It’s not easy being green…

A border tax on carbon emissions would encourage the markets to solve our green problems


This article is taken from the October 2021 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issue for just £10.

On 1 November, world leaders who signed up to the Paris climate accord in 2015 will gather in Glasgow for the formal session of COP26 — the 26th UN Climate Change Conference. The leaders gathering in Glasgow should be guided by advice from a scientist, a politician and a philosopher. 

The first comes to us from Albert Einstein, “insanity is doing the same thing over and over again and expecting different results.” In the six years since 196 nations announced in Paris their voluntary plans to attack climate change, things have gone from bad to worse. 

The latest report of the International Panel on Climate Change states the world has grown warmer since the 2015 Paris conference, and predicts that without stringent action it will become hotter still, with consequences that are already becoming visible in the shape of extreme weather events. The IPCC deems it “extremely unlikely” that these events would have occurred “without human influence on the climate system”. 

The National Oceanic and Atmospheric Administration reports there were eight extreme events in the first half of 2021 with losses exceeding $1 billion. There were only three in 1980. “Developments since 2015 have only strengthened the sense that the Paris Agreement is unlikely to even slow the growth of human influences on the climate, let alone reduce them … the world is very unlikely to zero out net emissions by 2075, let alone by 2050,” writes the well-credentialled Steven Koonin in his new book, Unsettled. Game, set and match. Paris has fallen.

The second dose of wisdom that might usefully guide the Glasgow proceedings comes from Otto von Bismarck, “Politics is the art of the possible, the attainable — the art of the next best.” In democratic countries, drastic changes in lifestyles are not easily induced. Especially not quickly, and especially if they are expensive. 

It is simply unrealistic to expect the world’s politicians to rally support for net-zero emissions by 2050 by telling their voters there will be no more oil and gas boilers for sale by 2025; half of air travel will have to cease if new emissions-free fuels are not developed; car trips must be replaced with walking and cycling; no permits will be issued to develop new oil and gas fields and no coal power stations will be constructed unless fitted with currently unavailable emission-catching equipment.

Carbon taxes may come to be seen as the least expensive, fairest and most efficient way to cope with warming

Difficult demands are also made by the European Commission’s €1 trillion “European Green Deal”, aimed at reducing net emissions by at least 55 per cent from 1990 levels by 2030. Known colloquially as its “Fit For 55” plan, it calls for massive renovation of existing buildings, a power sector based largely on renewable resources, and requiring all new cars to be emissions-free by 2035. This is 15 years ahead of the US schedule which itself is considered unrealistic by car industry experts even if successive administrations continue subsidies and tax credits for electric vehicles in the face of mounting fiscal pressures.

Sesame Street’s Kermit the Frog is not the only one finding that “it’s not easy being green”. Or, if you believe economists express things more clearly than a frog, the discounted value of benefits to be received at some far future date is often below the current cost of the measures that must be taken to achieve those benefits. 

The third piece of advice, from a great philosopher also claimed by economists, should be in Boris Johnson’s mind at Glasgow. The University of Glasgow was the academic home of Adam Smith for almost four decades, during which he spent considerable energy defining the role of government in economic life. The state’s role, he concluded, was far from a minor one. But he warned of interventions that “impede the progress of opulence”, or as Smith’s recent biographer, Jesse Norman, put it, “the centrality of markets to the process of wealth-creation and economic and social development”.

Japan, which has had its problems with nuclear power, intends to continue investing heavily in fossil fuels, and Australia has told the International Energy Agency it has no intention of taking the steps deemed necessary to reach the goal of net-zero carbon emissions by 2050, although wildfires and a change in the political climate might be softening that country’s position on global climate. Add to these Russia’s unwillingness to cooperate, Saudi Arabia’s “green commitment” being called into doubt after the independent Climate Action Tracker rated its climate commitments “critically insufficient”, and India, which is desperate for jobs and growth. 

Then there is China, the world’s largest emitter of CO₂. China has been blunt. Xi Jinping will not reduce China’s emissions, although he might be willing to promise to stabilize them, not in total but per unit of GDP. But not just yet. In the first five months of this year, China’s coal-powered electric generation rose substantially according to its National Development and Reform Commission, the regime’s main planning agency. China’s Five Year Plan for 2021-2025 suggests “coal power generation will continue to grow through 2025”.

Sesame Street’s Kermit the Frog is not the only one finding that “it’s not easy being green”

There is little hope that China is prepared to negotiate its emissions output with America. “The US has neither the moral standing nor the real power to issue orders to China over climate issues,” said the state-controlled (there are no other kind) Chinese newspaper, the Global Times on the eve of a visit to Shanghai by President Biden’s climate envoy, the vainglorious John Kerry. Although Kerry continues to insist “climate is not ideological … not a geostrategic weapon”, Wang Yi, China’s foreign minister, warns that “cooperation on climate change cannot be divorced from the overall situation of China-US relations”. 

Besides, even if Xi promises to cut back, the reliance to be placed on that oath must be considered in light of the pledges he made to adhere to the rules of the WTO, not to militarise the islands it constructed in the South China Sea, and to maintain the independence of Hong Kong.

America, too, cannot be relied on to follow through on any commitments made in Glasgow. To give those commitments legal force would require a treaty rather than the mere stroke of the presidential pen. The US Constitution gives the Senate the sole power to elevate presidential ephemera to the status of a treaty, with ratification requiring a two-thirds vote of the Senate. Biden is having difficulty marshalling a simple majority behind his climate proposals; a super-majority is beyond his grasp. 

If candour be his guide, Johnson will point out that the mere ratcheting up of existing policies would not be effective even if Xi Jinping turned green. Richer countries have not honoured their promise to deliver $100 billion annually to help poorer countries adapt to climate change, which the poorer countries regard as “reparations” for the damage done to them by greenhouse gas emissions in the course of the wealthy countries’ industrialisation. Worse, the UN Environmental Programme estimates the annual cost of adaptation by these countries could reach $300 billion by 2030 and $500 billion by 2050.

 Although renewables are making inroads into the generating markets, with less reliance on subsidies than in the past, solar panels and wind farms are far from a reliable source of base-load power. 

And they will not become such a source in the absence of major improvements in the capacity of batteries to store power from renewables. Producing batteries is a dirty business, relying on emissions-producing mining and manufacturing. Environmental groups also claim that the manufacturing process pollutes groundwater.

Of course, renewables could be backed up by coal or natural gas plants, but those are the very producers of the greenhouse gases climate experts agree we need to eliminate. 

That leaves nuclear power as a base-load possibility. But nuclear is more or less off the table in the US because of its bankruptcy-producing high cost. Furthermore, it seems likely to remain so unless the small module reactor (SMR) nuclear plants eventually prove to be financially and politically acceptable. With a few exceptions (the UK being one) the world will get its future nuclear power from China, Russia and the United Arab Emirates, which account for most of the 50 nuclear plants under construction.

Biden is an enthusiast for electric vehicles — so long as they are made in America

But even if the storage problem could be solved by improvements in battery technology, it is not certain that the supply of renewable energy could be expanded sufficiently to replace fossil fuels. This is why Germany is opening new mines to extract the dirtiest of all coals, lignite, and American consumption of coal is expected to increase by 15 per cent as the economy reopens in response to the wider use of Covid-19 vaccines, and natural gas prices soar. Given a choice of insufficient electricity or burning fossil fuels, politicians will inevitably select the latter.

Policymakers relying on sun and wind run into two objections from environmental groups (the fact that 80 per cent of America’s solar panels are made in China creates another problem, but security issues are a topic for another day). The first is that solar farms require huge acreage, and wind turbines are ugly and unpopular.

Second, both forms of renewables operate in locations far from the centres at which the electricity they generate is consumed. That requires a massive increase in the miles of high-voltage transmission lines needed to bring the power from where the solar farms and wind turbines are, to the population centres where it is needed. Then there is the cost: Bloomberg NES reckons that greening the global grid would add $14 trillion to the $15 trillion cost of generation over the next thirty years.

All of this means that in democratic countries with legal processes that confer rights on all sorts of environmental groups, many skilful at prolonging costly legal proceedings, getting permission for new transmission lines will be a nightmare. President Biden has proposed to establish a Grid Development Authority to facilitate overriding the objections of affected communities. Law suits to follow.

Biden is an enthusiast for electric vehicles — so long as they are made in America by trade-union labour (6.3 per cent of the private-sector work force). This preference bars America’s largest, and non-union, manufacturer of EVs, Tesla’s Elon Musk, from government panels and meetings. 

Electric vehicles remain substantially more expensive than traditional cars and trucks and the system of subsidies available, at least in America, favours affluent buyers who can avail themselves of tax credits. 

 Opposition can also be expected from governments dependent on high petrol taxes. They have yet to figure out how to replace the revenue generated at the filling-station pumps. In any event, the 1.4 billion petrol-fuelled vehicles on the world’s roads (300 million of them in the US) will not disappear any time soon, especially in America, where longer average trips make the absence of charging stations an important deterrent. 

That is one reason the market share of new battery-powered and hybrid vehicles is considerably higher in Europe, 17 per cent, compared with less than 4 per cent in the USA. That, reckon owners of America’s petrol stations, is too small a market to make it economic to incur the $100,000+ cost of adding chargers to their existing stations, especially since many EV owners charge their vehicles at home.

Other obstacles must be overcome to get combustion engines off the roads. China produces more than 90 per cent of the world’s manganese, relied on by the world’s largest builders of EVs. China’s producers have formed what is in essence a cartel and prices have soared. Developing alternative supplies is not a short-term effort. All these factors reduce the immediate contribution electric vehicles might make to emissions reduction. 

So, as Lenin asked in a different connection, what is to be done? Some of the proposals to reduce the pace of warming provide ancillary benefits. Two examples: electric vehicles reduce noise pollution and reliance on volatile oil markets, and reduced burning of coal has significant health benefits. Even if they don’t do much to drop temperatures, if the cost is modest, these things are worth doing.

There are, said the much-missed Irving Kristol, problems and there are conditions. The former can and should be solved, the latter adapted to and learned to live with. The problem of warming can be addressed in several ways, many of them well known. The condition of climate change, and the irreversible increases in temperatures the world has already seen, requires adaptation. This is defined by the IPCC as “the actions taken to manage impacts of climate change reducing vulnerability and exposure to its harmful effects and exploiting any potential benefits”. 

These solutions, mitigations and adaptations are not mutually exclusive. There are probably feedback loops, through which solutions suggest new means of adapting, and adaptations reveal new solutions. So, going down that twin-lane path is probably a good idea. 

In his How To Avoid A Climate Disaster, Bill Gates proposes a quintupling of the $22 billion he estimates the government now spends on “clean energy R&D”. One example is small modular reactors, a technology into which TerraPower (founded by Bill Gates), will pour $1 billion and more. Gates hopes these SMRs will produce power at a cost competitive with new combined-cycle gas plants. 

Other developments include work being done by private cement companies — which account for about six per cent of global emissions — to develop concrete that can store carbon dioxide (adding 15 per cent to costs). European and American steel makers are researching ways to make steel without using fossil fuels (adding more than 60 per cent to capital spending). About 80 per cent of the burden will fall on those two industries. 

The broader point is that, to be successful, R&D must draw on the financial and intellectual resources of private-sector players to the greatest extent possible, particularly players sensitive to the possibility of purchasing carbon offsets to net against their emissions if that is more efficient than new manufacturing processes. 

But R&D take a while to get results. Gates says that TerraPower’s design “exists only in our supercomputers” and that “we’re still years away from breaking ground on a new plant.” Losses will be incurred by investors exploring many approaches, and the patience of a democratic polity sorely tested. 

During this period of research and development, which should include deepening markets for carbon offsets which provide the “net” in “net-zero carbon emissions”, adaptation might take pride of place. After all, over generations people have adapted to changes in climate because that is what they had to do to survive and be comfortable. 

The process of mitigation has a virtue: it can be costly. As voters see with their own eyes and feel in their own wallets the cost of mitigation and adaptation, carbon taxes might come to be seen as the least expensive, most efficient and fairest way to cope with warming.

The Chinese authorities know the EU will present them with a choice over the next decade

The IPCC bureaucracy has not been the only one at work since Paris. The European Commission has unloaded a fully developed, 291-page “Proposal for a Regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism”. The essence of the proposal is a border tax on the carbon content of imports. This comes most perfectly upon the hour in America: President Biden needs quite a lot of cash, “pay-fors” as they are called by legislators, to fund his infrastructure programme and welfare state expansion. A carbon border tax — Democrats prefer “a polluter import fee” — would provide at least some of that cash: about $500 billion over the next decade, according to Maryland senator Chris Van Hollen. 

Putin’s Russia reluctantly and belatedly joined the Paris accord in 2019, but with no intention of reducing emissions: a carbon border tax would hit his country’s troubled economy and its industries hard. KPMG says that border-tax surcharges on Russia’s high-carbon-content exports would total $60 billion between 2022 and 2030. But RUSAL, Russia’s giant aluminium producer, is spinning off its dirtiest plants into a subsidiary that will sell only in domestic markets, and will use its cleanest plants to serve export markets. Such “circumventions” are anticipated in Article 27 of the European Commission-proposed regulations. 

China also would be hard hit. Its manufacturers rely heavily on coal-fired electricity: about 58 per cent of China’s energy use is coal-based (the roughly comparable US figure is 23 per cent), and since 2011 China has consumed more coal than the rest of the world combined. Its CO₂ emissions per tonne of steel are about three times those in the US and the EU. Little wonder that China’s vice-environment minister, Zhao Yingmin, says a border tax is a form of protectionism that will hurt global growth. 

Call it what they will, the Chinese authorities know the EU will present them with a choice over the next decade: reduce the emissions embedded in your exports — thus raising manufacturing costs — or face border taxes that will reduce their competitiveness in the EU and US markets that account for around 40 per cent of China’s exports.

Brussels’s proposal must be approved by the European Parliament, 27 countries with widely varying interests. Negotiating details with the industries affected will not be easy, and is expected to take two years. But the goal is worth fighting for. Markets work better if prices reflect production and consumption costs more accurately. And pollution charges, rebated for lower earners, send signals not only to consumers considering how to spend their incomes, but to investors who decide where to employ their capital. Asian investors such as the Mitsubishi UFJ Financial Group are already joining US banks in ending the flow of capital to coal projects. 

Climate change measures expand the reach of government. But markets are more efficient than men in making most decisions directing resources and only a well-functioning price system can process such information efficiently. Embed the social cost of emissions in the prices consumers pay and innovators face, and most of the rest that needs to be done will be done by the millions of participants in the world’s energy markets.

To answer Lenin’s question, what is to be done is to engineer a steady ratcheting up of a border adjustment tax — extending its reach to more industries and more countries — thereby getting the price signals right, and requiring users to pay the full cost of the emissions they are imposing on the world. A bit of humility would not be misplaced. “The curious task of economics,” wrote Friedrich von Hayek, “is to demonstrate to men how little they really know about what they imagine they can design.” 

The leaders gathered alongside Boris Johnson must admit what they surely know: they cannot solve all of the interrelated problems of optimum distribution systems for electricity, the environmental problems created by the ingredients needed for better batteries and the best use of research funds. 

But with a carbon border tax in place, all the players in this global drama will have the right incentives to make the most efficient decisions, with regulations playing a subsidiary role. Surely that is Bismarck’s “possible, attainable, next best”.

Irwin Stelzer is a Senior Fellow at the Hudson Institute and US economic and business columnist for The Sunday Times. He has been director of the Energy and Environmental Policy Center at Harvard University’s Kennedy School and founded National Economic Research Associates, Inc

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