Dollar hegemony bad for climate-Global green transition infeasible

The climate crisis offers a new angle from which to evaluate US dollar hegemony, since carbon emissions are tied to economic activity.

Dollar hegemony constrains the rest of the world’s ability to finance the green transition because other countries have less control over their own monetary policy.2 My research3 suggests that dollar hegemony is an external constraint on US decarbonization, as well. This is because dollar hegemony:

1. drives up the carbon-intensity of the US growth model;

2. obscures the responsibility for emissions in trade; and

3. undermines American green manufacturing in the global arena.

America’s growth model is driven more by household consumption than exports.4 The dollar’s role as the world’s reserve currency helps increase household consumption domestically. How does that work? The high demand for the dollar, and its resulting overvaluation,5 raises the relative price of American goods in global markets, costing US exports in market share and competitiveness. As a result, the US has become the largest global importer and source of demand.6 In effect, the world transfers its consumption to the US.

Most crucially, household consumption in the US is comparatively carbon-intensive. On average, American households consume more electricity, drive more, and enjoy cheaper fuel per capita than comparable wealthy democracies. Much of that energy consumption comes from fossil fuels. Plotting US trade data against carbon emissions confirms the wider world’s role in American consumption—more imports, more emissions.

Germany, the paragon exporter, complements this dynamic perfectly. The German growth model suppresses wages and household consumption to maintain export competitiveness.7 Thus, when plotting the German current account balance against its emissions, one sees emissions decrease with trade surpluses.

US (left) vs German (right) current account balances and emissions compared

Data: World Resource Institute, World Bank, FRED

To make this comparison even more concrete, let us examine the relationship between the two countries within a single sector: German-manufactured cars, exported to its most valuable trading partner, the US. Suppressing consumption means that German domestic emissions are lower, and that Germany enjoys a trade surplus. This allows Germany to hold US reserve assets as surplus, which, in turn, drives up American deficits, consumption, and emissions. Americans then drive the imported German cars with vigor, spewing carbon into the atmosphere and increasing domestic emissions. Thus, Germany has lower emissions in part because the US imports them.

In green manufacturing, too, dollar centrality undermines the United States’ capacity to remain competitive. The overvaluation of the dollar (remember, due to high demand for it as a reserve asset) has led to the general decline in manufacturing and the overvaluation of US goods on global markets. Comparatively weak resource endowments in the critical minerals needed for green technology8coupled with overpriced green manufactures do not bode well for the United States in its effort to lead the green transition.

We are already witnessing this dynamic at play—US solar panel manufacturers are unable to compete with Chinese ones. China produces the majority of solar panels in the world and President Biden recently suspended added tariffs and duties on Chinese solar-panel imports to accelerate decarbonization. Naturally, American solar producers are unhappy with the decision because they cannot hope to compete with Chinese prices. Yet given China’s semi-monopoly over the critical minerals needed for green tech and their competitive pricing, rapid decarbonization sometimes requires open trade partnerships.