New Zealand was once a leader on global trade issues and now, more than ever, we must be again. Rod Oram explains why we must help the global community pioneer powerful new economic and trade tools to tackle our climate and ecological crises.
We urgently need new thinking and practices to help us solve great dysfunctions and inequalities in our economic, environmental and social systems. Resorting to conventional actions, or at best merely tweaking them, will only deepen the damage they’re helping cause.
Free emissions and free trade are two related cases in point. They lower costs and spur growth and consumption. Both are beneficial but with severe side effects. They rapidly accelerate our co-crises of climate breakdown and ecosystem collapse.
The Stern Review in 2006 was the first authoritative report to demonstrate the economic benefit of pricing carbon emissions. Doing so incentivises cuts in emissions, greater innovation and faster adoption of clean technologies. Not to mention delivering wider economic, environmental and social benefits.
If all carbon emissions around the world were priced and traded, the positive impacts would be enormous, the US’s Environmental Defense Fund concluded in a 2019 report. The cost to nations of meeting their 2015 Paris climate commitments would fall by between 59 percent and 79 percent, it said. That would translate to about US$300-$400 billion in current value terms over 2020-2035.
Moreover, if the cost savings were re-invested into greater emissions reductions, the cumulative emissions cuts over 2020-2035 would be nearly double those under current policies. They’d rise from 77 gigatonnes of CO2 equivalent to 147 gt CO2e, the EDF’s modelling showed.
But the global community is lagging desperately behind in both pricing and emission reduction. Only one-fifth of global emissions are priced; and the average global price is only US$3 a tonne, economists at the International Monetary Fund (IMF) reported in a recent blog post published before China launched its very limited national carbon market.
By comparison, the current price in the New Zealand Emissions Trading Scheme is $47.20 (US$32.80) and in the EU scheme 51.21 euros (US$60.40). Moreover, the EU price continues its steep rise from its low at the outbreak of the Covid-19 crisis early last year, as this chart shows:
Key events driving the surge are actions by some major countries to set bigger climate targets and/or to increase carbon prices. In contrast, China’s launch last week of its national carbon market, building on what it had learnt from some regional and sector pricing schemes, was a muted affair. Analysts consider the new market too cautious and limited to be effective. Indeed, at the end of the first day’s trading the carbon price closed at 51.23 yuan a tonne (US$7.91).
In an effort to break through these economic and policy failures, IMF economists are proposing an international carbon price floor. Their paper is doing the rounds within the IMF with the hope of making a proposal to the UN’s next annual climate negotiations, which will be in Glasgow in November.
They are recommending a three-tier price floor - US$75, US$50, and US$25 per tonne for advanced, high-, and low-income economies. If just six jurisdictions - Canada, China, European Union, India, United Kingdom and United States - adopted the price mechanism, they would sharply increase the effectiveness of their emission reduction policies and programmes. Globally, that would achieve a 23 percent cut in emissions below baseline levels by 2030. That would be enough to bring emissions in line with keeping global heating below 2°C.
“The application of carbon pricing across Canadian provinces gives a good prototype for how a price floor could translate to the international level,” the IMF economists write. “The federal government requires provinces and territories to implement a minimum carbon price rising progressively from C$10 per tonne in 2018 to C$50 in 2022 and C$170 in 2030. Jurisdictions are free to meet this requirement through carbon taxes or emissions trading systems.
“At the international level, a well-designed carbon price floor agreement would yield benefits to individual countries as well as to the collective. All participants would be better off from stabilising the global climate system, and countries would enjoy domestic environmental benefits from curbing fossil fuel combustion — most importantly, fewer deaths from local air pollution.”
Meanwhile, the absence of some form of global carbon pricing mechanism is undermining efforts by ambitious countries to reduce their emissions. Their manufacturers, for example, can face competition from imports from countries that don’t price carbon; and they can be disadvantaged trying to export to those countries.
This is a very complex subject with some contradictory outcomes. For example, governments can shield their manufacturers by giving them free allocations of carbon credits to improve their competitiveness at home and in foreign markets. But doing so can reduce the incentive on the manufacturers to reduce emissions and to develop and adopt clean technologies. This week, our Government reported on the state of play here, which Newsroom reported in this article.
Last week the EU unveiled its proposal for addressing the distortions between countries created by inconsistencies in, or absence of, carbon pricing. Its Carbon Border Adjustment Mechanism (CBAM) would put a levy on imports similar to the cost differential on carbon between the EU and the country of origin. Where the EU can’t establish the carbon intensity of a given import, it would apply a rate equal to that of the dirtiest 10 percent of EU producers.
Initially, the mechanism, which would come into effect in 2026, would apply to only a limited range of carbon intensive imports such as cement, steel and fertiliser which account for only 5 percent of EU imports. But the proposal has been sharply criticised by many countries including China and India. The US was highly critical of the plan before it was announced, but somewhat less so after. One problem for the Biden Administration is its refusal to put a price on carbon in the US, a position shared by a strong majority of Congress.
Often the first line of attack against CBAMs is that they would contravene the spirit and letter of World Trade Organisation free trade rules. Yet, the EU and some other jurisdictions believe CBAMs could be drawn up in WTO-compatible ways.
As The Economist concluded in an editorial last week:
“Carbon tariffs, however, would not be inherently protectionist. They are an attempt to expand the reach of market forces rather than to limit them. The opportunity to pollute the atmosphere without penalty is itself a kind of distorting subsidy; more so if it exists unevenly across borders. Preventing climate change is a global public good, meaning every country’s citizens have a direct interest in reducing emissions wherever they happen. Pricing carbon at the border should therefore be viewed as a special case, and not as a precedent for using tariffs as a bludgeon with which to impose local regulations or standards abroad.”
Last year a group of some 50 WTO member nations began talks on a range of climate-related trade issues, including CBAMs. Quite where New Zealand stands is unclear. Its report this week on free carbon credit allocations only noted the arrival of CBAMs and some of the issues that might arise with them.
The Ministry of Foreign Affairs and Trade declined to be of further help. Its written response to my enquiries was:
“Sorry we don't have anyone available to speak to you, but below is a written response. If required, you can attribute to a MFAT spokesperson.
“New Zealand has followed with interest the discussions taking place in a range of jurisdictions regarding the possible development of a Carbon Border Adjustment Mechanism (CBAM). Officials are now considering the implications of the EU’s (just released) CBAM proposal.
"Zealand is a strong advocate for coherent and mutually supportive trade and climate policy responses. Our view is that for a CBAM to be effective it must adhere to certain principles.
“New Zealand considers that a CBAM must be environmentally effective, WTO compatible, least trade restrictive, predictable and scientifically robust. It should also include meaningful consultation with trading partners. New Zealand participates in discussion on these issues in various fora (e.g. WTO, OECD discussions) as they arise.
“There are no current plans for New Zealand to introduce its own version of a carbon border adjustment mechanism.”
Once we were leaders on global trade issues. Now more than ever we must be again. We must help the global community pioneer powerful new economic and trade tools so humanity can tackle its climate and ecological crises.
