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Greetings. I am personally experiencing the ongoing presence of Covid-19, which has put me out of action. As a result, today’s newsletter will be shorter than usual. However, I hope you are well and in good health. Thanks to my colleague Georgina Quach who has provided today’s reading recommendations.
One thing that hasn’t disappeared is the push for carbon pricing to decarbonise our economies. This may seem counterintuitive, given recent resistance to carbon taxes, but it’s true. The EU’s carbon border adjustment mechanism (CBAM) went into effect this month, and the IMF has recently published new arguments for carbon pricing.
The IMF has been advocating for a global floor on carbon prices for a few years now. Despite opposition, it was gaining traction, especially when compared to international corporate tax reform. Even the US has shown interest in forming a “carbon club” in the steel industry. However, the IMF has now developed a new argument. In its latest report, it estimates the effects on fiscal sustainability of climate policies that rely on spending and subsidies alone, compared to those that also include a tax or price on carbon. The results are significant: without carbon pricing, debt-to-GDP ratios could increase by 50 percentage points, whereas with carbon pricing, the increase would be only 10 to 15 percentage points. Delaying carbon pricing would worsen the long-term public debt situation.
The challenge, of course, is making carbon pricing politically acceptable. The IMF’s proposal allows countries to choose whether to implement carbon taxes, carbon pricing, or regulations. The proposal also suggests that poorer countries could have lower price floors than richer ones. Additionally, at the Africa Climate Summit, global leaders called for a global carbon taxation regime. The need for carbon pricing has become even more urgent due to increased costs and higher interest rates, which have impacted the economic incentives for investing in clean energy.
A global carbon pricing regime would prevent unilateral initiatives and incentivize countries to implement their own carbon pricing systems. The EU’s CBAM is just the beginning, and it encourages trading partners to adopt equivalent carbon pricing systems. The UK provides a cautionary tale, as its emissions trading scheme has decoupled from the EU’s, resulting in significantly lower carbon prices. UK exporters to the EU will still have to pay the EU’s CBAM, contributing to the EU rather than the UK exchequer. The bottom line is that affordability requires making emitters pay more, not less.
Other noteworthy reads:
– Martin Wolf explores China’s demographic shift and the policy reforms needed to manage its consequences.
– Gideon Rachman speaks with Adam Posen about President Joe Biden’s economic policies and their potential impact on future elections.
– Greece is dealing with the aftermath of Storm Daniel and its impact on feta cheese production.
Join us on October 11 for an exclusive webinar exploring macroeconomic trends in Japan and their impact on the stock market. Register here for free.
Recommended newsletters:
– Chris Giles on Central Banks: Your essential guide to money, interest rates, inflation, and central bank thinking.
– Unhedged: Robert Armstrong dissects market trends and analyzes Wall Street’s response.
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