Awaiting Climate Accord, Governments Toy With Dubious Measures

GENEVA: How do we protect the environment and reduce our greenhouse gas emissions, while preserving our economic growth? In the run-up to the Copenhagen Climate Summit in December, this question has been on the minds of big and small players, developed and developing countries, alike. Meanwhile, as the multilateral negotiations proceed, a number of developed countries are hedging their bets by preparing legislation that would go into effect with or without a multilateral deal. But unfortunately, some of the unilateral measures they are contemplating may fail in reversing global warming, potentially distorting world trade and harming competition.


If a multilateral deal were concluded many of the targets under different pieces of legislation would be boosted, such as the target GHG-emissions cut of the EU, which would rise to 30% below 1990 levels by 2020, instead of the mere 20%. If a multilateral deal is not concluded, several developed countries would unleash all sorts of unilateral carbon-equalization measures to offset the competitive disadvantage that their industries may suffer from acting first, and would also attempt to prevent "carbon leakage." So what does the new "carbon leakage" buzzword actually mean? It is a term used to refer to a potential shift in emissions from the carbon-constrained parts of the planet (i.e. countries that accept a cap on their total emissions) to the non-carbon constrained (i.e. countries that reject such a cap).

But where is the pessimism that underpins this debate coming from, one might ask? Does environmental regulation necessarily reduce competitiveness? In a recent survey conducted by the Climate Group, entitled Carbon Down, Profits Up, researchers find that it is exactly the opposite which is happening today. In reviewing 84 corporations, 36 city and 17 regional governments, which together emit about 8% of global CO2-equivalent emissions, the survey finds that these entities have collectively managed to cut their emissions by 14% while scoring economic gains. Dow Chemical, for example, managed to save US$4 billion between 1994 and 2005 from reduced energy use, while DuPont saved US$3 billion between 1990 and 2005.

What the survey does not comment on are the many economic benefits that would ensue from actually preventing our climate from changing; such as lower risks of being swept away by flash floods or inundation. These benefits are not minor. They represent a life or death difference for people as well as industries. The secondary benefits too must be considered, like the reduction in local air pollution, and the reduced number of sick-leaves; a not-so-insignificant cost for industry. In Egypt, numerous studies have shown that traffic controllers have had particularly elevated concentrations of lead in their bloodstream due to their routine exposure to car exhaust, in particular prior to the phase-out of leaded gasoline.

What lesson then can we draw from this survey? Surely, that carbon regulation does not destroy the competitiveness of economic actors, but can actually enhance it. Much depends on what a company chooses to do with the carbon price, once it exists. It could sit back and moan, and see its competitiveness and market-share eroded, or it could respond pro-actively, unleashing its full resourcefulness and creativity. The evidence shows that early movers in climate mitigation can see their reputation enhanced, their brand value increased, their operational costs reduced, and the emergence of new business opportunities. In short, they can be, and no doubt will be, the leaders of the future. Rather, at present, it is the companies that are swimming against the global tide of climate regulation that will have to plead for lifejackets soon.

In fact, pleading for lifejackets appears to have already started. On both sides of the Atlantic countries are considering allocating pollution permits for free to industries that may be in danger of losing their competitiveness, as well as to prevent leakage, under these countries’ cap-and-trade schemes. A subsidy of sorts. Proposals to penalize carbon-intensive imports at the border also abound. Some would have importers face an obligation to buy pollution permits upon entry, and others would simply slap imports with a tax equivalent to their carbon emissions. 

Countries contemplating such measures are resorting to highly complex systems to identify the industries that are at risk of losing their competitiveness. While the EU has identified these economic sectors mostly on the basis of the "cost increase" that they may face, and their degree of exposure to international trade, the US may choose them on the basis of their energy and greenhouse gas emissions intensity, with trade-intensity also playing a role. The assumption behind both approaches is, of course, that the higher the compliance costs, and the higher the exposure to international competition, the more firms would be likely to lose market share to imports, and the greater their temptation to relocate to areas with weaker carbon regulation. But as Paul Krugman reminds us, international competitiveness is a dangerous obsession, with most of the goods and services that we produce being consumed locally, despite all the hype about globalization. In other words, the risks of being swept away by imports, or of relocating overnight, are grossly overstated. In fact, the avant-gardes may actually see their competitiveness increased from proper carbon regulation.

Worse, it is the myriad of lifejackets that we are now building into our carbon regulations that may be the greatest threat to healthy competition, and industrial competitiveness, in future. While unilateral carbon-equalization equalization projects at the border may extend the lifetime of a carbon-uncompetitive industry for a while, by penalizing competing imports, how long can they do so? These actions may also endanger the world's ability to reach to global accord. At the negotiating session of the United Nations Framework Convention on Climate Change in Bonn this August, India and China, supported by the rest of the G-77 group of developing nations, all asked for a ban on the use of unilateral measures to fight climate change. They perceive the many unilateral carbon-equalization projects that are underway to be a hostile act; one that must be constrained. And, if carbon leakage is the worry, in reality no unilateral measure, however strong, can prevent it. The only real solution to leakage is a world in which carbon reduction commitments are assigned to all, based on the environmental principle of "common but differentiated responsibility."

As to the free allocation of permits, it sows the seeds of "climate injustice" at home, and leads to a race for such acts of charity abroad. Assume that a country with an emissions cap has two polluters, polluter A and polluter B, and that it decides to help polluter A reduce its emissions by giving it free pollution permits while giving no assistance to B. A greater share of the emission reduction burden would automatically fall to B. The country's pretext would be that since polluter A has always done badly, and has always had higher energy intensity or has always emitted more, it needs special assistance to comply. But where is the justice in this approach? Worse, distorting competition in the home market will lead to inevitable calls for such distortions in other countries too, where the competitors of polluter A will want a helping hand too. Is this really the sort of foundation on which the world wishes to build a climate accord?