Climate diplomats aim at Trump, but weapons are carrots not sticks

Former French President Sarkozy calls for trade penalties on the US if it pulls back from carbon-reduction commitments. But many prefer a 'carbon club' strategy that maximizes the benefits of participation.

Climate change will not start the next international trade war.

Former French President Nicolas Sarkozy’s suggestion to tax United States imports for carbon emissions if it walks out on a global climate deal reached last year in Paris is a non-starter, diplomats and policy experts here said.

“Addressing climate change should not be an obstacle for promoting trade,” Liu Zhenmin, China’s top climate change negotiator, said at a Wednesday press conference. He later added: “Promoting free trade and promoting participating on the Paris agreement should be a parallel process.”

National representatives are looking at any number of ways to keep the US striving for emissions reductions under President-elect Donald Trump, who has threatened to withdraw America from the Paris agreement for greenhouse-gas reduction.

But economists, negotiators, and environmental groups fear that a punitive measure on trade would further deter US climate engagement. Perhaps a bit biased as bulwarks of international governance, the diplomats also said such a move would threaten institutions like the World Trade Organization.

Instead, economists and diplomats said the best way to encourage US participation is by providing benefits from cooperation rather than punishing recalcitrant countries.

“It’s always been recognized that the Kyoto Protocol and these various climate regimes did not have serious penalties either for non-compliance or non-participation and that the one credible instrument would be trade restrictions,” Robert Stavins, an environmental economics professor at Harvard University, said in an interview here.

“However, the fear has always been – and I think it’s a reasonable fear – that the cure may be worse than the disease and by turning back 40 years of international trade regime … would be a serious mistake."

Economists here are therefore promoting “carbon clubs” – viewed as a precursor to a broader, global carbon market – instead of sanctions like border taxes.

Basically, the idea behind a carbon club is that a group of countries will coordinate internal policies, like a common price on carbon, while setting standards for accounting for emissions trading. That trust-building exercise would produce reinforcing benefits such as trade and increased investment between countries.

That doesn’t mean a Trump-led US would jump on board, but the groundwork could be laid for a different, future administration to slide into such a club, said Nat Keohane, vice president of global climate with the Environmental Defense Fund. Other small countries or governments might be able to plug into those larger clubs without having to do much of their own legwork themselves, he added.

"You could imagine [creating] a sort of carbon customs union if you will,” or marketplace for carbon, Keohane told the Monitor.  "That’s going to give us greater confidence in investing in other ways because if you’re a country that’s adhering to high levels of monitoring, reporting, and verification, I’m going to have greater confidence in your ability to see through other aspects of your climate policy – foreign direct investment, trade, other aspects."

There are plenty of eligible actors. About 30 percent of global emissions fall under some carbon pricing scheme, noted Ottmar Edenhofer, who directs the Mercator Research Institute on Global Commons and Climate Change.

The Paris agreement aims to seed more such markets. Markets earned important language in the deal last year. Negotiators will need to flesh out those details in the coming years to allow cities, states, and countries to link carbon markets across borders.

An event here Wednesday detailed Ontario’s participation in a cap-and-trade program with British Columbia, California, and Quebec. And Britain became the 18th country Wednesday to join New Zealand’s last-minute declaration at last year’s Paris agreement in support of carbon markets.

Carbon clubs are the building blocks to the markets that are needed to reach the Paris goal of keeping global temperatures from rising 2 degrees Celsius above preindustrial levels by 2100, said Jonathan Grant, director of climate change at the consulting and accounting firm PwC UK. He said members of the International Emissions Trading Association, which tracks emissions trading by businesses, would need a carbon price of about $40 per ton to incentivize investment needed to reach that mark.

“Paris alone is not a strong enough signal for investment,” he said at the Wednesday event, adding that carbon schemes need to get rules figured out now to get capital intensive projects rolling.

Some carbon club concepts, however, do include punishments. Yale economics professor William Nordhaus presented such a plan last year for addressing emissions, noting that international agreements were difficult to enforce. That’s a reality nations are now facing in the form of Trump, as the Paris deal doesn’t legally bind any nation to achieve national carbon emissions targets.

Nordhaus said these clubs would need to agree on a similar carbon price in order to make this process work, which is no small task. But he went further than most economists by suggesting members outside the club should possibly face tariffs, which he viewed as a “stick” to get belligerent countries involved.

That, essentially, is what Sarkozy was suggesting – though to say the Paris agreement represents a club is an enormous stretch, given there’s little coordination on carbon markets and carbon pricing between nations right now.

Edenhofer said the carbon club model could drive that price coordination. The German economist’s idea rests on a system of “conditional transfers” by which rich countries with carbon prices already in place offer payments to poor ones to raise weaker carbon prices.

“This conditional transfer program for many, many countries is a no go. I know this from a political point of view. But I think this is the right way,” he said. “I’m not advocating bilateral trade. It can be the Green Climate Fund, but it doesn’t have to be.”

The transfers could offer a relatively cheap way for rich nations to achieve global cuts in emissions, while also building goodwill between countries to amplify ambition for cuts.

And, while helping the environment, the actions would also be attractive for finance ministers in poor countries who aren’t that motivated by climate change, as it would give countries more money for reducing other taxes or funding infrastructure projects.

“The revenues from the domestic carbon price will remain in the country. And that’s important,” Edenhofer, who co-chaired an Intergovernmental Panel on Climate Change working group on mitigation and climate change, told the Monitor.

Edenhofer said the UN system is equipped to handle such a model. He noted rich countries are already trying to mobilize $100 billion of annual aid for poor countries by 2020, a project being kick-started with a so-called Green Climate Fund. But he said those countries have little say about where those dollars go after they get into the fund. Conditional transfers would give donor countries more input, he said, though he acknowledged this smacks of a “strings attached” system that’s anathema to the developing countries that would receive aid.

This story was supported by a fellowship through International Reporting Project.