Post-communist lessons for the green transition

Three decades after the events that lifted the Iron Curtain and sparked the integration of Central, Eastern, and Southeastern Europe into the global economy, we are on the cusp of a new historic transition. This time, however, it is the entire world that will change.

As we shift to a climate-friendly, truly digital economy, we should heed the lessons of post-communist Europe in the 1990s. One is that norms and behavioral patterns that have been hardwired into society cannot be reversed overnight. Change takes time, which is why it is never too early to begin the process.

A second lesson is that any transition path will be rocky. Like the evolution of political and economic systems after communism, the transition to a "net-zero" society risks disrupting individual lives and deepening social inequalities.

Some jobs that were once thought to be secure for life will necessarily disappear, which means that the process must be inclusive from the start. In practice, making social cohesion and solidarity a top-level priority throughout the transition will require providing concrete support to help people seize new opportunities, as well as managing expectations to avoid disillusionment.

With hindsight, we know that the societal upheaval 30 years ago was worth it, because it produced so many success stories. We therefore should not fear the green transition. It, too, offers new opportunity to build a more prosperous world.

Investments in human and physical capital will be the key to this transition. For change to be inclusive, we will need to invest more in schools, universities, and adult learning. In Europe and beyond, the green transformation will hinge on people's creativity and technological and scientific prowess.

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A third lesson is that to mobilize the necessary investments, policymakers will need to send clear signals and provide real incentives. In the 1990s and early 2000s, European post-communist countries followed a roadmap defined by the so-called Washington Consensus, a set of market-liberalizing reforms. The opportunity to join the European Union served as a powerful incentive to embrace these policies, and the need to harmonize their legislation with EU law provided a detailed blueprint for implementing them. The EU accession process, in turn, prompted substantial capital inflows, much of it direct investment, which supported the region's integration into global value chains.

With the green transition, the institutional path is not as clear; indeed, we are still piecing it together. Once again, the United States and the EU will need to take the lead and provide policy guidance. We should establish a new Transatlantic Partnership for Climate to develop fully compatible regulatory frameworks and a common vision on carbon pricing. The private sector is eager for more clarity on the emerging taxonomies for sustainable investment.

Now that the US has reaffirmed its climate commitments, the same transatlantic relationship that inspired democratic reforms in Europe 30 years ago can become the engine of the green transition. Involving China and India and leveraging the power of the G20 will be easier if the transatlantic partners are acting jointly.

But to reach net-zero greenhouse-gas emissions in time, Europe will need to ratchet up its spending on research and development. The International Energy Agency estimates that carbon dioxide emissions fell about 8% last year, owing to the Covid-19 lockdowns. If we are to hold global warming within 1.5°C of pre-industrial temperatures, emissions must fall by the same margin every year for the next decade.

Obviously, we cannot achieve those kinds of sustained reductions through more lockdowns, nor can we rely on any other kind of sudden forced change in behavior. What we need is massive investment in new technologies. To hit its 2030 emissions-reduction target (55% below 1990 levels), Europe must mobilize an estimated €350 billion ($418 billion) of additional investment per year.

In the post-communist transformation, technological transfers and new innovations helped to propel growth and job creation in Central, Eastern, and Southeastern Europe. To drive breakthroughs in climate technologies, Europe needs to exhibit a greater willingness to fund ideas that are not yet ready for the market. It cannot simply replicate the best innovations from elsewhere.

While the EU's knowledge-sharing platforms and venture capital funds represent steps in the right direction, they are not ambitious enough. Research shows that the carbon footprint shrinks faster in economies that receive more funding from equity markets than from credit markets.

Likewise, Europe's green taxonomy discussion is necessary, but it ought to go further. We must create an investment environment that will produce a truly just transition. When new technologies do emerge, they need to be able to grow to scale and become attractive for developed as well as developing countries around the world. Like the post-communist transition in the 1990s, climate action, technological innovation, and economic development should become inseparable parts of a single strategy to achieve a singular transformation.

Werner Hoyer is President of the European Investment Bank

Sabine Mauderer is a member of the Executive Board of the Deutsche Bundesbank

Disclaimer: This article first appeared on Project Syndicate, and is published by special syndication arrangement