66 Business The Economist October 9th 2021
Thecarbontax crackdown
M
any questionsare on the minds of business leaders in the
run up to the un’s cop26 climate summit from October 31st to
November 12th. For ceos making the trip to Glasgow, they range
from the mundane (travel by train? eat only plantbased food?) to
the profound (why am I going in the first place?). The most impor
tant question, though, is barely asked: what would happen if gov
ernments agreed, sooner or later, to commitments serious enough
to limit global warming to 1.52.0°C above preindustrial levels, as
stipulated in the Paris climate agreement of 2015? This question
has an answer most multinationals shy away from. It would send
shock waves through their entire business models.
Businesses, as a rule, do not like being forced to do anything.
They prefer to make voluntary gestures—just enough to keep gov
ernments off their backs. Right now they are throwing around
promises to cut carbon emissions to “net zero” like confetti, on
the grounds that such vows attract investors, employees and cus
tomers. It is a step in the right direction. And yet some of those
pledges are paperthin. Of more than 4,200 firms in the g20 club
of big economies that have disclosed their climate ambitions, only
a fifth have committed to socalled sciencebased targets that
would keep the world on track to meet the Paris agreement’s goal.
That requires firms to start slashing emissions within years, not
decades. For big emitters this poses an instant threat to profitabili
ty. It strains credulity to think that altruism is enough to convince
firms to act. Governments will have to apply the thumbscrews.
Even business folk realise that the best way to apply pressure is
by imposing a global system of carbon taxes, with some form of re
distribution to ease the pain on the poorest thumbs. The trouble is
that only about onefifth of global emissions is covered by a price
on carbon. As a result the global average price is just $3 per tonne
of carbon dioxide. To meet the ambitions of the Paris agreement,
the imfsays the global carbon price needs to rise to $75. Others be
lieve it should be almost double that. For some heavy emitters co
vered by the European Union’s emissionstrading system, it is al
ready above €60 ($69). In China’s new (limited) scheme, by con
trast, it is a pittance. America has no federal scheme of any kind.
A higher global price would affect all businesses—albeit un
evenly. For now, it is treated as too much of a long shot to take seriously. But assume for the moment it actually happened.
The first important thing would be to separate out the heavy
emitters from the rest. Early adopters of bold emissions targets
come from industries such as retail, where abating is relatively
easy. In countries like Britain, where the grid is decarbonising fast
anyway, that may require no independent effort on the part of
energy users. A small number of sectors responsible for the bulk
of listed companies’ emissions—power utilities, oil and gas firms,
steel and cementmakers—have a much harder challenge. As de
mand for carbonintensive stuff collapses, they would have to find
new ways to generate cashflows. Some are dabbling in renew
ables. Some see a future in lowcarbon plastics and materials. But
if they cannot turn these swiftly into huge sources of income, they
would be better shutting down operations and returning cash to
shareholders. Western firms may hope they can sell off their dirti
est assets to stateowned companies in the developing world. Yet
these, too, would be subject to a truly global carbon tax. For some,
the sooner they start lightening their carbon load, the better.
For a broader set of businesses, supply chains would be the
main issue. Standard Chartered, a bank, says almost threequar
ters of multinationals’ emissions come from their suppliers. Tack
ling those is an immense task. Take coaladdled China, where
many of them are based. Guido Giacconi of the euChamber of
Commerce in China says that though the country is investing
heavily in renewables, it is “difficult if not impossible” to guaran
tee that a firm’s energy use is free from coal, because of the opacity
of the electricity grid. That makes it hard for firms like Apple to
certify that their supply chains in China (where iPhones are made)
are carbonneutral. If its Chinese suppliers were consequently
subject to a carbon tax, it might have to raise prices of iGadgets.
Moving supply chains out of China would bring costs, too. In
some Asian alternatives, such as Vietnam or Indonesia, fossil fu
els are more prevalent than in China. In emerging markets with a
lot of clean energy, such as Brazil, the costs of bad infrastructure
and red tape are unappealing. Reshoring is unpalatable for many
Western firms; the costs of richworld labour are just too high.
This feeds into a third problem: consumption. A high carbon
tax is bound to push up prices, which will change consumer be
haviour, especially among lower earners. The tourism industry,
for instance, would have to rely less on customers arriving by
cheap flights. Supermarkets would need to provide more local
foods. People might start tracking the carbon trail of some things
they buy, creating headaches for retailers like Amazon.
The flip side would be more innovation. The International
Energy Agency, which represents energyconsuming countries,
said last year that investments in lowcarbon research and devel
opment had barely budged since 2012, and was a fifth of what was
spent on health and defence. This is pitiful. A carbon tax would
change that. Think of hyperloops for longdistant transport; eat
ing bugs, seaweed and labgrown meat; an endless stream of virtu
alreality entertainment as people stay at home rather than con
sume goods that become less affordable owing to the carbon bill. Extinction rebellion
Inevitably, some firms which fail to see the writing on the wall will
die. But others will swiftly realise that the future is “adapt or per
ish”. This is not a mantra ceos will chant at cop26. It should be.
When it comes to action on the climate,they are alltookeen to
show off their halos. The thumbscrewisa less appealing accoutre
ment—but a far more necessary one.nSchumpeter
What if firms were forced to pay for frying the planet?