The world can harness trade to save the planet
SHARM EL-SHEIKH, Egypt (Reuters Breakingviews) – Trade is a major cause of global warming. Think of all those goods that travel far and wide on polluting ships – and the raw materials and components that cross the world in complex supply chains.
But good trade policies can also do a lot to save the planet. The solution is to tax trade in carbon-intensive goods and remove tariffs on clean goods, while subsidizing green technologies and stopping aid for dirty goods. And to do it all fairly.
Trade was not at the forefront of COP27, the United Nations climate conference that just ended in Egypt. It must be central by next year’s COP28 in Dubai. Five principles would make a big difference.
The first step is to have fair carbon prices. Taxing companies based on the amount of carbon they emit would go a long way to stopping climate change. This would encourage them to reduce their emissions and switch to cleaner technologies. The International Monetary Fund thinks a tax of $75 for every ton of carbon emitted by 2030 would do the trick.
The catch is that while 46 countries have put a price on carbon, the average price is only $6 a ton. Of the major economies, only the European Union and the United Kingdom set a carbon price at or above $75 per tonne. This places their industries at a competitive disadvantage. If these countries end up importing cheaper, more carbon-intensive products from abroad – known as “carbon leakage” – the planet could still suffer.
This is why the EU is expected to finalize plans for a Carbon Border Adjustment Mechanism (CBAM) next month. The idea is to impose tariffs on imports from countries that do not tax their companies enough for the carbon they emit, starting in 2026.
The plan could spur other countries to introduce their own higher carbon taxes. But it could also trigger trade disputes, especially with the United States, which does not plan to introduce carbon taxes. Even if President Joe Biden wanted to, he couldn’t push legislation through Congress. His administration argues that what really matters is reducing carbon emissions — and that US regulations and subsidies have a tax-like impact.
Unfortunately, there is no agreed methodology on how to compare regulations and carbon taxes. The problem does not only apply to the EU’s CBAM, but also to carbon tariffs that other countries might launch. The idea that America could tax imports without taxing the carbon emitted by craft production is particularly controversial. The World Trade Organization is concerned that imposing carbon tariffs in an uncoordinated way could harm global trade and is working on a framework to avoid this.
The second principle is to make subsidies fairer. The EU says it has designed its CBAM to comply with the key WTO principle of non-discrimination. There is no evidence that America has done the same with its Inflation Reduction Act (IRA), which earmarked $369 billion in subsidies for clean technologies such as electric vehicles, green hydrogen and fuels. batteries.
The EU and other countries are unhappy that the IRA favors US producers over foreign-made rivals. It’s not just unfair. It divides trade, preventing industries from benefiting from global economies of scale. As such, it undermines what is otherwise an excellent climate change initiative.
The EU hopes to resolve its dispute at next month’s meeting of the US-EU Trade and Technology Council. A high-level working group tries to find a compromise. While the Biden administration won’t be able to change IRA legislation itself, it could soften its protectionist elements via a slew of regulations it has yet to write.
REDUCED FOSSIL FUEL SUBSIDIES
In addition to encouraging clean technologies, the world could penalize the consumption of fossil fuels. For the moment, he artificially supports it. Total fossil fuel subsidies amounted to $5.9 trillion, or 6.8% of global GDP, in 2020, according to the IMF. The lion’s share of these subsidies are “implicit subsidies” where governments do not charge enough for the environmental damage caused by burning oil, gas and coal, or do not apply normal consumption taxes.
The Group of 20 major economies said it would “step up efforts” to phase out inefficient fossil fuel subsidies at its summit last week in Indonesia. Their leaders first made that promise in 2009. Let’s hope they mean it now.
The fourth principle is to tax ships and planes. International trade accounts for 20-30% of total greenhouse gas emissions, most of which are carbon dioxide, according to the WTO. This is split between producing goods and shipping them. The international transport sector accounts for 12% of global emissions.
One way to solve the problem would be to tax emissions from ships and planes. This would prevent companies from shipping goods over long distances when there is no compelling logic to do so. It would also stimulate the development of cleaner transport fuels.
The EU tried to tax flights like this a decade ago, but backed down when America, China and others threatened retaliation. Now is the time to relaunch the effort.
The final part of the mix is to promote green business. The easier it is to transfer clean technologies such as solar panels around the world at low cost, the faster countries will be able to tackle climate change.
WTO Director-General Ngozi Okonjo-Iweala pointed out in Egypt that in many countries tariffs on fossil fuels are lower than those on renewables. It’s crazy. She wants to relaunch talks on a global environmental trade pact. Although these collapsed in 2016, the climate emergency could provide the impetus needed to strike a deal.
Global trade is struggling following the Covid-19 pandemic, Russia’s invasion of Ukraine and tensions between China and America. But last week’s detente between the People’s Republic and the United States means the two biggest carbon polluters are talking about climate change again. By COP28, these and other countries should advance trade policies to save the planet.
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(Editing by Peter Thal Larsen and Oliver Taslic)
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