Globalisation: also part of the solution to climate change

Economic opinion

While economic globalisation has contributed to climate challenge, it can also contribute to possible solutions. Indeed, globalisation accelerates the diffusion of climate-friendly technologies through global networks of industry, capital flows and research and development. In addition, the spread of new technologies will facilitate monitoring and increase transparency on climate action. The challenge, therefore, is to make globalisation both economically and ecologically advantageous. While not an obvious goal, it is a necessary one.

 

Climate change and global warming are - not unjustifiably - hot topics today. In its annual Global Risk Report (2019), the World Economic Forum (WEF) ranked the failure to address climate change and its consequences, such as extreme weather conditions, among the largest and most likely risks the world could face in the next decade. Economic globalisation is often cited as one of the causes of the current climate problems. However, globalisation could also contribute to possible solutions.

Globalisation as a culprit

Economic globalisation is a multi-dimensional concept. In short, it can be defined as the use and distribution of goods and services, people, knowledge and capital across national borders. It's notion regularly evokes controversy. Proponents point to the wide range of available consumer goods and services, efficiency gains due to product specialisation, and the (diffusion of) technological progress. On the other hand, there are also many opponents who see globalisation as the cause of, among other things, increasing income inequality and the destruction of jobs. Economic globalisation is also seen as one of the factors responsible for climate change and environmental issues.

Although it is difficult to calculate the exact climate impact of globalisation, there is clearly a link between the two. This negative impact of globalisation on climate is mainly due to increased greenhouse gas emissions. The main direct sources of greenhouse gas emissions are power supply, industrial production and transport. Even without globalisation, these activities would take place. But the trend towards globalisation in the 20th century and especially in recent decades has contributed to its global acceleration. In the first place, globalisation gave rise to a multiplication of transport networks in the form of road, rail, sea and air transport within and across national borders. In addition, growing international trade and investment have stimulated global industrial activity.

These developments went hand in hand with an increase in global greenhouse gas emissions, (figure). Initially, developed regions such as the US and Europe were the main polluters, but over time emerging economies such as China have become the main emitters. After all, an important part of global production has shifted to these countries, where, moreover, less stringent environmental standards often apply.

Figure – Global trade and greenhouse gas emissions (index 1970 = 100)

Source: KBC Economics based on UNCTAD, JRC EDGAR

But also part of the solution

Economic globalisation has led to many positive developments, but its (negative) contribution to the climate problem is undeniable. This does not mean, however, that globalisation and climate change are incompatible. There is no doubt that the production and transport of goods will have to be done in a more sustainable way going forward. Agreements at the global level and monitored compliance are highly needed. From a macroeconomic point of view, in an ideal world the negative externalities of transport and production would be eliminated or compensated – likely through pricing - without undoing the positive effects of international free trade. However, the means through which such a system, or other options for combating climate change, could be implemented, such as public policy or providing incentives to change private behaviour, have proven difficult to achieve. After all, complex, global problems in the longer term are less of a priority for policymakers, who tend to focus on more acute, national themes where visible results can be achieved quickly.

On the other hand, globalisation can also contribute to possible solutions to climate problems. The diffusion of green or climate-friendly technologies is facilitated through global networks of industry, capital flows and research and development. In addition, the rapid dissemination of technological improvements will also make it possible to better monitor and report on all kinds of climate actions (or the lack thereof). This heightened transparency will increase global climate awareness and the pressure to act will only intensify. In order to tackle the climate issue thoroughly, a profound collaboration between public and private parties with cooperation platforms that cross national borders will be necessary. Globalisation facilitates this process. The European emissions trading system (EU ETS) is also a good example of how globalisation can contribute to climate solutions that are in line with market mechanisms.

It is also important to take greater account of the distribution of the benefits and costs of economic globalisation. Many developing countries today are hardest hit by global warming while enjoying relatively little of the benefits of globalisation. However, throwing the baby out with the bathwater and reversing economic globalisation is a step too far. After all, its positive effects worldwide are considerable. The challenge, therefore, is to make globalisation both economically and ecologically interesting. Not an obvious goal, but a necessary one.

Disclaimer:

Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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