Climate Policy Has Become Central in the Fight for Global Power

(Bloomberg) -- The latest trade tensions between the US and the European Union underscore just how critical climate policy has become for geopolitical jockeying.

The US Inflation Reduction Act incorporates a raft of climate-friendly industrial subsidies to bolster domestic investment, while new European Union trade laws will impose a levy on some high-carbon imports. The initiatives show how major economies are trying to create incentives to contain the damage from global warming while also keeping pace with high-stakes technological shifts. 

The EU’s fossil-fuel exit strategy — made more urgent by the energy crisis stemming from Russia’s war in Ukraine — calls for massive investment in renewables and low-carbon technologies, while the bloc’s planned Carbon Border Adjustment Mechanism would place additional costs on goods from countries with laxer climate policies to protect local producers.

“Climate is becoming an integral part of numerous economic sectors; it’s not just energy anymore but also industry, farming, buildings or transport,” said Joanna Pandera, president of the Forum Energii think tank. “The world needs to ensure that trade plays by the green rules too.”

In Europe, the energy crisis and soaring prices have tightened the links between climate and economic policy, and efforts to implement the EU’s Green Deal accelerated Sunday, when officials reached provisional deals on the design of CBAM and a reform to bolster the bloc’s carbon market.

“The only effective way out of Europe’s energy challenges remains the same: the transition to low-carbon solutions, like home-grown and affordable renewables,” European Commission President Ursula von der Leyen said in a letter to member states last week laying out the bloc’s efforts to respond to its rift with the US over environmental subsidies.

As climate policy gets intertwined with industrial goals, new fronts for disputes are opening, and rules on the exchange of goods are already hotly contested. Germany and France on Monday urged Joe Biden’s administration to grant Europe the same exceptions enjoyed by nations with free-trade deals with the US in a bid to resolve a spat over the Inflation Reduction Act.

“It is in our mutual interest to swiftly find common ground here,” according to a paper signed by German Economy Minister Robert Habeck and his French counterpart, Bruno Le Maire.

Alongside the transatlantic dispute, both the US and Europe are weighing tariffs on Chinese steel and aluminum to fight carbon emissions and global overcapacity. The EU is also keen to form an alliance with the US on standards for electric vehicles — an industry that China heavily subsidizes — and to overcome Beijing’s dominant position in rare earths and other resources critical for clean technologies. 

“There is huge opportunity in using trade policy as a lever” to promote cleaner technologies, said Greg Bertelsen, chief executive officer of the Climate Leadership Council. “Those who don’t enlist will be faced with a choice,” including losing global market share.

The World Trade Organization underscored the growing role of climate policy by focusing its 2022 report on the impact that the warming of the planet is having on the international flow of goods and services. Director General Ngozi Okonjo-Iweala was also the first WTO leader to ever attend the COP climate talks, held in Egypt earlier this year.

Leaders of the Group of Seven have also agreed to push ahead with a new climate club for the world’s most advanced economies by launching a permanent bureau that will help coordinate rules with the aim of avoiding disputes over green tariffs. 

By marrying trade and environmental goals and framing them as a way to buttress domestic competitiveness, governments have found they can lure support even from climate skeptics. For instance, some conservative policymakers in the US are getting behind a possible border fee on carbon-intense goods in order to support local steelmakers and chemical manufacturers.

Geopolitical flexing is also a draw. Republican Kevin Cramer already backs a border adjustment on national security grounds. 

“Our businesses are already disadvantaged” because of higher standards, the senator from North Dakota said on Fox Business last week. “We shouldn’t be punished for that again by the European Union. Rather, they should join us and punish the really bad guys like China and Russia.”

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