Time for a climate alliance (05/01/2016)

A Climate Alliance for a global price on carbon emissions

Negotiations and voluntary pledges among nations is a risky solution to climate change and after more than two decades the results are poor. Highly ambitious nations should not wait any longer, but join forces and create a Climate Alliance with the aim to create a global price on carbon emissions. In order to expand the Alliance to a global institution a synchronized carbon tariff on imports from nations outside the Alliance is necessary, as it would provide incentives for outsiders to join the Alliance.

The UN negotiations in Paris brought international climate policy a step forwards, but is not enough. The combined pledges do not add up to the total reductions necessary to limit temperature increase to well below 2˚C and it is unclear how and when they will be implemented. There is no coordination to ensure efficiency and no sanctions for nations that do not live up to their promises. The agreement is vague and based on voluntarism. The largest problem is that world leaders, NGOs and media after Paris has turned their interest to other issues. But global negotiations will hardly solve the problem. New initiatives are urgently needed. Most important is to reach a global price on carbon emissions. An alliance among highly ambitious nations could start such a process.

Negotiations and voluntary pledges among all nations is, to put it mildly, a risky solution to climate change. Each participant has incentives to escape costs and free ride on benefits from reductions by others. Participants get trapped in a dilemma – why should we reduce our emissions if others continue? Different ambitions the nations with low ambitions will determine the level of action. These problems accentuate if some participants are hostile to the whole idea of reducing emissions. Add to this the possibility for participants to argue that fairness require that they should be compensated for reducing emissions.

UN agreements on the climate are characterized by these problems and it explains the poor results despite more than two decades of negotiations. Climate change is an example of ‘the tragedy of the commons’. The atmosphere is an open access resource and such resources run severe risks of being overused and destroyed. There is no market price on emissions and therefore the cost of climate change is not considered in economic decisions. The most important part of an efficient climate policy is therefore a global price on carbon emissions. There is massive theoretical and empirical support for introducing such a price, preferable by a cap and trading scheme or a carbon tax. Introducing a carbon price will make polluters reduce emissions to the lowest possible cost for society. It will provide the necessary dynamic incentives for a sustainable development as sustainable alternatives gain competitive advantages. Introducing a global price will also, as opposed to arguments about fairness, provide all participants with a clear logic for allocating reductions. It is when markets do not exist that problems start, as illustrated by i.e. the fisheries, wild animals, the Arctic. Rich nations have a moral reasonability to be fair and help nations plagued by disasters, war, poverty and environmental challenges. But ideas about fairness do not determine the use of global resources. Actions for moral responsibility and fairness are better kept as a parallel process, not replacing market mechanisms but complementing them.

The urgent question in climate change is therefore: How can a global carbon price be introduced in a world of 200 sovereign states? Without a global authority and with insufficient UN negotiations the answer has to be found in other designs. The solution needs to emerge bottom up. Compare with WTO, an organization that started with a group of nations and then expanded to a global institution. The EU and NATO are other examples on emergent institutions that started in smaller scale.

My proposal is this: Highly ambitious nations should join forces and create a Climate Alliance with the aim to create a global price on carbon emissions. Initial members should be nations with highly ambitious climate policies, especially those nations that have already introduced domestic prices on carbon emissions (by carbon taxes or trading systems, or hybrid versions).

The Alliance should do three things. First, nations within the Alliance should synchronize their carbon prices and agree on a common minimum price level, reflecting global marginal costs for climate change. Each nation could then be allowed to deviate from the minimum level with higher prices if they suffer from additional local damages from carbon emissions.

Second, nations of the Alliance should introduce a synchronized carbon tariff on imports from nations outside the Alliance. Such a tariff would price climate costs on goods imported to the Alliance. A tariff would also correct trade relations. Producers in outside nations trade their goods at a price that do not cover climate costs and gain distorted competitive advantages. A tariff will compensate for this and prevent a leakage of carbon intensive production from the alliance to outside nations. Finally, a climate tariff will work against free riding among Alliance members; if they leave they have to start to pay the tariff.

Third, the Alliance should be open for new entrants. A nation that decides to join the Alliance shifts paying tariffs to the alliance to receiving taxes and tariffs at home. The tariff hereby becomes a mechanism that incentivizes reluctant outsiders to participate in the Alliance. The more nations that become members, the stronger economic reasons there will be for outsiders to follow. Even nations that promote fossil fuels and do not care about the climate might be tempted to join. A bandwagon effect is hereby created that gradually can provide the world with a global price on carbon. Such a price is what the world needs now if we want to hinder severe climate change.

Håkan Pihl

Associate Professor in Business Administration and Vice Chancellor at Kristianstad University, Sweden, and Vice President of Intelligence Watch