Make the polluters pay
Rather than focus on sticks, carrots in the form of global carbon reduction incentives could help make headway in the fight against climate change
As detailed preparations begin for the COP26 climate summit in Glasgow, attention is turning to “deep decarbonisation”. In short, the message that the time for talk is past is at last getting through. The priority is now for multilateral agreement on practical steps that start to sharply reduce carbon dioxide (CO2) emissions.
Only now that the US has rejoined the climate discussion does this become possible. Together with other high-income countries, plus big emitters such as China, India, South Africa and Russia, the road map and milestones to huge reductions in net emissions and “net zero” by 2050 must be agreed.
That means agreement on sticks, carrots and assistance programmes for the poor that ensure clear, measurable movement towards decarbonisation. My own personal mantra remains to decarbonise electricity, then electrify everything.
Some of the necessary sticks have been in place – or discussed in detail – for many years. Carbon trading has been in place in Europe since 2005 and is being rolled out in China this year. This has provided a marvellous and profitable side show for financial markets but has so far largely failed in cutting carbon emissions.
While the cost to big polluters remains around US$25 per tonne of emissions and emissions ceilings remain generously high, carbon trading will continue to be ineffectual. There is widespread agreement that pollution rights need to be set at US$100 to US$135 a tonne to change the behaviour of big industrial polluters.
Momentum towards another stick – carbon border taxes on emissions-intensive imports – is also accelerating, led by governments in the European Union. My betting is these taxes will arouse huge controversy that will keep World Trade Organization negotiators mired for years.
Less attention has been paid to carrots, but proposals from Raghuram Rajan, at the University of Chicago, for “global carbon reduction incentives” have aroused my interest. His proposals are elegant and, by international trade policy standards, quite simple.
Worldwide CO2 emissions in 2019 were 36.4 billion tonnes. With a world population of 7.7 billion people that year, that means average per capita CO2 emissions worldwide of about 4.7 tonnes.
Rajan calls for all countries with per capita emissions of more than 5 tonnes to contribute to a climate pool, calculating the contribution by multiplying their population by their per capita emissions above 5 tonnes.
For example, China had 10.2 billion tonnes of total emissions in 2019. With a population of 1.4 billion people, that means per capita emissions were 7.3 tonnes. If countries were asked to pay US$1 per tonne over 5 tonnes, China’s contribution would be its population multiplied by 2.3 – about US$3.2 billion.
The US emitted 5.28 billion tonnes in 2019, which on a per capita basis was 16.1 tonnes.
The US, China and the EU would account for 60 per cent of contributions to the starter fund
Using the same calculation, its contribution would be its population of about 330 million multiplied by its 11.1 excess over the 5 tonne allowance, amounting to US$3.7 billion.
Using the Our World in Data emissions database built in collaboration with the UN’s Global Carbon Project, Rajan’s carbon reduction incentive pool for 2019 would raise about US$13 billion,
with eight economies – China, the US, the EU, Japan, Russia, Saudi Arabia, South Korea and Canada – contributing 87 per cent of the climate pool. China, the US and the EU alone would contribute 66 per cent.
It is possible China would complain that rich economies get off lightly under this basic scheme. In response, my thought is that a US$100 billion “starter
pool” could be created, based on every country’s cumulative contribution to the more than 1.5 trillion tonnes of emissions generated since the start of the Industrial Revolution.
The US, whose cumulative contribution was 399 billion tonnes as of 2017 or 25 per cent of the total, would pay US$25 billion into the starter fund. The EU contribution, based on cumulative
emissions of 353 billion tonnes, would contribute 22 per cent or US$22 billion. China, with cumulative emissions of 200 billion tonnes or 12.7 per cent, would contribute US$12.7 billion.
Between them, the US, China and the EU would account for 60 per cent of contributions to the starter fund. However, all economies would contribute a little. For example, based on our cumulative emissions, Hong Kong would contribute US$100 million, Singapore US$120 million, Taiwan US$500 million and Japan US$4 billion. Even India, with emissions of just 1.91 tonnes per capita and cumulative emissions of just 48 billion tonnes, would contribute about US$3 billion.
The carbon reduction incentive pool could then be launched with a starter pool of US$100 billion to aid adjustment among developing economies or those facing the gravest or most immediate climate change challenges, with additional annual contributions similar to the 2019 contributions of US$12.99 billion.
Countries that succeed in cutting their emissions to or below 5 tonnes per capita would contribute less, year by year. Those that increase them would have to contribute more. To ensure a progressive squeeze towards “net zero”, the 5-tonne per capita allowance could, for example, be cut to 4 tonnes in 2030, 3 tonnes in 2040 and 2 tonnes in 2050.
With so many governments heavily indebted or horribly leveraged as they chart a recovery path from the Covid-19 pandemic, there will doubtless be protests from many prospective contributors to the global carbon reduction incentive. If we are to make headway in the battle to reduce carbon emissions and slow climate change, though, there really is no choice.
As Martin Wolf at the Financial Times wrote, the next decade has to mark a start, even if the effort is rolled out over decades: “This will be the biggest effort at cooperation among countries, between private and public sectors, and across entire economies, in history.”
Much rests on the Glasgow COP26 in November – not for the talk, but for the practical steps it delivers.