Turning short-term climate policies into long-term gains

The ambitious climate targets of the Nordic countries will not be reached without significant investments in all sectors.

Emissions reductions are particularly difficult for the industrial sector, since increased costs can encourage imports from countries without stringent anti-pollution policies.

In Sweden, basic industries account for roughly 80% of emissions within the trading system. Ten production facilities in the steel, iron and cement industry alone are associated with over half these emissions. Within the next 25 years, these industries need to develop and implement new carbon-neutral processes and introduce technologies to capture and take care of the CO2 they generate.

A basic characteristic of heavy industry is long-lived capital, and although modest emission reductions may be available in the short run, substantial reductions require transformative investments and significant innovations.

Uncertainties—including the “risk” of policy reversal—raise the stakes for such developments. Firms report that serious investments require an assurance of sustained demand for their product and that their competitiveness is not undercut by unfair competition from jurisdictions with lax policies.

Policy sequencing — pathway towards a broader ambitious climate policy

Most economists agree that a global carbon price would be the most cost-effective tool to mitigate climate change. While this measure is still far from realisation, regulations and overlapping policies are still the mainstay of policy in most countries.

However, even if some of these policies induce marginal cost differences between sectors and regions, they can serve as an important pathway towards more ambitious climate policy.

Policy sequencing therefore is vital, as even policies that may appear inefficient at first, might be the necessary stepping stones to an impactful, cost-effective climate policy in the long run.

One such example is the German support for renewable energy (the 2000 Renewable Energy Act, EEG), which enabled the rapid deployment of solar cells by reducing costs over time. Overlapping policies such as performance standards and technology support, in combination with a moderate carbon price, can signal to investors that policy makers are committing to an ambitious future climate policy, even if the necessary carbon price level is not politically feasible in the short run.

Swedish industry is investing heavily in innovative long-run projects to produce fossil-free steel and cement. This could never be profitable in the short run, and it requires sustained long run vision and state support.

Even if this succeeds, however, we must remember that we cannot solve the climate problem one sector or technique at a time. If we do, the world market price of coal and oil would decrease, and people would find new ways to use (and waste) energy. Therefore, a global price on carbon emissions would still be needed.

As a result, even if such a price may be unattainable today, we need to think in terms of policy sequencing, which includes short run policies that allow us to implement carbon pricing in the long-run.

Löfgren and Sterner are both researchers within the MISTRA Carbon Exit Research Program, which focuses on the technical, economic and political opportunities and challenges for Sweden to reach the target of net zero greenhouse gas emissions by 2045.

Further reading: Meckling, J., Sterner, T., and Wagner, G. (2017). Policy sequencing toward decarbonization. Nature Energy, 2(12), p. 918. doi:10.1038/s41560-017-0025-8.