US economy

Global ‘carbon club’ that dare not talk of tariffs

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Hello. Good news last week for fans of preferential trade agreements and chatter about shared progressive values as New Zealand, very much the Europe of the southern hemisphere, signed a bilateral deal with the EU, the New Zealand of the northern one. Lots of good liberal stuff about the environment and transparency and rules-based trade, and what have you. Not so much of the actual market access for meat and dairy exporters that the Kiwis got in their bilateral with the UK, though, Brussels being less willing than London to shaft its farmers to get a quick deal. See the Links section for more excitement in UK trade policy and how I might have been a bit optimistic about its quality. Today’s main piece is on carbon emissions and the trading system, and just how far away we are from any coherent international attempt to address the issue of carbon leakage. Charted waters looks at whether low cost-air travel in Europe is too low cost for consumers.

As ever, if you have thoughts on any of this or anything else, I’m on

An all-too-obvious emission

There’s an initiative launched every other day to tackle global warming. The one to emerge from last week’s alpine G7 meeting in Germany was a “carbon club” of like-minded governments banding together to reduce emissions. The name’s got a friendly vibe in a nerdy kind of way, membership presumably including an iron-on badge, a smart pen-and-pencil set and maybe a loyalty card: buy nine credits from the EU’s emissions trading system and the tenth is free, especially if you’ve got heavy industry to protect.

What it does not entail, unfortunately, is any kind of coherent plan to deal with the “carbon leakage” problem of companies that face emissions pricing losing international competitiveness, an issue lumbering inexorably towards the world trading system. The debate on addressing leakage is being dominated by partial EU and US initiatives rather than a systematic discussion in a broader forum.

The idea of a carbon club was embraced by German chancellor Olaf Scholz while finance minister under Angela Merkel’s coalition government. The principle of collective action on emissions with mutual benefit for those doing it is politically astute: it reassures energy-intensive industries that they won’t be the victims of first-mover disadvantage. Confusingly, it sounds a bit like the well-known “climate club” proposal from Yale economist William Nordhaus, which envisages a group of countries with emissions pricing regimes imposing tariffs on outsiders to equalise carbon costs.

But at this stage the G7 carbon club mainly involves an analytical exercise on best practice in emissions reduction and mitigation, drawing heavily on work at the OECD. The World Trade Organization, which is name-checked in the G7 statement, is keen to be involved in the leakage issue: its director-general Ngozi Okonjo-Iweala wrote in the FT last year about the (hugely ambitious) goal of creating a single global emissions price. But beyond setting up some “structured discussions” on trade and environmental sustainability in the WTO, its member governments see carbon border pricing as too contentious to start anything that looks like an actual negotiation.

Into this multilateral vacuum of discussions come two main initiatives. One is the EU’s unilateral proposed carbon border adjustment mechanism (CBAM), which envisages targeted import tariffs to equalise emission costs to domestic and foreign producers. The other is the US’s bid to replace former president Donald Trump’s absurd “Section 232” national security tariffs on steel and aluminium on its trading partners with “green steel” clubs where the US and those partners, particularly the EU, jointly put tariffs on emissions-heavy third countries.

The problem here is that the processes envisage different outcomes, are on different timelines and, some would say, have different purities of motive and concerns about compatibility with WTO law. There was suspicion from the beginning from the EU side (shared by me, I must say) that the US wheeze, which doesn’t even require it to impose its own carbon pricing first, looks dangerously like transforming unilateral into club-based protectionism. (To be fair, a group of Democratic senators have introduced a bill that would have domestic and border carbon pricing, but it’s reckoned to have a low chance of success.)

Last week the European Parliament came up with its proposal for the CBAM. More radical than the European Commission’s version, as is the Parliament’s wont, it would cover a much wider range of products — including organic chemicals and hydrogen — which would start to hit significant chunks of US exports to the EU, so might help focus minds in Washington. It would also give rebates to EU exporters, an issue that the commission has flatly rejected as incompatible with WTO law. The different EU institutions will now go into negotiations with each other.

The CBAM design process has at least worked through the detail and taken its time: the parallel talks between the EU and US over Washington’s green steel club rather less so. The deadline for completing the EU-US talks is next October, a date set just last year when the EU gave the US a two-year ceasefire on retaliation against its Section 232s. Brussels really doesn’t want to extend that deadline: while talks are going on, the 232s have temporarily been replaced by a cumbersome system of jury-rigged US steel and aluminium import quotas, the kind of “managed trade” the EU instinctively hates.

The talks are going on behind closed doors, but it’s pretty clear that no substantive ideas have yet emerged on how to create a green steel club that would cleanly pass WTO muster. (I’ll get into the technicalities of this in a future newsletter). There’s a serious risk of the EU agreeing to some cynical deal of going along with the American plan and trying to use legal loopholes (the “exhaustible natural resources” exception under Article XX (g) of the WTO treaty, if anyone’s taking notes) to defend it if challenged on discrimination grounds.

Global public policy isn’t generally best made by a couple of governments in private working to an artificial deadline set by the threat of a renewed conflict over an absurd set of tariffs originally put in place by a ghastly president with a crazed, pitiful set of ideas about trade. But that’s where the carbon leakage debate is happening. It’s a hell of a way to run a planet.

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Charted waters

One of the big selling points of free markets is the driving down of prices through greater competition. But the reality is that this can go too far, such that prices become unsustainably low. Ryanair’s chief executive Michael O’Leary has now called time on this in the airline sector.

Line chart of median return ticket price from London (£) showing European flights have become cheaper over the past decade

The chart — using data from — shows that median fares from London to summer destinations in Portugal, Spain and Greece have all jumped compared with a year ago. However, they are significantly lower than 10 years ago.

Budget airlines are being hit by the same headwinds that are pushing up prices in other sectors — staff shortages and fuel costs — and Ryanair may be in a better position than its rivals, having hedged the majority of its future fuel requirements for the rest of this year at $65 a barrel before Russia invaded Ukraine and kept staff, albeit on lower wages, rather than cutting headcount during the pandemic. (Jonathan Moules)

Looks like I was rather too kind saying that British trade policy was pretty well run with the (massive) exception of relations with the EU: the UK last week not only fiddled its own rules to safeguard tariffs on steel imports but went out of its way to say it was breaking WTO law to do so. I mean, what?

Using satellite evidence (I find this extremely cool), an investigation by my FT colleagues shows how Russia is busting sanctions by smuggling grain across the Black Sea.

The hoped-for nearshoring bonanza for Mexico as US companies moved their sourcing closer to home hasn’t happened, FT analysis says.

Officials from the Biden administration are continuing to disagree in public about whether to remove some of the tariffs on China it inherited from Trump to help combat inflation.

The EU member states and parliament have reached provisional agreement on a legal instrument to deter state-subsidised foreign companies from taking over businesses or bidding for public procurement contracts in the European single market. (This is a big deal: I’ll come back to it.)

Trade Secrets is edited by Jonathan Moules

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