Climate change has long turned from a narrow environmental problem into a significant factor affecting economic processes around the globe. Temperatures on the planet have risen by nearly 1°C compared to the pre-industrial era, and scientists have no doubts that this process will continue. This has already started to adversely affect people’s health in different countries, their access to water and food, and their exposure to natural disasters. Efforts to combat climate change by cutting greenhouse gas emissions serve as a main driver of the world economy’s green transformation. The power generation sector is gradually transitioning towards cleaner energy sources, industry and construction are increasingly embracing green standards, and green bonds are booming in the financial market.
The Iceberg of Green Transformation
The measures being taken to reduce greenhouse gas emissions can be compared to an iceberg. The smaller but most prominent part above the sea surface is the 2015 Paris Agreement, which has been ratified by 185 countries to date (Russia is expected to ratify it in 2019). The document calls for capping the rise in temperatures at no more than 2°C compared to the pre-industrial period, preferably at 1.5°C if at all possible. However, unlike the Kyoto Protocol that came before, the Paris Agreement does not impose obligations on all the signatory countries; rather, it merely determines the procedure for declaring so-called nationally determined contributions, which are each nation’s emission reduction plans. The countries develop their plans individually and voluntarily, based on their own development strategies for the economy and the energy sector. The contributions declared to date are fairly modest: they will only cap the rising temperatures at around 3°C above the pre-industrial era.
Just like the bulk of the iceberg is under water, the climate agenda is largely being implemented outside the UN negotiating processes. Global climate change governance is sometimes described as polycentric: not only are the thousands of national, subnational, regional, municipal and non-state actors implementing the global rules, but they are also offering and testing their own climate policy measures, learning from their own mistakes, sharing experiences and introducing bottom-up rules. They remain independent in their decisions while at the same time closely interacting with one another. National governments and regional administrations launch carbon emission trading schemes, businesses introduce internal carbon prices, and investment institutions increasingly join the fossil fuel divestment movement. Rather than being direct consequences of the Paris Agreement, these measures are necessitated by a range of technological, geopolitical, economic, and environmental factors. It is thanks to them that green the transformation of the world economy has become an irreversible process.
Pros and Cons
Not all the actors are equally prepared to embrace the climate agenda. Some are more eager to do so than others. Almost all the developed countries plus China are interested. They contribute the lion’s share of the world’s green investments, ensure the maximum growth of renewable sources in the energy balance, and develop carbon trading schemes. Businesses in these build their corporate strategies with the climate factor in mind. The enthusiasm of these national actors is explained not only by their climate change-related concerns, but also by the added benefits of switching to low-carbon economies (including the European Union reducing its dependence on fossil fuel imports or China fighting urban air pollution).
There are also climate sceptics. At the national level, these include leading developing countries (such as India, Brazil, South Africa, and Mexico), which are not fundamentally opposed to participating in the green transformation drive, but only for as long as they do not have to give up their key priorities of overcoming poverty (including energy poverty), economic growth and industrialization. Another group of sceptics comprises countries where green transformation is fraught with significant risks to their economic model, which is centred around extracting and exporting fossil fuels. These include Russia, Saudi Arabia and Iran.
In fact, the polycentric model implies that low-carbon development is not just the concern of national governments. In fact, national governments could be seen as taking the back seat here. At the national level, the green agenda enjoys the support of a broad range of political parties (which often represent a significant proportion of the middle class in developed countries), companies representing the green economy (for example, renewable energy) and innovative sectors, non-governmental environmentalist organizations, many banks and financial corporations, individual regional and municipal administrations, and universities and research centres. Many of these actors are driven by climate change concerns, while others are guided by commercial or political interests.
At the same time, each country has actors who stand to lose from green transformation and who thus oppose it. These include coal producers, oil- and gas- companies, corporations operating in traditionally carbon-intensive sectors, administrations of regions in which such businesses deploy their production facilities and create jobs, significant portions of people residing in these regions or countries, and the political forces representing them. The reason for these actors’ scepticism is quite simple: green transformation either destroys their businesses or runs counter to other priorities of their social or economic development.
Current Balance of Forces
The pace of green transformation will largely depend on how the balance of forces between these two groups of actors will change. The group of “enthusiasts” has expanded substantially in the past several decades and will continue to consolidate its positions as the effects of climate change worsen and the costs of introducing low-carbon technologies and disseminating green values decrease as incomes increase around the world.
It should be noted that the efforts of the “enthusiasts” are far from enough to keep temperatures at 2°C above the pre-industrial level. In fact, green transformation is facing increased risks as inequality in developed countries deepens. One example of this is the situation in the United States, where the election of Donald Trump as president slowed down the country’s low-carbon development, although did not throttle it altogether. Also illustrative of the trends are the yellow vest protests in France, which were prompted by a hike in fossil fuel taxes.
Yet green transformation continues. The polycentric model, in which the rules are set at the lower levels and promoted upwards, gives actors who are interested in cutting emissions numerous opportunities to transform their regulatory practices into international standards. For example, Western companies require their partners, including raw-material suppliers, to use green management practices (such as estimating the carbon footprint of products or disclosing information about emissions). Enthusiastic businesses initiate the introduction of industry standards by forming coalitions and promoting their “grassroots” initiatives all the way to the top. One example of this can be seen in the aviation sector, where an International Civil Aviation Organization-wide agreement has been reached on the introduction of an industry-wide emissions control system from 2021. Another example is the 2018 roadmap adopted by the International Maritime Organization. Its main goal is to cut emissions by 50 per cent compared to the 2008 level by the year 2050.
Companies operating in countries that enforce carbon trading schemes, particularly those businesses that introduce internal carbon prices, are worried that they may be losing to foreign competitors which, they believe, are engaged in climate dumping. Many of these businesses are requesting their national governments to introduce carbon duties against products originating in countries that do not practice carbon trading. The idea has recently been supported by certain politicians, including President of France Emmanuel Macron. If implemented, this innovation in the low-carbon agenda is set to change the landscape of global trade, just like it has changed the global energy sector over the past decade.
The green transformation of the world economy is irreversible. It is not defined by the Paris Agreement, nor by whether Russia ratifies it, nor even by whether the United States chooses to withdraw from it altogether. The rules of green transformation are set from the bottom up, and the key part here is played by those actors who are most interested in cutting their emissions. Russian business, just like the Russian government, has virtually no involvement in drafting these rules. This can hardly be described as a wise approach, given that the Russian economy primarily specializes in fossil fuels and carbon-intensive industrial production, to which the consequences of green transformation are of critical significance. Many representatives of the Russian political elite and business circles remain sceptical about the very problem of climate change and continue to question its man-made nature. That this view contradicts scientific evidence is beside the point here – it is not a question of faith. Gone are the times when nations and businesses could largely neglect the issues of climate change, low-carbon development and green technologies. There is simply no going back.
First published in our partner RIAC