Resetting transatlantic climate cooperation

Carlo Stagnaro // 25 November 2020

Everybody seems to agree that climate and energy policy is an area – possibly the area – where the difference between US President Donald Trump and President elect Joe Biden is the largest. The pillars of Trump’s energy policy were the refusal to implement measures to counter global warming – both at the national and international levels – and a strong support of fossil fuels, particularly coal. Biden has proposed an ambitious climate agenda to reinvolve the US in the Paris Agreement and reduce domestic emissions.

From a political point of view, Biden may be inclined to engage in equal-and-opposite measures as Trump did: as much as the incumbent subsidized fossil fuels (particularly coal), the incoming president might be willing to subsidize renewable energies and other “clean” fuels. They are both wrong, for the very same reason. Different from Trump’s claims, global warming is a threat; but different from Biden’s promises, the solution can hardly come from discretionary public spending.

In fact, the largest driver of carbon emissions reduction in the US has been the coal-to-gas switch, mostly due to market forces. Natural gas accounts for about 30% of total energy consumption and 40% of electricity generation in the US. By subsidizing coal, Trump tried to stop coal’s continuous loss of competitiveness, and by so doing he harmed both the climate and markets. Renewables are becoming more competitive too, but picking them as winners of the energy game, as the Europeans did and as Biden might do, would result in unnecessary costs for energy consumers (particularly the energy-poor) and it might prevent or slow-down innovation.

It is market forces, not industrial policy, that will ultimately provide humanity with the means to solve the climate crisis. Just look at data: as Trump came into office, he removed many of the subsidies to green energies from the Obama era and he replaced them with coal and other subsidies. Still, the trend towards lower emissions, lower use of coal, and greater energy efficiency remained almost unchanged, which suggests that green subsidies did little to improve the climate cause, and their removal did little harm.

Trump was no closer to free market environmentalism than Biden is likely to be. Trump may have removed some unnecessary regulations, but he replaced old subsidies with new subsidies. He vigorously denied climate change rather than seeking free-market solutions. By doing so he polarized the debate, strengthening the perception that the only political choice is between ignoring environmental problems, or addressing them through Big Government. Biden is likely to push the pendulum the opposite way: he accepts the reality of global warming, but he will see it as an opportunity, or even a pretext, to increase the regulatory powers of the state.

Things may be different from an international perspective. Trump’s rejection of the Paris Agreement did not prevent progress in international climate negotiations, and did not stop the switching from the Kyoto Agreement’s targets and timetables to a more sensible, strategy-based plan based on nationally determined contributions.  Nudging governments into more climate-friendly strategies works better than pretending to force them into commitments they are unlikely (or even unwilling) to stick to unless they do so unilaterally as the EU did. At the same time, the lack of US leadership gave greater momentum to environmental ideologies that see climate change as a Trojan Horse to advance a broader political agenda. By rejoining the Paris Agreement, it will be up to Biden to decide whether the US will make a call for leadership – emphasizing the importance of open markets and technological innovation – or join the interventionist crowd.

The question also remains open on whether and how the US will revive the multilateral system on climate and other international issues such as the evolution of transatlantic relations. On one hand, Biden is more likely than Trump to engage in a dialogue with the European Union– instead of individual member states – particularly on climate issues. On the other hand, Biden is no less likely than Trump to take a stand in defense of the interests of US companies if he feels they may be harmed. A potential first test would come from carbon border adjustment mechanisms, if Europe implements one in order to improve the competitiveness of European products in the EU market vis-à-vis foreign products from countries that do not price carbon (or do not price enough), including the US. The White House might oppose a European CBAM or argue that existing or forthcoming domestic measures would result in US carbon to be priced as much as its European counterpart, hence US products should not be covered by CBAMs.

In practice though, a Republican-led Congress may force Biden to strike compromises with moderate Republicans who might support the introduction of a revenue-neutral carbon tax or other forms of carbon pricing, but would vehemently oppose the climate interventionism advocated by the “Squad”, such as the so-called Green New Deal. This may turn into a fortunate circumstance from a free-market environmentalist point of view. The choice between solving the climate crisis or promoting present and future prosperity is a false and misleading one: human ingenuity is greater than both Trump’s environmental blindness and Biden’s economic arrogance.

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).


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