A new political trilemma
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A new trilemma is preoccupying the economist Dani Rodrik:
“This one is the disturbing possibility that it may be impossible simultaneously to combat climate change, boost the middle class in advanced economies, and reduce global poverty. Under current policy trajectories, any combination of two goals appears to come at the expense of the third.”
Rodrik, who is the Ford Foundation Professor of International Political Economy at Harvard Kennedy School, is no stranger to drawing attention to trilemma’s that have proved prescient over subsequent decades.
In 2000 he penned an essay called “the political trilemma of the world economy,” in which he claimed that globalisation, the nation-state, and mass politics could not coexist. According to Rodrik, societies would eventually settle on (at most) two out of three, and governments would most probably start by pulling up the draw bridge to protect the nation-state.
As Rokrik explains in his latest article, in the aftermath of the Second World War policymakers naturally focused on growth and social stability, at the expense of climate change; assuming it even entered their calculus at all.1
“During the early postwar decades, policies in the developed and developing world alike emphasized economic growth and domestic social stability. The advanced economies built extensive welfare states but also progressively opened their markets to poorer countries’ exports, so long as the distributional and social consequences were manageable. The result was inclusive growth in the rich countries, as well as significant poverty reduction in those developing countries that were pursuing the right policies.
Successful as this strategy was, it sidestepped the risks of climate change. Over time, the consequences of economic growth powered by fossil fuels have become increasingly difficult to ignore.”
Thereafter domestic social stability began to crumble as hyper-globalisation undermined wages and employment prospects. The security that many felt rapidly disintegrated. This set the backdrop for the political trilemma identified by Rodrik almost a quarter of a century ago.
Over the past three or four years policymakers have responded by pivoting; focusing on giving back confidence to the middle classes while also tackling climate change.
American policymakers have employed subsidies and tax credits to wrestle back control of critical supply chains such as batteries and semi-conductor chips, and incentivise the buildout of renewable energy, and carbon capture, etc. All the while they have explicitly incentivised the use of domestic inputs, over those imported from overseas (see Second-best climate policy: When political economy trumps economic efficiency).
“In the United States, President Joe Biden’s administration has tackled these new realities head-on. It has broken new ground by promoting substantial investment in renewables and green industries to combat climate change.”
European policymakers have used a different type of incentives to protect its industries while also incentivising industrial decarbonisation. For example, the EU’s Carbon Border Adjustment Mechanism (CBAM), which takes effect in 2026, is a pioneering use of trade policy to help the bloc meet its climate goals (see Carbon markets are going global).
“The EU’s carbon-pricing mechanism will soon require “dirty” exporters from developing countries to pay additional tariffs.”
Rodrik believes that policymakers pivot to protect the nation state and tackle climate change - as evidenced in the US and Europe - must now come at the expense of reducing global poverty.
“This new focus on climate and the middle class is long overdue. But what US and European policymakers see as a necessary response to neoliberalism’s failures looks, to poor countries, like an assault on their development prospects. The recent crop of industrial policies and other regulations are often discriminatory and threaten to keep out manufactured goods from developing countries.”
I’ve highlighted the potential for CBAM to adversely affect less developed economies before. The carbon border levy will accelerate the adoption of carbon pricing as an instrument of decarbonisation. We can see this in places like Indonesia, Turkey, and Brazil that are looking to introduce these carbon pricing policies, but can also support the necessary capital investment to decarbonise.
But for many countries, especially those less able or willing to expend the political capital to impose carbon pricing, carbon intensive industries face being priced out of European markets, forcing them to seek alternative markets for their higher carbon intensive commodities (see No level playing field: Europe's carbon levy will accelerate adoption of carbon pricing, but not everyone will win).
Western governments have unsurprisingly behaved distinctly myopic in their pivot to protecting the nation state and the environment above all else. All the hard work being carried out to cut emissions in advanced economies risks being undone if governments fail to support the development of emerging economies. Climate change is an existential global issue, and one that will not be solved if climate policy is part of a zero-sum game.
“…it will be virtually impossible to address climate change without significant cooperation from developing countries. While emissions from the US and Europe have been declining, developing-country emissions are still rising, in some cases rapidly, and their contribution to global emissions (excluding China) will soon exceed 50%. Hence it is in rich countries’ self-interest to promote green-transition policies that poor countries regard as part of their own growth strategies, not just as pure cost.”
Advanced nations should look to invest in less developed countries energy transition and industrial decarbonisation, finance the infrastructure necessary to clean up their environment, incentivise the introduction of policies such as carbon pricing and other regulations, and most importantly, boost trade and investment to help support their economic growth.
“We can imagine an alternative combination of policies that focus on poor countries and the climate. This would entail a large transfer of resources – financial and technological – from the North to the South, to ensure the requisite investments in climate adaptation and mitigation in the latter.
It would also require significantly greater access in the North’s markets to goods, services, and workers from the poor countries of the South, to enhance these workers’ economic opportunities.”
This will accelerate their progress through and beyond the tipping point described in the Environmental Kuznets Curve (EKC). This is the point at which economic development reaches a certain level and where further incremental growth results in a decline in environmental degradation, not more (see Prosperity bends the curve).
Recent trends in the amount of finance directed at the energy transition in emerging markets and developing economies (EMDE) delivers a sobering view. Low-carbon investment reached a record high in 2022 of $85 billion, but it only represents 14% of the global total, and its the lowest share since 2016. The research, carried out by BloombergNEF, found that outside of the advanced economies, investment remains highly concentrated, primarily in a small number of upper-middle income countries such as Brazil and India.2
Investment falls woefully short of what is required to be on course to reach 1.5C. To meet the IEA’s Net Zero Emissions by 2050 Scenario (NZE), annual investment in EMDE countries will need to hit $2 trillion by 2030, a 24-fold increase on current levels. With poorer countries increasingly marginalised as the West focuses on the nation-state and it’s own domestic climate policies, their share of future low-carbon investment is likely to get squeezed even further.
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www.project-syndicate.org/commentary/new-trilemma-of-climate-change-global-poverty-rich-countries-middle-classes-by-dani-rodrik-2024-09
https://about.bnef.com/blog/mobilizing-capital-in-and-to-emerging-markets/