How can we be at our 27th COP, but haven't yet successfully implemented worldwide climate action? The rationale is simple: most of the burden rests on climate actors; countries that go forward with strong climate policies risk diminishing the competitiveness of their businesses and hurting their economies.
For example, we adopted a carbon tax in Canada because it is the cheapest way to achieve our GHG reduction target. But, unfortunately, it comes with carbon leakage; by imposing an extra burden on our Canadian businesses, the goods we produce here might "leak" to more GHG-intensive countries — increasing the total greenhouse gases released into the atmosphere despite our objective to reduce it.
To ensure our carbon tax does not damage the Canadian economy or the climate through leakage, we need to implement carbon border adjustments, or CBAs. This means taxing imports from countries that do not have a carbon pricing system.
The climate club
William Nordhaus, who won the Nobel Prize 2018 in economics for his research on the economic impact of climate change, proposes the concept of a climate club.
Countries with reasonable carbon prices would not have to pay border taxes — since they are "club members" — whereas those without carbon pricing would see themselves being taxed proportionally to the GHG insensitivity of their grids. This would ensure that those with solid climate agendas do not pay the economic or political price of doing the right thing. On the contrary, they would benefit from doing so — ending the so-called tragedy of the commons.
Foreign corporations — not solely environmentalists — would push their governments to apply carbon pricing since they would benefit from doing so. This also means more economically minded voters would request a carbon tax, seeing better prosperity from being green.
Realistic
This proposal is realistic. It does not need international collaboration; countries with a carbon tax will implement a CBA to prevent leakage. In fact, the EU will start implementing it next year, and Canada pledged collaboration. Moreover, even without a carbon tax, the U.S. is considering applying a CBA to prevent production from being reallocated to cheaper, more GHG-intensive countries. Indeed, the Inflation Reduction Act makes it especially appealing for American firms to implement a CBA since the American grid will become greener, improving their competition.
In short, a CBA — a climate club being a logistically easily implementable form — favours climate action. In addition, it incentivizes non-members to implement climate policies, such as carbon pricing, clean electricity regulations, and/or subsidies.
It is, perhaps, the best tool we possess to reduce the world's GHGs. Even better, this measure would not hurt our economy, quite the opposite; it would support and facilitate the energy transition of Canadian businesses. They would no longer undergo unfair competition against competitors from lax environmental jurisdictions.
Equitable
Some wise voices may raise concerns. For example, "The West has polluted massively during its industrialization and now has greener grids. Wouldn't that be unfair for developing countries?"
It is.
It is worth stressing that developing countries are the most affected by climate change; this implies that they benefit the most from climate action. So, a worldwide reduction of GHGs is excellent news for them, yet these nations do not possess our wealth, and the lives of their citizens depend on their economies. Literally.
To tackle this issue, Canada should start by honouring its part (ideally more) of the $100-billion pledge from the Paris Agreement, which aimed to assist developing countries in this climate endeavour. The money could be used to implement renewable grids, foster a green transition and establish climate resilience.
The financing for this could come from the very tax we imposed on borders. That way, the money would be efficiently allocated to maximize intergenerational welfare without exacerbating inequities.
Prisoner of the wrong dilemma
The climate club proposal is rooted in the idea that climate change is a prisoner's dilemma. However, Akalin and Mildenberger (2020) have weakened the prisoner's dilemma hypothesis. Their thesis is simple: the evidence that climate change is a prisoner's dilemma is weak, whereas evidence that it is a distributive conflict is strong. But, forming a climate club is not only destined to solve the prisoner's dilemma, it is aligned with the Bergquist et al. (2020) coalition-building strategy. If implementing a climate club reduces the loser's burden — notably by ensuring fair competition with foreign countries — then climate action is eased.
Conclusion
The carbon tax is one of the best tools to reduce local GHGs. However, the existing tax gives rise to carbon leakage, potentially increasing the GHGs released by certain goods worldwide. Here is where the climate club takes root. By stopping leakage, the concept promotes itself as a realistic, efficient and equitable form of CBA.
Hugo Cordeau is a PhD student in economics at the University of Toronto.
Comments
A couple of sections of this article were written in such a way that they impair understanding.
“…imposing an extra burden on our Canadian businesses, the goods we produce here might "leak" to more GHG-intensive countries…”
In this, it is not clear what, exactly, is leaking. Thus, it simply obfuscates the point.
“…ending the so-called tragedy of the commons.”
I understand the idea of a “climate club”, but I see this – “my country is doing the right, but yours is not, and you’re benefiting economically as a result” -- as an example of freeloading, rather than tragedy of the commons. Again, the point is somewhat lost.
The paragraph starting with, “Foreign corporations — not solely environmentalists…”, is not argued well.
First, the overseas corporate producers might, just as easily, be foreign-owned – e.g. offshored operations of a domestic, North American or European corporation – and thus points of lobbying pressure on North American or European governments to NOT impose such taxes on their foreign-produced goods. That foreign producer may, indeed, by contrast, be a huge, multinational contract manufacturer – e.g. a Foxconn – which, I expect, will simply shift manufacturing to its overall lowest cost option (foreshadowing a point, regarding international cooperation, made farther down).
Second, the statement, “This also means more economically minded voters would request a carbon tax, seeing better prosperity from being green.” doesn’t logically follow, in my opinion, and, if I understand the author’s point, seems merely optimistic projection of (rarely observed) consumer altruism in shopping decisions.
The paragraph following shoots itself in the foot, when, following the opening phrase“...It does not need international collaboration…”, it offers as an example an action by the EU which, one might observe, is, itself, a rather glaring example of international cooperation.
The CBAs are, of course, examples of international agreement and cooperation. People, generally, like fairness and are more open to change if they see that perceived “costs” of such change – if not “benefits” – are equally shared.
Then, there’s this: “It is, perhaps, the best tool we possess to reduce the world's GHGs."
Well, let’s look at Canada, which sits amongst the global leaders in per capita GHG emitters even though much (most?) of what Canadians consume is foreign produced. What impact would “green” production, overseas, have on reducing our domestic emissions? (One point of uncertainty, on my part, is whether or not emissions embedded in imports are included in recognized carbon footprint numbers. I tend to think not.)
Look, I’m in favour of full lifecycle CBAs, which must also include costs of, for example, shipping. I’m also in favour of even more completely internalizing all costs – not just GHG (i.e. all environmental, social, etc.) of production.
My point here, simply, is that I like to see well-presented arguments for doing so.
Thanks for that.
I have one point to add, about dicey language. When we refer to grids, we generally mean either a map grid, setting out the dimensions of areas considered in calculations, or our electricity grid.
Neither apply here. So I wonder exactly what "grid" he's talking about.