Breakingviews - How to crack the climate free rider problem - Reuters

How to crack the climate free rider problem | Reuters

How to crack the climate free rider problem

LONDON, July 10 (Reuters Breakingviews) - Why are the world’s governments fiddling while the planet burns? Can’t the United States’ politicians smell the smoke from wildfires in Canada? Can’t Chinese leaders feel the scorching heat in Beijing? Don’t Europe’s prime ministers and presidents see that parts of the Rhine risk being unnavigable in the coming weeks as water levels fall perilously low?

Of course, politicians know these things – and some are taking action. For example, the United States, China and Europe are engaged in a green subsidy race that is driving down the cost of clean technology. But it risks being too little too late. The earth’s average temperature hit a record high last week, according to unofficial figures.

Governments aren’t doing enough partly because of what economists call the “free rider” problem. Individual countries bear the costs of tackling climate change, but the benefits are spread across the whole world. It’s not in any single country’s interest to take sufficient action – because it can take a free ride on the actions of other countries. As a result, everyone suffers.

In theory, there are ways to incentivise all countries to pull their weight. One is for nations to agree to take action together. That was the thinking behind the 2015 Paris Agreement on climate change. But the deal has no teeth.

Another solution is for ambitious countries to create a “climate club”. William Nordhaus, the Nobel Prize-winning economist, has proposed that countries which are willing to cut their emissions rapidly could form such a coalition and use the threat of trade sanctions to get non-members to join in.

The Group of Seven (G7) large rich democracies is creating such an association but not, at least for now, with so much bite as Nordhaus envisages. Another, somewhat similar idea is for China and the United States, the two biggest carbon polluters, to jointly agree to do more to curb their emissions and then use their weight to push other countries to follow suit.

Geopolitical tensions mean these solutions are far from ripe. That said, the stars may align in the coming months and years.

CARROTS AND STICKS

Start with the climate club. To have a big impact on global warming the group needs high ambitions and a critical mass of members. But the more onerous the obligations, the fewer countries are likely to join.

This is why the club needs carrots and sticks. Rich economies could offer poorer members money to fast-track the decarbonisation of their economies, or promise them special trade opportunities.

Meanwhile, the club could threaten non-members that don’t transition from fossil fuels fast enough with tariffs on carbon-intensive imports. The European Union has agreed to impose such a carbon border adjustment on imports of industrial goods such as steel and cement from 2026.

However, the G7 is finding large carrots hard to come by. For example, so-called “ friendshoring” initiatives – where rich countries seek to reduce their dependence on China by building up supply chains in other places – are producing new trade opportunities for the likes of India. But these are not conditional on reducing carbon emissions.

Cash for developing countries is also scarce, though rich countries have mobilised the World Bank to focus on climate change and signed so-called just energy transition partnerships with the likes of Vietnam. The club could also pledge to give money from any carbon tariffs it raises to poor members.

When it comes to wielding the carbon tariff stick, the main problem is how to avoid falling foul of the World Trade Organization’s non-discrimination rules. The EU thinks it has avoided the issue because it already requires domestic manufacturers to buy permits for every tonne of carbon they emit. The carbon border tariff will make overseas producers pay an equivalent price.

Extending such a scheme to the members of a G7-led climate club is tricky. The United States doesn’t charge domestic producers for carbon emissions, and a club without the U.S. wouldn’t have much clout. However, Washington is using regulations and green subsidies to lower emissions. The Organisation for Economic Co-operation and Development has launched an initiative to compare different decarbonisation policies. This could provide a basis for concluding that U.S. policies are broadly equivalent to EU ones – and so for wielding the tariff stick in a non-discriminatory way.

Without a big carrot and a big stick, though, the climate club will be a low-key affair. The only large emerging economies to join so far are Argentina and Indonesia. And for the time being, the club is focusing on the useful but hardly game-changing task of setting standards for green industrial products.

JUMPING TOGETHER

The other idea – of China and the United States together signing up to more ambitious decarbonisation pledges – will also be hard to bring to fruition.

It’s true that both countries need to do more. Beijing’s commitment to reach peak carbon emissions by 2030 and reduce them to net zero by 2060 is soft, says Isabel Hilton, founder of China Dialogue. The People’s Republic should be able to beat its targets comfortably given the rate at which it is deploying renewable energy. Meanwhile, despite the big step forward of the U.S. Inflation Reduction Act, Washington’s policies aren’t yet sufficient to hit its target of cutting emissions by half in 2030 compared to 2005 levels, says Adair Turner, chair of the Energy Transitions Commission.

China might be prepared to tighten its targets if others were willing to be more ambitious. The problem is that President Joe Biden cannot do much more until after next year’s presidential election. If Donald Trump returns to the White House, the battle against climate change would take a step back.

It’s uncomfortable that the planet’s future depends on the trajectory of U.S. politics. But the other G7 members can still work on their carrots and sticks – and China can keep deploying solar and wind power.

And if Biden wins re-election next year, the prospects of a more ambitious G7 climate club and cooperating with China would improve. Either – or both – would go a long way to solving the climate free rider problem.

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