Let’s negotiate a global carbon price signal – quickly!

By Stéphane Dion [1] and Éloi Laurent

Two decades after the Rio Conference, and just as a new climate conference is opening in Bonn on Monday 14 May 2012, we must admit to collective failure in combating human-induced climate change. We cannot escape serious climate disruption if we continue down this same path. We must change direction, and we must do it quickly.

The International Energy Agency forecasts warming of over 3.5°C by the end of the 21st century if all countries respect their commitments, and by more than 6°C if they content themselves with their present policies. At that level of warming, climate science warns us that our planet will become much less hospitable for humans and all other forms of life.

At the Durban Conference in December 2011, the countries expressed their grave concern about the gap between their commitments and achieving the objective of a 2°C limit on increased global warming (relative to the pre-industrial era). They promised to re-double their efforts to bridge this gap. But they failed to make any commitment to achieve more stringent targets. We are thus facing an increasingly untenable gap between the urgent need for action and the inertia of international negotiations.

The developed countries are refusing to strengthen their climate policies so long as the other major emitters don’t do the same. But the emerging economies, particularly China and India, with annual GDP growth rates of 8 to 10%, will not accept in the foreseeable future targets for the reduction of the volume of their greenhouse gas (GHG) emissions. On the other hand, these countries might be more open to the idea of setting a price per ton of CO2 that was standardized at the global level, from which they would derive revenue, and which their economic competitors would also be required to levy.

We believe that the best instrument for the international coordination needed to combat climate change is a global carbon price signal. This is why we are proposing that the forthcoming negotiations focus on this crucial goal.

Here is what we are proposing (for more detail, see, in French, http://www.ofce.sciences-po.fr/pdf/dtravail/WP2012-15.pdf and, in English): every country would make a commitment to introduce, in their respective jurisdictions, a carbon price aligned with a scientifically validated international standard, in order for the world to achieve or at least come as close as possible to the objective of keeping global warming below 2°C. Each country would decide whether to extract this levy through taxation or through a system of ceilings and trading in emissions permits (a “carbon market”).

Governments would be free to invest, as they see fit, revenues from the carbon emission levy and from the corresponding elimination of fossil fuel subsidies. They could, for example, invest in research and development in clean energy and public transportation, etc. They could also choose to address social inequalities with respect to access to energy.

Developed countries would be required to set aside part of their revenues to help developing countries introduce policies to mitigate emissions, to adapt facilities and to create carbon sinks (by means of reforestation, for example). The contributions of each country would be based on what their respective GHG emissions represent relative to the total emissions of all the developed countries.

Under this international agreement, countries would have the right to levy border taxes on products from countries that have not established a carbon price in accordance with the international standard. The message would be clear to all large emitters: if you do not levy a carbon tax on your products before you export them, the other countries will do so in your place, and it is they who will collect the revenues. Each country will understand that it is in its own commercial interests to comply with the international agreement, to tax its own emissions and to use the corresponding revenues as it sees fit.

In this way, the world would have available an instrument that is vital to its sustainable development. At last, carbon emitters would be required to pay the environmental price for their actions. Consumers and manufacturers would have an incentive to choose lower-carbon-content goods and services and to invest in new emission-reducing forms of technology.

We need to negotiate a global carbon price signal, and quickly. What better place to do this than at Rio, where the problem of climate change was first recognized by the international community 20 years ago?

[1] Stéphane Dion is a Member of the House of Commons of Canada; as Canada’s then Minister of the Environment, he chaired the 11th Conference of the Parties to the United Nations Framework Convention on Climate Change, held in Montréal in 2005 (COP 11).

A carbon tax at Europe’s borders: Fasten your seat belts!

By Éloi Laurent and Jacques Le Cacheux

How can the current deadlock in international climate negotiations be resolved? By an optimal mix of incentives and constraints. In the case that currently opposes the European Union and the international air carriers, the EU is legitimately bringing this winning combination to bear by imposing what amounts to a carbon tax on its borders. It is brandishing a constraint, the threat of financial penalties, to encourage an industry-wide agreement that is long overdue among the airlines to reduce their greenhouse gas (GHG) emissions.

The ongoing face-off with the carriers of several major countries, which, with the more or less open support of their governments, are contesting the application of these new regulations on GHG emissions from planes flying into or out of the EU is, from this perspective, a crucial test. It is an issue with considerable symbolic value, as it represents a first: all the airlines serving airports in the EU are subject to the new measure, regardless of their nationality. On March 9th, European officials reaffirmed their determination to maintain this regulation, so long as a satisfactory solution has not been proposed by the International Civil Aviation Organization (ICAO). However, 26 of the 36 member states of the ICAO Board, including China, the United States and Russia, have expressed their opposition to the new European requirement, advising their airlines not to comply. And the Chinese government is now threatening to block or outright cancel orders for 45 Airbus aircraft, including 10 A380 super-jumbos, if the European measure is not repealed.

Air emissions up sharply

GHG emissions attributable to air transport account for only about 3% of global and European emissions (about 12% of total emissions from transport in the EU). But despite the progress made by aircraft manufacturers in energy intensity, these emissions, which are still modest compared to road transport, have been experiencing explosive growth over the last 20 years, and are rising much faster than those in all other sectors, including shipping (see chart). They must be controlled.

In addition, in most countries, in particular in the EU, airline fuel is not subject to the usual taxation applied to oil products, which obviously distorts competition with other modes of transport.

A robust legal framework

The new European regulations, which took effect on 1 January 2012, require all airlines serving any EU airport to acquire emission permits in an amount corresponding to 15% of the CO2 emissions generated by each trip to or from that airport. The measure is non-discriminatory, since it affects all airlines flying into or out of European air space, whatever their nationality or legal residence. This requirement, which is grounded in environmental protection, is therefore fully consistent with the Charter of the World Trade Organization (WTO).

The measure is also of course in compliance with European treaties as well as with the various provisions of international law in the field of civil aviation, as is reiterated in the judgment of 21 December 2011 by the Court of Justice of the European Union, in a case brought by several US carriers challenging its legality. The legal framework for this new provision is thus robust.

Towards the death of air transportation?

The airlines and the governments of the countries that are major emitters of greenhouse gases and that are hostile to this measure justify their outright opposition by arguing its poor timing, given the current economic climate of low growth and rising fuel costs, and its excessive cost, i.e. that the resulting rise in passenger air fares would be likely to further depress an already fragile industry.

In reality, the measure is largely symbolic and the cost is almost insignificant. Judge for yourself: according to the Air France calculator approved by the French environmental agency, the ADEME, emissions per passenger amount to just over one tonne of CO2 for a Paris-New York return trip, and approximately 1.4 tonnes for Paris-Beijing. The current price of a tonne of carbon on the European carbon market on which companies must buy emissions permits, the ETS, is just under 8 euros. The additional cost per ticket thus amounts, respectively to 2 euros for Paris-New York and 1.7 euros for Paris-Beijing! (estimates using the ICAO calculator are even lower).

Towards a trade war?

Given the current state of the legislation, the threats to cancel Airbus orders or similar retaliatory trade measures are obviously out of proportion to the economic impact of the tax on the European skies. To fear that this might trigger a “trade war” is also to forget that such a war has already been declared in industry, particularly in the aviation sector (with the multiplication of more or less disguised subsidies, including in Europe, and with the use of exchange rates as a veritable weapon of industrial policy). Furthermore, agreements or cancellations of orders in this sector are in any case very often influenced by the political context, sometimes for dubious reasons (as in the case of diplomatic reconciliation with relatively distasteful regimes). In this case the cause, the defence of the integrity of Europe’s climate policy, is legitimate.

The various threats and blackmail attempts being taken up by the pressure groups targeted, in this case air passengers, are intended to sway governments for obtaining short-sighted gains. They are targeting particular countries, foremost among them Germany and Poland, which are currently dragging their feet in accepting the EU Commission’s proposal to accelerate the pace of European emissions reduction by raising the goal of emissions reduction for 2020 from 20% to 30% (compared to 1990 levels). As is their right, on the climate issue Germany and Poland have been following an approach that is in accordance, respectively, with a growth strategy based on exports and an energy strategy based on coal. In both cases, these are national decisions that should not take precedence over the European approach. From the perspective of Europe’s interests, there is therefore no valid reason to yield to these pressures even if some member states become involved.

By confirming its determination, the EU can provide proof that leadership by example on the climate can go beyond simply setting a moral example and lead to actual changes in economic behaviour. The EU can ensure that everyone sees that, despite the impasse at the global level, a regional climate strategy can still be effective. If its approach is confirmed, the success of the European strategy, which consists of encouraging cooperative strategies under the threat of credible sanctions, would point towards a way to break the deadlock on climate negotiations.

The European Union will, in the coming weeks, be passing through a zone of turbulence (yet another) on the issue of its border carbon tax. It would be legally absurd and politically very costly to make a U-turn now: instead, let’s fasten our seat belts and wait calmly for the stop light to change.