Beware the risks of secular decarbonization

Associated Press/Rick Bowmer
The Utah State Capitol is shown behind an oil refinery on May 12, 2022, in Salt Lake City. A growing number of Republican-led states with economies that rely heavily on fossil fuels are pushing back against shifts in the financial industry to consider new factors such as environmental risk in their investment decisions.

For many, integrating “decarbonization” into public policy, corporate and financial strategies has become a requirement, not an option — yet, what happens when the critical link between climate stability and decarbonization breaks?

A recent report from the Intergovernmental Panel on Climate Change (IPCC) demonstrates that, to date, the speed of climate action is not fast or large enough to achieve the goal of keeping temperatures from rising above 1.5 degrees celsius. Hence, the original purpose of the Paris Agreement will not be achieved. 

The risk of entering an era of secular decarbonization — that is, the decoupling of decarbonization politics from the belief that they can stop climate change — increases dramatically. Policymakers, corporations and individuals might reevaluate their stances regarding decarbonization. Russia’s war in Ukraine is forcing many European policymakers to recognize the need for reliable and renewable energy sources to improve national security. Geopolitical factors will likely increase pressure on advanced economies, at least, to pursue low-carbon strategies.

Countries and regions that have invested significantly in renewable infrastructure will likely continue their decarbonization efforts, regardless of what the rest of the world does. Because of their economies of scale, these nations have proven that renewable energy, especially solar photovoltaic systems, can be cost competitive with carbon energy production. Existing paths toward decarbonization will be reinforced through network effects. These occur when advantages accrue to agents that adopt similar rules, such as green taxonomies. Green indexes such as the FTSE Russell Green Revenues have been outperforming their parent benchmarks over the past five years.

Moreover, countries that are strongly committed to decarbonization, notably in Europe, may intensify trade and financial interaction with like-minded nations, and they may oppose (perhaps with sanctions) countries that postpone or underinvest in decarbonization. An inflection point may be the European Union’s plan to introduce a carbon border adjustment mechanism (CBAM) covering cement, aluminum, fertilizer, electric energy production, iron and steel. 

Parallel, we can imagine a situation in which countries not yet invested heavily into renewables find it increasingly difficult to justify costly low-carbon adjustment. Recent data by the Climate Policy Initiative (CPI) showed that public and private fund flows for green infrastructure development tend to be biased heavily toward developed countries and Asia. For example, public funds for decarbonization measures predominantly flow from European countries to other European countries. 

In the absence of significant support from the developed world, elected leaders from developing countries may find it increasingly difficult to finance decarbonization. Because of the different competitive uses for infrastructure finance, more focus may be placed on climate adaptation than on decarbonization. 

Without clear national determination to decarbonize — notably, the lack of environmental laws and taxonomies, together with underdeveloped carbon accounting capacity regarding standards, estimates and taxonomies — corporations in these countries may find it more feasible to maintain their comparative advantage in polluting industries and export relatively more from polluting industries.

Consequently, we’re likely to see intensified economic interaction between countries with weak environmental regulation. We’re already seeing that most of the steel from Asia is traded with other Asian countries. China, the world’s biggest steel and iron exporter, exports 70 percent of its steel and iron to other Asian economies and less than 10 percent to Europe. The EU is the world’s biggest steel market. Germany alone ranks No. 2 — just behind the United States — in terms of steel and iron imports. More than 90 percent of Germany’s steel and iron imports are from other EU member countries. 

Secular decarbonization adds a layer of complexity to the geopolitical environment. It could blur the lines between existing geopolitical coalitions. Bifurcation into “green” and “brown” economic activities could lead to the emergence of green curtains in trade, energy, finance and industry. This relates directly to debates on uneven transition patterns between decarbonization leaders and laggards and on decarbonization divide.

These uncertainties point to the urgent need for a “Plan B,” one that ensures the continuation of coordinated global decarbonization efforts even in a post-1.5C world. Otherwise, secular decarbonization likely will move the prevention of climate change further into the distance.

Juergen Braunstein is a fellow at Harvard Kennedy School’s Belfer Center where he works on the Geopolitics of Energy Project. Follow him on Twitter @JuergenBraunst1.

Tags Climate change climate policy decarboinization green indexess

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