Climate change requires actions on multiple fronts. Government, finance, technology, innovation, law, insurance... You name it, and it should be ready for the crisis. This is a prevalent idea we hear in social media. But if this is a real crisis, it needs prioritization. The divergence of actionable areas lowers the concentration for successful actions. I believe climate change is an engineering problem at its heart. Finance will enable the engineering solutions, and the government should support these two.
Last week, US Climate Envoy John Kerry visited European capitals and talked about the upcoming COP26. There are lots of expectations from the new US administration, and obviously, it will be harder to fulfill these expectations as more action plans are revealed. One of the very interesting talks was about CBAM - carbon border adjustment mechanisms. Kerry politely rejected some part of the EU proposals, but it is interesting how the EU thinks about its carbon mechanisms.
From the EU’s perspective, the internal carbon market and mechanisms are fantastic creations. The word does not belong to me; that is their definition. They have so much belief in their carbon market that they believe California, China, the US, and any carbon pricing should follow European footsteps. That is not the bigger issue. The big problem is whether taxation will solve the climate crisis.
In Turkey, the tax on diesel and gasoline is around 50%. What if we renamed it as the carbon tax and directed all income to green projects. Will it stop gasoline consumption or stop fossil cars? Unfortunately, the tax couldn’t stop the demand for fossil fuels. It may dampen the growth a little bit. Therefore we call these financial measures complementary measures.
CBAM is aiming to stop leakage in the EU market. The argument is simple, should you decarbonize by transforming your sectors or importing services that these sectors provide? Border adjustments are not without merit. They may work. But not in the world of free allowances. If there will be free allowances in parallel with such policies, it may disturb trade differently. China can hand free allowances to its certain industries and put a custom price to protect its market.
EU market, in that sense, can stop leakage. But compared to the cost advantages of foreign countries, the barrier should be quite high.
China is also running its carbon market. It will be the largest globally, and it may include some ASEAN countries in the future, too. It may tweak its custom rules and calculations for a better creative market setting with such a gross market. On the other hand, India is already complaining about high oil prices, and there are political issues to be settled.
So Europe has the perfect carbon market, and now a carbon border mechanism is expected. The US wants to move forward, but taxing is a very big political issue to implement. The divergence of local politics makes it harder to settle. China’s market size may dwarf all the carbon efforts around the world. VAT in Saudi Arabia already caused inflation. For the rest of the MENA, more taxes are not easy to work with. India is very sensitive to high energy and agriculture prices. And Africa should be exempted from all kinds of taxes?
The arithmetics of carbon taxing and pricing is also complicated. With more creative maths from the finance side, the targets are already reached, or targets are just junk promises to be sorted out by the genius accountants. The sensible thing is to look at this emergency as an engineering problem and act accordingly. Otherwise, we will sign documents, promise pledges, create certificates, have activist board members, implement international barriers, tax the producers, and hence consume more, but emissions will not slow a bit.