Warming take: The most optimism-inducing climate news last week was... the G7 tax agreement?!?!
Multilateralism is necessary (if insufficient) and it has been sorely lacking for a while
The world of climate activism has been abuzz with the news of Exxon, Chevron and Shell. They were all told to reduce their impact on climate, by shareholders and courts respectively. It all went down in such a short period of time, that in today’s media climate makes it all the more tempting to draw a thick ink line between three points and assume we’re on a new trajectory. As I wrote last week, I think that’s premature.
But I’d argue that instead the most important news to come out of the last week for our planets' prospects of staying at ‘only’ 1.5-2 degrees Celsius warming was not overtly climate related at all. Janet Yellen characteristically was quoted as saying the deal would "end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the US around the world." Rishi Sunak said it would get the global tax system “fit for the digital age”.
The proof will be in the pudding as this all gets implemented (and critics certainly have a point that 15% may be a low bar), but the big story here is multilateralism, and big countries throwing their weight around to ensure that we don’t have a system of countries undercutting one another and in so doing creating an enormous loss for the world. The EU commissioner for economy Paolo Gentiloni said that the "extraordinary" deal "wouldn't have been possible without the recent change of the U.S. administration. Multilateralism is back. Yellen was crucial. Six months ago we were in the middle of nowhere." And that’s the point. Big countries deciding to do something about an issue of global importance that only they can. Leadership matters, as does fairness to the rest of the world.
The situation will sound familiar to anyone who follows climate policy - one of the biggest concerns about decarbonization policy is offshoring or “leakage”. If the EU sets a high price on carbon emissions and that results in steel purchases shifting from the EU to the US or China where emissions are not taxed as highly (or at all), the world likely gets no cleaner and could get substantially dirtier. Not only do we not meet our goals in that hypothetical situation, but Europe has lost steel sales and in so doing, likely lost political support for decarbonization policy. Sound familiar? It’s a race to the bottom, this time on carbon policy.
For us to have an impactful and resilient decarbonization policy, it’s got to be consistent and consistently applied across national & regional boundaries. That’s been inconceivable for the past few years. Without strong global leadership, we can’t achieve much. Carbon policy led by a single country or region will soon collapse.
The Biden administration has been criticized by many for not taking a stronger leadership position on climate and decarbonization. Personally, given the situation he faces in Congress, I’m not sure what he could actually achieve nationally and so despite my deep unwavering commitment to decarbonization I’m not surprised nor overly critical. However, the prospect for multi-lateral negotiations to create a strong international framework for carbon regulation and pricing is going to be needed - no matter what the national movements are.
If you want to know what I think the end-run is going to be which will give the Biden administration the opportunity to put carbon pricing on the agenda, I think it’s a currently obscure policy called a ‘border adjustment’. Currently EU and Canadian steel producers are concerned that their products (which face prices on carbon emissions that have recently reached $50/ton of CO2) are disadvantaged vs. US and Chinese steel imports that do not incur similar prices on carbon. Very well, a ‘border adjustment’ would mean that any steel brought into the EU would face a tax on import to equalize the cost vs. domestic supplies1. Faced with an effective EU ‘tariff’ on high-carbon imports, the US would have an opportunity to do the same thing to China - a country whose energy is so skewed toward coal that the tariff would likely be significant2 in many categories. You just might be able to set off a “race to the top”.
However, regardless of the mechanism for decarbonization which is selected, the basic message is that multilateralism is, at least this week, back. And since multilateralism is the lifeblood of decarbonization (after all, a ton of carbon emitted into the atmosphere has the same effect no matter where it comes from - it does not respect borders or any other distinctions), anyone focused on the climate should cheer the news.
All eyes will be on COP263 in Glasgow this November. Maybe the G7 can pull together and come up with an agreement that together with the rest of the world sets us on a path with a chance of success. The chances that they will just went up substantially.
So, for instance, if there was already a $10/ton price on the carbon associated with a load of steel coming into the EU from the US, and the current price in Europe was $80/ton, then the company importing it would pay $70/ton incremental. This isn’t easy to measure or implement, but trust me - in the world of tariffs we do much more complex things all the time.
This isn’t to be shrugged at lightly - the potential cost to US consumers might be high of a border adjustment on Chinese imports with lots of embedded carbon. See the famous 2016 UChicago paper which casts some doubts on the efficiency or likely consumer benefit of such a tax. But if you want to create jobs in the US, this has significant potential. Remember, it’s not just the carbon embedded in manufacture, but also in transport. There are other systems - William Nordhaus has called for “Carbon Clubs” which place a broad uniform tariff on imports from any country which doesn’t impose that global tariff. No one said this would be simple.
For true climaterati, the fact that Cop26 was supposed to be last year but got delayed by COVID, so this is Cop26 redux. That fact that Cop26 didn’t take place last year might end up being a good thing, because let’s just say that multilateralism seemed like it wasn’t gonna be a good bet in 2020.