Nicholas Mulder is an assistant professor of modern European history and a Milstein faculty fellow in the department of history at Cornell University.
The Inflation Reduction Act (IRA) marks a new phase in U.S. environmental politics and is a cause for some optimism: $369 billion will be made available over the next decade to expand renewable energy, electric vehicles, carbon capture, clean fuels and other climate measures. The United States, long a laggard in climate change mitigation, now seems on its way toward meeting the emissions reduction target of 50% from 2005 levels by the end of this decade.
But the IRA’s potential to reinvigorate international climate politics is circumscribed by two serious global crises, one economic and the other geopolitical: rapidly rising energy prices and the turmoil caused by Russia’s invasion of Ukraine. The conflict has been particularly destabilizing because of the economic warfare that ensued: an international array of financial, commercial and technological sanctions imposed against the Russian economy, and Russian blockades of Ukrainian ports and reductions in gas deliveries to Europe.
Like climate policy, sanctions are an economic attempt to force behavioral change. The big question is whether they currently impede or accelerate the goal of decarbonization.
Does the ongoing Western attempt to reduce exports of Russian hydrocarbons merely boost hydrocarbon production in other countries, leaving the climate as badly off as it was before? Or can an improvised international sanctions policy offer a glimpse of how we might coordinate a broader international effort away from oil and gas?
The sanctions against Russia, the world’s third-largest producer of oil and second-largest producer of natural gas, aim in part to cripple its fossil fuel exports. Russia is now facing a future of declining energy production; its oil output is expected to fall between 25% and 50% by the end of the decade. On the demand side, Europe is scrambling to reduce its dependence on Russian energy by cobbling together imports from a variety of sources — oil from Norway and Iraq, for example, and natural gas from the U.S. and Qatar.
“Can an improvised international sanctions policy offer a glimpse of how we might coordinate a broader international effort away from oil and gas?”
Renewable energy investment in wind, solar and nuclear will play a role in making up the shortfall as well. Europe’s overarching goal of achieving carbon neutrality by 2050 remains unchanged. Optimists argue that ending reliance on Russian fossil fuels in the short term will ultimately help to end reliance on fossil fuels in general.
Yet climate impact has never really been a prime concern for sanctions policymakers. Indeed, economic coercion has often stimulated pollution and extractive industries. For much of the 20th century, countries that came under external economic pressure tended to increase rather than reduce their reliance on fossil fuels. From Nazi Germany to apartheid South Africa, regimes threatened with oil blockades resorted to ultra-carbon-intensive chemical processes to obtain petroleum from coal. Decades of sanctions against Iran have encouraged land use patterns that depleted its lakes and rivers. The U.S. embargo against Venezuelan oil has led the Nicolás Maduro regime to massively ramp up illegal mining and logging in the Amazon rainforest, a desperate rush for gold, diamonds and timber that is destroying one of the planet’s most precious carbon sinks.
Economic coercion affects the prospects for decarbonization not just through resource use but through price levels. Here the effects of US sanctions have begun to accumulate. Washington’s lengthy effort to constrain Iran and Venezuela’s oil exports during the 2010s reduced the available supply on the international oil market. This gave the Biden administration less room to work with when it began to impose major sanctions against Russia in February. But the resulting energy price shock of 2022 has exposed a much larger problem: that the dominant view of how the world economy will make a smooth transition to a low-carbon future is illusory.
For a long time, it has been assumed that the global switch to renewable energy would benefit from continuous gentle energy price inflation. Underlying this was a neo-classical view of carbon pricing: If the price of fossil fuels rose steadily, up to the point where consumer demand for carbon assets — and with it corporate investment — would start being diverted into renewables, then decarbonization would happen smoothly. Price signals in a free market would suffice to render human civilization greener.
Sensible though this theory seemed to many, it is now evident that broad price spikes are very damaging to the low-carbon transition. This is not just because they can trigger recessions that destroy demand and leave unused precious resources that could accelerate the green transition. Renewables also depend on supply chains bringing together raw materials — lithium, copper, steel, rare-earth metals — whose price is co-determined by energy prices. By raising the cost of transport and industrial production, energy crises cause shortages of all sorts of components needed for the green transition.
What the world economy needs is an energy price level that both encourages investment in green technology and simultaneously keeps such capital expenditures profitable and sustainable. Ideally, this would be delivered if policymakers can guarantee a prolonged period in which demand growth is steady but price volatility is low. This would allow governments to channel resources into large-scale projects and from rich to poor countries. In such a scenario, renewable investment would accumulate up to the point where the price structure and capital allocation of the world economy ultimately pivot decisively toward green energy.
“It is now evident that broad price spikes are very damaging to the low-carbon transition.”
This sounds like a pleasant trajectory. But to anyone who has observed the last two years of pervasive chaos in financial and commodity markets, and concomitant recession and inflation fears, it should be clear that the chances of our world economy making such a smooth transition to a green future are vanishingly small.
This year has exposed the Goldilocks scenario of price stability during the energy transition for the fantasy it is. Consumer confidence and investor sentiment are highly volatile and brittle. Instead of paving the way to the low-carbon transition, today’s elevated oil and gas prices are shifting the relative balance of power between fossil capital and green capital back toward the former. This has consequences beyond enriching a few unproductive asset managers. Petro-states too are seeing their economic model experience a new lease on life. Even under sanctions, Russian energy revenues rose to $167 billion in the first six months of this year. According to the IMF, Middle Eastern hydrocarbon exporters stand to gain an additional $1.3 trillion in revenues in the next four years.
The adverse effect of price movements on the international system has spawned some creative thinking, too. The most innovative idea yet is to cap prices on Russian oil exports. In theory, this would financially weaken Russia while macro-economically benefiting the world economy. In June, G7 policymakers began to explore the idea, including potentially using the threat of sanctions against private insurance companies that cover oil cargoes sold above the agreed price ceiling.
But implementing such a policy would be rife with problems. For one thing, it is not yet clear whether major importers of Russian oil such as India and China would be fully on board. For another, it could be skirted by transporting oil in state-owned vessels that enjoy sovereign insurance.
Nonetheless, the price cap scheme’s innovative nature is a step forward. It is the first coordinated attempt to impose international energy price controls in the 21st century. Even if it does not come to fruition, its example is instructive for possible future applications. Other commodities important to the energy transition might lend themselves more easily to coordinated management. Sudden spikes in food prices caused by the low-carbon transition could erode support for it. But what if the 10 countries that grow 69% of the world’s wheat collaborated to impose floors and ceilings on this vital cereal?
Or imagine a set of price control agreements aimed at managing the prices of key raw materials for green energy technologies, such as lithium, 99% of which is produced by just four countries. This could take the form of an international framework to let the lithium price float between a minimum level to spur investment and a maximum level to guarantee affordable access and speed up the expansion of global battery capacity.
Of course, price management is a deeply and openly political undertaking. By engaging in it, governments will lower the incomes of some groups and increase the gains of others. There is no way out of this dilemma. Economic war and climate politics are both domains in which the outcomes of policy are decided in the forcefield between the state and capital. As public policy measures, the success or failure of both sanctions and climate measures hinges on the reaction of the private sector.
But it has proven difficult to formulate an accurate theory of private sector responsiveness to sanctions and climate measures. U.S. policymakers were somewhat surprised by the market reaction to the sanctions imposed against Moscow this spring. Corporations left Russia with remarkable speed, but bond yields also rose across emerging markets as sovereign default risk increased. Technological decoupling also went far beyond the letter of the official sanctions measures.
Much of this was welcomed in the campaign to impose pressure on Vladimir Putin. “Self-sanctioning” added a wave of private sector divestment to the raft of Western government prohibitions being rolled out. Sanctions enforcement agencies such as the Treasury’s Office of Foreign Assets Control (OFAC) have previously fanned corporate fears of falling afoul of sanctions to add punch to their restrictive measures against Iran and North Korea.
But the Biden administration also underestimated the way the economic offensive against the Kremlin would ripple across commodities markets, including un-sanctioned markets such as grain and fertilizer. These price surges ricocheted back to the U.S. economy, contributing to pressure on Biden to act on inflation.
The private sector’s role in determining sanctions outcomes is also the result of governments failing to take seriously the task of damage control in economic war. As Edoardo Saravalle has argued, U.S. economic statecraft has prioritized coercion over its ability to reassure and stabilize markets. Washington can use its control over the dollar to block hostile central banks from accessing their international reserves. But a responsible hegemon should also be prepared to mobilize dollar liquidity to facilitate trade finance in essential goods and to unclog supply bottlenecks. One modern-day equivalent might be a “constructive OFAC,” but a more multilateral institution with broader legitimacy would be better still. In the interwar period, the League of Nations envisioned a special financial institute for this purpose — effectively a proto-IMF dedicated to financially fighting the fallout from geopolitical emergencies.
Eliciting the desired response from the private sector is an even more acute challenge for climate policy. Governments publicly set emissions reduction goals in the hope that they will catalyze corporate action. But long-term public commitments are no substitute for actual climate finance. Even when governments are prepared to pay, the dominant decarbonization approach remains centered around carbon pricing through taxes and investment stimulus through tax credits. Biden’s IRA exemplifies this philosophy: More than half of its $369 billion in climate spending consists of tax credits to incentivize consumers and businesses.
“Big green states would combine providential and coercive functions.”
While such incentives help, they remain an incomplete solution. Our planet’s energy transition is currently far behind schedule, but this is hardly just because of affordability and cost issues. Renewable energy prices have in fact fallen dramatically in the last decade. Instead, the lack of progress has much to do with the fickleness of household and business decision-making in a global economy where market pressures remain dominant. Risk, not cost, is what prevents the private sector from becoming a reliable conductor of planetary decarbonization efforts. Hence the state, which has a greater risk-bearing ability and a longer time horizon than the private sector, must necessarily play a leading role — not to the exclusion of households and businesses, but as an initiator of investment and a coordinator of private decarbonization plans. Such a strategy, led by what economist Daniela Gabor calls the “big green state,” would rely on indicative planning, capital controls and green public investment to guide the private sector in the multi-decade process of decarbonization.
Big green states would combine providential and coercive functions. Their main focus would be to mobilize funds for investment: At least $5 trillion annually (circa 4.8 percent of global GDP in 2022), according to one estimate, will be needed until 2030. But these decarbonization states would also bring to heel non-complying actors who refuse to remain within broad emissions-reduction parameters.
Here the U.S. experience with the use of sanctions since the 1990s is enlightening. Sanctions have great potential as enforcement tools when used against companies: Multinational corporations and banks are especially vulnerable to liquidity shortages. They have much greater funding needs than individuals but lack the carapace of sovereignty that governments possess. States can respond to the pressure of sanctions by printing money, imposing taxes, smuggling goods, repressing living standards or mobilizing their constituents. This is why sanctions against governments often fail. But the success rate of sanctions or threats thereof against individual private firms is higher. Few modern companies can survive for more than a few weeks without access to hard currency and major Western markets unless they possess some kind of state backing. This is the Achilles heel that climate sanctions can exploit.
The main issue in using climate sanctions against corporations is that they turn a tool of foreign policy into an instrument of economic regulation. In many countries, moreover, close links between the state and capital complicate the task of punishing major corporate transgressors. Precisely for this reason, big green states should employ sanctions only as a complement to their main task: the planning, financing and coordinating of the energy transition. Sanctions are primarily prohibitive and destructive of business activity; only sustained investment can create new economic activity.
Amid the energy crisis, national governments are beginning to respond to public pressure for more equal burden-sharing. Even strongly pro-market parties like the British Conservatives have accepted windfall profits taxes on energy companies. More statist economies like France and Spain have embraced the outright nationalization of utilities and the redistribution of private profits to consumers. After the pandemic of 2020 and the supply chain crisis of 2021, the energy crisis of 2022 is further breaking old constraints on what the state can do to capital. The ability to engage in democratically directed capital leadership — and if necessary, capital coercion — will be a key dimension of state capacity in the implementation of future climate policy.
Even if the twin challenges of price administration and public leadership of private investment can be mastered, any planetary green politics must still navigate the international system. Sanctions and climate policy are both incomplete forms of internationalism, torn between multilateral aims and unilateral realities. They aspire to unite countries worldwide in rules-based moral communities. But in practice, their implementation often falls to powerful hegemonic states, or coalitions of the willing that include some states but leave out many others.
In the anti-Russia sanctions coalition, major emerging-market economies such as China, India, Brazil and Turkey remain noticeably absent. Likewise, before the IRA, the inability of the U.S. to pass meaningful climate legislation drew into question its commitment to combating climate change internationally.
The question of international political alignment is heightened by rising U.S.-China tensions. The IRA was signed into law just two weeks after House Speaker Nancy Pelosi’s visit to Taiwan prompted China to hold military exercises and suspend cooperation with the U.S. on climate issues.
This blow to climate internationalism leaves the world in a paradoxical situation. On the one hand, partly due to the energy crisis and the war, the conditions for a mass green politics are improving across the West. On the other hand, most recent climate policy, from Biden’s IRA to Europe’s energy rationing strategy for the upcoming winter, has been legitimated using a national security framework.
The discourse of energy security and “geo-economics” stimulates a competitive and zero-sum mentality about global politics. Once in place, such paradigms become self-fulfilling. This dynamic poses a real danger to international peace and global governance.
Green policy has proven to be compatible with this new way of thinking. Used in pursuit of geo-economic goals, environmentalism has decisively lost its political innocence. Political theorist Pierre Charbonnier has diagnosed this as our collective arrival in the era of “ecological Realpolitik”: a world where the energy transition is being undertaken by nation-states not because of idealistic motives but to preserve or even increase their political and economic power vis-à-vis competitors.
“Sanctions are primarily prohibitive and destructive of business activity; only sustained investment can create new economic activity.”
As a result, many governments are now jockeying to preserve a competitive edge for their own green capitalists. The stakes of this confrontation are highest in the U.S.-China relationship. Some realists have argued that an environmental arms race between the U.S. and China should be encouraged. Though the idea of a competition to decarbonize as quickly as possible is appealing, the prospect that it will not be a friendly one, and accelerates competition in other domains, is daunting.
Amid growing superpower rivalry, the dilemmas of ecological cooperation increase quickly. Why would China collaborate on green technology with the U.S. when Washington openly seeks to limit Beijing’s progress in semiconductors, AI, computing and other cutting-edge sectors? Conversely, what incentive does the U.S. have to protect the world’s sea lanes for everyone, including for China’s gargantuan energy imports from the Middle East, unless Beijing guarantees international access to its supply of rare-earth metals?
If great power competition is on, would it not make more sense for both sides to try to hamper the other’s clean energy capabilities, even if this sets back global decarbonization as a whole? Unless some rules and limits are agreed upon, ecological paralysis and spiraling global insecurity are a likely outcome. An environmental arms race will ultimately be difficult to separate from an actual arms race.
While it is never possible to remove considerations of power from international economics, there are real synergies to exploit in the global distribution of skills and resources required to make green technology. The U.S. and Europe possess the most capital available for investment, while the East Asian manufacturing complex centered on China is the prime site for producing any technology at scale. Meanwhile, the most urgent mitigation needs are in Latin America, Africa, the Middle East and South Asia, which stand to be severely exposed to floods, storms, heatwaves, wildfires and droughts.
Ultimately, competitive geo-economics is not a promising framework within which to pursue effective global decarbonization: In a world racked by inflation, energy shortages and debt crises, the capacity to respond to climate change will be increasingly lopsided. Richer states in the Global North have both inherent and acquired advantages in this situation, but if they focus on competing over resources on a heating planet, the majority of the world’s population will be sacrificed to the ravages of climate disaster.
The war in Ukraine has exposed how strongly yoked to fossil fuels our world remains. The best policy response that the West has been able to mount to a geopolitical crisis caused by its own dependence on fossil fuels is, by and large, to find those fossil fuels elsewhere. Amid record-breaking summer heatwaves across the Northern Hemisphere, the disruptive process of shifting away from Russian crude and natural gas provides a shocking preview of what will be required to end our civilization’s fossil fuel reliance. But continuous improvisation to fix the problems of the moment should not preclude us from thinking about how to achieve those ultimate goals as quickly and effectively as possible.
Radical, long-term green ambitions will require powerful states, plentiful capital and a good deal of ingenuity. The balance between provision and coercion is also about the management of risk: Whereas risk is routinely left uncontained to amplify the effect of sanctions, risk is also what prevents investors from allocating more capital into green assets.
Ultimately, corporate over-compliance with sanctions and underinvestment in renewable energy are both symptoms of a tumultuous geopolitical landscape and unstable market conditions that breed uncertainty and caution. What is needed are creative policies that alleviate this fearful reticence. In an era of global economic dislocation, the urgent goal of achieving a fair and rapid energy transition can only be achieved by using creative policies to exercise more control over the vagaries of the price mechanism and the investment function.
