At the turning point of a new age of economic, financial and industrial policy, Simon Dikau and David Lunn summarise the importance of seizing this opportunity to deliver sustainable, inclusive and resilient economies and financial systems – and how CETEx will help.

The UN World Meteorological Organization’s latest report highlights that climate records were not just broken but shattered in 2023. Antarctic sea ice has fallen to its lowest level on record and the world’s oceans are suffering heatwave conditions. The world is at a turning point and there is a real risk that it could turn the wrong way.

A backlash against ‘green’ is growing in Europe and elsewhere. Faced with the criticism that the costs of a transition to a low-carbon, nature-positive economy are too high, governments are reconsidering their green policies, succumbing to political pressure and vocal opposition from certain segments of the economy and society. Even corporate and financial market actors have begun to weaken their climate goals, fearing carbon-fuelled profits being slashed, and some are backing out of climate action initiatives they had only recently joined.

But urgent action is necessary if the world is to avoid the worst impacts of a degraded planet in the Anthropocene. This brings an ever increasing need for evidence-based and skilfully designed financial and economic policy measures and strategic reforms to the economic and financial policy frameworks within which they operate – to deliver sustainable, inclusive and resilient economies and financial systems across Europe.

Mobilising research

Researchers have a key role to play in the transition, as trusted advisors and honest brokers of technical policy solutions. Scientists, along with professionals with the technical, legal and institutional expertise, will be pivotal in developing and proposing well targeted policy blueprints. They can operate outside of the public institutions that often have limited capacity, and sometimes little political or policy space, to develop ambitious proposals for policy reform.

Of course, research on its own is not enough, unless it is mobilised to answer the most pressing questions and create the foundation for well-informed and ambitious policy reforms. And it needs to do this in the context of an increasingly complicated and fragmented political environment in which the transition to net zero and sustainable economies has become a point of contention and disagreement on ideological grounds.

At the national level, the governments and authorities of many countries in Europe and elsewhere are challenged by the need to find compelling arguments to support policy and regulatory change that will reduce emissions, and to introduce more sustainable economic development models. In Europe, while there are different visions of the pace and shape of the route to net zero emissions by 2050, political uncertainties around future climate ambitions point to the importance of a clear and honest vision for the transition that explains trade-offs and explores compensation and alternatives.

Building collaboration across borders

International disagreement on climate policy, and an increasingly geopolitically fragmented world in which significant collaboration and coordination are needed along complicated supply chain dependencies, also necessitates strong collaboration outside of short-term political considerations. Historically, Brussels, Washington and Beijing have built on different economic systems to tackle economic policy and more recently climate transition policy, ranging from a focus on regulations or subsidies to centralised industrial policy. Now, increasingly, common ground can be seen in the focus on large-scale financial and economic policy measures.

Tackling the global dimension of reducing emissions and protecting nature and key ecosystem services, while acknowledging local and regional trade-offs with growth, economic development and social stability, presents challenges. This is especially the case in emerging markets and developing economies, but also in the developed world. It is therefore imperative to recognise that new dependencies are already developing and will continue to do so along the renewable energy and technology supply chains – for example, those that connect nickel mining in Indonesia and processing capacity in China and elsewhere to the scaling up of electric vehicles in the EU.

Governments will need to fund and finance much of the cost associated with climate change mitigation and adaptation. At the same time, environmental degradation and climate change, along with shifts in the tax base induced by the transition, will have fiscal implications in terms of spending imperatives and revenue streams.

Central banks and financial supervisors also face significant challenges, with technical (and in some countries political) obstacles to integrating the related economic, financial and price stability implications into assessment and policy frameworks, but some central banks are exploring how to actively support transition efforts.

At the same time, there are significant economic opportunities in the transition to deliver sustainable, inclusive and resilient economies and financial systems across Europe. While it is important to recognise the costs and potential trade-offs in the transition, more resilient and sustainable economies and financial systems are key to ensuring long-term prosperity.

Providing direction as the world reaches a crossroads

The new Centre for Economic Transition Expertise (CETEx) at the London School of Economics and Political Science is being launched with the aim of aiding the conception of compelling arguments to support policy and regulatory change, by synthesising and leveraging research, policy analysis and insights, and communicating these through tailored messaging. CETEx launches at the turning point to a new age of economic, financial and industrial policymaking.