What matters in global climate protection

Written for session 1 – Towards a new economy of scarcity ?

Climate protection, as is too often forgotten, is a global challenge. Only with a worldwide effort can emissions be reduced quickly enough. However, the starting positions and interests of different countries and regions worldwide, their opportunities and risks, are highly unevenly distributed in this process. 

The vulnerability of countries to climate change is likely to be greatest near the equator, where temperatures are already high. In industrialized countries, the physical risks will also increase, but for the most part the focus is on challenges such as the profound change in production structures and the loss of business areas. The transformation of complex and often international value chains often requires coordination of multiple stakeholders and is not trivial. The result: uncertainty delays necessary investments.

At the same time, in developed economies there can occur an abrupt depreciation of assets if economic activities are no longer in line with national climate goals. Furthermore, the increase in extreme weather events, for example, lowers the profitability of insurance companies – this also results in risks for financial market stability. Nevertheless, the financial markets must play a central role in financing the ecological transformation. It is therefore necessary to address the risks and at the same time strengthen the possibilities for financing the transformation.

With regard to the challenges ahead, countries with access to hydropower, such as Switzerland and Norway, or those with a high potential for renewable energies, such as Australia or the Gulf states, are in a much better starting position than countries such as Poland, China and India, where a large part of the energy supply is based on coal – or Nigeria and Angola, which rely on exports of oil and gas.

Many countries with extensive deposits of oil and gas are highly economically dependent on their production and export. Other economic sectors often have a comparatively low share of value added. The so-called resource rents of these producing countries are extremely varied. They depend above all on the geologically determined extraction costs compared to market prices. Countries with large oil reserves and low extraction costs, such as the Gulf States, achieve high resource rents in relation to their gross domestic product.

Increasingly, however, Saudi Arabia and the United Arab Emirates, for example, are trying to diversify their economies. They are deepening their value chains, relying on high-tech and investing in renewable energies and the production of hydrogen.

At the same time, climate protection goals are becoming increasingly important globally and the opportunities for decarbonisation are thus more and more prioritized. Following the agreement on a global climate target in Paris in 2015, many major emitters have set themselves climate neutrality targets in recent years – the European Union, the US, Canada, Japan and South Korea by 2050, China and Saudi Arabia by 2060.

The concrete climate targets of major industrialised countries result in an enormous demand for technologies that can be used worldwide to generate climate-neutral energy and to do business in a climate-friendly way. Companies in the industrialised countries are now certain that they can no longer earn money in the long term on the basis of climate-damaging technologies. That is why they are calling for an ambitious climate policy – and a reduction of regulatory uncertainty in the national and global environment.

The need for action and the opportunities are manifold and, in turn, unequally distributed. Countries specialising in climate-friendly technologies can open up new opportunities for value creation. Germany, Scandinavia, the USA and Canada, for example, have a high potential for clean tech start-ups.  Germany compares favourably with other countries when it comes to environment-related patents. However, China and Japan already dominate the production of electric vehicles, battery cells, photovoltaic systems and electrolysers. It will be crucial for the future competitive position of these countries to quickly create more innovation-friendly political framework conditions. The US has taken a big step forward here with the Inflation Reduction Act.

Further opportunities will arise in the course of the conversion of global energy trade to climate-friendly energy sources. Countries with good conditions for generating green energy on the basis of wind, photovoltaics, hydropower or geothermal energy can tap new value-added potential through energy exports – this applies, for example, to Chile, African countries, but also Saudi Arabia, Australia and the United Arab Emirates.

Other states, including Germany, can thus better diversify their energy imports by contracting with multiple suppliers worldwide. The advantages of such diversification are obvious, at the latest since the recent energy crisis and the discussions about dependence on Russian gas. Bilateral partnerships of Germany with countries such as Japan, Chile, Morocco and Australia already aim at cooperation in hydrogen technologies or imports. The industry is ready to contribute to the development of these value chains and thus position itself in future markets. The H2Global initiative funded by the Germany Ministry of Economic Affairs and Climate Protection (but open to outside funding bodies as well), for example, is well suited to bringing hydrogen suppliers and consumers together.

But it must also be clear: In order to save the world’s climate, we must also build a bridge for those countries that cannot or do not want to develop a willingness to transform. Be it because the power elites derive their prosperity from fossil resource rents or because the financial strength for an ecological transformation is simply not available in developing and emerging countries.

There is no question that bi- and plurilateral cooperation will play an important role in the coming years, if only because of the diversity and variety of interests of individual states. If smaller groups of states realise synergy effects, for example in the development of energy trade relations or through the founding of a climate club, this should always contribute to international climate policy and its financing. It is precisely in the field of international climate cooperation that Europe can play an important role in the future. Even in a climate-neutral world, the continent will be dependent on energy imports and can turn the need for cooperation into a strength.

It will be important for national governments and the EU to create international framework conditions that make it attractive for companies to build new value chains – for example, through investment protection agreements and progress on trade agreements. These options were widely discussed by the German Council of Economic Experts in its Annual Report 2022.

Veronika Grimm is professor of economics at FAU Erlangen-Nürnberg and member of the German Council of Economic Experts