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The COP26 climate conference in Glasgow seems to have made only limited progress so far. Agreements to reduce methane emissions and deforestation are welcome. India has joined the conversation on climate change with its own, albeit very long-term, commitments. The surprise announcement by the US and China that they will work together is tempting. But the most recent commitments that countries have made are completely inadequate. According to a new UN balance sheet, they will bring the globe to a warming of up to 2.7 ° C compared to pre-industrial levels by the end of this century.
And above all, little attention is paid to the most powerful tool for reducing CO2 emissions. My colleagues Tim Harford and Gillian Tett have eloquently presented the arguments for a global carbon price. Tim explains economics how a carbon tax would help reduce emissions, and the same argument applies to other forms of carbon pricing. Gillian points out how a carbon price could redirect capital flows. But there will be no announcement of a globally harmonized CO2 price from Glasgow, let alone a sufficiently high one.
Still, there are reasons to be hopeful. If you look beyond the blatant lack of a global agreement on carbon pricing, many developments bubble out to move us towards higher carbon pricing.
Despite my desperate opening paragraph, one of these developments could take place at COP26 itself. One of the most intense areas of negotiation in Glasgow is Article 6 of the Paris Agreement on global carbon markets and carbon offsetting mechanisms. Many details were not defined by previous COP meetings, so there is still no good framework for emissions trading between jurisdictions. The negotiators work to the core and can fail – but they could also be successful.
If this is the case and emissions and balancing markets begin to be interconnected across jurisdictions, carbon prices would appear in new places and converge between places where they already exist. The markets set prices; with more and better networked CO2 markets, more CO2 will be priced.
Another encouraging sign is that powerful countries and policymakers are moving towards policies that would help create global carbon pricing. Most importantly, the EU intends to introduce a “Carbon Border Adjustment Mechanism” (CBAM): tariffs that are supposed to price the CO2 content of imported goods in the same way as the CO2 emissions from domestic production. Such a tariff system would, as a side effect, create something like a price for CO2 among the EU’s trading partners.
More recently, look at how the EU-US agreement on steel and aluminum tariffs hinted at a future alignment between the two blocs to use trade measures to punish high-carbon steel production elsewhere (see China). That sounds like a sector-specific “carbon club” in which parties who strive for decarbonization create common trade barriers against others who do not. Like CBAM, a carbon club would also extend carbon pricing to activities in economies that do not belong to it. I am very curious to see what will become of the first indications, as I have been arguing for some time that the EU and the USA should jointly found a carbon club. The idea is endorsed by Nobel laureate William Nordhaus (he calls it a “climate club”) and recently adopted by Germany’s new finance minister and likely soon-to-be Chancellor Olaf Scholz.
A third straw is how the institutions that govern the global economy – insofar as they are governed at all – stand behind carbon pricing. For the first time, the heads of state and government of the G20 included it as an instrument in their summit communiqué, which was issued on the eve of COP26, where Chancellor Angela Merkel supported it in a speech. The IMF has proposed an international lower limit for CO2 prices. She explained how this could be achieved through a mix of national approaches: carbon taxes, different pricing or regulatory emission limits that could be translated into a “shadow price”. The point is that all of this results in a price for the emission of carbon, and therefore the reward for decarbonization, and that price is internationally comparable. (PwC has analyzed the effects of such a CO2 price floor and has come to the conclusion that it could pay for itself “if emissions were reduced by 12” [per cent]”And designed with redistribution to allow for an equitable transition to carbon.)
It’s a very good suggestion. But some may think that this is utopian. This year, however, almost all countries in the world have agreed on a minimum level of corporate income taxes. If that is possible, there is also a minimum price for CO2.
All of these developments lead me to expect that the pressure on global carbon pricing will accelerate. It may not always be easy to notice, but there is progress.
UK economic growth picked up faster than expected in September, but the downward revisions for the earlier months made the quarter worse than hoped.
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