The saying “don’t allow the best to be the enemy of the good” is true for most facets of human life, including the transition to a greener economy.
The majority of economists concur that imposing substantial carbon taxes globally would be the most affordable method to tackle climate change. However, that is not politically feasible, as reported by Reuters.
Economy not covered?
The European Union and the United Kingdom put a high price on carbon dioxide, though this doesn’t cover the entire economy.
Elsewhere carbon taxes are low and patchy, as in China, or virtually non-existent, as in the United States.
Dishing out state aid comes with problems.
It is often inefficient: for example, consumers may get subsidies to buy electric vehicles that they would have bought anyway.
Subsidies can also be protectionist and distort the market.
A classic riposte to protectionist subsidies is for the affected countries to impose anti-dumping tariffs on the offenders.
The EU is dropping hints it may do just that for Chinese imports.
But it is reluctant to do the same for America, given how much the United States is helping Ukraine defend itself against Russia.
Instead, the EU will crank up its own green subsidies.
The plan risks undermining the EU’s single market as hardly any of the money will come in the form of grants from EU programmes.
Race to the top
However, with America investing heavily in green technologies, the chances of halting climate change are now considerably better. Huge amounts of government assistance could start a positive feedback loop that lowers costs for developing technologies that will gain from significant economies of scale. Renewable energy costs have decreased as a result of generous subsidies for wind and solar energy equipment.
Cost reduction will be accelerated by a race for subsidies among the three major economic blocs of the world as they compete for a piece of the emerging green economy. This will hasten the adoption of clean technology and drive down costs even more. Consumers in other regions of the world will profit from the competition between China, the United States, and the EU to supply this kit.
In this regard, it is incorrect to believe that financial support for green technologies is a zero-sum endeavour. Having a tonne more investment everywhere is both feasible and necessary.
Fair play
Nevertheless, as the elephants distribute their subsidies, the risk is that they trample smaller countries which rightly want their people to have good employment opportunities in the industries of the future, as well as cheap products.
So it is important to ensure as much fair play as possible.
The United States could align its green subsidies with its “friend-shoring” plan, which aims to build up supply chains in friendly countries.
Doing so wouldn’t just solidify relations with allies.
Spreading the production of clean technologies around a large number of countries would lead to greater economies of scale and lower costs.
America is already negotiating some changes in the IRA rules with the EU.
For its part, the EU can ensure some fair play inside the bloc by offering more grants to poorer countries so they can keep up with Germany.
Countries such as Italy would then be able to tap more of the loans left over from the EU pandemic programme.
The EU is better placed to do this than America.
It says trade is a priority in the battle against climate change, in part because it will help secure access to raw materials such as lithium.
Even with such supporting policies, a global green subsidy race will remain the second-best option.
But it is a lot better than doing nothing.
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Source: Reuters
