Industry Transition to Climate Neutrality: Comparing Policy Approaches in Times of Geopolitical Fragmentation

Abstract

European climate policy was traditionally pursued in the expectation of global policy convergence, ensuring equal opportunities for domestic and foreign firms in achieving climate neutrality. However, increasing geopolitical fragmentation has disrupted this expectation. Across the globe, national strategies increasingly favor economic policies that benefit domestic industries and coercive economic networks, altering the effectiveness of climate measures along international value chains. This study evaluates three policy approaches governing the transition to a climate neutral basic materials sector – (i) polluter pays, (ii) dedicated policies targeting both production and use, and (iii) green demand – to assess their political viability in the context of European policy in a fragmented world. Our analysis suggests that in a fragmented world, both the polluter pays and green demand policy approaches face significant challenges in achieving climate neutrality at sufficient stringency. A decarbonization approach based on separate but coordinated policies for material production and use appears to be more politically viable.