The Economist - UK (2022-05-28)

68 Finance&economics TheEconomistMay28th 2022

costtosocietyoffightingclimatechange.

Manyschemes,however,fallshorton

bothcounts.Thereasonisobvious:a well­

functioningetsdemandspoliticalcour­

age.Liketaxes,carbonmarketstransferre­

sourcesfromtheprivatesectortothestate,

whichirksthosestandingforsmallgov­

ernment.Higher carbonprices can also

helpto pushupconsumerprices,angering

voters,whilehurtingthemarginsoffirms

thatdonatetopoliticalparties.Howambi­

tiouscarbonmarketsareis“anexpression

ofpoliticalwill”,saysDallasBurtraw,who

chairstheindependent committeeover­

seeingCalifornia’stradingscheme.Alltoo

oftenthatwillismissing.

Changingpoliticalwindshave some­

timesdealta fatalblowtofledglingcarbon

markets.Australia,forexample,junkedits

ownschemein 2014 afterthecentre­right

Liberalpartymaderepealingthe“carbon

tax”a plankofitselectioncampaign.

Moreoftenpoliticalheatleadsgovern­

mentstodoalltheycantokeeppriceslow

(see chart). On May 18th the European

Commission, pressedby memberstates

worriedaboutsoaringenergyprices,saidit

wouldsellanextra200mpermits(there

arecurrently1.45bnincirculation).Carbon

pricesontheeuscheme,theworld’ssec­

ond­biggest,promptlyfellfrom€90($97)a

tonnetoaround€80.Otherschemeshave

beenfloodedwithpermitsfromthestart.

China’s ets, launched last year, is the

world’sbiggest.Butwitha pricenearing 60

yuan($9)it doeslittletoreduceemissions,

saysYanQinofRefinitiv,a datafirm.

Thesecondproblemisthatswathesof

theeconomyareoftenexcluded.Industrial

firmsargue thatincludingthemina robust

etsgivesanunfairadvantagetoexporters

fromcountrieswitha lowercarbonprice,

which is why the eu and others offer

home­grownchampionsa certainamount

ofpermitsforfree.Althoughmeanttopre­

vent“carbonleakage”,wheresteelfirms,

say,relocatefromareaswithstrictemis­

sionsrulestothosewithlooserstandards,

suchperksmakeschemeslesseffective.

Consumers, too, are often shielded

from highcarbon prices. Transport and

buildings, wherehigher costs wouldbe

passedontovotersdirectly,areexcluded

fromtheeu’s scheme.Othersdobetter:the

Californiansystem,themostcomprehen­

siveofthebiggeretss,covers80%ofthe

state’semissions.Proceedsfromthesales

ofcarbonpermitsarepartlyusedtosubsi­

disepurchasesofelectriccars.

Othermarketsareevenmorelimitedin

scope.TheRegionalGreenhouseGasIni­

tiative(rggi),backedby 11 north­eastern

Americanstates,onlycoverspowergener­

ation. So does China’s national system

(giventhesizeoftheChineseeconomy,it

stillcovers7.4%ofglobalemissions).

Sometimesitisthewayemissionsare

countedthatistheproblem.Chinadoes

notputa caponthetotalamountofemis­

sions,whichcanstillrisealongwithelec­

tricitydemand,butonthecarbonintensity

ofpowergeneration.Itsetsisalsobedev­

illedbypoordatacollection.

Makingcarbonmarketsworkbetteris

moreofa politicalchallengethananeco­

nomicone.Neitherloweringcapsontotal

emissionsnorcoveringmoresectorsre­

quiresa deeprethinkofcarbonmarkets’

designs.Thedifficulty,rather,isbuilding

andpreservingsupportformeasuresthat

make most economic activities costlier.

Thesameappliestootherclimate­friendly

measures,notesBenCaldecottofOxford

University:Britainhaslongfailedtoraise

petroltaxesinlinewithinflation,costing

thegovernmentbillions.

Cheeringly, however, themomentum

aroundcarbonmarketslooksself­sustain­

ing.Theeuisconsideringwhatitcallsa

“carbon border­adjustment mechanism”

whichwouldseeimportersintothebloc

pay thedifferencebetween therelevant

foreigncarbonpriceandtheeu’s. Notonly

wouldthatremovethejustificationforfree

allowancesformanufacturingfirmsinside

Europe;itwouldalsoencouragecountries

thatwanttoexport tothebloctobring

theircarbonpricesclosertotheeu’s.

Creatingbiggermarketsbylinkingtwo

ormoreetsscan alsohelpplugcarbon

leaks.Thatis,ofcourse,justifiableonsci­

entificgrounds:atonneofcarbonisas

harmfulinonecountryasit isinanyother.

Italsomakescarbonmarketsmoreliquid,

whichhelpsformtruerprices.According­

ly,regionalpatchworkshaveemerged.Cal­

ifornia’setshasbeenlinkedwithQuebec’s

since2014.Switzerland’setsmergedwith

theeu’s in2020.Pennsylvaniawillbecome

the12thstatetojointherggiinJuly.And

althoughBritainchosetorunaseparate

etsafterleavingtheeu, rejoiningthere­

gionalschemeshouldberatherpainless.

Asmoreoftheworldeconomyisco­

veredbyetss andcarbonbordertaxesgain

favour,itwillbelaggardsratherthanearly

adoptersthatriskbecominguncompeti­

tive.Thatthreatseemstobeworking.After

resistingforyears,Japanissettotryouta

national carbon market in September.

SomeAmericanlawmakersarealsostart­

ingtolookagainatcarbonpricing,ifonly

becausetheircountrytendstobegreener

thanmanyofitstradepartners,andcarbon

bordertaxescouldbea handyexcusefor

protectionistmeasures.Thekeytobuild­

ingsupportfordecarbonisation,saysMr

Burtraw,isto“createwinners”.Ina country

where China­bashing tends to be more

popularthanenvironmentalism,itwilldo

no harm to the cause if points can be

scoredattheexpenseofanarch­rival.n

Not so taxing

Emissions-trading schemes

$ per tonne of CO equivalent

Sources:Bloomberg;Refinitiv

120

90

60

30

0

2021 2022

South Korea China

New Zealand

European

Union

It’s a gas

Carbon-pricing initiatives, April 2022

Source:WorldBank

California Pennsylvania

Zacatecas Tamaulipas

Jalisco

Tianjin To k y o

Beijing

Shenyang

Shanghai

Shenzhen

Australia

Chongqing

Saitama

China

Carbon tax implemented, ETS under consideration

Emissions-trading scheme (ETS) & carbon tax implemented

ETS or carbon tax under consideration

ETS implemented Carbon tax implemented

None

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