Leonardo Badea (BNR): Regional and global climate change policies. Challenges and opportunities for Romania
Editors
Posted On April 3, 2024
An important contribution to the quality of life for us, but especially for the generations to come, is the way in which we will manage to protect the environment by developing sustainable economic activities, reducing pollution, and implementing the principles of the circular economy.
Already in recent years, global warming is generating increasingly alarming changes. The average global temperature is nowadays 0.95 – 1.20 degrees Celsius higher than it was at the end of the 19th century (according to the US National Centres for Environmental Information – Annual 2022 Global Climate Report). An increase by 2 degrees Celsius compared to the levels recorded before the Industrial Revolution is associated with the risk of changes with a significant negative impact on the climate and the environment, and consequently on people’s health.
The Paris Agreement, adopted in 2015 under the UN Framework Convention on Climate Change (UNFCCC) of 1992, set the objective of limiting the increase in global average temperature below 2 degrees Celsius compared to the pre-industrial period and continuing efforts to limiting it, as far as possible, to 1.5 degrees Celsius, while also introducing framework measures to reduce carbon dioxide emissions, to which to these harmful effects are mainly attributed.
Climate change is without a doubt a major challenge of our times, affecting all countries and regions of the world. We are therefore facing a global problem, which has no borders and which requires a joint effort and practical coordinated actions at international level. On the other hand, the growing urgency to address climate change and the need to coordinate national policies are increasingly contributing to the reshaping of the world economy.
The green transition is one of the factors likely to generate a new era of industrial policy and technological revolutions with far-reaching economic implications. Climate policies will increasingly change the structure of economies and have effects on trade and financial flows globally, requiring an extensive process of cross-border cooperation.
Most countries are developing a series of policies, institutional frameworks, and legislative approaches to mitigate the pressure of global warming. Although established under the principle of shared responsibilities in international environmental law conventions, climate transition policies differ from country to country. The Paris Agreement is based on contributions established at the national level of the countries that have joined this effort, but which are circumstantiated according to the specifics of each individual economy.
Although efforts have intensified in recent years and despite the aforementioned agreements, there is unfortunately still not enough real unity at the global level regarding the vision of transition policies. Approaches vary from initiatives such as carbon pricing to subsidy-based strategies (e.g. for R&D and innovation), or to combining such mechanisms in a green policy mix.
It is natural that climate policy options will be influenced by the macroeconomic conditions of each country or their political context. Some policies consider, for example, tariffs, or customs and regulatory measures, while other countries adopt so-called expenditure-based measures, which target both the supply side aiming to lower production costs (e.g. through subsidies, grants, tax incentives, etc.), as well as the demand side, with an impact in terms of household consumption for various goods or services (e.g. tax facilities for the purchase of electric vehicles).
At the same time, the differences regarding the targets set from the climate transition perspective are sometimes accentuated by the implementation gaps arising from the fact that the actual efforts of the countries are not always proportional to the set targets and their real potential. However, the reduction of these gaps could be achieved through regional and even global cooperation mechanisms, based on securing funding sources and technological developments. As always, investment and innovation play an essential role in achieving economic objectives, in the present case those related to the green transition.
According to data from the Global Carbon Atlas, advanced economies (mainly China and the US) are of course the largest contributors to global carbon dioxide emissions, while emissions from low- and middle-income countries have only increased recently. The European Union is considered a major generator of greenhouse gases worldwide, as well.
In this context, a comparative analysis of the principles of climate transition policies in these three economies (China, the US, and the EU) and their impact at the international level is relevant, as follows:
China emits about a third of the amount of carbon dioxide globally resulting from fossil fuels and has a share of about 30% in terms of greenhouse gas emissions (GHG emissions of all world countries, Publications Office of the European Union, Luxembourg, 2023). Therefore, China’s contribution to reducing climate risks is crucial. Without China’s transition to a low-carbon economy, achieving global climate goals would be virtually impossible.
Playing a key role in global efforts to fight climate change, China has committed to reducing carbon dioxide emissions by 65% by 2030 and plans to achieve climate neutrality by 2060 (China’s Policies and Actions for Addressing Climate Change, 2022 – Ministry of Ecology and Environment of the People’s Republic of China). Such a transition involves increasing energy efficiency, but also the productivity of resources, which requires structural changes at the level of the economy (energy, industrial, transport systems, etc.), resources, innovation, and technological capabilities.
Balancing China’s climate and development goals involves structural reforms and broad market mechanisms linked to climate action. The 2022 World Bank Country climate and development for China[1] presents a range of policy options to meet China’s climate and development goals. This report looks at the structural changes in key areas such as energy, industry, transport, agriculture, etc., that would enable China to meet its national commitments to cap carbon emissions before 2030 and achieve neutrality by 2060.
The World Bank report on China’s policy options highlights a framework geared towards sustainability and fighting climate change, focused on a sustained transition to a green economy. The proposed policies aim at a deep transformation of the energy sector, by increasing the production capacity of renewable energy and reforms of the energy market, the decarbonisation of industry and transport, through electrification and the promotion of means of transport with low carbon emissions. There is a strong focus on the sustainable development of urban and rural areas, encouraging resilience to climate change and the adoption of low-emission agricultural practices. Harnessing markets to drive innovation and reduce costs, effectively managing transition risks for the workforce, supporting vulnerable communities, and promoting global action and green finance are also key pillars. These integrated strategies point to the need for ambitious and coordinated economy-wide reforms to navigate the transition to a low-carbon future and sustainable growth.
The US, the world’s second largest emitter of carbon dioxide, was a supporter of the Paris Agreement, initially pledging to cut emissions by 26-28% by 2025 compared to the 2005 levels. After the temporary exit of the Paris Agreement, the US returned with ambitious commitments aimed at significantly reducing greenhouse gas emissions by 2030.
In the year 2022, the Inflation Reduction Act (IRA) was passed in the USA, a major component of which addresses the issue of climate change. In addition to other regulations (e.g. regarding the reduction of the budget deficit and inflationary pressures on the economy, ensuring equity and solidarity at the level of society in terms of taxation and budget allocations, etc.), from a climate perspective, the IRA is considered the most important package of measures in US history to reduce carbon pollution by establishing a series of mechanisms regarding:
- tax credits and direct subsidies;
- the prerequisites for making major investments in energy security solutions – e.g. investments to increase the energy efficiency of industrial sites, solutions to produce clean energy and facilitate the green transition, etc., considered to be able to reduce in the long term consumer expenses as well;
- the reforms necessary to mitigate climate change, by significantly reducing carbon emissions by 2030, reforms considered to have a number of other beneficial effects in the long term, such as for example the price of insurance.
This legislative initiative promoted in the USA, with reference also to the issue of climate change, confirms the need for structural reforms and far-reaching projects in the representative sectors, but also the need for appropriate financing and the promotion of development programs in numerous fields.
It should be noted that this complex program highlights the idea of concerted and synchronized action of the policy mix in order to achieve major economic and social objectives, which have been discussed for a long time in many countries, including Romania.
The initiators emphasize that the proposed climate policies, oriented towards environmental protection, can simultaneously stimulate economic growth, through a series of interconnected effects. These include mitigating greenhouse gas emissions, which, in addition to direct climate benefits, promise long-term economic benefits by preventing the costs associated with environmental degradation. Investments in adapting to the effects of climate change, such as consolidating the infrastructure, are shown to be less expensive compared to the consequences of neglecting them. Also, reducing pollution and its harmful effects on the health of the workforce could lead to increased productivity, while the adoption of green energy can reduce economic dependence on the volatility of fossil fuel prices. Furthermore, government support for climate research, development, and innovation is crucial for the acceleration of technological progress, without which private investment may remain suboptimal. This integrated approach suggests a vision where climate policies not only protect the environment, but also drive sustainable economic growth.
At the international level, there were also voices that claimed that initiatives such as the Inflation Reduction Act could entail a greater relocation of production capacities to the US, even suggesting potential effects of slowing down the ecological transition at the global level. On the other hand, it should also be taken into account that a proper reassessment of climate priorities in other countries could lead to greater global investments in the field of green technologies, implicitly, to a broadening of the global production base in green sectors.
At the end of last year, the US and China reaffirmed the commitments made through the 2021 US-China Joint Statement addressing climate issues and strengthening the actions required for the effective implementation of the Paris Agreement, in light of the principles of equity and shared responsibilities, but differentiated by specific national circumstances.
Moreover, realizing the extremely important role they play at the global level and to respond in a meaningful way to the challenges generated by climate change, the US and China decided to operationalize the Working Group on Enhancing Climate Action, considering the need for cooperation and dialogue to accelerate climate action in the coming years. This Working Group, made up of officials from ministries and relevant government agencies from the two countries, will focus on the implementation of cooperation projects in the key areas established by the Joint Statement of 2021, such as energy transition, circular economy, resource efficiency, etc., and will exchange best practices and information on policies, technologies, and other relevant measures on energy strategies and policies (e.g. for monitoring and reducing greenhouse gas emissions, developing renewable energy production capacities, circular economy, etc.). Last but not least, the US and China have pledged to support climate cooperation between states, regions, and cities, in relevant areas such as the energy sector, transport, buildings, waste, deforestation, etc.
European Union – In order to prevent the planet from warming by more than 1.5 degrees Celsius above pre-industrial levels, the EU has committed, through the European Green Deal and the European Climate Law, to make Europe the first climate-neutral continent by 2050.
The Net Zero Industrial Act complements the European Climate Law and supports a fair social transition and EU competitiveness through the EU Cohesion fund, but also through NextGeneration EU funds.
Also, the energy crisis has determined another initiative, namely the REPowerEU Plan, which aims at a number of relevant aspects from this perspective, such as strengthening energy security, diversifying the energy matrix, and expanding the use of local renewable energy sources.
In order to reach the target established by the European Green Pact, the European Climate Law provides intermediate targets, such as the reduction of greenhouse gas emissions by at least 55 percent by 2030 (compared to the level of 1990) or the setting by the EC of the intermediate target at European level for the 2040 horizon.
In this context, at the beginning of February this year, the EC launched into public debate a Communication on Europe’s climate target for 2040[2] (Securing our future. Europe’s 2040 climate target and path to climate neutrality by 2050 building a sustainable society, just and prosperous society).
Thus, in continuation of the target proposed for the year 2030 through the Fit for 55 package of reducing polluting emissions by 55 percent compared to the level of 1990, which is being implemented at the level of the EU member states, the EC has recently launched a public debate on a proposal to reduce the EU’s net greenhouse gas emissions by 90 percent by 2040 compared to 1990, and initiated dialogue with national authorities of Member States.
The proposal regarding the target of reducing pollutant emissions by 90 percent was based on the overall analysis of the EC on greenhouse gas emissions and their dynamics, on the impact on the environment, and on the scientific studies available at the international level in the field of climate, but also on the evaluation of the costs associated with reaching the target, in order to determine the need for financing in the coming years.
It is expected that, in the new composition and through the new mandate for the period 2024-2029, the European Commission will transpose the climate target set for the 2040 horizon into a new package of actions and regulations. Therefore, it is very important that at this stage of public debate, the member states, including Romania, identify their own competitive advantages, funding sources, cost optimization and efficiency measures, taking into account the specifics and particularities of each country, in dialogue with the EC and international investors. Member States should also identify dependencies considered critical, alternative sources of supply, but also other aspects, such as the necessary mechanisms for adjusting social inequalities and compensation measures for a just social transition.
Challenges and opportunities for the development of Romania
During the last decades, in Romania, there have been significant reductions in greenhouse gas emissions. According to data published both by Eurostat and the EDGAR database, Romania had already reduced its net level of greenhouse gas emissions by almost half in 2000 compared to the level in 1990, largely as a result of structural changes in the economy in the post-communist period (for example, the significant reduction in heavy industry and coal use). In 2021, Romania’s net greenhouse gas emissions represented, according to Eurostat, only 29 percent compared to the level of 1990. However, meeting the climate objectives comes with a series of challenges, such as the decarbonisation of the energy system in its entirety. The main pillars of the decarbonisation process are energy efficiency, industrial electrification, low-carbon fuels, raw materials and energy sources, carbon capture, usage, and storage.
In other words, to move towards a greener and more competitive, low-carbon economy that uses resources efficiently and is as resilient as possible to the risks posed by climate change, we need to increase energy efficiency while economic sectors must reduce the levels of greenhouse gas emissions.
In March of this year, the Organization for Economic Cooperation and Development (OECD) published the Economic Survey for Romania, edition 2024, which was launched in Bucharest, in the presence of the Secretary General of the OECD, Mr. Mathias Cormann. From the perspective of climate change, one of the main messages of the OECD Economic Survey is that, although significant investments are planned or underway to reduce greenhouse gas emissions caused by electricity generation or transport activities, Romania must do more to achieve net zero greenhouse gas emissions by 2050. In this regard, according to the study, a comprehensive package of policies is needed to accelerate the process of reducing carbon emissions in a more efficient and equitable manner, with stricter regulations, good governance, and more public support for green investments. Romania must also strengthen its resilience to the impact of climate change.
In the case of Romania, 82 percent of greenhouse gas emissions are generated by economic activity, the remaining 18 percent being produced by households. Therefore, the green transition will have effects on both the population and the economy. All economic sectors will fall under the scope of decarbonisation, but given that the main generator of greenhouse gas emissions is the energy and fuel sector, the energy transition plays a major role. In addition to the energy sector, other areas that generate significant levels of greenhouse gas emissions are agriculture, industrial processes, and water and waste treatment.
In order to reach the climate targets, mechanisms are needed to contribute to increasing the resilience and the ability to adapt to the hazards related to climate change at the level of the entire economy of Romania. Decarbonisation of economic sectors is a complex process that requires substantial investments and a set of actions and policy instruments, which must take into account the specifics of the economy (e.g. economic incentives, long-term investments in low-carbon technologies, strengthening networks of electricity transport and distribution, the implementation and expansion of storage capacities in batteries to support the development of renewable energy sources, increasing the energy efficiency of buildings, etc.). In addition, it is important to implement policies that ensure the necessary infrastructure to maintain the dynamics of economic activities and allow investments in decarbonisation, very useful during the green transition.
In addition to sustained efforts to decarbonize to meet climate change commitments, other competing imperatives must be addressed simultaneously, such as recovering from multiple recent crises, preparing for a world of automation and artificial intelligence, development on increasingly competitive markets, aspects that will inevitably generate a series of structural changes within the economy.
An example in this regard can be the reorientation of the demand for jobs, from polluting sectors that generate greenhouse gas emissions, to greener sectors. Also, the risks related to decarbonisation investments, including uncertainties arising from regulatory framework or the emergence of low-carbon technologies, can sometimes be quite high.
At the same time, financing costs may be higher for low-carbon technologies, taking into account that they sometimes require more capital than high-carbon ones.
However, the energy transition can be facilitated by a dynamic business environment, which allows a relocation of production factors from less efficient companies to more efficient ones from the perspective of the green transition (whether we are talking about large companies, SMEs, or even start-ups).
Encouraging and attracting investments in Romania, through the development of new, innovative activities with low carbon emissions, therefore represent key elements in the decarbonisation process, but also for supporting economic development, all the more so since, at the European level, the process of transition to climate neutrality represents, along with digitalization, the foundation of the plan for economic recovery, following the effects of the Covid pandemic.
Strategies and other policy instruments that engage long-term government commitments can significantly contribute to attracting investment in low-carbon technologies. An example in this sense is Romania’s Long-Term Strategy for the Reduction of Greenhouse Gas Emissions or the Integrated National Plan in the field of Energy and Climate Change (PNIESC) 2021-2030, which facilitates the fulfilment of the commitments assumed at the European level.
In the short term, the increase in energy efficiency and the expansion of the implementation of renewable sources must be considered in areas such as road transport or light industry. Reducing emissions from energy production can still be based on already existing and relatively affordable technologies. However, a major challenge will be the need for long-term decarbonisation of sectors such as the heavy industry, agriculture, waste management or freight transport, for which reducing greenhouse gas emissions is much more difficult, depending to a large extent on technological developments (e.g. green hydrogen, carbon capture, storage, and usage, etc.).
On the other hand, to support the green transition of the economy, substantial investments are required. According to a report of the World Bank for Europe and Central Asia on climate and development[1], in the case of Romania, the investments required for the green transition in several key economic sectors were estimated at approximately 3 percent of the GDP cumulatively until 2050. In other words, the necessary investments to mitigate climate change in the areas most relevant for decarbonisation (electricity, buildings, and transport) were estimated at 2.9 percent of GDP cumulatively by 2050, aside from the investments needed in other sectors to adapt to climate change, which could amount to an additional 1.3 percent of GDP cumulatively.
For example, in the case of Romania, electricity resources are mainly concentrated in the eastern part of the country, where the nuclear power plant in Cernavoda is located and in the proximity of the Black Sea shore, where significant amounts of wind energy are expected to be produced. In order to properly manage the additional amounts of electricity produced from renewable sources, however, significant investments in the associated infrastructure will be required. In this regard, an example could be the strengthening of the energy transmission system to connect this region with demand centres in the western part of the country or investments in auxiliary services or backup capacities to ensure security of energy supply. In addition, to facilitate and stimulate the export of renewable energy, investments are needed to ensure and strengthen interconnections at the international level.
In this context and considering that Romania faces significant budgetary constraints, in addition to financing from public funds, including European funds, an important role will be assigned to appropriate green investments from the private sector, which will lead investors to less pollutant technologies and fields, by implementing incentives and appropriate governance frameworks.
Climate change mitigation and adaptation measures will, as in many other situations, generate winners and losers. That is why it is very important that Romania, in its transition to climate neutrality, capitalizes on the opportunities and potential for economic growth, for new markets and business models, for technological development, and for the creation of new jobs. The success will depend on many factors, such as significant investment in mitigating, adapting, and resilience to the effects of climate change. Finally yet importantly, as I detailed above, it must be taken into account that climate transition policies are transmitted across borders, and a lack of coordination could accentuate the challenges generated by the scale of the climate transition phenomenon and even the existing economic gaps between countries. That is why Romania could consider the development of partnerships with the states in the area and even the establishment of strategic alliances at the level of Central and Eastern Europe, in the fields considered relevant for our country from the perspective of climate change.
It is essential that we address climate change now, for the sake of the generations to come. The consequences of inaction will have a profound impact on the world in the future. Rising sea levels, extreme weather events, food and water shortages, and ecosystem destruction are just some of the challenges we will face. They will only intensify if we do not take immediate and decisive action. By reducing greenhouse gas emissions, switching to renewable energy sources, and implementing sustainable practices, we can mitigate the most serious effects of climate change. Protecting the environment through ecological development and fighting climate change is therefore not a choice, but a responsibility towards future generations.
