Old and new challenges<\/b><\/h3>\n
The political landscape has changed since the Paris agreement was signed in 2015.<\/span><\/p>\n Since the Paris Agreement, new political challenges have been added to the existing ones. Among the existing domestic challenges are the distributional effects of climate policy. In principle, a well-designed climate policy does not cause aggregate economic losses, but they do shift demand between sectors. This causes political resistance by the sectors which expect to lose demand. Another existing challenge is the voluntary nature of the Paris Agreement, which causes concerns about losing competitiveness through climate policy if other countries do not comply.<\/span><\/p>\n Among the new challenges are the economic effects of the COVID-19 pandemic. Government spending programs for households and sectors affected by the pandemic depleted government resources, so that the fiscal space left to finance the green transition is much lower than before. At the same time, inflation required central banks to increase interest rates. Higher interest rates in turn affect financing clean technology more than conventional technology, because clean technology typically has a more front-loaded investment profile.<\/span><\/p>\n Additional new challenges arise from the effect of Russia\u2019s invasion of Ukraine on energy supply. The abrupt decrease in energy trade from Russia to Europe caused concerns about energy security. The concern about energy security surged after the invasion and stayed high for over a year (Figure 1.) This resulted in increased investments in fossil fuel infrastructure (IEA 2023), particularly in Europe. The additional investment was targeted at the supply of oil and natural gas. At the same time, Russia channeled its supply of oil and natural gas to China and India at a discount, which increased the consumption of these fuels in these two countries.<\/span><\/p>\n A third group of challenges arises from increasing populism. Populism became a particular challenge for climate change, because of a narrative that climate policy was a project of the \u201celites\u201d, which stood against the will of \u201cthe people\u201d. As a result, it became more difficult to introduce carbon pricing. For instance, the \u201cyellow vest\u201d protests in France stopped an increase in gasoline taxes in 2018 and Ecuador had to retract a fossil fuel subsidy reform in 2019. Populist leaders eroded previous climate policy instead of advancing it. The US Inflation Reduction Act (IRA) achieved support in the US Congress partly through potentially protectionist measures, like local content rules. This reduces the opportunities for trade partners to benefit from the investment push and thus hinders international cooperation. The design of the IRA also poses a larger burden on government finances than a policy package based on carbon pricing would have done.<\/span><\/p>\n At the same time, climate policy was supported by a more positive development of technology than expected. This translated into lower prices for low-carbon technology. As a result, the share of investments allocated to low-carbon energy technology has passed the share going to high-carbon energy technology. This process is self-reinforcing through learning-by-doing. For example, it is estimated that for each doubling in cumulative production capacity in solar photovoltaics, prices decreased by 22.5 percent. The implications have surprised even experts. Until recently, World Energy Outlook reports by the International Energy Agency have projected solar energy production well below the level of what then materialized. The latest projections by the International Energy Agency now extend the very fast historical growth rates.<\/span><\/p>\n Figure 1 – World<\/strong><\/p>\n Figure 2 – Europe<\/strong><\/p>\n *Sources:<\/span> IEA (2023b), IMF staff calculations.<\/span><\/em><\/p>\n ** Note: Low-carbon = renewables, nuclear, fossil fuels with carbon capture and storage, and energy efficiency; Neutral = electricity networks and storage; High-carbon = fossil fuel generation and fuel production; 2023 numbers are IEA estimates from May 2023.<\/span><\/em><\/p>\n The current speed of the transition might be reaching the point of a second self-reinforcing mechanism: equilibrium switching if network externalities come to play. Until a few years ago, research, supply chains and human capital was fully locked into a fossil fuel equilibrium. For example, fueling a conventional car was extremely convenient due to a dense network of petrol stations. Now, electric vehicles and renewable energy generation have reached considerable market shares and continue strong growth rates (Figure 3). This means, low-carbon infrastructure is expanding, so that low-carbon technology becomes locked in. Already, the boom in low-carbon technology is affecting investments in oil and natural gas significantly. Market expectations are changing. Tellingly, even the energy crisis did not cause an increase in investments for fossil fuel-based powerplants. For automobile manufacturers, for example, it is more profitable to invest all research and development into one technology in order stay at the technology frontier. Once the decision is made to invest R&D budgets into electric vehicles, electric vehicles will gain a technology advantage.<\/span><\/p>\n Global EV car sales, 2010\u201322 percent of car sales volume<\/strong><\/p>\n *Source:<\/span> IEA, Global EV Outlook 2023.<\/span><\/em><\/p>\n ** Note: Electric cars include passenger light-duty battery EVs, plug-in hybrid EVs, and fuel cell EVs.<\/span><\/em><\/p>\n Share of global electricity generation by fuel, 1985\u20132022 percent<\/strong><\/p>\n *Source<\/span>: Energy Institute, Statistical Review of World Energy 2023<\/span>.<\/span><\/em><\/p>\n We identify two sets of conclusions to navigate the race between political backlash and technological progress. The first relates to further enabling low-carbon technology development. Reinforcing the ongoing shift to clean technology could involve restricting sales of high-pollution goods, taxation, or phasing out polluting technologies. The government also has an important role in directing basic research towards technologies, like green hydrogen and negative emission technology, that are currently still expensive, but are needed at a large scale by mid-century. In addition, the diffusion of technology to emerging markets and developing economies needs to be supported actively. Key for this are climate policies, both among innovating countries and recipients of technology transfers, as well as lower trade barriers.<\/span><\/p>\n The second set of conclusions relates to the design of climate policies. Surveys show that support for climate policy increases when they are effective, when social fairness is ensured and when the policies are communicated well. Climate policy also needs to be designed in a way that supports international cooperation. On this, the IRA is an interesting example. The protectionist features of the policy package are not cooperative and should not be imitated. At the same time, the package is expected to accelerate low-carbon technology deployment in the US and, as a result, boost clean technology innovation. The net effect on other countries is thus likely positive. It is thus not necessary to counter its effect with more protectionism.<\/span><\/p>\n *Pierre-Olivier Gourinchas, Gregor Schwerhoff, and Antonio Spilimbergo*<\/span><\/p>\n **The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":" Since the historic Paris Agreement in 2015, new obstacles have arisen on the path of climate policies: from populism to concerns about energy security, all […]<\/p>\n","protected":false},"author":5731,"featured_media":903,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"coauthors":[66],"class_list":["post-858","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-non-categorizzato"],"acf":[],"yoast_head":"\nPopulism and climate<\/b><\/h3>\n
The technology boom<\/b><\/h3>\n
Global energy investment, 2010\u201323 (2021 billion USD)<\/b><\/h3>\n
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<\/p>\nOvercoming obstacles<\/b><\/h3>\n