OECD seeks global plan for carbon prices to avoid trade wars

Climate change updates

The OECD is seeking a new global plan for carbon prices that it hopes will prevent trade wars from erupting between countries with different green policies.

The Paris-based club of nations aims to follow its success in forging an initial agreement between nations on corporate taxes with a similar approach to carbon prices. This would allow economies such as the EU to move fast on limiting emissions while imposing reasonable carbon border taxes on imports from heavier polluting countries.

Mathias Cormann, the secretary-general of the OECD, called on the EU to back the plan at last weekend’s meeting of EU finance ministers, according to people present. Cormann proposed that the European Commission join the project.

Setting a price for carbon is widely considered the best way to drive down fossil fuel emissions as polluters can then effectively be taxed for the carbon they emit. One of its main sticking points, however, is determining what that price should be. The OECD believes it has a global solution.

A carbon price high enough to limit temperature increases to below 2°C is seen as a step too far by the US, China and India. They prefer to use domestic regulations to cut emissions, such as banning coal-fired power stations.

The EU is instead pressing ahead with a plan to extend carbon pricing on emitters within the bloc. Furthermore, it has promised to protect domestic industry via a carbon border tax on imported goods, such as steel and cement that emit a lot of carbon.

However, this approach has produced howls of protest from EU trade partners which see it as a trade tariff.

John Kerry, US president Joe Biden’s envoy on climate, warned the EU in March that a carbon border tax adjustment should be a “last resort” and could have “serious implications for relationships and trade”. Kerry has since said the US might consider a similar scheme, although it was thinking through the consequences carefully. 

OECD officials are privately critical of the EU approach. They fear it could lead to EU border carbon taxes being too high if they only take into account explicit carbon prices imposed by other economies.

Instead, the OECD wants the EU’s approach to include implicit carbon taxes used by other countries that have different carbon-reducing measures, such as banning coal-fired power stations.

Including those measures could reduce threats of a global trade war over environmental policy. That is why Cormann, who formerly worked in the Australian government which has been among the laggards in setting climate change policy, raised the OECD plan at a meeting of the EU’s 27 finance ministers in Slovenia on Saturday.

Under the OECD plan, countries and economists would use a voluntary framework to agree on how to best price both carbon taxes and other forms of environmental regulation. That in turn could help drive consent for an international framework for carbon border taxes, and so avoid potential trade battles.

A European Commission official said: “We are always ready to talk to all partners and are open to co-operating with the OECD. We also know how difficult it will be to find global consensus on carbon pricing, and time is not on our planet’s side.”

Several large economies already operate a regulated carbon market, involving the buying and selling of greenhouse gas allowances. This includes the EU, which saw carbon prices rise above €60 per tonne on its exchange trading system this year.

China has also recently launched its own limited ETS, and California operates a sizeable cap and trade programme.

The IMF has proposed a carbon price of $75 a tonne be applied globally by 2030, but this has not received international support.

The EU recently unveiled measures to help meet its goal of reducing the bloc’s average carbon emissions by 55 per cent in 2030, compared to 1990 levels. It proposed carbon border adjustment lies at the centre of its strategy and will initially target a narrow range of higher polluting imports from outside the EU, including iron, steel and cement.

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