G20 Carbon Pricing Seen Cutting Need for ‘Divisive’ Border Adjustments: IMF (1)

BY MATHEW CARR

July 12, 2021 (LONDON): Minimum carbon prices across the G20 might cut the need for “divisive” carbon border adjustments, according to the IMF’s Kristalina Georgieva, managing director.

Georgieva was speaking as G20 finance ministers indicated they would explore carbon pricing floors and other measures to build back more sustainably after the global pandemic.

“Crucially, as well as making global mitigation efforts more effective, a price floor would address concerns about competitiveness that already incentivize carbon border adjustments, which are less effective and more divisive,” she said.

The EU is planning to introduce a carbon border system in 2023 as many countries around the world resist ambitious climate action and/or struggle to deal with the political realities of it.

It’s planning it because its high carbon prices mean domestic factories currently pay a higher price than imports, “which may tilt the playing field against EU producers and drive ‘carbon leakage’, i.e. producers shifting from higher carbon price jurisdictions such as the EU to lower/no carbon price jurisdictions,” investment bank Morgan Stanley said today in a research note.

“And the gap and therefore incentive for carbon leakage is now quite substantial, since the World Bank estimates that the average carbon price globally is $3/metric ton of carbon – with the lion’s share of that attributable to the EU ETS – and the EU carbon price is now over 50 euros/ton, or around 20 times the average,” the bank said.

See these charts:

Morgan Stanley research, July 12; Using the World Input-Output Database (WIOD), covering 40 countries
with 35 production sectors each over a period from 1995 to 2011, allows analysis of
model shocks to overall output and final demand as well as shifts in output between sectors. See also this: https://www.econstor.eu/bitstream/10419/161619/1/888677375.pdf

The G20 issued a statement (see below) four days before the European Union was scheduled to unveil on July 14 its controversial carbon-adjustment border fee on goods from countries without high carbon prices.

“It is the first time in a G20 communique you could have these two words ‘carbon pricing’ being introduced as a solution for the fight against climate change,” French Finance Minister Bruno Le Maire told reporters, according to Reuters (see link below). “We have been pushing very hard to have these two words … introduced into a G20 communique.”

Those efforts met strong U.S. resistance for most of Trump’s presidency, during which the United States quickly withdrew from the Paris climate agreement, Reuters said.

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Key section of the IMF speech is reproduced here (link below):
The first priority is to make market signals work for the new climate economy, not against it.  As politically challenging as this may be, the world needs to rid itself from all forms of fossil fuel subsidies. Defined broadly to include undercharging for supply and environmental and health costs, they are equivalent to more than 5 trillion dollars annually—and we will soon publish an updated research on the exact composition of these subsidies. 

Key is putting a robust price on carbon as we discussed at the G20 High-Level Tax Symposium. This will provide a critical signal for redirecting private investment and innovation to clean technologies, and to incentivize energy efficiency. Our research is clear—without it we simply can not reach the goals of the Paris Agreement.

And this price signal needs to get predictably stronger—by 2030, we need an average global price of $75 per ton of CO2, way up from today’s $3 per ton and up from the 23 percent current emissions coverage.

A minimum first step on carbon pricing is a regular stocktaking of measures by the G20 countries to assess progress toward mitigation commitments.

A higher level of ambition is an International Carbon Price Floor agreement among major emitters—staff at the IMF have elaborated in a recent proposal how this could work, and we will continue to expand our policy research in this area.

With a pragmatic design, this type of arrangement would allow different minimum prices based on different development levels and different national policy approaches. And the carbon price floor does not have to be a tax. Some countries may prefer other measures that achieve the same outcome, such as emission trading or combinations of feebates/regulations at the sectoral level.

Crucially, as well as making global mitigation efforts more effective, a price floor would address concerns about competitiveness that already incentivize carbon border adjustments, which are less effective and more divisive.

(Smoothed some imperfections on July 16)

NOTES:

IMF speech: https://www.imf.org/en/News/Articles/2021/07/11/sp071121-md-on-global-policies-and-climate-change

G20 statement: https://www.g20.org/third-g20-finance-ministers-and-central-bank-governors-meeting-under-the-italian-presidency.html

REUTERS story: https://www.reuters.com/business/sustainable-business/g20-recognizes-carbon-pricing-climate-change-tool-first-time-2021-07-10/

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