The West and China may be at loggerheads, but unless they plan on launching a full-fledged cold war or, God forbid, a hot war, they will have to find common ground and make nice at some point. The most obvious place to start, it seems, is global decarbonisation or tackling climate change.
The Biden White House has not specified a firm deadline, but it is committed to investing in green projects and tightening regulations on decarbonisation. US companies will bear the cost of carbon pollution. Foreign importers will be subject to “carbon border adjustments” (CBAs), essentially a tariff on imported goods based on the amount of greenhouse gases emitted during their production.
Remember CBAs, a key term in what may be the most workable globally coordinated scheme to slow down or halt climate change. If the three largest economies agree to work together, there is an excellent chance of compelling others to follow. How?
Nobel Prize-winning economist William Nordhaus has called such a scheme “the climate club”. The idea is to have the club’s member states or blocs of states agree domestically to impose carbon taxes, emissions trading schemes and/or environmental regulations; and internationally, to target importers with CBAs together. The latter is especially important if the goal is to discourage “free-riders” who increase profit margins by ignoring environmental standards.
Nordhaus first proposed the idea back in 2015. Writing last year in Foreign Affairs, he argued:
“States need to reconceptualise climate agreements and replace the current flawed model with an alternative that has a different incentive structure – what I would call the ‘Climate Club.’ Nations can overcome the syndrome of free-riding in international climate agreements if they adopt the club model and include penalties for nations that do not participate. Otherwise, the global effort to curb climate change is sure to fail.
“Agreements on global public goods are hard because individual countries have an incentive to defect, producing noncooperative, beggar-thy-neighbour outcomes. In doing so, they are pursuing their national interests rather than cooperating on plans that are globally beneficial – and beneficial to the individual countries that participate.
“Free-riding is a major hurdle to addressing global externalities, and it lies at the heart of the failure to deal with climate change. The key to an effective climate treaty is to change the architecture, from a voluntary agreement to one with strong incentives to participate.
“Nations can overcome the syndrome of free-riding in international climate agreements if they adopt the club model rather than the [voluntary] Kyoto-Paris model. The first is that participating countries would agree to undertake harmonised emission reductions designed to meet a climate objective. The second and critical difference is that nations that do not participate or do not meet their obligations would incur penalties.
“Although many different penalties might be considered, the simplest and most effective would be tariffs on imports from non-participants into club member states. With penalty tariffs on non-participants, the Climate Club would create a situation in which countries acting in their self-interest would choose to enter the club and undertake ambitious emission reductions because of the structure of the payoffs.”
Obviously, such a club will only work if it is big and powerful enough to compel others to join. In a new analysis published in the science journal Nature, two researchers at Bruegel, an economic think tank based in Brussels, argue that such a climate club of the EU, US and China will have sufficiently the size and clout to make it work.
Together, they make up 61 per cent of the world’s gross domestic product and 43 per cent of goods imports. Their coordinated CBAs would be hard for other exporters to ignore or resist.
The two researchers also point out that unlike most tariffs, World Trade Organization rules allow the imposition of CBAs to protect the environment, so there is no question of breaching international trade rules.
And, for the first time, they wrote, “the EU, the United States and China share a common climate ambition”.
To start building up a reserve of goodwill and cooperation to give the world a shared hope after all the East-West rancour and antagonism as well as the pandemic, things can move quickly if the three dominant economies agree to work together. What better time to announce such a global initiative to save the planet at the 26th UN Climate Change Conference of the Parties in Glasgow, in November?