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OECD and non-OECD countries alike are all encountering a common paradox: if the green transition does not lead to perceived economic gains—and worse, leads to perceived job losses—then it is not politically sustainable. And if political leaders cannot get sound, politically durable policies in place, we have no hope of solving climate change. Time is not on our side.
Explicit in the original Green New Deal in the United States and the European Green Deal was the promise of job creation and “just” energy transitions for workers in legacy industries as well as those historically marginalised. The resulting U.S. Inflation Reduction Act (IRA) attempts to onshore clean energy manufacturing jobs while also spurring the deployment of clean energy technologies in the United States. The accompanying Science and CHIPs Act contains significant new and additional appropriations for clean energy research, development and demonstration (RD&D), even though the United States is already the largest aggregate investor in public energy RD&D (though not the largest when measured as a percentage of GDP).
European and East Asian countries have expressed their discontent with provisions in the IRA, including local content requirements. Bonus tax credits are offered to projects that meet domestic content requirements for iron and steel and “manufactured products”. Clean energy industries receive bonus credits for meeting domestic content requirements. Additional bonuses are offered if projects are in low-income communities.
These provisions may be frustrating to American allies in Europe, Japan and Korea, but they seem to be working:
- Kia announced in September 2022 that it would expand production of electronic vehicles (EVs) in the United States in response to the legislation; Hyundai is doing so as well
- In 2022 alone, the announced total (foreign and domestic) investments into electric vehicle and battery plants in the United States totalled USD 128 billion, according to NPR
- Kentucky’s Governor recently declared that his state would be the EV battery production capital of the United States after receiving USD 9 billion in investments in 2022
Ironically, provisions like the ones relating to the electric vehicle industry will certainly slow down the deployment of EVs in the United States. But, the trade off is that these policies are likely to create more durable political support for climate-friendly policies like the EV tax credit in the future, which could prevent the drastic flipflopping of climate policies we’ve witnessed during the last four American presidential administrations.
Also on the Forum Network: From Trilemma to Triple Dividend: Clean, affordable and secure energy by Patrick Lenain, Senior Associate, Council on Economic Policies
Some governments see the objectives of renewable energy as a daunting "Energy Trilemma". But the trilemma can be avoided. The right policies—especially the right fiscal policy—could achieve a triple dividend of clean, affordable and secure energy, explains Patrick Lenain.
After listening to earnest complaints from European allies, the Biden Administration is now talking about “friend-shoring” clean energy supply chains with trusted allies, or potentially extending privileges to free trade agreement partners. Meanwhile, the EU has countered with its own Green Deal Industrial Plan.
Where does this leave major emerging economies who are trying to stake a neutral middle ground between China, which is a major trading partner for most and provides valuable infrastructure investment to developing countries, and the United States or Europe? It leaves them stuck between a rock and a hard place.
Meanwhile, the European Union has announced its Carbon Border Adjustment Mechanism (CBAM) to address the competitive disadvantages faced by its firms, which must comply with stringent EU climate policy. But according to one recent analysis, aside from Canada it will be developing countries (specifically South Africa, Brazil, Turkey, China and India, in that order) who are hit hardest by the policy, with a USD 91 billion estimated cost between 2026-2040 for South Africa alone.
What is a developing country to do if it wants to achieve fast economic growth and higher per-capita income in a climate-friendly way? First, they will try to determine their own competitive advantage in a low-carbon world. They may attempt to switch to use low-carbon fuels for their economy. They will almost certainly try to diversify their economies and switch from heavy to light or service-based industries. They will emphasise green job creation and workforce preparedness in these new green industries. Sound familiar? In effect, they too will attempt their own green new deals. Mimicking the United States, they may then try to protect their own infant industries and lock out foreign competitors.
The OECD should collectively address this problem in dialogue with developing countries. Unless they can restructure their economies and find sources of competitive advantage to pursue job-creating green industrialization pathways, future growth in greenhouse gas emissions is likely to come from them.
The crux of the challenge for already-developed countries, of course, is how to reconcile the politically desirable goal of local job creation with the goals of being able to export one’s products to other markets and import low-cost products to benefit consumers in your country. The situation is no different for countries like Vietnam, South Africa, India or Brazil—in fact it’s more difficult because they are engaged in the long, hard process of catching up to the West.
The OECD should collectively address this problem in dialogue with developing countries. Unless they can restructure their economies and find sources of competitive advantage to pursue job-creating green industrialization pathways, future growth in greenhouse gas emissions is likely to come from them. And if these countries are locked out of a US-EU climate allies “club”, they will have every excuse to throw up their hands and give up on net zero right at a time when we need to begin a sharp global decline in emissions. That outcome would not be in the interest of Europe and the United States—or the world.
The green transition is changing jobs, skills, and local economies. It poses new challenges but also opportunities, both of which will differ across places within countries. Learn more with the OECD report Job Creation and Local Economic Development 2023: Bridging the Great Green Divide
And learn more about the Inclusive Forum on Carbon Mitigation Approaches, which contributes to a globally more coherent and better coordinated approach to carbon mitigation efforts by facilitating sharing of data and information, mutual learning and multilateral dialogue
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