The Economist: The pros and cons of carbon taxes

Professor Dieter Helm has written extensively on climate change, most recently in Green and Prosperous Land: A Blueprint for Rescuing the British Countryside (2019), and assisted the European Commission in preparing its Energy Roadmap 2050 initiative. Here, he discusses the links between energy, infrastructure, regulation and the environment.

4 minute read

Dieter Helm
Dieter Helm, professor of economic policy at the University of Oxford

What are the key impediments to the sustainable energy transition?

They are numerous. The transition requires a laser focus upon the causes of climate change, principally consumption; the focus should be on carbon consumption as a starting point, rather than on territorial emissions.

Secondly, and within that framework, the countries most responsible for emissions need to make reductions. That means China, the US and India. And then it’s about finding mechanisms to bring about the technological changes required – in particular, market mechanisms like a carbon tax, especially at the border.

How might a carbon border tax work?

It need not be fantastically complicated. Take steel, cement, aluminium, fertiliser, petrochemicals; these products account for a huge proportion of the carbon footprint of total trade. A carbon border tax is a vastly superior bottom-up way of addressing a country’s true carbon footprint compared to the top-down approach behind the Paris Agreement, which has so far failed to limit the growth of carbon emissions and consumption. “Top down” clearly hasn’t worked.

A carbon adjustment is economically efficient, and the only way to properly address countries’ carbon footprint

A carbon adjustment is economically efficient, and the only way to properly address countries’ carbon footprint, because it doesn’t matter where you buy the steel from, whether it’s British steel or Chinese steel. A carbon border tax has the potential to encourage genuine economic cooperation through the spreading of carbon prices globally.

Is a carbon border tax the most effective way of tackling “carbon leakage”?

There is no other way. If you wish to pursue territorial carbon-reduction targets for carbon production, you may well increase leakage and increase global warming.

Unless every country in the world is at net zero in 2050, then the UK will still be contributing to climate change

The UK’s Committee on Climate Change states, erroneously, that when we get to net-zero emissions [the government target for 2050] we will no longer be contributing to climate change. That’s utterly wrong, unless every country in the world is at net zero in 2050. We will continue to buy petrochemicals from abroad, steel from abroad and cars from abroad. Given we have less coal in our energy mix than most of the countries from which we import these products, the risks of climate change will go up, not down, as a result of pursuing net zero domestically without a border adjustment.

If you want to tackle carbon leakage, border taxes are the only way. The crucial point is that it’s not the carbon production we should be focused on. If we want to be sure we’ll no longer be contributing to climate change, we need to target net-zero carbon consumption.

The EU is looking at a carbon border tax. What are the chances the US would consider one?

Actually, I think quite high. First, let’s move away from the hype about how America is President Trump and somehow America is the evil player in this game.

We’re in a world of “China first”, “Russia first”, “America first” and so on

We’re in a world of “China first”, “Russia first”, “America first” and so on. Nationalism is not the preserve of the US. No American president – Clinton, Bush, Obama or Trump – has been willing to sign up to an international agreement on climate change. I don’t want to defend any country’s approach on climate change, but I would like to correct the public rhetoric that if only we could get rid of Trump somehow the US is going to pursue a different policy.

What is the point in cutting emissions if you are going to import stuff from countries that are increasing their pollution fastest?

Now let’s consider the point about cutting emissions from both a US and European perspective: What is the point in cutting emissions if you are going to import stuff from China and other countries that are increasing their pollution fastest? If you really want to find a way Americans could start to commit to international climate change goals – and in a way that will get the necessary votes in Congress – levelling the playing field with a carbon border tax between the US and China has deep political appeal.

So why doesn’t the US have a carbon border tax yet?

If you ask a slightly different question, “Is reshoring happening?”, then the answer is yes, on a significant scale. One of the reasons reshoring is taking place is the price of energy is much lower than it was. And that’s because of shale gas, which I’m not defending or supporting. But reshoring from China is happening in a stepwise fashion. Car production is coming back, so are petrochemicals, aluminium and fertilisers, among other industries.

The real reason reshoring is happening is because of the digitalisation of almost all economic activities

Is all this happening fast enough? Absolutely not. Is Trump’s trade policy, which has nothing to do with climate change, encouraging reshoring to the US? Yes. But the real reason reshoring is happening is because of the digitalisation of almost all economic activities. In a robotic world you don’t need any labour, and therefore you will want to locate your production closer to consumers, rather than cheap labour markets in southeast Asia or China.

Fundamental shifts are taking place. World trade is currently declining, and reshoring is happening. The net carbon effect of this is beneficial, relative to the other way around.

What is your view on EU farming subsidies in relation to climate change?

In Green and Prosperous Land, I suggest public money should be spent to provide public goods, not private goods. Therefore, I’m very critical of Common Agricultural Policy (CAP) funding, as most of the money pays farmers to own land, rather than to produce things for the public benefit. I’d like to see farming subsidies spent on providing public goods, which often have to do with soil, biodiversity and water. So that’s the first thing.

We need to pay as much attention to how good the natural environment is at soaking up carbon as to how much we’re emitting

In respect to land use, the way to think about climate change is not purely in terms of emissions, but also in terms of sequestration. Our natural environment, indeed our planet, has been sequestrating carbon for millennia. All the fossil fuels are sequestrated carbon. We need to pay as much attention to how good the natural environment is at soaking up carbon as to how much we’re emitting. Taking that into account, the climate change story is much worse than people are currently projecting.

Do you see roles for individuals and companies in improving the situation?

Absolutely. The climate initiative starts with you. When you get up in the morning, you can make choices about what your carbon consumption is. And there are plenty of companies that want to be net zero. Well, they should really think through what net zero is: What is their carbon footprint – not just what comes out of the factory chimney, but out of their entire supply chain? The challenge for companies that want to move beyond greenwashing, to genuinely make sure that they’re not causing any more climate change, is really demanding. But that is where people are going to shine the torch.

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