relaunching the 2015 Paris Accords and as well as a general convergence with private sector investments and with consumer preferences for sustainability.

The following main points emerged from the discussion:

  • All plans to counter climate change must take into account the data on the state of the atmosphere. Feasible policies should be understood as intended to mitigate a problem that has been building for many decades. Since only a gradual reduction in emissions is conceivable, the challenge is a medium to long-term one. That challenge must, however, be undertaken immediately, in the form of farsighted policies and investments. This has highly complex economic, political and regulatory implications when it comes to reconciling costs and benefits.
  • In the coming years, a growing world population with significant prospects for economic expansion is going to have to be ensured access to energy sources. This poses enormous issues in terms of energy distribution. This is especially true of the African and, in part, Asian continents, where the importance of such access – not least in terms of environmental sustainability – is entirely evident and must not be overlooked in global planning. Another important geopolitical question concerns key “green technology” materials, such as those rare earth minerals found in only a few areas of the planet and the risk of the kind of fierce competition that such scarcity generates.
  • As is evident in various national plans, including Italy’s, the necessary interventions are vast in scale and highly diversified, ranging from electrification to energy savings programs to the more efficient use of hydro-geological resources and infrastructure upgrades. Moreover, they involve efforts that must be political and regulatory, cultural at the level of citizen behavior and economic as regards the role of industry.
  • From the American perspective, the three policy priorities announced by the Biden administration are all tied to some extent to the green agenda: ending the epidemic and facilitating economic recovery; launching a major infrastructure campaign linked to the “build back better” mantra; and confronting climate change head-on with “humility and ambition” in the knowledge that the decade leading up to 2030 is going to be decisive to inverting the current trend. The president’s special envoy for climate John Kerry’s first steps have been aimed at mobilizing the cooperation of European and Asian partners, as well as those of the Gulf countries and China itself, despite the well-known difficulties in relations with Beijing.
  • Widening observation to encompass more general economic policy, the picture emerging from Washington is more encouraging than in the recent past, to wit the recent proposal advanced by Secretary of the Treasury Janet Yellen, and espoused by President Biden, to establish a shared international standard on the taxation of large-scale industry (minimum corporate tax). Indeed, it is clear that green transitioning calls for massive investments, which therefore implies government funding and a fiscal framework geared to offering the right incentives.
  • As for Europe, Brussels is working toward carbon neutrality by 2050 and has set 2030 as the first intermediate objective. Work is also underway on investments, both within the context of the Next Generation EU package as well as through ad hoc instruments. Assessment is being made of various other proposals, such as the Carbon Border Adjustment Mechanism, which will certainly be discussed jointly with the EU’s major international partners. The main challenge will be to move forward swiftly while at the same time garnering the broadest possible global consensus – something that will obviously require a healthy dose of diplomatic creativity given the reticence of some large emerging economies such as India and China.
  • Both the United States and Europe recognize that, given its aggregate weight, the G20 is a crucial forum for achieving progress in international coordination. Agile multilateral formats such the COP, the G20 and the G7 are important for making the best use of consensus on the urgency of goals. Such forums seek reasonable compromise on dividing up responsibilities, on their binding nature and on eventual mechanisms for compensating less advanced countries or sectors that could be penalized by some aspects of the transition.
  • In any case, the “China factor” remains central, given that Chinese emissions are higher than those of the U.S. and Europe combined. A framework agreement would facilitate China’s involvement in efforts already underway, taking into account the expectations of that country and other emerging economies that have witnessed the decades of growth that globalization has generated. China’s role however is a reminder that global production chains are partially structured to handle the environmental footprint of the most pollution-producing industries and often to the advantage of more advanced economies – decades of accumulated imbalances that today inevitably become a point of contention in negotiations over the green transition. 
  • Nevertheless, the private sector is generating some positive data and trends. Major projects are immediately feasible thanks to technologies already available. Financial resources are available, as is a pool of market buyers willing to pay slightly higher prices for sustainable products. And there is true global alignment (reflected in many government policies) on the shared priority of pursuing carbon neutrality, despite persisting differences over timeframes and transition cost distribution.
  • The combination of these factors will also make it possible to accelerate technological innovation, which will trigger a virtuous circle by gradually making investments more profitable. Nevertheless, nearly half of the technologies that are going to be needed to achieve neutrality are not yet available, which points to the crucial role of investment and continued research and development. In any case, the private sector is going to be absolutely essential to developing the technological mix necessary to make the sustainable transition from various renewable sources already in the advanced stages of adoption to carbon capture and storage and the development of hydrogen.