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T H E C H A N G I N G W E A LTH O F N ATIO N S 2021
Political Economy of Global Cooperation on Climate Change From the policy perspective, the question of who loses the most value in what fuel and under what scenario matters much more than any global value of stranded assets. Two country groups stand out with the highest fossil fuel assets value at risk in dollar terms (figure 10.9). The first is MNA, which is heavily dependent on fossil fuel wealth for growth and export revenue. The most exposed fuel in MNA is oil, which is also the most valuable fuel per unit of energy and the most tradable. The second group consists of middle-income fuel importers including China and India. These countries have a large value of coal reserves exposed to low-carbon transition risk, although their growth and export revenues are not dependent on coal (figure 10.4). Potentially stranded coal assets are not a source of systemic macrofiscal risk, although they pose a challenge for low-carbon transition in the electricity sector and social and political risk because of potentially stranded labor in coal mining. These two most exposed regions differ in many respects but have one surprising common interest—they both benefit from cooperative low-carbon transition. MNA benefits because lower CPL carbon taxes in the cooperative scenarios prolong the transition away from oil in transport in CPLs, which are the major oil importers. China and India also benefit from cooperation because lower domestic carbon taxes in the cooperative scenarios prevent industrial leakage to FFDCs and delay early retirement of some of the most efficient coal power plants. None of these increase global CO2 emissions. Total emission trajectories are the same as in the unilateral policy scenarios (figure 10.6). Emissions just shift between countries. Ambitious unilateral climate policies implemented by large net fuel importers can trigger significant industrial and emissions leakage to fossil fuel–dependent countries. In the unilateral policy scenarios, the OECD countries and middle-income net fuel importers, including China and India, implement much higher domestic carbon taxes to maintain the same global emissions as in the cooperative scenarios. FFDCs continue domestic climate policies just to meet their initial NDC goals. This triggers a chain of macroeconomic pressures on fuel producers and exporters. First, by imposing carbon taxes, fuel importers capture a portion of exporters’ resource rents and collect them as their own fiscal revenue. High carbon taxes in major fossil fuel importers increase fuel prices to their consumers, suppressing external fuel demand. The declines of export demand and/or producer prices reduce the exporters’ opportunity costs of using fuels at home. Exchange rates of exporters’ currencies also fall, reversing the Dutch disease and boosting the export competitiveness of their manufacturing industry (if it is sufficiently developed and competitive). In industrialized fuel-producing countries, a bulk of manufacturing output is concentrated downstream in the value chain of the extractive sectors. In the meantime, foreign competitors in energy-intensive industries are being prematurely retired at home by high unilateral carbon prices. Therefore, the emission- and energy-intensive industries in fuel-producing countries expand their market shares in the globally declining emission-intensive sectors, at the expense of the CPLs. Such traditional diversification away
