The political economy of tackling climate change

Over the past decade, climate change has moved from an abstract notion to having real impact.  Summers have become hotter and dryer in many parts of the world. The frequency of extreme weather events has increased, and the damage has grown. Over the same period, significant progress has been made too in terms of policy commitments, but implementation still lags well behind what is needed. 

Even for well-intentioned policy makers, implementing climate-friendly policies is not easy: the actions that are needed are fundamental, affecting our entire energy and transport systems, construction, and industrial and food production. Taking action can trigger resistance -- encouraging political competitors willing to promise an easier solution, and ultimately creating a risk of policy roll-back. 

In somewhat simplistic terms, climate change policy actions that really put countries on a path to net zero turn almost entire societies into (short-term) losers, while benefits accrue in the future. The most direct losers are concentrated in fossil fuel extraction and power generation. But a large majority of citizens - who are typically expected to benefit from reforms - will also initially lose. Citizens will face at least some higher costs and losses on existing assets such as cars, and may fear new ‘climate restrictions’. Moreover, politicians have to weigh the risk of hurting their countries’ economies and jobs, given global collective action challenges and as countries continuing to rely on dirty but cheap energy sources could reap substantial short-term competitive benefits.

Accordingly, the default approach for today’s political decision-makers is either to take limited action, or - where there is substantial electoral demand for climate friendly policies - to make policy commitments, but to postpone significant action to later governments (see Battaglini and Harstad 2016).

Taking these challenges seriously, how can we still hope to accelerate? One ground for optimism is technological and financial: as generating clean energy has become far cheaper in recent years, reaching the point of being cheaper than adding new dirty energy, the problem that too many stakeholders would face steeply rising costs has been reduced. For some firms in some countries, the potential benefits of gaining market share and attracting investors by ‘going green’ has increased significantly (Kennard 2020). Massive investments in green energy and switching to greener transport are set to generate new sources of income and jobs  – and these investments are being embraced with greater enthusiasm due to falling prices. 

However, the transition costs still remain large – from mothballing existing mines, fossil fuel exports, and coal fired power plants to replacing hundreds of millions of vehicles while wiping out re-sales – and the risk of political polarization over green policy action remains. Thus, governments need to pay attention not just to the transition as such, but also to generating buy-in in smart ways – and development partners need to consider these dynamics when seeking to support green transitions (see Worker and Palmer 2021). 

While starting points and opportunities vary greatly across countries, some potential solutions include the following: 

• First, there needs to be more prominent monitoring and reporting on emissions  -- for countries and specific industries, as well as enabling people to measure their personal CO2 emissions and facilitating access to alternative options to spur awareness and demand for action. 
• Second, governments can target the wealthy first. Imposing (significantly) higher taxes on large, high-emitting vehicles and homes, as well as providing rewards for minimizing emissions – for fairness and to stimulate experimentation with emission-reducing services and products. 
• Third, convincing domestic electorates to back climate friendly policies in the face of global economic competition may be one of the hardest challenges.  One option is the idea of the EU to set a Carbon Boarder Adjustment Tax – to incentivize trade partners to follow suit in reducing emissions. Supporting transitions to reduce energy intensity across industries to maintain job growth will be critical. One important argument many voters may like is the promise of energy independence. As generation and storage technology improves further, more countries could achieve a greater degree of energy independence compared to the status quo. 

The political economy of climate change has begun shifting towards accelerated action, but it remains tricky.  As moving from declarations to action becomes critical, considering these aspects has to be part of the strategy to succeed – both in developed and in developing countries. 

Editor's Note: The author of this blog would like to recognize contributions from Eric Arias and Nick Menzies, Senior Governance Specialist at the World Bank, to this piece.