Countervailing impacts of fossil fuel production and exports of electrical goods on energy transitions and climate change

Abstract

We analyze the implications of fossil fuel production by the U.S. and increasing exports of electrical goods by China on critical mineral prices, energy transitions, and climate change. Using a GVAR model from July 2012 to December 2019, encompassing 12 economies, we employ the dominant unit model and structural identification of shocks. Our findings reveal that increased U.S. fossil fuel production leads to a rise in global CO2 emissions, hampers domestic energy transitions, and triggers changes in critical mineral markets. Fossil fuel emerges as the primary external factor influencing national energy matrices and carbon emissions, highlighting spillover effects from the U.S. energy matrix on the global economy. While U.S. fossil fuel production negatively impacts energy transitions over the long term, Chinese exports of electrical goods contribute to cleaner energy production. These countervailing forces suggest that the global transition to clean energy may occur, but it will be slow. We discuss policy implications, which should: i) promote international trade by reducing protectionist policies and establishing multilateral or bilateral agreements; ii) incentivize the adoption of clean energy; and iii) diminish the incentive to use fossil fuel energy through fiscal and tax policies.