The Climate Policy Shift Reshaping Global Economies

For much of the last 50 years, policymakers and the international economics community largely relied on carbon pricing, or the taxation of carbon production, to try to counteract the climate crisis. In recent years, a new framework of state-led incentives, called Green Industrial Policy (GIP), used to combat carbon emission, has grown in popularity.  

A recent research paper published in Socio-Economic Review by Professor of Government Basak Kus, “From carbon pricing to green industrial policy: new moment, old dilemmas, and divergent pathways,” tracks the global shift away from carbon pricing toward GIP. Her research explores the different models of GIP implementation (especially in China, the United States, and the European Union), how this industrial turn affects low- and middle-income countries, and which questions climate economists should address in future research. 

“For students, for scholars in this field, climate change is no longer solely about climate policy; climate change is also about industrial policy, national security, and geopolitical rivalry,” Kus said. “With those expansions come with all sorts of new questions.” 

Pricing carbon  

In the early 1970s, economists faced a thorny problem in their attempts to address the burgeoning climate crisis: Greenhouse gas emitters were reaping short-term economic benefits while passing the cost of their carbon production onto the masses over the long-term. Since the climate crisis unfolded over decades, economists struggled to adequately measure the true impact of carbon emissions in real time, which made it difficult to pin down a way to redirect the costs back onto emitters, Kus explained. 

To address this quandary, policymakers in some countries decided to start taxing carbon emissions, Kus wrote. Alongside carbon taxes, countries also used a cap-and-trade model, which set an overall limit on emissions and issued a matching number of permits that companies could buy and sell. Lowering the cap over time is meant to drive emissions down. However, these attempts did not reduce carbon as quickly as expected, and were still based on the understanding that tackling climate change came at the cost of economic growth, she wrote. 

Critics of carbon pricing argued that economic models used to determine the price of carbon severely underestimated the economic losses caused by climate disasters. Also, the price of carbon often fell significantly below suggested prices since nations set their prices through legislative negotiating, where special interest and other factors are at play. Kus said carbon pricing could have worked if it was taken seriously and adopted more quickly. 

“We could have been at a much better place if a comprehensive, efficient carbon tax could have been passed in the United States and in other places,” Kus said. 

Global Industrial Policy 

Kus said as time went on, economists questioned whether giving up on the possibility to create economic growth through climate policy was necessary. “Do we really have to give up on growth? People began to say no,” Kus said. “If we manage to transition to using renewable energy properly, then growth can happen and it does not have to come with emissions.” 

Over the last five years, many of the world’s largest economic hubs have shifted to GIP, or state-led programming aimed at sustaining economic growth through greener business practices. GIP often includes states offering tax credits, direct subsidies, public funding guarantees, and other policies designed to accelerate the development of renewable energy and low-carbon sectors. 

“Particularly in Nordic European countries, as economic growth is increasing [through GIP], emissions have actually started decreasing,” Kus said. 

In her research, Kus outlines the different ways countries have approached GIP integration and how differences in state structure, fiscal capacity, bureaucracy, financing, and the strength of a nation’s political commitments to decarbonization impact its success. 

China is the birthplace of the global green industrial turn, as they were the first to treat clean technology as a strategic foundation in its national development. In 2015, China’s State Council announced the Made in China 2025 initiative, where it identified key areas for green development that would be crucial to increasing China’s economic growth, from the creation of green-energy vehicles and advanced electric power equipment to next-generation information technology and robotics. 

After 2020, China established its “dual-carbon” goals, which projected a peak in carbon emissions before 2030 and carbon-neutrality by 2060. These goals integrated decarbonization efforts directly into any broader development initiative by prioritizing the use of clean energy technology, she said. 

“GIP in China did not emerge merely as an instrument of emissions reduction, but as a strategic development policy through which China could reduce dependence on foreign technology, build domestic productive capacity, and compete for leadership in the next technological-industrial order,” Kus wrote in the paper. 

By estimates in 2024, China accounts for nearly 40 percent of the global renewable energy capacity. They have invested around $818 billion in energy transition, and in the past three years, Chinese firms have launched a wave of overseas investment in green industries. Kus said the overseas investments total over $250 billion—rivaling the scale of the Marshall Plan in today’s money. 

The United States has taken a different approach to GIP, partly due to its lack of leadership continuity in the transition from presidents Joe Biden to Donald Trump, Kus said. During the Biden administration, Kus said GIP was decentralized, subsidy-driven, and focused on protecting national security. Now under Trump, climate regulation has been rolled back, and the administration is “openly contemptuous” of green policies like the Green New Deal, Kus said. 

The European Union’s approach is centered on derisking, a strategy used by governments to reduce vulnerability to sudden geopolitical events. For example, the Russian invasion of Ukraine in 2022 exposed Europe’s dependence on fossil fuels, which led to an acceleration of GIP efforts, Kus said. While the EU cannot directly fund projects within its member nations, the organization has changed regulation to make it easier for its members to steer funding toward clean-technology production. 

Another consideration is how the transition to GIP affects low- and middle-income countries that have the physical resources to support the transition, but extraction of those resources could leave workers and local ecologies vulnerable to exploitation. Reports of human rights violations in lithium mining operations, for example, have popped up as demand for lithium batteries has increased.

Kus organized this year’s Shasha Seminar for Human Concerns on The New Global Economic Order at Wesleyan on Nov. 13 and 14. The seminar’s programming will explore the rapidly changing global economy in the face of energy transition, supply chain issues, artificial intelligence, and bubbling geopolitical rivalries. Register to attend the seminar here.