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Economists are rarely unanimous, but they do agree on the need to set a price for carbon. Their support is bearing fruit. The polluter pays principle is becoming more and more prevalent around the world. In an interview with Financial Times last week, Ngozi Okonjo-Iwealadirector of the World Trade Organization (WTO)said there are 78 carbon pricing and tax mechanisms globally. These cover about a quarter of international emissions, up from just 5 percent in 2010, according to the report. World Bank.
The expansion of carbon pricing policies is welcome as it provides an incentive for polluters to switch to cleaner energy sources and invest in green technology and efficiency. Pollution covered by the European Union Emissions Trading System —which combines a cap with a mechanism for negotiating rights—have already declined by about 40 percent since 2005. China seeks to expand its STDs (emissions trading scheme); Türkiye and Brazil They plan to introduce one as well, but as more nations price their carbon emissionswhether through taxes, trading schemes or through the regulationthe global trade tensions increase.
The Carbon Border Adjustment Mechanism of the European Unionwhich was launched last year, is a good example. It will eventually require exporters to the bloc, who pay lower or no prices at home, to pay a tax linked to the price the group charges. The idea is to level the playing field for European manufacturers who pay the same price. STDsbut it is already prompting complaints from trading partners, in particular that it burdens poorer nations with additional costs and administration. Countries can apply equivalent rates at home to avoid the border chargesbut they have difficulties because they think it is unfair that they have to do so.
Okonjo-Iweala says the answer is global carbon pricing. That makes sense. Aligning carbon pricing regimes carbon will reduce the trade frictions and will ease concerns about arbitrage, where large emitters move to lower-price zones. But reaching agreement on pricing, let alone regulatory equivalence, at an international level will not be easy, nor quick. And given signs that the world is warming faster than expected, carbon prices need to rise quickly.
There is a way forward. First, more governments must realise that indecision is increasingly futile. The world is moving away from fossil fuels and green subsidies are expensive. Politicians can build support at home by using revenues from the taxes to the carbon to cushion their impact, reduce debt or increase public investment. The revenues from these schemes on a global scale exceeded the 100 billion dollars last year, a record.
Second, as more countries adopt their own carbon prices, trade distortions and threats to competitiveness will be alleviated. Indeed, the potential additional cost of trading with the European Union led others to act. Given its prominence, the expansion of the Border Adjustment Mechanism Carbon pricing from the bloc to more industries will, in turn, help expand the reach of carbon pricing elsewhere. USA It is also studying the possibility of importing it.
Third, as complicated as efforts to synchronize the global trade and the climate policy should continue. Countries will want to take action carbon tailored, but over time they can be grouped.
Multilateral institutions can promote this bottom-up process. That means providing experience and administrative support to developing countries seeking to develop carbon regimes and act as a forum to advance economies larger than they are aligned.
Pricing is just one part of the vast arsenal of policies that is needed to address the climate change global, but failure to build on recent momentum will be a missed opportunity.
