The IMF recently released a paper (“How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits”) with findings that if the co-benefits of carbon restrictions were taken into account, it would be in countries’ self interest to unilaterally implement carbon pricing programs. The paper notes that countries can benefit from reduced use of fossil fuels, primarily through improved air quality and reduced vehicular traffic congestion. Accounting for these externalities in the top 20 emitting countries justify efficient national CO2 prices that are quite high, for example, $63 per ton in China and $57 per ton in the US. These are comparable with the estimated optimal global CO2 price of $35 per ton. In short, even if countries do not care about climate change, carbon mitigation is in their national interests. Given that, they should proceed with national level carbon pricing and not wait for an international climate agreement.
The paper’s release was timed to embolden national leaders at the UN Climate Summit on 23 Sep to consider more aggressive commitments, given the short runway left to the critical COP21 in Paris. It has drawn renewed calls to action by climate change friendly economists like Paul Krugman and Martin Wolf. Since climate action is not in conflict with economic growth, there is now no excuse for leaders to continue to kick the can down the road for the next generation to deal with.
With the IMF’s findings, the deal seems almost too good to be true. With carbon mitigation, leaders can further national interests and yet be seen to be good responsible global citizens. Should they not be falling over themselves to declare aggressive CO2 reduction commitments?
Not so fast. The enticingly high estimates of co-benefits from carbon mitigation may not be enough to change the leaders’ political calculations on climate change efforts.
One, environmental co-benefits may not matter that much to the leaders. The paper’s authors noted that although the fossil fuel externalities should ideally be addressed via direct policies, e.g. air pollution charges for coal use and road congestion tolls, it is unlikely that countries will comprehensively internalize them for a long time. This reality reflects the low priority attached to these environmental costs. Although these are longstanding environmental problems, many countries consciously choose not to correct them, as other national goals take precedence. For example, cheap electricity from coal is seen to be essential to support the growth of heavy industries. The resultant unhealthy air quality is unfortunate, but that is the inevitable price to be paid for economic development. For countries where ruling legitimacy is not established through ballot boxes, it is even more important to justify continued leadership with strong economic performance. Environmental achievements without progress in material metrics cannot secure obeisance. Even among the other countries, compromised air quality and long commutes are often accepted as part and parcel of urban living. While a politician may be cheered for acting on these environmental issues, the voting public’s expected strong and sustained displeasure over higher electricity rates and tolls would make such a move ‘courageous’, as defined by Yes Minister’s Sir Humphrey Appleby. Ultimately, a dollar is not a dollar is not a dollar. The co-benefits are likely to be highly discounted in most government’s calculations of national interests.
Two, countries care about relative competitiveness. The authors acknowledge that dynamic responses are not considered. For example, the reduced fossil fuel demand could depress an energy exporting country’s terms of trade. More critically, there could be emissions leakage if firms in energy intensive and tradeable sectors relocate to other countries that still do not price carbon. The loss of competitiveness and resulting hollowing out of industries can potentially offset the co-benefits, making carbon pricing a costly exercise if undertaken unilaterally. However, if carbon pricing was concurrently adopted by other countries, especially the competitor economies, the relative competitiveness will not be disturbed. That is why even when countries are prepared to do what is right for the climate, they are insistent that other countries commit to actions commensurate with their respective levels of economic development.
These concerns could be overcome if carbon pricing improved competitiveness instead, along the lines of the Porter hypothesis that strict environmental regulations induce efficiency and spur innovations that give local firms a dominant competitive position over firms in other countries without the regulations. Although the hypothesis’ logic has been much criticized, the thinking has helped to spur the Green Growth movement. The promise that going green can be a long-term driver for economic growth is relatively easy for governments to market to voters, and many have signed up with public funding for green industries.
I look forward to eventual conclusive evidence that green growth works, so as to boost the case for unilateral climate action. Otherwise, there is no avoiding the Gordian Knot of equity at climate negotiations. The painful, messy process of reaching a global agreement of coordinated commitments will have to run its course before countries initiate effective climate change mitigation.