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So far, the COP26 climate conference in Glasgow looks to have produced only limited progress. Agreements to cut methane emissions and deforestation are welcome. India has joined the climate change conversation with its own commitments, albeit very long-term ones. The surprise announcement by the US and China that they will collaborate is tantalising. But the most up-to-date commitments that countries have made are woefully inadequate. According to a new UN tally, they put the globe on course for warming of up to 2.7C from pre-industrial levels by the end of this century.
And, most importantly, little attention is given to the single most powerful tool to reduce carbon emissions. My colleagues Tim Harford and Gillian Tett have eloquently set out the case for a global carbon price. Tim explains the economics of how a carbon tax would help reduce emissions, and the same argument applies for 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 harmonised carbon price coming out of Glasgow, let alone a sufficiently high one.
Even so, there are reasons for hope. If you look beyond the glaring absence of a global agreement on carbon pricing, there are a lot of developments bubbling away that move us in the direction of having more carbon priced.
Despite my despairing opening paragraph, one of those developments could be taking place at COP26 itself. One of the most intense areas of negotiation in Glasgow is Article 6 of the Paris agreement, about global carbon markets and carbon offsetting mechanisms. Much of the detail has been left undefined by previous COP meetings, so there is still no good framework for emissions trading across jurisdictions. Negotiators are working on this down to the wire, and may fail — but they could also succeed.
If they do, and emissions and offset markets begin to be connected across jurisdictions, we would begin to see carbon prices appear in new places and converge between places that already have them. What markets do is set prices; with more and better connected carbon markets, more carbon will be priced.
Another encouraging sign is that powerful countries and policymakers are moving towards policies that would help global carbon pricing emerge. The most important is the EU’s intention to put in place a “carbon border adjustment mechanism” (CBAM): tariffs designed to price the carbon content of imported goods the same as the carbon emitted in domestic production. Such a tariff scheme would, as a side effect, provide something like a price on carbon in the EU’s trading partners.
More recently, look at how the EU-US deal on steel and aluminium tariffs hinted at a future alignment between the two blocs on using trade policy to penalise high-emissions steel production elsewhere (read China). This sounds like a sector-specific “carbon club” where parties who put in an effort to decarbonise create common trade barriers against others that do not. Like CBAM, a carbon club would also in effect spread carbon pricing to activities in economies not part of it. I am quite excited to see what comes of the early hints, since I have been arguing for a while that the EU and the US should set up a carbon club together. The idea is advocated by Nobel laureate William Nordhaus (he calls it a “climate club”), and recently adopted by Germany’s latest finance minister and likely soon-to-be-chancellor, Olaf Scholz.
A third straw in the wind is how the institutions governing the global economy — to the extent it is governed at all — are rallying behind carbon pricing. For the first time, G20 leaders included it as a tool in their summit communiqué, issued on the eve of COP26, where German chancellor Angela Merkel supported it in a speech. The IMF has proposed an international carbon price floor. It has explained how this could be achieved through a mix of national approaches: carbon taxes, price-setting in other ways, or regulatory limits on emissions that could be translated into a “shadow” price. The point is that all these lead to some form of price put on emitting carbon and therefore on the reward for decarbonising, and that this price is internationally comparable. (PwC has analysed the effects of such a carbon price floor, concluding that it “could pay for itself while cutting emissions by 12 [per cent]” and be designed with redistribution to make for a just carbon transition.)
It is a very good proposal. But some may think it is utopian. This year, however, an agreement was struck by almost all countries in the world on a minimum level of corporate profit taxes. If that is possible, so is a minimum carbon price.
All these developments make me expect the push for global carbon pricing to accelerate. It may not always be easy to note, but progress is happening.
UK economic growth picked up more than expected in September, but downward revisions for earlier months made for a worse-than-hoped-for quarter.