The European Central Bank published an Occasional Paper examining how climate transition policies and geoeconomic fragmentation (GEF) interact, concluding that poorly coordinated national transition measures can intensify cross-border frictions and fragmentation, while GEF can in turn slow and complicate the low-carbon transition. The paper is a report of the European System of Central Banks International Relations Committee Network on climate change and does not represent the European Central Bank’s views. The analysis highlights trade, investment and regulatory spillovers as the main transmission channels. It notes that carbon pricing remains globally uncoordinated, with 73 carbon pricing mechanisms in force in 2022 covering 23% of global greenhouse gas emissions, and argues that divergence in policy mixes can trigger subsidy races, protectionism and retaliation. Illustrative examples include the European Union’s Carbon Border Adjustment Mechanism, which requires European importers of a subset of Emissions Trading System products to purchase emissions certificates at the ETS price for embodied emissions, and modelling in a box suggesting that domestic-content provisions in the United States Inflation Reduction Act could materially reduce bilateral trade with the United States in targeted sectors and relocate production. On the reverse link, the paper argues that GEF can restrict trade in green goods and technology diffusion, disrupt concentrated supplies of critical raw materials essential to the transition (including cobalt, rare earth elements and nickel), and reinforce unequal access to sustainable finance, noting International Energy Agency estimates of around USD 2 trillion per year in mitigation investment needs in emerging markets and developing economies by 2030 and that sustainable funds allocated 6% of investments to those economies by end-2022 versus 11% for conventional funds. It identifies research priorities to better quantify these interactions, including improving climate-policy modelling to capture investment and innovation dynamics and developing more granular, forward-looking Inter-Country Input-Output tables that isolate green products and reflect structural changes from the transition.
European Central Bank 2025-01-08
European Central Bank paper links uncoordinated climate transition policies with rising geoeconomic fragmentation risks
The European Central Bank's Occasional Paper analyzes the interaction between climate transition policies and geoeconomic fragmentation (GEF), noting that uncoordinated national measures can worsen cross-border frictions and that GEF can impede the low-carbon transition. It identifies trade, investment, and regulatory spillovers as key channels and highlights the global lack of coordination in carbon pricing. The paper emphasizes the need for improved climate-policy modelling and detailed Inter-Country Input-Output tables to better understand these interactions.