Climbing a mountain requires preparation and execution – establish a base camp, take supplies higher, struggle for the summit. It is an apt metaphor for this monumental year for decision making on climate change policies. The peak is the UN Climate Change Conference of the Parties (COP26) in November, which will be preceded by the G-7 meetings in June. Immediately ahead is Biden’s Climate Summit on 22-23 April.
Many commentators have raised two cheers for Biden’s announcement. He has invited 40 countries to attend, including the 20 most important, which account for about 80% of global greenhouse emissions. Irrespective of any announcements in the next few days about more stringent carbon emissions targets for 2030, the Biden Administration can already point to a step change from the Trump years. Executive order 13990, setting out various environmental policies, was the foundation for the proposed infrastructure package, which contains billions of dollars for renewable energy, green housing, electric vehicles and commendable plans to decarbonise the electricity sector by 2035.
It is generally acknowledged that the investment needed to achieve net-zero carbon emissions by 2050 is as profound a transformation as America’s New Deal or the Marshall Plan for post-war Europe. John Kerry has stated, “we believe very deeply that this is going to be the biggest economic transformation since the Industrial Revolution.” President Biden is using a mixture of regulatory and spending instruments to achieve his ambitions.
However, he is missing an important piece of equipment to reach the summit, namely carbon taxes.
Carbon levies were part of his pre-election manifesto. Treasury Secretary Janet Yellen has stated that “we cannot solve the climate crisis without effective carbon pricing”, while organisations such as the US Chambers of Commerce or the Business Roundtable have swung in favour. Individual states such as California have partial schemes and 10 bills including carbon pricing were introduced into Congress in the 2019-21 session. Still, against razor-thin majorities in the US Senate and House of Representatives there are probably too many Democrats that are worried about the politics of carbon taxes, which can be portrayed as regressive. The political obstacles are clear, especially in states where the energy sector is important such as Texas and West Virginia.
This is a major problem for two reasons. First, without effective carbon pricing, the US will be isolated at COP26. Second, American businesses could also suffer.
The case for broader carbon taxes has been cogently argued by the IMF. There are over 60 carbon tax and emission trading systems around the world. Yet they are limited, both in terms of the countries which they cover and the industries within those countries. The continent of Europe does well, and road transport, electricity generation or heavy industry are generally included. But carbon pricing schemes are limited in those countries – China, the US, India, Russia and Japan – that emit the majority of CO2 emissions. In sector terms, obvious areas such as air transport or marine shipping need to be included. Hence, the estimate is that such carbon schemes only cover about 22% of global greenhouse gas emissions.
The price of carbon varies widely from country to country, scheme to scheme. However, the IMF calculates the current global average price as only $2/tonne CO2. Where should it be? Much higher, according to the following organisations: The High-Level Commission on Carbon Prices recommended at least $50–100/tCO2 by 2030; an OECD report suggested $120; while the 2018 Intergovernmental Panel on Climate Change estimated that an effective tax would need to be at least $135. That is just by 2030. British Petroleum suggests the 2050 price could be as high as $250.
The benefits of carbon duties are clear. The IMF has suggested that a carbon tax rising to $50 per ton by 2030 would cut US CO2 emissions by 22%, whilst also raising revenue worth about 0.7% of GDP per year. That could be used to offset any regressive effects of higher energy prices on lower income households.
Pollution knows no borders and will require action in every country. Other nations are following the advice of the scientists and economists. Canada has passed a law establishing a minimum federal price for carbon. Thanks to rebates, the majority of Canadian households will be better off. China is launching an emissions trading scheme this year set to become the world’s largest national carbon market. Prime Minister Boris Johnson is reported to be considering a full discussion on carbon prices at the G7 meeting in June.
Much the most important element, however, will be the EU’s plans for a carbon border adjustment mechanism, which should be announced in the summer. Such a policy would place a carbon price on imports of certain goods from outside the EU, in order to push trading partners to raise their climate ambitions and reduce the risk of European firms facing unfair competition or pressures to shift operations overseas. While initially aimed at such industries as cement, steel, aluminum, and fertilisers, and hence with the most impact on emerging market economies such as China or Turkey, Eastern Europe and North Africa, logically it should expand over time. This helps explain the recent pushback from John Kerry, the US climate envoy, that the EU should delay consideration until after COP26. A cross-border carbon tax could have serious implications for economies and trade relationships and, as such, it probably ought to be a last resort option. Externalities will be a very familiar concept to Jackson Hole Economics readers. Carbon pricing is an idea whose time has come. The world needs to make sizeable progress towards lower emissions over the next decade. In a market economy, price incentives can be used to affect consumption and investment decisions. Indeed, in 2019 more than 3,500 economists signed the Climate Leadership Council’s statement calling for a carbon tax as “the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.” It is commendable that Joe Biden has begun to climb the climate mountain. It is a shame he is not yet fully equipped to do so.