SHARM EL-SHEIKH, Egypt, Nov 21 (Reuters Breakingviews) – Trade is a major cause of global warming. Think of all those goods that come from far away on polluting ships – and raw materials and components that whiz across the world in complex supply chains.
But the right trade policy 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 also subsidizing green technologies and ending aid to dirty ones. And to do all this honestly.
Trade was not prominent at COP27, the United Nations climate conference that just ended in Egypt. It should be front and center by the time of next year’s COP28 in Dubai. Five principles would make a big difference.
The first step is to have balanced carbon rates. Taxing companies based on the amount of carbon they emit would go a long way towards halting climate change. It would encourage them to reduce their emissions and move to cleaner technologies. The International Monetary Fund is considering a tax of $75 for every ton of carbon emitted by 2030 would be enough.
The problem is that while 46 countries have put a price on carbon, the average price is only $6 per ton. Of the major economies, only the European Union and the United Kingdom price carbon at or above $75 per ton. This puts their industries at a competitive disadvantage. If these countries end up importing cheaper, more carbon-intensive products from abroad — something known as “carbon leakage” — the planet could still suffer.
Therefore, the EU is expected to announce plans for a next month Carbon limit adjustment mechanism (CBAM). The idea is to impose import duties from 2026 on countries that do not tax their companies enough for the carbon they emit.
The plan could prompt other countries to introduce their own higher carbon taxes. But it could also lead to trade disputes, especially with the United States, which has no plans to introduce carbon taxes. Even if President Joe Biden wanted to, he won’t get legislation passed by Congress. His administration argues that reducing carbon emissions is the most important thing — and that US regulations and subsidies have a similar impact to a tax.
Unfortunately, there is no agreed method for comparing regulations and carbon taxes. The problem applies not only to the EU’s CBAM, but also to carbon tariffs that other countries may introduce. Particularly controversial is the idea that America could tax imports without taxing the carbon emitted from home-made production. The World Trade Organization is Worried that the uncoordinated imposition of carbon tariffs could harm global trade and is working on a framework to prevent this.
The second principle is to make subsidies fairer. The EU says it has designed its CBAM to comply with the WTO’s key principle of non-discrimination. There is no sign that America has done the same with its Inflation Reduction Act (IRA), which allocates $369 billion in subsidies to clean technologies such as electric vehicles, green hydrogen and batteries.
The EU and other countries are angry that the IRA favors US producers at the expense of foreign rivals. This is not only unfair. It fragments trade, preventing industries from taking advantage of global economies of scale. As such, it undermines what is otherwise an excellent initiative to combat climate change.
The EU hopes to resolve its dispute at the meeting of the US-EU Trade and Technology Council next month. A high level workgroup tries to stamp out a compromise. While the Biden administration won’t be able to change IRA legislation on its own, it could soften its protectionist elements through a host of rules it has yet to write.
SLASH FOSSIL FUEL GRANTS
In addition to encouraging clean technology, the world could penalize fossil fuel consumption. At the moment it artificially supports it. Total fossil fuel subsidies were $5.9 trillion, or 6.8% of global GDP, in 2020, according to the IMF. The bulk of these are “implicit subsidies” where governments don’t charge enough for environmental damage caused by the burning of oil, gas and coal, or don’t levy normal consumption taxes.
The Group of 20 Major Economies said they “increase our effortsto phase out inefficient fossil fuel subsidies at their summit in Indonesia last week. Their leaders first made this promise in 2009. Let’s hope they mean it now.
The fourth principle is the taxation of ships and aircraft. International trade accounts for 20%-30% of total greenhouse gas emissions, most of which are carbon dioxide, according to the WTO. This is divided between the production of goods and their shipment. The international transport sector accounts for this 12% of global emissions.
One way to address the problem would be to tax ship and aircraft emissions. That would deter companies from shipping things long distances if there’s no compelling logic to do so. It would also encourage the development of cleaner transportation fuels.
The EU tried to tax such flights a decade ago, but backed down when America, China and other countries threatened retaliation. Now it’s time for a new impulse.
The last part of the mix is promoting green trading. The easier it is to ship clean technologies like solar panels around the world at low prices, the faster countries can tackle climate change.
WTO Director-General Ngozi Okonjo-Iweala pointed out in Egypt that in many countries tariffs for fossil fuel products are lower than those for renewables. This is crazy. She wants to revive talks on a global environmental trade pact. Although these collapsed in 2016, the climate crisis may provide the impetus for a deal to be struck.
Global trade is struggling following the Covid-19 pandemic, Russia’s invasion of Ukraine and tensions between China and America. But last week’s détente between the People’s Republic and the United States means the two biggest carbon emitters are talking about climate change again. By COP28, they and other countries must promote trade policies to save the planet.
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Edited by Peter Thal Larsen and Oliver Taslic
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