This week, US president Donald Trump signed an executive order that aims to reverse the climate regulations introduced by the Obama administration. It could effectively cancel plans to restrict carbon dioxide emissions, such as those from coal-fired power plants. Years of legal battles lie ahead, but the message could not be clearer: the US is turning its back on efforts to curtail global warming.
The nightmare scenario that Trump’s inauguration posed for the nearly 200 countries signed up to the Paris climate agreement has now become reality. The world’s second-biggest emitter of greenhouse gases has given up on even trying to meet its target under the agreement.
Now what matters is how the world responds. If other countries stand by and let the US brazenly flout its commitments, the entire agreement could slowly unravel as its credibility evaporates. But what can the other nations do when the agreement includes no enforcement measures?
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There is an alternative approach, and many think it could lead to faster emissions cuts. It is introducing a global price on carbon, and slapping carbon tariffs on goods from any country that refuses to join in.
Such a global carbon price has historically been dismissed as politically infeasible. But that was before Trump’s flagrant climate rollback. Suddenly, an intriguing possibility has arisen: could the outrageous behaviour of the US unite nations to take action on climate that will be effective?
“Trump might just outrage the world so much that he makes the politically infeasible feasible”
An ever-rising price on carbon has long been the most agreed-on way to speed the transition to zero-carbon economies. But it is easier said than done.
Although some countries have unilaterally introduced carbon pricing, they have done so only in a very limited way or with a very low price, or both – greatly reducing the effectiveness of the policy. Why so toothless? Countries fear that if companies have to pay high penalties for their carbon emissions, their industries will go bust or move production elsewhere to avoid the higher costs.
Take the European Union. In theory, it has carbon pricing in the form of its carbon trading system. Companies in carbon-intensive industries – for example, electricity, steel and cement – must buy permits to emit CO2 (see chart, below). However, to keep these companies competitive with their non-EU counterparts, the EU dishes out free permits, for instance, to the cement industry. Even when not given freely, the EU permits are so cheap they have failed to drive emissions reductions.
How to break the stalemate? Carbon tariffs, also known as border adjustment taxes, are one answer. The idea is that countries that impose carbon pricing on their own industries would also impose border taxes on goods imported from countries that do not. This would allow countries to raise carbon prices to a meaningful level without putting their own industries at a disadvantage.
Better still, if enough powerful countries banded together to institute carbon tariffs, it would create a compelling incentive for other countries to join in too. That’s because if your exporters are forced to pay a carbon tax, better to collect that money yourself rather than see it go to another country (see “How to put a price on carbon”, below).
A global carbon price is the approach that many prominent researchers and economists, including at the University of Cologne in Germany, have been calling for. They argue that it will produce much faster falls in emissions than simply setting targets, which is the current approach. For example, under the Paris agreement, each country comes up with its own target for cutting emissions – and there are no penalties for failing to meet them.
Last year, the prospect of using carbon tariffs to force countries to adopt carbon pricing faded after the apparent success of Paris. After signing the agreement, countries could not then turn around and threaten to impose carbon tariffs on others, says Glen Peters at the Center for International Climate Research in Norway. “The general feeling is that it would create so much bad will, when Paris created good will.”
Now the situation has changed. Trump has just demonstrated how ineffectual the Paris approach is. The key problem, as his executive order reveals, is that the Paris agreement does not deter selfish behaviour: nations leaving it to others to tackle climate change while benefiting from their efforts.
“The Trump case confirms that climate change is a problem of international free-riding,” says Ockenfels. “And carbon pricing could be an effective way of preventing free-riding.”
So carbon tariffs are now back on the agenda. After Trump’s election, former French president Nicolas Sarkozy openly called for the imposition of carbon tariffs on US goods. Mexico, whose relations with the US have been strained by the new administration, .
And in February, , claiming that they are losing out to competitors in other countries because of the EU carbon trading system.
EU leaders have been more circumspect. In public, they have said they have no plans for tariffs – but conspicuously have not ruled anything out.
Even before this week’s climate U-turn in the US, there was much discussion behind the scenes about how to deal with the US situation, says Oldag Caspar of trade and environment group , based in Bonn. “EU-China talks are already starting on this.”
This could lead to new agreements between China and the EU, Caspar says – possibly including one on carbon tariffs.
China’s stance could be crucial. In the past, it has been the proposed target of the tariffs, and has fiercely opposed them. But now its situation has changed. China has been making huge efforts to cut pollution, and it also has plans to introduce a carbon trading system similar to that of the EU. For the first time, China may be starting to see some upsides to tariffs as well as downsides.
So could the EU and China join together to impose them on the US? This is the surprising scenario that Christoph Böhringer at the University of Oldenburg in Germany has been analysing using an economic model. suggests more countries would need to join in to force the US to change course.
If tariffs are imposed only by the EU and China, the short-term costs to the US will be relatively small, Böhringer concludes. China, by contrast, would lose much if the US claimed carbon tariffs violate trade rules and retaliated by slapping punitive tariffs on goods from China – in other words, if there was a trade war.
“Climate change is a problem of international free-riding – one that carbon pricing could solve”
In principle, there shouldn’t be. If carbon tariffs are designed to be fair, they should be allowed under World Trade Organization rules, says Sam Lowe of environmental organisation Friends of the Earth. But no one can say for sure. “So much has been written on this question,” Lowe says. “We will only find out if it gets challenged.”
For many economists, the risk of trade wars is the strongest argument against carbon tariffs. However, world leaders will need to weigh this risk against the immense and growing costs of climate change. There is an opportunity here for countries that are serious about tackling climate change to bypass the ineffectual Paris agreement and club together to impose a global carbon price.
Here again, Trump might make the decision easier. He has been threatening to slap big tariffs on goods from China to boost US industries, an action that could spark a trade war. If it happens, imposing carbon tariffs on US goods would be one of the ways China and others could respond while maintaining the moral high ground. We live in interesting times.
How to put a price on carbon
If someone vandalised your house, you’d be outraged if they got away scot-free. The idea of a carbon price is to make polluters pay for the damage their emissions will do to people’s homes and livelihoods, as a result of climate-change related floods, storms and sea level rise.
One approach is to tax goods and services on the basis of how much carbon dioxide is emitted during their production – a carbon tax. The other is to impose a limit on how much CO2 can be emitted by large industries, and then sell permits to pollute – cap and trade, or carbon trading.
We already know that a high-enough carbon price discourages fossil fuel use, encourages energy efficiency and makes renewables more competitive. To be really effective, the carbon price just needs to rise rapidly.
This article appears in print under the headline “The price of emission”
