Ambrose Pritchard, writing in The Telegraph criticises the proposed Democrat Green Deal as being a dirigiste policy with an ulterior motive of ‘fuelling’ the trade war with China. He gives a very cogent explanation of the mechanics of carbon fee and dividend and why he prefers this market led method of carbon pricing. He also argues why the dividend should go directly to consumers…
Mr Biden’s new age Gosplan is not to my taste. Should the Democrats be pledging to install 500 million solar panels and 60,000 wind turbines over the next four years? Is such dirigiste planning the American way?
The laissez faire way is to set a carbon price that ratchets up predictably, letting business respond to the price signal, and letting Schumpeterian competition find its own answers. All former chairmen of the Federal Reserve and a cast of economists of all ideological stripes have backed HR 763, a bipartisan House bill for a carbon tax and dividend.
It starts at $15 a tonne and ratchets up $10 every year until CO2 emissions are almost eliminated. The money raised is rotated back into people’s pockets. The higher the carbon price, the bigger the cheque, and the poor do best.
Needless to say, Ursula von der Leyen’s variant in Europe aims to siphon off its carbon tax to fund the Commission’s apparatus. The EU seems to have learned little from the gilets jaunes and the sociology of revolt.
British Steel, an icon of the industrial heritage of the very nation that initiated the Industrial Revolution is on the brink of collapse. Its decline since the 1970s has been precipitous and it is now facing the closure of its last plant in Scunthorpe.
Carbon taxes have been squarely blamed for driving up costs that the business can no longer bear and so it faces collapse. While this is superficially true, the real root cause is the failure of the market to properly price carbon from all sources, domestic and foreign. It’s a failure of the design of the European ETS. In short, this is not a case of too much carbon pricing – it’s a case of not enough.
A Carbon Fee with effective border adjustment taxes would simultaneously action four key goals:
properly price steel, factoring in its carbon emissions,
incentivise reductions in carbon emissions from the sector
protect the British heavy industry from dirty, unfair competition, and
preserve, and indeed nurture, a vital strategic industry
20th Century Policy for a 21st Century Problem
The immediate problem for British Steel is the bill for Carbon Credits that has come due under the European Emissions Trading Scheme (ETS). The company has sought a loan of £100M from the U.K. government to pay this bill but it has no obvious sources of revenue to repay the loan, making propping up British Steel a very risky prospect from the taxpayer’s point of view.
But ultimately, the pressure is coming from British Steel’s inability to raise enough revenue from sales due to the crushing competition that the company faces from cheap imports of steel into the EU from China.
So while the ETS is trying to correct the market failures associated with the externalised costs of fossil fuels used in European production, there is no accounting for the massive emissions embedded in imported steel coming from China, leaving European manufacturers at a huge disadvantage.
Border taxes level the playing field for carbon
A border adjustment tax on carbon imposes tariffs on imports from countries that are not adequately pricing carbon themselves. This immediately strips out the cost advantage of imports from dirty economies associated with underpriced carbon in those economies. In fact, as the carbon price rises, these tariffs dominate the cost of such dirty imports and they become completely uncompetitive.
Furthermore, to keep the market fair in the opposite direction, for exports from the clean producer to the high-carbon economy, the relevant carbon fees are refunded to the producer on export, removing the advantage that the dirty producer has, even in their own territory.
What about the effect on consumer prices?
A common objection to tariffs is that they raise consumer prices, often punishing those who can least afford higher prices. This is an especially prevalent concern in a time of incipient trade wars and the economic distress they cause.
This is where the Dividend element of the Carbon Fee & Dividend policy comes in. All revenues from the carbon pricing, whether from domestic producers or tariffs on imports are fully distributed to citizens. This not only protects low and middle earners, it actually benefits them overall.
Price ALL carbon to rebuild British industry
The U.K. has made significant progress decarbonising its energy supply and just recently it boasted the longest period of coal-free energy production since 1882. But at present, the U.K., and relatively low-carbon economies like France, have no way to fully monetise their cleaner power sector when it comes to international trade.
Plentiful cheap clean energy combined with fees on imported carbon can reverse the decline of the British steel industry
This can be directly addressed by a Carbon Fee & Dividend policy, and when it is, it will give shelter to traditional industries that are being unfairly eroded by dirty imports and will provide a huge boost to investment in new, clean industrial production that can leverage the burgeoning low-carbon energy sector that the U.K. is building.
A common refrain among those who oppose action on climate change is something along the lines of “Why should we take action? It won’t matter what we do, if China doesn’t do anything.”
There is a superficial logic to this statement, but it lacks a proper understanding of the root causes of many global emissions and how they are allocated to players on the international stage.
First, it’s right to acknowledge that China is the world’s leading carbon emitter, a mantle that it took over from the USA in 2005 as it went through a huge expansion of its coal-fired power sector.
During that period of rapid increase in China, countries like the U.K. congratulated themselves as they wound down their coal-fired power sectors and reduced emissions. Today, the U.K. government continuously touts its achievement of bringing down emissions down 44% since 1990.
Sinners into saints
However that is really only a conclusion that you can arrive at if you use very incomplete accounting.
Even though domestic emissions have fallen 27% in the UK between 1990 and 2014, once CO2 imports from trade are considered this drops to only an 11% reduction. Similarly, a 9% increase in domestic US emissions since 1990 turns out to be a 17% increase when trade is included.
This puts the performance of the US into even sharper contradiction with its political protestations about China’s emissions.
While the US has seen tiny incremental reductions in its officially accounted emissions between 2014 and 2017, it exported 352 million tonnes of carbon emissions in just the year 2014. And even the most apparently virtuous stewards of nature are not immune to shaming when their trade in carbon emissions is evaluated.
In one extreme case, Switzerland’s emissions are 209% higher (more than three times as large) once CO2 imports are taken into account, due to large imports and exports containing little in the way of embedded carbon.
So if the U.K. and the US are effectively exporting their carbon emissions to other countries, then where are they being exported to?
China acts like the advanced world’s Picture of Dorian Gray
Well, no prizes for guessing, they are being exported to low-cost, highly carbon intensive manufacturing economies with China at the head of the list for pretty much every advanced country that is currently crowing about its progress on reducing emissions.
In 2014, China imported 1.37 billion tonnes of carbon emissions from trading partners, equivalent to 13% of its total emissions. With a growing economy, growing connection to new markets with the One Belt One Road strategy and growing share of global trade, that number is likely to be rising.
None of this is to say that China is anything but a grave threat to the climate and that it does not need to radically and rapidly reform its energy system. But when opponents of domestic action on climate change bleat about China being to blame for everything, remind them that China is in fact just doing our dirty work (literally) and that the true picture of responsibility for emissions shows that we lack a lot of the moral authority that we think we have.
Border Adjustment Taxes protect domestic industry and lay bare true responsibility for emissions
The Carbon Fee and Dividend model of carbon pricing includes a border adjustment tax that applies tariffs on imports from countries that do not sufficiently price carbon themselves. This restores proper responsibility for the emissions to the importer of the goods.
It also has the effect of levelling the playing field for domestic producers bearing the downstream effects of carbon fees from unfair competition from overseas producers using cheap but dirty energy. Indeed as the domestic energy supply decarbonises and the carbon fees applied diminish, the domestic producer gains a bigger and bigger differential advantage against dirty imports as its carbon costs fall while border adjustment taxes continue to apply to carbon-intensive imports.
Given the current trajectory of the energy system in the U.K. in contrast to that in China, Carbon Fee and Dividend provides a strong, fair and effective protection of the U.K. manufacturing sector against unfairly cheap competition from China, which has been exploiting its unsustainable practices for years to systematically erode U.K. manufacturing.
CF&D is therefore a jobs- and economy-friendly measure for U.K. industry.
