Jessica F. Green is a political science professor at the University of Toronto and the author of “Existential Politics: Why Global Climate Institutions Are Failing and How to Fix Them.”
Australian mining tycoon Clive Palmer is a great example of what’s wrong with international climate policy. When his own government refused to grant him mining licenses for iron and coal because of concerns about carbon emissions, he sued them repeatedly, seeking a total of roughly $400 billion in lost profits.
When that failed, he used a legal loophole — transferring assets to a firm of his based in Singapore — to make his case for financial compensation as a foreign investor using an international arbitration system.
After more than two years of legal maneuvering, Palmer also lost that battle last September. But imagine, for a moment, if the Australian government had lost. It would have had to pay one of the world’s wealthiest men large sums of money for the supposed right to accelerate the climate crisis in a country that is already very vulnerable to droughts and fires.
It is hard to square the increasingly devastating effects of the climate crisis with policies that protect fossil asset owners like Palmer. From a climate perspective, the government’s actions have been a no-brainer: mining is an emissions-intensive industry in a country that has some of the highest per capita emissions in the world.
But the case also provides a tangible demonstration of why three decades of international rules to manage climate change have failed to accelerate decarbonization at the pace that the climate crisis demands. We have been overly focused on the wrong problem: emissions mitigation rather than the power asymmetry between green and fossil asset owners.
To date, the UN Framework Convention on Climate Change (UNFCCC) and the Paris Agreement have addressed the climate crisis as a problem of emissions mitigation, with policies such as carbon pricing, offsetting and goals of achieving net zero emissions. These are highly technical approaches that are not readily legible to the public and prone to gaming or outright regulatory capture.
But focusing on assets helps address the real obstacle to decarbonization: how fossil asset owners are able to manipulate emissions-focused policies to maintain the status quo, slowing the growth of green assets. Regulating assets by redirecting their flow in the global economy rather than managing emissions means using international tax, trade and finance institutions rather than the UNFCCC as the engines of multilateral climate policy.
This shift would represent a radical rethink of climate policy. It would also provide a clear indication of which international institutions are best suited to supercharge the energy transition, as well as give them political leeway to actually make progress.
The Real Climate Challenge: Existential Politics
Making progress on the climate crisis means acknowledging that the realities of any contest between green and fossil asset owners is existential: It’s about whose assets and ways of life survive. Fossil assets include fossil fuel and mining companies, heavy industry, industrial agriculture and the banks that finance them, among others. Green assets comprise renewable energy companies and utilities, electric vehicle manufacturers, and firms that produce wind and solar components, among others. These will be the building blocks of the decarbonized economy.
While the diplomatic mantra is that all countries must do their part to reduce emissions, the reality is that we are not all in this together — or equally responsible for the climate crisis. Roughly two-thirds of global emissions between 1854 and 2010 are linked to just 90 firms. And for decades, these firms have been obstructing progress on climate change to protect their bottom lines and to avoid the potential total devaluation of their assets. Oil and gas companies have shifted their strategy from outright denial to greenwashing, maintaining that they are investing in the green economy. However, the numbers don’t lie: their use of renewables is minuscule compared to their total energy production. Simply put, these claims are more marketing varnish than reality.
Green asset owners, by contrast, have struggled to scale up in many countries; due to both economic and technological constraints (though that has changed rapidly in the last decade). As Brett Christophers points out in his book, “The Price is Wrong: Why Capitalism Won’t Save The Planet,” wind and sun are free inputs, but the upfront costs for renewable energy are steep, and profit margins are thin. The combination of costs, political uncertainty and competition from fossil-fuel asset owners means that those who own green assets often need help — a thumb on the scale through government policies — to get them up and running.
“It is hard to square the increasingly devastating effects of the climate crisis with policies that protect fossil asset owners.”
The short-lived U.S. Inflation Reduction Act showed the effectiveness of government intervention. For example, the Act included a $7,500 tax credit to those who purchased electric vehicles. Consumers responded as expected: the credit resulted in increased sales, including a massive spike in last-minute purchases by those who wanted to claim it before the program was dismantled. Even car manufacturers like Ford and General Motors lobbied againstthe repeal of the credits, which would require paring back battery production and result in associated job losses.
In their current state, green asset owners are simply no match for the material and political power of fossil asset owners. This is why focusing on reducing emissions distracts us from the real challenge of decarbonization: reducing the power asymmetry between these two groups. Seen through the lens of existential politics, “climate” policy should have two goals: constrain the power of fossil asset owners and expand the number and influence of green asset owners.
A Focus On Assets
Taken together, these two goals can be translated into concrete policies to accelerate decarbonization. First, tax policy can be a powerful lever for climate action. Countries are losing billions of dollars to corporate offshoring, in which multinational firms report their profits in jurisdictions with low tax rates rather than where the economic value is actually created. For instance, despite being headquartered in California, Apple reported profits in Ireland — a known corporate tax haven — for decades in a mutually beneficial deal: Ireland received tax revenue that it would not have otherwise, while Apple massively reduced its tax bill. (This arrangement worked until the European Court of Justice ruled that it gave Apple an unfair economic advantage.) Studies indicate that these practices result in global revenue losses of between $500 billion and $850 billion per year. Recouping these funds would cover roughly half of the $1.3 trillion in aid that developing countries requested to address climate change at COP29.
Fossil fuel companies are particularly fond of offshoring, and often use shell companies to book their profits in tax havens — jurisdictions with little to no corporate tax. For instance, in 2018 and 2019, Shell booked 7% of its total income in Bermuda and the Bahamas. In so doing, it avoided approximately $700 million in taxes that Shell would have had to pay if it had reported that income in its home country of the Netherlands.
Global rules to increase corporate tax rates can eliminate loopholes like the one Apple used in Ireland. Additional tax revenue can be used to fund efforts to decarbonize or, simply, reduce the material wealth of fossil asset owners. Since oil, gas and energy firms spend billions on lobbying, any money diverted to government coffers is money they can’t use to exercise political influence.
The good news is that there is at least some movement afoot to tackle this problem. More than 145 countries and jurisdictions have agreed to rules to implement a corporate minimum tax of 15% for all firms with over 750 million euros, or nearly $900 million, in revenue. Thus far, more than 60 countries have passed domestic laws to implement the agreement, which is expected to recapture between $150 and $200 billion in revenue annually. The best part of the agreement? There is a built-in enforcement mechanism. If firms choose to report profits in low-tax jurisdictions, they have to pay the difference in their “home” country. So, a corporation based in, say, the Cayman Islands, which has no corporate taxes, would have to pay the difference between its 0% tax rate and 15% to countries that have signed the minimum tax agreement.
Moreover, taxation is gaining prominence in global politics. Countries are beginning to negotiate a framework for global tax cooperation to tackle issues like tax evasion, illicit financial flows and the fair allocation of tax rights. At the 2024 G20 summit, Brazil proposed a billionaire tax on the world’s wealthiest individuals, which was backed by the G20 finance ministers, albeit in very general terms. The proposal remains far from being adopted; it was tabled again at a UN aid conference last June, but this time with additional backing from Spain. Since extreme wealth is a huge driver of emissions, increasing taxes on wealthy individuals and corporations is generally good news for the climate.
The Clive Palmer story indicates another pathway for assets-focused climate policy. Governments can constrain the power of fossil asset owners by phasing out their use of the international arbitration system to protect their fossil fuel investments. Provisions governing the use of the Investor-State Dispute Settlement (ISDS) system are included in trade agreements so that foreign investors can sue states for compensation if domestic regulations impede their investments. As of January, there are more than 2,600 bilateral and multilateral investment treaties that enable use of the ISDS.
“In their current state, green asset owners are simply no match for the material and political power of fossil asset owners.”
Payouts to the fossil fuel industry have indeed been huge. Since 2013, roughly 20% of ISDS cases have involved the fossil fuel industry. The absence of clear guidelines to calculate lost future profits has resulted in awards to fossil fuel companies that are particularly large compared to those in other sectors: the average award to fossil fuel firms is $600 million, five times greater than the average non-fossil fuel award. Eight of the 11 largest ISDS awards — all over $1 billion — have gone to fossil fuel companies and most come from the coffers of middle- to low-income nations.
As the legal scholars Jonathan Bonnitcha and Sarah Brewin explain in a policy brief for the International Institute for Sustainable Development think tank, in 2016, Pakistan was ordered to pay $4 billion to an Australian mining company after it lost an ISDS case — just two months after the International Monetary Fund provided a loan of similar size to bail out the Pakistani economy. (The case was settled after a protracted legal battle, reducing Pakistan’s payments in exchange for a share of the mine’s profits.) These payments constitute a subsidy to fossil asset owners, directly undermining the goals of the Paris Agreement by propping up the profitability of the very activities that exacerbate the climate crisis.
Fortunately, there is a relatively straightforward way to fix this problem: States can simply — and in some cases unilaterally — opt out of the ISDS. Canada did this during negotiations on the Canada-U.S.-Mexico free trade agreement (formerly NAFTA). And eight countries, plus the EU, have already withdrawn from the Energy Charter Treaty, which was created to facilitate foreign energy investment and includes protections via the ISDS, because of it.
Cancelling these provisions will protect states from potentially having to make huge payouts to firms simply for enacting domestic climate policy — a phenomenon that economist Joseph Stiglitz has called “litigation terrorism.” Dismantling these protections makes investing in fossil fuels a riskier proposition because future governmental climate policy may affect potential profitability, and it deprives fossil asset owners of a key weapon in their arsenal for obstructing climate policy. Supporters of maintaining these protections argue that they encourage foreign investment; however, there is ample evidence to the contrary.
Cooperation In An Era Of Global Turmoil
Skeptics will argue that even these relatively modest proposals are infeasible in the current geopolitical moment. The Trump administration is actively undermining the multilateral system. It has withdrawn from the Paris Agreement (again) and, by instituting a unilateral tariff scheme, has single-handedly thrown the global trading system into chaos. The liberal international order is at an inflection point, and it is unclear what comes next.
But uncertainty provides the opportunity for change. Though the speed and scale of the transformation of the current political order may seem unprecedented, the post-industrial world has seen numerous reconfigurations of state power. The decolonization of Africa, the formation of the Eastern bloc and more recently, the economic rise of Brazil, Russia, India and China (the so-called BRICs) have all transformed geopolitics.
This time, however, the transformation is singular, since it is so deeply imbricated with the climate crisis. Geopolitics, climate change and green industrial policy are colliding — creating a new “green world order” that goes well beyond emissions mitigation. The race for critical minerals and escalating trade protectionism are creating enormous shifts in power and new political and economic choices. The middle powers, in particular, will have to decide whether to align and trade with future-oriented decarbonizing states (i.e., China) or to wring the last dollars out of the petro-economy with countries like the U.S. and Russia, and hope for the best.
Re-alignments can also come with conflict. Fear of change, rising costs and Western fears around the rise of China — particularly in its dominance in renewables and critical minerals — make the domestic politics of decarbonization even more challenging.
There is a way through. The current trade chaos provides an opportunity for countries to create new strategies that achieve both economic health and decarbonization. Autarky is infeasible both as an economic strategy and as a climate policy.
Green industrial policy should be crafted with an eye toward new cooperative arrangements and trading partners; they should create a “collaborative advantage,” as political scientist Jonas Nahm notes. For example, Chinese, German and American firms have used their specialized capabilities to mutual benefit in the production of solar photovoltaic (PV) modules. An American start-up firm, backed by venture capital funding, provided new technology, a silicon ink that enhances the efficiency of converting sunlight to electricity. A German manufacturer with experience in circuit board manufacturing used those materials to become one of the leading manufacturers of solar PV equipment. And then Chinese companies, with the experience and infrastructure, scaled it up for mass production. The expertise developed in each country was supported by broader national institutions and policies.
“Green industrial policy should be crafted with an eye toward new cooperative arrangements and trading partners.”
This small example shows how governments could think about green industrial policy as a way to leverage existing capabilities and create new ones. Politicians love to announce grand new projects, but much of the real work of the energy transition will be through governments helping firms find their place in global supply chains. The choice of policy will depend on whether industries are nascent or mature, and the degree of technological development and domestic socioeconomic uncertainty.
In developing green industrial policy, governments should begin with “decarbonizable industries” such as the electric and automotive industries, where technologies are both available and cost-competitive. A focus on these industries will deliver desperately needed near-term carbon reductions as well as economic benefits, since in some cases, such as power generation, green technologies are often cheaper than their fossil counterparts.
It will also yield important political benefits. If some firms in decarbonizable industries can be “flipped” from fossil to green through government incentives, they will likely become advocates for greater climate ambition, thereby enhancing demand for their products and services. For example, the increased sales of EVs due to the U.S. Inflation Reduction Act resulted in growing support for climate policy within the auto industry and was driven by a variety of “local content requirements”: Only EVs with “made in America” parts and domestic labor would qualify for the subsidies. Indeed, when President Trump announced his plan to roll back the subsidy in the new federal budget, the industry, along with its largest union, protested vigorously, lobbying for continued tax credits. Still, those credits were repealed.
A similar story played out in Germany, where the federal government’s investments in green steel, which is produced using renewable energy instead of fossil fuels, helped win the political support of the manufacturing sector. Despite subsequent implementation challenges, the government remains committed to decarbonization and continues to receive support from unions.
Both examples show how domestic economic investments can help build political support. And the larger the decarbonizable industries, the larger the potential coalitions. If enough formerly fossil asset owners “flipped” to green asset owners, this could create a “green spiral,” a positive feedback loop whereby new green asset owners advocate for more stringent climate policy, or a tipping point, where fossil laggards are simply uncompetitive.
The former EV subsidy in the U.S. provides another important insight into principles to guide states in crafting green industrial policy. Some protectionism can be an important political tool. I call this the “Goldilocks approach” — allowing for enough protection to facilitate political coalition building and the creation of green asset owners without the economic losses that result from a complete retreat into autarky.
Canadian Prime Minister Mark Carney’s recent trade deal with China is a good example of striking this balance. Canada agreed to slash the 100% tariff rate, but only on the first 50,000 imported Chinese EVs. This allows some cheaper green vehicles into the country without completely flooding the market, which would overwhelm domestic EV production. Of course, the Canadian auto industry isn’t happy with the decision, but these imports represent only 3% of the nation’s annual auto sales. In the meantime, cheaper EVs for consumers may help potentially drive long-term demand.
Green industrial policy will require a more muscular state — one willing to regulate and impose costs on fossil asset owners. In a time when, as David Wallace-Wells notes, “the whole world has soured on climate politics,” the challenge is to find the political will from voters and governments alike to make such changes. Green industrial policy has a distinct advantage here: it’s about the economy, not the climate. It can provide upfront benefits in the form of jobs, infrastructure and economic competitiveness.
In a time of increasing polarization over climate and a resurgence of climate denialism, focusing on economic arguments is a much safer bet for advancing decarbonization. The battle between fossil and green asset owners is already underway. It’s crucial to empower green asset owners now, both economically and politically, as they fight for their — and our own — futures.
