Rethinking economics in time of climate crisis - Hindustan Times

Rethinking economics in time of climate crisis

May 20, 2024 10:09 PM IST

In a warming world, businesses and countries in the Global South need to become climate-ready and tap into opportunities that arise from the energy transition

A seismic shift is underway in the battleground between environmental imperatives and economic realities, challenging the very core of conventional economic wisdom. Climate change, once viewed only through the lens of extreme temperature fluctuations and weather patterns, and dismissed as a “polar bear problem”, has morphed into a full-blown crisis. It now reverberates through global economies, impacting everything from the prices we pay for goods and services, the heat to which we have to adjust (India is currently reeling under severe heat waves), the location of industries, and the weight of different voices in international forums. To emerge as a leader in this rapidly heating world, businesses and countries in the Global South need to become climate-ready and tap into opportunities that arise from the energy transition. But this is where outdated economic logic challenges the evolving environmental logic.

India is currently reeling under severe heat waves ((PIC FOR REPRESENTATION)) PREMIUM
India is currently reeling under severe heat waves ((PIC FOR REPRESENTATION))

I increasingly find myself reflecting on four fundamentals I was taught as an economics student. These lessons no longer hold true and need a reality check.

First, we were taught that industrial policy is bad, rife with inefficiency and crony capitalism. However, given the current clean energy landscape, industrial policy can be a tool for emerging markets and developing economies (EMDEs) to gain competitiveness along new technological and industrial frontiers. It can, for example, tackle some of the current concentration of clean energy technologies. According to an analysis by the Council on Energy, Environment and Water (CEEW), 70% of the global exports in solar photovoltaics came from only four countries in the last decade. These concentrations lead to high import dependence for low- and middle-income countries. Nearly all low- and middle-income countries were almost entirely dependent on concentrated imports of solar technologies and lithium-ion batteries over the last 10 years. We must keep the global clean energy market free, open and transparent. Cartelisation, creating islands of protectionist regulations, and creating non-tariff barriers are neither economically efficient nor politically wise. Whereas China has aggressively pursued subsidies to build up its clean energy prowess, now industrial policy in the European Union and the United States, while necessary for their own clean energy transitions, risks diverting investment from EMDEs. So, fast-growing EMDEs must make concerted pushes to invest in cleantech industries and position themselves as nodes within cleantech supply chains.

Second, contrary to neoclassical economics, capital does not flow from capital-rich to capital-poor regions. Nobel Laureate Robert Lucas pointed this out as the Lucas Paradox. For instance, in the case of the energy transition, money does not flow to where the sun shines the most, namely the Global South. The cost of capital in developing countries and economies is several percentage points higher than in OECD countries. Some of that is driven by the real risks of investing in these geographies, but in large part, it is due to perceived risks. Our priority, then, must be to use climate finance not just for the deployment of cleantech, but also to build manufacturing capacity and supply chains across low-, middle- and high-income economies. For this to happen, limited public capital and finance from multilateral development banks must be used to guarantee against policy risks and hedge against currency risks.

Third, conventional economic wisdom holds that technology, or the x-factor in growth equations, is exogenously determined, resulting in shifts in the production frontier. However, the world’s transition to cleaner energy shows why technology policy and development are endogenous and often restricted within a few countries. We find that 95% of clean energy technology patents are owned by citizens in high-income and upper-middle-income countries. The bigger challenge? Many of these patents will not expire before the 2030 climate targets set under the Paris Agreement. This means that EMDEs either face high cleantech acquisition costs or do not have the time to reverse-engineer existing technologies. A new paradigm of technology co-development must be pursued between advanced economies and EMDEs. This not only requires financing but also the exchange of technical and human resources. The geographies of emerging markets can be used as laboratories for cleantech that will be deployed in these fast-growing economies.

A fourth flawed lesson economics students are often taught is that as long as the price is right, energy and resources will flow unhindered. This notion now stands on shaky ground in an era of energy insecurity and geopolitical turbulence. Fifty years have passed since the oil shocks of the 1970s, which spurred cooperation towards pooled energy security among mostly rich and energy-hungry countries. Today, we find ourselves grappling with similar questions but regarding the secure supply and distribution of sustainable energy resources, technologies and products. Solar panels, wind turbines, critical minerals embedded in a battery, or green hydrogen electrolysers are missing a global architecture to ensure the security of supply to match burgeoning demand across much wider geographies compared to the 1970s. This needs more diversified and interdependent value chains, access to capital, and co-developed technologies, but also rules and standards to preempt regulatory islanding and non-tariff barriers to trade in cleantech. The absence of an energy security architecture for the fuels of the future and price wars will create geopolitical risks and suboptimal markets rather than bring equilibrium and security to global energy markets.

Last year, at the G20 Leaders’ Summit in New Delhi, the world’s major economies came out and announced a bold new GDP — a Green Development Pact. If we take these failed economic lessons and reality checks into account, this new GDP can help us forge a covenant for green development that is simultaneously sustainable and economical. Economics 101 makes sense only when we make unreal assumptions about the real world. We should stop expecting reality to fit theory and instead design policy to correct for market failures — to build a clean future and jobs, growth and sustainability for all.

Arunabha Ghosh is CEO, Council on Energy, Environment and Water. The views expressed are personal. This article draws on the author’s keynote at the International Vienna Clean Energy and Climate Forum

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