Carbon tariff let’s talk about it.

Home/Featured, M·Blog/Carbon tariff let’s talk about it.

Carbon tariff let’s talk about it.

Political rhetoric is cheap, but drastic cuts in carbon dioxide emissions remain prohibitively expensive and technologically challenging. After all, emissions cuts have been promised (and mostly not delivered) since the “Earth Summit” in Rio de Janeiro in 1992.

Cutting CO2 emissions to net zero by 2050 or much sooner is the ambitious goal being pushed by environmental protesters by politicians around the world. These protesters and politicians get a lot of attention, but their proposals would incur far higher costs than almost any electorate is willing to pay.

Although opinion polls show that people care about climate change and want to spend a relatively modest amount to fix it, they want more spent-on education, health, job opportunities, and social support. Most Americans, for example, are willing to pay up to $200 per year to fight climate change; in China, the amount is about $30. Britons are unwilling to cut their driving, flying, and meat consumption significantly in order to combat climate change. And although the German government prioritizes climate action so highly that it convened a “climate cabinet,” just one-third of Germans support a controversial proposed tax to reduce global warming.

The gulf between politicians and citizens is most apparent in France. The government vowed to cut CO2 emissions sharply by 2050 – but, embarrassingly, this has turned into an empty promise, with almost no meaningful measures enacted under President Emmanuel Macron. That’s because the “Yellow Vest” protest movement took to the streets to push back against the government’s fuel price surcharges, which disproportionately hit car-dependent people in rural areas.

France is not alone in neglecting its lofty promises. Recent analysis shows that of the 185 countries that have ratified the 2015 Paris climate agreement, just 17 – including Algeria and Samoa – are actually meeting their commitments.

The carbon tariff is already on Uncle San’s table

This January, 3,554 US economists – including 27 Nobel laureates, four former Chairs of the Federal Reserve, and two former Treasury Secretaries – proposed a previously heretical policy. The United States, they said, should combine a domestic carbon price with a “border carbon adjustment system.” By backing tariffs that would reflect the carbon intensity of key imports, they broke with the free-market orthodoxy.

The fundamental obstacle to decarbonization is the apparent paradox that the costs are trivial at the final consumer level, but large for an individual company. As the Energy Transitions Commission’s recent Mission Possible report argues for the inclusion of border carbon adjustments (carbon tariffs) in policymakers’ tool kit, the technology to achieve total decarbonization of the global economy by around 2050-60, with very small effects on households’ living standards.

According to the same ETC report in Appendix 2, if all steel used in car manufacturing were produced in a zero-carbon fashion, the price of a typical car would increase less than 1%. The total cost to decarbonize all the harder-to-abate sectors – heavy industries such as steel, cement and chemicals, and long-distance transport (trucking, aviation, and shipping) – would not exceed 0.5% of global GDP. Viewed from this perspective, there is no excuse for national policymakers failing to adopt policies that can drive progress to a zero-carbon economy.

But, viewed from the perspective of an individual company, the costs of decarbonization can be daunting. Producing zero-carbon steel could add 20% to total production costs and producing zero-carbon cement might double cement prices. So, any individual steel or cement company that committed to zero-carbon emissions or was forced to do so by regulation or carbon pricing, could be driven out of business if its competitors did not face equivalent constraints.

The orthodox proposal

In the United States the main, the key centrist proposal, in keeping with the prevailing neoliberal dispensation, is a carbon tax. The idea is simple: if you tax fossil fuels where they enter the economy – be it at a wellhead, mine, or port – you can fully capture the social cost of pollution. In economic parlance, this is known as a Pigovian tax, because it is meant to correct an undesirable outcome in the market, or what the British economist Arthur Pigou defined as a negative externality – in this case, the greenhouse-gas emissions that are responsible for global warming.

Almost all economists who accept climate science believe that carbon taxes, or prices set in an emission-trading scheme, must be part of any optimal policy response. Let us remember that CO2 trade is developed in an artificial market, created by means of Directives, Regulations and Technical Guides for its transposition.

Thus, the fragmentation of its periods of operation, together with the continuous modification of the rules of the game, changing in each of the periods, generates confusion and uncertainty, added to the already complicated economic scenario. This is especially true if the battle against climate change continues. The following graph shows the evolution of the average price of a ton of CO2 Y+1, which is the amount of CO2 that allows the emission of a European Emission Allowance (UEA).

The regulatory ups and downs that occurred in 2007, and that were repeated in 2012, with respect to the rules of the game applicable to the subsequent period, is pointed out in both cases as a fundamental explanation for the respective falls.

Thus, for example, in the first three-year trial period between 2005-2007, banking or carryover of surplus rights to the following period was explicitly prohibited. Therefore, the correlation between its price and its decreasing value, as the change of period approached, was foreseeable.

As a response to climate change, a carbon tax is immensely popular among economists from across the political spectrum. But it is far from sufficient. Rapidly decarbonizing the economy in a way that is economically equitable and politically feasible will require a comprehensive package on the order of the Green New Deal. That means combining some market-based policies with large-scale private- and public-sector investments and carefully crafted environmental regulations.

Even in this case, including a standard carbon tax involves certain risks. Just ask Macron, the lesson from the weekly “yellow vests” protests are clear: unless environmental policies account for today’s high levels of inequality, voters will reject them.

But while the economists couch their argument in language designed to play well in the US, the policy could equally be applied by other countries to defend their industries against carbon-intensive imports from America, should the US choose to be a free rider in efforts to tackle global climate change.

Sometimes, intellectual taboos should be dropped. Border carbon adjustment is an idea whose time has come. It could play a major role in driving progress toward the zero-carbon economy that is technologically and economically possible by mid-century.

Declaring a “climate emergency” generates headlines and makes politicians and activists feel better. But empty rhetoric that ignores economic reality and common sense will not help the planet.

Priscila Scheel| Energy Consultant

By | 2019-07-02T07:34:04+00:00 July 2nd, 2019|Categories: Featured, M·Blog|Tags: , , |0 Comments

Leave A Comment