Global Warning: Pricing out greenhouse gases

Current events have brought out starkly the question: is society fit to deal with global threats, from coronavirus to climate change? For over two decades, the UN, IMF, numerous governments and businesses have tried to agree on market-based solutions to global warming, like carbon pricing. But, asks MARTIN POWELL-DAVIES, can the capitalist system really solve the climate crisis?

In 1997, the Kyoto protocol established the setting of a price for carbon as capitalism’s solution for reducing atmospheric greenhouse gases, chiefly carbon dioxide, in order to prevent a critical increase in global temperatures. The treaty was meant to establish a global market for trading carbon permits that, through the magic of the market, would incentivise individual nations and companies to cut their greenhouse gas emissions and invest in low-carbon alternatives.

The preferred market model at the outset was an international cap-and-trade system. The idea was that countries would be set a limit on emissions totalling an overall global cap. If one nation – or a business given its own limit by a government – wanted to exceed its cap, it would have to buy additional emission rights from the carbon market. If it managed to reduce emissions beneath the cap, it could sell the unused allocations on the market as well.

The plan was that the overall cap would be reduced gradually, leading to a phased reduction in greenhouse gases over time. Over twenty years later, it is self-evident that the market mechanisms proposed in Kyoto have completely failed to prevent continued global warming.

Competition not co-operation

The latest scientific data show that all key indicators of climate change are worsening. Levels of greenhouse gases in the atmosphere continue to rise rapidly. Glaciers and ice sheets are retreating. Global temperatures and sea levels continue to rise, as does the frequency of extreme weather events.

Far from the situation improving, the pace of global warming is accelerating faster than most scientists expected. Capitalism has launched us on a catastrophic trajectory that is forecast to see global temperatures rising to 3.5°C above pre-industrial levels by the end of the century. Unless reversed, that would mean irreversible tipping points are reached that result in permanent catastrophic change for humanity.

Climate change is, of course, a global problem that demands global co-operation and planning. Kyoto, and all the climate summit failures since, have shown without doubt that capitalism cannot meet that demand. A world made up of competing nation states and economic blocs was never going to agree on a global cap and carbon price that could really tackle global warming with sufficient urgency.

How could such a cost be meaningfully arrived at in the first place? It would require setting a price on the effects of fixing climate change now and into the future. That cannot be done through the capitalist market where, in practice, decisions are largely dependent on political compromises allowing agreements to be stitched together between nations with competing short-term economic interests.

Capitalism’s inability to overcome these national differences was glaringly obvious in the fact that neither China’s regime nor the USA administration adopted binding targets after 1997. Yet these two nations alone accounted for 44% of the world’s CO2 emissions in 2018.

The US refused to ratify the Kyoto treaty. US capitalism was not prepared to weaken its economic position by adopting measures that could undermine its profitability, particularly the influential big coal and oil interests. Later, Canada also withdrew from Kyoto on similar grounds. It had committed to cutting its greenhouse gas emissions to 6% below its 1990 levels by 2012, but by 2009 its emissions were 17% higher.

US capitalism argues that it cannot be expected to take on the economic costs of a global problem unless its economic and strategic rivals commit to do the same, not least China. In 1997, China was still classed as a ‘developing country’ and was, therefore, exempted from Kyoto targets. Now, however, it is the world’s biggest net emitter of greenhouse gases, although not per head of population. In turn, China’s regime argues that it should not have to pay the cost for a problem first created by imperialist countries.

The tensions between global competitors will remain a major stumbling block in reaching any global agreement on a capitalist basis.

Market failure

As a result, despite all the climate summits and the mounting evidence of accelerating climate change, no single global market has been created and 80% of greenhouse gases are still not covered by any price. Nonetheless, some markets were set up, most notably, the Emissions Trading System (ETS) established by the European Union in 2005.

Yet the ETS has shown the limitations of such a market mechanism. Rather than make businesses pay for their allowances, the ETS distributed credits to them freely. Global recession in 2008 then resulted in reduced demand leaving many firms well beneath their allocated caps. So, rather than driving genuine change, the unused credits generated windfall profits for shareholders.

Even if operating as planned, however, a market based on one region cannot resolve a global problem. While the EU has cut its carbon emissions, particularly from burning coal, those reductions have been counteracted by importing goods from other regions, particularly China, where emissions are increasing.

As the big-business-sponsored Carbon Pricing Leadership Coalition (CPLC) points out: “Even in regions with established carbon pricing initiatives and declining territorial emissions, such as the European Union, the overall carbon footprint has actually increased in certain years, when accounting for the (consumption-based) CO2 emissions embodied in internationally traded goods”.

The EU claims that the carbon content of imports is now falling. However, its calculations are based on the assumption that “imported products are produced with production technologies similar to those employed within the EU-28” member states – 27 now, of course, with Brexit. In reality, most will have been produced in economies reliant on higher greenhouse emissions.

European big business has also complained that it has been difficult to plan investments because of uncertainty about the level of carbon pricing. As with any traded market, carbon prices within the ETS have varied widely. In recent years the EU has intervened to reduce the supply of emission allowances. That has driven up the carbon price which now stands at around $25 a ton. That is a significant increase on the period between 2012 and 2017 when, in the wake of the global recession, the price fell beneath $10 per ton. Before that, in 2007, an excess of supply over demand had seen the carbon price during the pilot phase of the ETS collapse, effectively, to zero.

Offsetting or greenwashing?

A similar crash in prices torpedoed another market mechanism set up as part of the 1997 Kyoto protocol, the Clean Development Mechanism (CDM). The CDM was an ‘offset’ programme that allowed industrialised countries to turn their support for greenhouse emissions reduction projects in a developing country (mainly China, in practice) into a credit that allowed them to exceed their own emissions targets.

In the face of market uncertainty following the global recession, CDM credit prices fell beneath $1 and led to the mechanism’s complete collapse. The ongoing wrangle over whether unclaimed CDM credits might still be honoured as part of a new global offset scheme was one of the sticking points that could not be resolved at the latest climate summit, COP25 in Madrid, last December (see: Bad Cop, Socialism Today No.235, February 2020). It is far from clear how much genuine offsetting occurred under the CDM and how much proved to be merely an accountancy exercise allowing big business to get around emissions limits while proclaiming its ‘green’ credentials.

Moreover, the profiteering inevitable under capitalism has been exposed in some of the ‘voluntary’ offset programs that have also been created. Forestry offset projects, where businesses have claimed to be supporting reforestation programmes in return for continued greenhouse gas emissions, have been particularly criticised. It is rarely clear whether a forest has really been conserved and whether any protection is ongoing.

A recent Daily Telegraph investigation suggested that much of the deforestation offsetting backed by companies like British Airways, easyJet, BP and Shell achieves little beyond greenwashing their reliance on fossil fuels. It quoted Doug Parr, Greenpeace UK’s chief scientist, explaining that “what customers aren’t told is that this market is an unregulated Wild West, and there’s little evidence that offsetting schemes generally work”.

The Telegraph report concluded that “the solution is a properly regulated market” – not necessarily a conclusion shared by the proprietors of this right-wing, Tory-supporting newspaper! But how can one set of profiteers be trusted to regulate other profiteers? Working-class oversight, through the democratic public ownership of industry and finance, is the only way to ensure the future of the planet.

‘Leakage’ to economic rivals

The lack of a global agreement increases the risk that any reductions in greenhouse gas emissions made in one part of the world would be undermined by greater emissions elsewhere. Some capitalist economists are raising the danger of carbon ‘leakage’ where, rather than being ‘incentivised’ towards lower carbon production, a multinational operating in an area covered by a carbon market could simply opt to move production to another region that is not. In reality, of course, these commentators are not only concerned with global emissions, they also fear the hit to profits that could result.

Economists further warn that capitalist supply and demand could have other unintended consequences if, for example, the oil price falls as more industries move to sustainable energy resources. That might then drive up oil consumption in areas without a carbon limit.

They also discuss the risk that goods produced more cheaply in countries without the overheads of a carbon tax or cap could gain a competitive advantage over their rivals who do. This is a particular concern for energy-intensive sectors like steel, aluminium and cement. For example, when ArcelorMittal announced cutbacks to its steel production in France and Germany last year, it cited rising carbon prices as part of its reasoning.

The capitalists operating in those sectors are pushing for the threat to their competitiveness to be countered by ‘border carbon adjustments’, essentially, additional tariffs levying a domestic carbon price on imports from jurisdictions that do not price carbon. However, other capitalist interests oppose measures that risk adding to protectionism and a reduction in world trade. These conflicting interests are only going to diverge further in the face of a new world downturn.

Raising the global carbon price

Up to now, the risks posed to corporations and nation-state economies through localised carbon markets have not been particularly significant because prices have been kept at such a low level. Globally, the IMF estimates they average no more than $2 a ton of CO2. However, in turn, there is also general agreement among capitalist economists that carbon pricing, therefore, has failed to address climate change in the way that their market-driven theories had envisaged.

A section of capitalist economists recognise that their market-based solutions require carbon prices to increase substantially. In the face of the damning evidence that urgent action is needed, it has fallen on the IMF to carry out an analysis to estimate how high global carbon prices would need to be set.

The 2015 Paris accord agreed an international goal of at least preventing global temperatures increasing beyond 2°C above pre-industrial levels – without any binding targets to achieve it! Climate scientists have since warned that 2°C is too high to avoid severe consequences and that even deeper greenhouse gas emissions cuts and swifter action are required. Nevertheless, the IMF decided to calculate what global carbon price would be required to meet that Paris goal, concluding that it required a rapid increase to $75 a ton of carbon dioxide by 2030.

The IMF is not alone in concluding that such a steep carbon price increase is necessary. In 2017, the High-Level Commission on Carbon Prices, chaired by economists Joseph Stiglitz and Lord Nicholas Stern, also concluded that carbon needs to be priced between $40-80 by 2020, then rise to $50-100 by 2030, to achieve the Paris target. Of course, 2020 has already arrived, so this remains another recommendation where international capitalism is showing itself to be incapable of even acting on its own advice.

Can a capitalist solution be found?

Clearly, capitalists will never accept that their system is the problem. Instead, acting through bodies like the Carbon Pricing Leadership Coalition, they continue to try and find a global market-based solution. The CPLC claims the backing of 34 national and sub-national governments, including the UK, France, Germany, Japan and Canada. It is also supported by over 160 businesses, including BP, Shell, Nestlé, Siemens, Unilever and other major firms. Its conclusions offer a good idea of how capitalism thinks it might yet manage an “orderly transition to a low-carbon resilient global economy”.

Instead of questioning capitalist methods, the CPLC maintains that the market can still provide a solution, just as long as carbon prices are applied globally at the high levels recommended by the IMF. At the same time, it acknowledges business concerns about “the potential for international competitors to have an unfair advantage if they do not face a similar carbon price”. It offers reassurance that these fears are exaggerated and that other variables, such as wages and corporate tax rates, can be adjusted to “alleviate competitiveness concerns”. In other words, the costs can be passed on to the working class, and profits can be protected!

Of course, if that does not work and profits are threatened, the pure ‘free market’ can be put to one side. The CPLC recommends “temporary or partial exemptions for certain specific industries or regions competing heavily on a global scale”. So, in the final analysis, the requirement for short-term profit outweighs its faith in the ability of the market to solve climate change.

The conditional support for a carbon price hike is evident in the responses from big business on the CPLC website. For example, Cefic, the European Chemical Industry Council, agrees that “carbon pricing is a crucial tool”, but “best would be a global carbon price for all”. For now, however, it says that, “as regions implement climate policy at different speeds… measures to overcome the impact on competition can and should be part of a carbon pricing scheme”. Meanwhile, Michelin’s chief executive commented that the “Michelin Group has always been in favour of pricing carbon”, on condition that “the system is transparent, rewards best performers, and ensures a level playing field worldwide”.

Capitalism is searching for an agreement that cuts greenhouse gas emissions while protecting existing big-business interests from being undercut by global competitors. But that’s simply beyond its means. The higher the price set for carbon, the more big businesses will plead for special protection to safeguard their profits. The more exemptions that are agreed, the lower the carbon price will be, driven down by the market.

A solution can only be achieved through a socialist global plan, motivated by the joint interests of the world’s workers and poor in reversing climate change, rather than the short-term profit motives of capitalism.

Carbon taxes

World capitalism’s initial preferred mechanism for applying carbon pricing was a cap-and-trade system that set a ceiling on global emissions. Now, given the glaring failure of the Kyoto protocol, capitalist economists are increasingly backing an alternative approach: applying carbon taxes directly to households or businesses. It was on this basis, having tried to determine the social cost of greenhouse gas emissions and climate change, that the IMF arrived at its figure of $75 a ton.

In practice, it has been estimated that a carbon tax levied at that level could see the price of, for example, natural gas – still widely used for power generation and household use – increasing by 70% on average. But what effect would that have on both the production costs for capitalism and the living standards of workers?

Supporters of taxation measures point to Sweden – where a carbon tax of $140 per ton has been levied – as reassurance that it would not hold back economic growth. Its introduction was combined with a reduction in income tax to offset the effect on individual household income. An expansion of district heating networks also meant that most homes no longer rely on buying in their own fuel. Electricity generation from fossil fuels has been cut through the expansion of alternatives, including hydropower, biofuels and wind energy. As a result, greenhouse gas emissions have fallen by 26%, although they remain high in the transport sector.

Nonetheless, applying a carbon tax to a developed economy with the resources to invest in alternative technology would not translate so easily into a global model. Moreover, the carbon tax is facing growing opposition within Sweden, particularly in rural areas where workers rely on cars for transport. Economists have also pointed out that, as emissions fall, the income generated by the carbon tax falls with it. The Swedish government is now investigating introducing a per-kilometre road tax to generate further income. Once again, workers will foot the bill rather than big business.

Because energy costs make up a greater share of the budget of low-income families, a carbon tax will inevitably fall hardest upon the working class. But as discussed already, significant carbon taxes will also face resistance from big business and governments worried about being undercut by rivals without the same overheads. These concerns will grow sharper as the tensions between different trading blocs increase against the background of world economic slowdown. International efforts to find a capitalist solution based on a global price on carbon dioxide emissions will undoubtedly continue. They will also continue to fail to reach any meaningful agreement.

The serious thinkers of capitalism are only too aware that climate change is an existential threat that needs urgent action. Their proposals, however, are always constrained by the limits of the system they defend. Without addressing the twin barriers of the nation state and the profit system, their market-based solutions have not – and cannot – succeed. Capitalism is incapable of taking the united international action needed to reverse climate warming. Only a system change that replaces it with a global socialist plan can achieve that urgent goal.