By Richard Samans
The 2015 United Nations Paris climate agreement was an important political accomplishment, but confronting climate change will ultimately require an economic breakthrough.
The Paris agreement established a consensus goal for humanity: a maximum temperature increase of 2 degrees Celsius over the level prevailing before the dawn of the Industrial Revolution in the mid-1700s. It also created a universally acceptable political framework in which states make nonbinding, nationally determined contributions toward this goal, subject to periodic peer review and voluntary adjustment.
As important as this diplomatic achievement was, it represents only half the job that the international community must perform. To stabilize the planet’s warming by midcentury at levels our children and grandchildren will find manageable, the world needs a new economic framework to accelerate the propagation of low-carbon energy innovations that entrepreneurs are increasingly bringing to market on competitive terms.
Even with the national commitments registered under the Paris agreement, the world remains on course for a catastrophic 3 degree temperature rise rather than the 2 degree goal set in Paris.
This new phase of international climate change cooperation will require a different cast and architecture than the one that produced the Kyoto and Paris accords. Foreign and environment ministries were the key players in the creation of the U.N. Framework Convention on Climate Change’s Kyoto Protocol in 1997 and the Paris accord in 2015, with crucial input from the scientific community through assessments organized through the Intergovernmental Panel on Climate Change.
This time around, the economic ministries (finance, trade, energy, transport, infrastructure, development, and technology) will need to be engaged as well, with active input from the business and financial communities.
While the climate diplomacy of the past two decades has taken place at the multilateral level in the U.N., this new economic phase will require a more purpose-built and variable configuration. Since the speed and volume of greenhouse gas emissions reductions is what matters most, a universal, multilateral approach will be unnecessary and even counterproductive. Global emissions are concentrated in a limited number of locations and industrial sectors, so there is no need to seek unanimous agreement among the U.N.’s nearly 200 member states.
The best approach would be for a group of like-minded major economies to use their combined market power to speed the diffusion of carbon-efficient utility, industrial, and consumer goods and services by aligning their policy incentives and standards in ways that create greater economies of scale and lower transaction costs for producers.
A coalition of countries with big markets and ambitious environmental goals as well as supportive business communities could together accelerate a shift of production and consumption patterns
A coalition of countries with big markets and ambitious environmental goals as well as supportive business communities could together accelerate a shift of production and consumption patterns, directly at first within their own sizable collective share of the world economy and then indirectly in other markets as these increased economies of scale drive down production costs of low-carbon goods and services and make them more affordable globally.
Examples of climate-related economic cooperation have begun to emerge over the past several years. For example, the Major Economies Forum, World Trade Organization environmental goods negotiations, Carbon Pricing Leadership Coalition, RE100, the Financial Stability Board Task Force on Climate-Related Financial Disclosures, and other initiatives have all taken important steps forward. But relative to the challenge the world faces, these are baby steps—fledgling and uncoordinated efforts that unfortunately are not yet making a major difference in production and consumption patterns where they would most affect global emissions.
A vanguard coalition of countries could, however, generate a significant change in the pace of low-carbon adoption within the world economy by working together to shift the relative prices of the high- and low-carbon goods and services within their markets. Indeed, a growing chorus of citizens and business, civil society, and international organization leaders have been calling for the introduction of “a price on carbon.” This drumbeat is growing louder, but it is an appeal that suffers from being too narrowly focused, potentially to the point of making the perfect the enemy of the good.
The most effective way to shift the relative prices of low- and high-carbon alternatives would be to impose a broad carbon tax or implement a national cap-and-trade scheme. But these policies have been slow to spread, and when adopted—often at considerable political cost—they have yielded meager results. While the idea of putting a price on carbon might appear to be a magic bullet, in the real world, it has so far been a disappointment.
While the idea of putting a price on carbon might appear to be a magic bullet, in the real world, it has so far been a disappointment.
The focus of climate change strategy therefore needs to expand beyond carbon pricing on an economy-wide basis to using a much larger set of policy tools to shift relative prices with respect to specific carbon-intensive products, as well as magnifying the combined market pull of these incentives by jointly applying them across many of the world’s largest markets.
There are multiple ways to shift the relative prices of high- and low-carbon goods in an economy beyond a broad tax or cap-and-trade scheme, whether via tariffs, procurement, financing, corporate governance, subsidies, technical standards, targeted tax, investor disclosure, or emission trading rules and policies. Some of these instruments have the potential to influence prices directly, others more indirectly through a shift in purchasing behavior that generates expanded economies of scale for low-carbon technology producers.
The actors relevant to this broad economic agenda are currently scattered across many different ministries, international organizations, and industries. Each has no shortage of challenges and priorities on its traditional turf, which is why the machinery of international economic cooperation has remained so quiet in the fight against climate change for so many years. Only presidents and prime ministers—whose authority spans finance, trade, development, infrastructure, energy, and technology ministers—can galvanize the necessary domestic and intergovernmental action. And only they can compel the engagement of the key business leaders in their societies needed to co-design and support such a strategy.
But there is an alternative. Imagine if the leaders of France, Germany, China, Japan, South Korea, Canada, and Britain—all countries that have exhibited broad popular support for climate action—agreed to create a new kind of international economic alliance aimed at collectively scaling market incentives for low-carbon adoption.
Imagine if the leaders of France, Germany, China, Japan, South Korea, Canada, and Britain—all countries that have exhibited broad popular support for climate action—agreed to create a new kind of international economic alliance aimed at collectively scaling market incentives for low-carbon adoption.By creating a low-carbon economic zone that aims to take full advantage of the growing price competitiveness of clean technology products, they would add fresh momentum to humanity’s race against time, propelling faster adoption of clean technology in a group of the world’s most important economies and driving down the relative price differential of these products worldwide in the process.
They could begin to form this new kind of trade alliance later this year, agree on its initial set of aligned incentives and standards by the U.N. secretary-general’s special climate summit in New York in September 2019, and declare membership of the club open as of 2020: Any country prepared to align its low-carbon economic incentives and standards with those of the alliance would be welcome to join it.
The alliance could take a flexible approach to the terms of membership, requiring each member country to commit to implementing at least half of the policies on its agenda within a certain number of years, while encouraging all to adopt as many as possible over time.
The policy menu could include: zero tariffs for a defined set of low-carbon goods and services; common energy efficiency standards for government procurement of energy-intensive goods and services; mutual recognition of technical standards for related goods and services; minimum, time-bound targets for the reduction of fossil fuel subsidies; a trade dispute peace clause and consistent rules on the use of clean energy subsidies; implementation of the Financial Stability Board’s industry task force on climate-related financial disclosure framework in corporate governance and disclosure rules; coordination of efforts within the boards of multilateral development banks to have them make more effective use of their balance sheets to mobilize the private finance necessary for climate mitigation and adaptation in key developing countries; alignment of policies in carbon-intensive sectors such as maritime, aviation, cement, steel, and oil and gas; coordination of basic and applied clean-energy research to avoid wasteful duplication and speed the rate of technical progress; mutual recognition of the rough equivalency of domestic carbon pricing schemes to avoid the tit-for-tat imposition of border adjustment taxes on one another’s carbon-intensive products in the name of industrial competitiveness; and linkage of emission trading systems.
Building such an expanding low-carbon zone within the world economy would help to scale up demand for low-carbon goods and services by embedding and aligning price advantages for them through linked trade, procurement, tax, and investment rules.
Building such an expanding low-carbon zone within the world economy would help to scale up demand for low-carbon goods and services by embedding and aligning price advantages for them through linked trade, procurement, tax, and investment rules.A virtuous cycle of policy leadership, technological innovation, and market forces would ensue. And the risk of border adjustment tax disputes relating to differences among national carbon tax and cap-and-trade regimes could recede as member countries used the club as a mechanism to recognize the equivalency of effort of each other’s carbon pricing policies or eventually to negotiate a common scheme at either the national level or within key industrial sectors.
A climate leadership club of this nature need not be restricted to national governments. City and provincial governments could be invited to accede to those elements of the menu within their jurisdiction, particularly with respect to procurement rules and energy-efficiency product regulations.
Supplementing the architecture of global climate action in this manner would accelerate the implementation of the U.N. Paris agreement by speeding up the underlying economic transformation that is needed before nation-states can fully realize the political commitments they have made.
The world urgently needs to build on the 2015 agreement, not rest on its laurels by hoping for the best from voluntary national plans. The best way to do so is to think beyond the Paris accord. In particular, economic institutions and policies need to be at the center of this effort—and that will only happen if a group of the most like-minded heads of government of major economies compels it. Only they can cut through the Gordian knot of fragmentation and inattention that has plagued international economic cooperation on climate change for so many years.
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