This op-ed was originally published by Project Syndicate.
With the arrival of effective vaccines likely to bring the catastrophic COVID-19 pandemic under control in much of the world by summer 2021, the fight against climate change will once again be humanity’s great existential challenge. Adopting the right approach will be critical.
Five years ago, 196 countries signed the Paris climate agreement with the objective of limiting global warming to well below 2 degrees Celsius relative to preindustrial levels. The accord, which has been ratified by 189 countries, was the first global agreement of its type and constitutes a milestone in international cooperation. Although the United States withdrew from the accord under President Donald Trump, President-elect Joe Biden has vowed to rejoin it immediately upon taking office in January 2021.
Although the level and speed of climate-change mitigation must be increased, and carbon pricing has an important role to play, an attempt by rich countries to dictate terms could result in deadlock.
The Paris agreement’s success stemmed not only from the increasing recognition of global warming’s dangers but also from the voluntary character of the targets that signatories pledged to meet. Penalties for noncompliance were not included.
The world is now preparing for a hugely important follow-up climate summit, COP26, in Glasgow in November 2021. Scientists warn that the world has only about a decade to embrace a green transition that would enable it to become carbon neutral by 2050, and thus prevent catastrophic climate change. Moreover, they emphasize that a 1.5 degree Celsius limit on global warming is much safer than one of “well below” 2 degrees Celsius.
Since the Paris summit, many have advocated penalties for insufficiently ambitious climate policies as a remedy for the free-rider problem. There have also been calls for measures to prevent “carbon leakage,” which occurs when carbon-intensive production shifts from countries with demanding mitigation policies to those with much weaker measures, leaving total carbon dioxide emissions unchanged.
Many favor the establishment of a “climate club” of countries that would share similarly ambitious emission-reduction goals and penalize nonmembers. One early and influential proposal was advanced by the Nobel laureate economist William Nordhaus, who advocated a uniform 3 percent tariff on all imports—whether carbon-intensive or not—from outside such a club. Avoiding the penalty would be incentive to join.
But Nordhaus’s proposal, while simple, would violate the World Trade Organization’s most-favored-nation clause. Others have since floated various schemes for border adjustment taxes more compatible with WTO principles, which would aim to equalize the domestic “price” of carbon with that embodied in imports.
The European Union plans to introduce such a measure as part of its ambitious climate agenda. Biden included a similar, if less specific, pledge in his election platform—although the U.S. would first have to introduce a domestic carbon tax, or somehow increase and quantify its “shadow” carbon price implicit in its regulations and standards in a way that other countries (and the WTO) would accept.
Similarly, Guntram B. Wolff, director of the Brussels-based think tank Bruegel, recently called on the U.S., the EU, and possibly China to form a “Climate Club” with a common external carbon-adjustment measure to create a level playing field for producers inside and outside the club.
But, apart from the difficult carbon-measurement problems resulting from complex cross-border value chains, we must keep several important features of the climate problem in mind when considering such proposals.
True, climate mitigation is an “aggregate” global public good whose provision amounts to the sum of individual countries’ efforts. And, because the policies pursued by a few small greenhouse-gas (GHG) emitters don’t really matter in global terms, an agreement binding major emitters might seem sufficient to steer the world toward net-zero emissions by mid-century.
But the EU, the U.S., and China combined account for only about half of global GHG emissions. That is a sizeable share, but not big enough to solve the global-warming problem. India has become a substantial emitter while another two dozen countries, taken as a group, are significant enough to make a difference.
Although a climate-club agreement even without penalties for outsiders could exclude many countries without appreciably weakening global climate-mitigation efforts, it must include a large enough number, particularly because higher explicit or implicit carbon prices would likely result in more carbon shifting to less ambitious jurisdictions. Moreover, there is no good way to draw a line and leave some emitters out of such a club while forcing others in. These considerations would thus seem to provide a strong rationale for seeking a universal agreement and considering border price adjustments as a strong incentive for good performance.
Nonetheless, the Glasgow summit is likely to adopt the Paris approach and rely on a voluntary framework. A global climate treaty binding countries to emission ceilings or minimum carbon prices is well beyond reach and practicality.
An important and thorny issue is differences in per capita income. Developing countries rightly argue that they deserve special treatment during the clean-energy transition because they have not contributed much to the global stock of atmospheric GHGs over the past two centuries. The Paris accord recognized these claims by pledging to mobilize $100 billion per year by 2020 to help developing countries combat climate change. But today, because of COVID-19, they have even less fiscal room to act.
With COP26 less than a year away, some continue to advocate binding national climate targets with penalties for underperformance and comprehensive border adjustment taxes aimed at establishing a de facto uniform global carbon price. But, as the Brookings Institution’s Amar Bhattacharya has argued, a strategy of encouraging nationally determined voluntary contributions, harnessing technology, and providing substantial financial assistance to developing countries remains the preferable approach. Green technologies’ increasing cost-effectiveness increases the likelihood that a bold global climate agreement based on voluntary contributions could succeed, provided China commits to a path toward carbon neutrality by 2060, as it has pledged. Over the coming years, a green strategy will also become increasingly cost-effective, particularly if substantial side benefits such as reduced air pollution are included in the cost-benefit analysis.
Although the level and speed of climate-change mitigation must be increased, and carbon pricing has an important role to play, an attempt by rich countries to dictate terms could result in deadlock. The voluntary approach, accompanied by large financial flows to help developing economies shift to a green growth strategy, remains the world’s best bet for reaching an ambitious and inclusive agreement in Glasgow next year.