Economy

Ngozi Okonjo-Iweala: Adopting a global carbon price is essential

The author is director-general of the World Commerce Group

Final month, the scientific community confirmed what most of us already know. Local weather change is right here. Left unabated, the frequency and depth of its impacts will solely worsen. We’re already seeing lack of lives and the impact on macroeconomic stability. Taking daring motion by the introduction of a worldwide carbon worth is crucial.

Momentum on local weather change is choosing up, with governments and corporations pledging to get to web zero carbon emissions by 2050 or earlier. Many have already adopted a spread of initiatives. Members of the World Trade Organization have, since 2009, formally notified greater than 4,500 climate-related measures, from direct taxes to regulation, and mentioned their commerce implications.

Nonetheless, we’re nonetheless nicely brief of what’s wanted to restrict world warming to 1.5 and even 2 levels Celsius. COP26, subsequent month’s UN local weather convention, will take a look at the political will to shut the hole.

However as governments transfer to boost the price of polluting throughout the economic system, together with in energy-intensive, heavily-traded sectors equivalent to aluminium, cement, electrical energy and metal, we hear rising issues about “carbon leakage”. That is the notion that elevating the value of carbon in a single market dangers shifting funding and manufacturing to locations the place carbon costs are decrease or non-existent. The concern is that carbon-constrained international locations would endure job and business losses, with world emissions unchanged as a result of polluting manufacturing is just occurring elsewhere.

We nonetheless await definitive proof of carbon leakage, however analysis of low carbon costs reveals that if massive economies diverge considerably in local weather ambitions, leakage might happen. This has led to requires “‘border carbon adjustment measures” — tariffs or equivalent measures meant to make sure that international opponents are topic to the identical carbon prices as home producers.

But growing international locations, particularly, concern that border carbon adjustment might grow to be a pretext for protectionism geared toward their exports, when they aren’t the core drawback. Africa, as an example, contributes roughly 3 per cent of greenhouse gasoline emissions. From that perspective, poor areas of the world see this measure as unfair.

That is no argument in opposition to carbon pricing. In each sphere of our economic system, manufacturing and consumption are guided by worth alerts. Sadly, carbon has too typically been an exception, although that is beginning to change. Certainly, greater than 60 completely different carbon pricing schemes exist already globally, although they cowl solely 22 per cent of complete emissions.

The problem comes from the inconsistency of carbon pricing programs. Costs range from less than $1 per tonne of CO2 in Ukraine to more than $130 per tonne in Sweden. Every subnational, nationwide or regional system works otherwise and has completely different sectoral protection. Costs are sometimes too low, contemplating the estimate by the Stern-Stiglitz Commission on Carbon Pricing that someplace between $50 and $100 per tonne of CO2 is required to satisfy Paris Settlement temperature targets.

There are alternative ways to cost carbon. Competing concepts and approaches can spur studying and innovation. However fragmentation dangers producing commerce frictions and unpredictability for companies in search of to decarbonise. Worse, it might weaken the effectiveness of world efforts to mitigate local weather change.

Funding on the scale and pace wanted to remodel our economies over the following two or three a long time could be finest served by open worldwide markets for items and companies, intermediate inputs and uncooked supplies. An enormous worldwide push to spend money on decarbonising electrical energy, transport, industrial manufacturing and houses might give rise to what some have dubbed “greenflation”. Commerce frictions would exacerbate these pressures and scale back the associated fee effectiveness of inexperienced funding.

Essentially the most easy answer could be a worldwide carbon worth aligned with the Paris Agreement. This could assist obtain our collective local weather objectives, and convey stability and equity for cross-border enterprise. Sadly, we’re not but there. Leaders gathering in Glasgow at COP26 ought to make fixing this drawback a precedence.

However absent such an settlement, the WTO, IMF, World Financial institution and OECD share an obligation to work collectively to seek out options. We have to provide governments our insights on a standard methodological method to carbon pricing.

We even have a duty to handle the wants of least developed and growing international locations, to allow a simply transition in direction of environmentally sustainable economies and societies. Becoming a member of forces to suggest a standard method on world carbon pricing is the way in which ahead. We owe it to the planet and its individuals. We’ve no time to waste.

Ngozi Okonjo-Iweala will probably be one of many audio system on the forthcoming FT Africa Summit


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