Decarbonization in the West: From Climate Politics to Climate Economics?

The era of climate politics

Since the end of the Cold War, a consensus has formed around recognizing Western politics’ shift toward “liberal internationalism”. This entailed top-down treaties, technocratically-led markets, and a sense that global problems require global rules. Climate policies fit neatly into this framework, backed by the Kyoto Protocol, the Paris Agreement, the European Green Deal, and various international emissions-trading programs.

The backlash…

Then, around the mid-2010s, the pendulum of change swung back (1). Much of the electorate grew wary of supranational fixes, fiscal expansion and migration, and environmental policies were caught in the crossfire.

Under President Trump’s administration, Washington withdrew from the Paris Agreement and rolled back environmental rules and “green subsidy” programs. In Europe, protest movements such as the gilets jaunes gained traction, pressuring governments to soften measures (2) (3). Meanwhile, energy shocks and the outbreak of new wars hardened public preferences for sovereignty and economic security, making the often-costly push for renewables harder to sell.

This combined pressure led to an undeniable deceleration, sometimes even a reversal, of green policies in the Western world.

… against the era of climate economics

Notwithstanding, the energy transition furthered its course and, in places, even accelerated. Global clean-energy investment is on track to outpace 2030 plans (4), and most new renewable projects have now become cheaper than fossil alternatives (5). The transition appears to be less driven by top-down politics and more by price signals and markets. That begs the question: are we seeing a shift from climate politics to climate economics (6)?

Theoretical explanation

While this explanation may seem convoluted, the economic premise is simple: renewables require a period of subsidy and political fostering before becoming competitive enough to rival or even replace fossil fuels.

Research by Acemoglu, Aghion, Bursztyn and Hémous (7) shows that when “clean” and “dirty” energy inputs are sufficiently substitutable, a temporary combination of market mechanisms, such as carbon pricing, and policy instruments, like clean-energy subsidies, can redirect innovation towards renewables. Once this initial political push causes the cost curve to tilt, markets take over and the industries strengthen, causing costs, in theory, to fall further. If that push comes early and hard enough, the shift should become self-sustaining.

Market reality

For all its simplicity, I find that theory maps neatly onto what we see today. Large-scale solar and onshore wind now rank among the least expensive new-build options for energy generation, even in the United States (8) (9).

On the demand side, rising EV penetration and data centers are projected to more than double electricity needs by 2030 (10) (11), favoring adaptable capacity, where renewables generally excel (12) (13). On the other hand, fossil fuels, while still profitable, tend to adjust more slowly[1] and are likely to struggle to meet fast-rising demand (14).

Hence, even where renewables are politically contentious, they remain a rational choice not only because their relative returns are higher, but also because they are better able to handle uncertainty.

Limits and caveats

Does this interpretation hold across the board? Well, it depends. Importantly, “renewables” is not a single industry, but an all-encompassing term covering a panoply of different technologies. Different technologies entail different use cases, which in turn make for different economic feasibilities. I would argue that while solar and wind have become economically viable in many markets, newer low-carbon pathways such as green hydrogen, Sustainable Aviation Fuel (SAF), and e-fuels still require much R&D and scale-up incentives. These could very well be left in limbo in the case of sharp funding cuts (15) (16). At last, geothermal and hydropower, among others, are highly site-specific and will remain confined to particular contexts for the foreseeable future. None of this contradicts the central claim; it just marks where policy still needs to bridge cost gaps.

Conclusion

While recent politics has not fostered renewable deployment as quickly as may have been possible, nor has it been able to hamper it. Most “clean” energy technologies are now able to sustain themselves and even thrive without heavy government incentives and subsidies. The only sectors at risk, for which government support remains decisive, are those that have not yet had the time to fully develop.

Put simply, today’s political turbulence around renewables is mostly noise. With economics now propelling the transition, it will carry on with or without political favor.

Appreciations: Rebecca Stuart for introducing me to Acemoglu and Al’s research paper. Flavio Turck, Lexie Chu, Kaila Doehler and Micheal Mendes for being great sparring partners.