SMH: Biden Could Work with the EU to Impose a Global Carbon Price

Guest essay by Eric Worrall

According to the Sydney Morning Herald, the EU and Biden administration working together could together impose a global carbon price to which even China would have to submit. But there is a catch which proponents of global carbon cartels are ignoring.

Biden and the EU can forge a new path on global warming

By Andreas Kluth
January 7, 2021 — 11.38am

There’s a great way the US and the European Union could together address two huge challenges in one policy sweep. It’s to create a transatlantic “carbon club,” which I’ll describe in a moment.

It’s that the rest of the world isn’t in the system. This both slants the economic playing field against European companies and leads to “carbon leakage.” Take a European steel company, for example. It must buy allowances to emit carbon, which is a cost. To avoid that cost, it can invest in technology that makes production cleaner, but that’s also expensive.

By contrast, a Chinese steelmaker doesn’t incur this cost yet. A European firm that uses steel could therefore simply switch to buying it more cheaply from China than from the home market. The European steelmaker and its workers lose. And the world loses because the same amount of carbon – or even more – has been emitted, just elsewhere. Only the Chinese supplier wins.

This is the classic problem of free riding, as analysed by the economist William Nordhaus among others. In a nutshell, countries have an incentive to share in the benefits of a global public good – saving the climate – while shirking the costs of abatement. This logic, also known as the “tragedy of the commons,” explains why purely voluntary international climate deals such as the defunct Kyoto Protocol or the Paris Agreement tend to disappoint.

The solution to the free-riding dilemma is the club model proposed by Nordhaus and now endorsed by sharp minds such as Guntram Wolff, the director of Bruegel, a think tank in Brussels. Here a group of countries would agree on a minimum international carbon price.

All club members would then set about reaching that price with either a carbon tax or a cap-and-trade system, the equivalent of their club dues. As long as their domestic carbon prices are high enough and comparable, there’s no need for club members to punish each other’s imports, so they trade freely (if you ignore other tariffs and quotas for the moment).

Read more: https://www.smh.com.au/business/the-economy/biden-and-the-eu-can-forge-a-new-path-on-global-warming-20210107-p56scp.html

The underlying premise behind carbon cartels like the SMH proposal is that the world will absorb the additional costs, that life would continue as normal, except that with the imposition of a global carbon price farmers and manufacturers would have a strong pricing signal, an overwhelming incentive to reduce CO2 emissions.

But what if there is no practical means to respond to that pricing signal?

The provision of essentials we take for granted, and the systems which provide those essentials, can easily be broken by politicians blindly imposing impossible burdens. Think food availability in Venezuela.

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January 7, 2021 at 08:19PM

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