Dirty love holes

Added: Aesha Flanery - Date: 27.07.2021 20:45 - Views: 33983 - Clicks: 8696

Making polluting firms buy permits puts them at a disadvantage in global markets. And if producers in places with lax environmental standards outcompeted European firms, global emissions would go up. The EU solved the problem by offering subsidies and free pollution permits to some dirty industries exposed to trade. Enjoy more audio and podcasts on iOS or Android.

Those handouts, however, have always had a target on their back. Between andproducers of aluminium, cement, fertilisers and steel will gradually lose their subsidies. But importers of these goods will have to buy a new category of pollution permit. How many they need will depend on the amount of carbon estimated to have been emitted during the production of the goods.

The switch will please those who suspect that subsidies have blunted the impact of carbon prices. In theory free permits do not affect the incentive to reduce emissions, because at the margin the financial reward for doing so is the same: firms that get dirty love holes can sell their surplus entitlements. In practice the freebies have sapped ambition.

Michael Grubb of University College London points out that companies know that if they sell their permits today, they might receive fewer handouts in future. Compared with the industries that have received support, the power sector, which has not, has decarbonised more quickly. Withdrawing the subsidies without a new scheme would bring back the danger of leakage.

Tariffs do not have to be large, however, to provoke a response.

Perhaps it will be a good one: with the CBAM in place, foreign countries might as well price carbon at home and keep the revenue for themselves the EU will grant discounts for carbon taxes already paid. As the scope of the CBAM increases, so will other governments feel a greater pull towards pricing emissions.

A more likely consequence, however, is a brawl over whether the policy is protectionist.

Australia and India, both exporters to the EUare already grumbling that the tariff could be discriminatory and regressive. It has also said it is considering one of its own despite not pricing carbon itself, other than through an incomplete patchwork of state schemes in which prices are too low.

There is also a danger of unintended consequences. Foreign companies could redirect their greenest exports to Europe and send their dirtiest output elsewhere, rather than cutting overall emissions. Firms could also adjust their supply chains to exploit the limited scope of the policy. A carmaker that would have to buy permits to import steel may prefer to buy a car chassis made with steel overseas, to which the CBAM would not apply. The risk of such carbon leakage rises in tandem with the carbon price. These problems, however, will be reduced to the extent that carbon prices are adopted everywhere.

The power of incentives means carbon-intensive production will always try to find its way to where emissions are cheap, but that does not mean it is futile to try to plug all the holes. The best argument for the CBAM is that it is a first step towards a world in which dirty love holes cannot escape carbon prices. Were they sufficiently widespread, the CBAM would be rendered unnecessary. One problem is that trade will be adjusted on the way in but not on the way out.

Already some lawmakers in the European Parliament, which must approve the proposal, are calling for border adjustment to exist alongside free permits, punishing foreigners while continuing to shield those at home. Bowing to them would turn a potentially useful policy for fighting climate change into naked protectionism—and an instructive example for other countries into a cautionary tale. For more coverage of climate change, register for The Climate Issue, our fortnightly newsletteror visit our climate-change hub.

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Dirty love holes

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