WORKING PAPER 24-4 Energy transition: The race between technology and political backlash Pierre-Olivier Gourinchas, Gregor Schwerhoff, and Antonio Spilimbergo March 2024 ABSTRACT The green transition faces old and new challenges. Old challenges include insufficient domestic action and challenging international coordination. New challenges include the quest for energy security and the rising threat of geoeconomic fragmentation, the political backlash against climate policies, and a slowing growth prospect. At the same time, technological progress has been faster than expected. The success of the green transition depends on the outcome of the race between technological progress and rising inward-looking policies. Energy security and green transition are mutually reinforcing provided clear policy directions are given. The challenge is to pursue collaboration to exploit technological progress in a world at risk of fragmentation. JEL Codes: O38, Q43, Q54 Keywords: climate policy, energy security, innovation Authors’ Note: This paper was prepared for a conference on Macroeconomic Implications of Climate Action on June 5-6, 2023, at the Peterson Institute for International Economics (PIIE). The authors thank Jean Pisani-Ferry, Alain de Serres, James Stock, Florence Jaumotte, and the participants to the PIIE conference for helpful comments and suggestions. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 1750 Massachusetts Avenue, NW | Washington, DC 20036-1903 USA | +1.202.328.9000 | www.piie.com Pierre-Olivier Gourinchas is the economic counselor and director of research of the International Monetary Fund (IMF). Gregor Schwerhoff is an economist in the IMF Research Department. Antonio Spilimbergo is deputy director in the Research Department at the IMF and research fellow of CEPR. 1. Introduction The 2015 Paris Agreement provided both a shared mitigation goal to keep the rise in mean global temperature to less than 1.5°C compared to the preindustrial level and a framework centered on voluntary nationally determined contributions (NDCs). The agreement was historic because it was signed by almost all countries and provided a clear and monitorable target. However, it also raised domestic and international implementation challenges. The domestic challenges include the need for deep structural change to achieve climate objectives. Such challenges include the handling of stranded assets in the carbon-intensive sectors as well as sectoral and regional labor market dislocations. The mechanisms by which structural changes would be effected—an increase in the relative price of carbon-intensive energy and regulatory policies—present challenges of their own, including the impacts of green policies on the macroeconomy, potentially large distributional effects and strong political opposition, or effects on the competitiveness of carbon-intensive industries. Macroeconomic estimates of the costs of the green transition vary widely. Some analysts, such as Jean Pisani-Ferry (2021), warn that the macroeconomic costs of the climate transition might be quite high. The speed of the needed transformation required to limit catastrophic climate change, they argue, is bound to have serious and immediate negative economic implications. Others, such as Nicholas Stern (2016), argue that the transition to lowcarbon growth will unleash wider economic benefits. In an empirical study of Europe, Gilbert Metcalf and James Stock (2023) find that carbon taxation has negligible effects on GDP while being very effective for emission reductions. There are thus economic upside and downside risks to modeling estimates: On the upside, future technological breakthroughs might reduce mitigation cost. An additional benefit may arise from the reduction in local air pollution, expected to improve health and increase labor productivity (Graff Zivin and Neidell 2012). Downside risks include stranded fossil fuel assets, difficult reallocation of labor across sectors, scarcity of some key metals and material necessary for the transition, the scale and speed of the required investments in the transition, increased production costs, and inflation. Focusing more narrowly on the near-term macroeconomic impact of feasible decarbonization policies, an IMF study using the new Global Macroeconomic Model for the Energy Transition (GMMET) estimated global annual costs of b