Emissions With or Without Borders

    You would think that everyone is onboard the decarbonization train by now. Countries outbid each other, pledging ambitious goals to curb carbon emissions and introducing ever more aggressive policies and environmental regulations. Yet, busy as they are cleaning their own backyards, it seems like many governments harbour a lingering suspicion that their neighbours are not applying themselves to the task just as diligently as they are. Aware that CO2, true to its gaseous nature, leaks[1] easily over borders, politicians are determined to do something about it.

    And so, in the name of fair play, proposed measures to tackle the problem are popping up all over the place these days. Call them border adjustment mechanisms, carbon tariffs on imports, taxes… “A dear child has many names,” as we say in Swedish.

    You might remember the proposal for a Carbon Border Adjustment Mechanism (CBAM), introduced as part of the EU’s bold ‘Fit for 55’ package earlier this summer. It turned out to be a catchy one. As if just waiting for a cue, democratic senators in Washington were quick to propose a border tax based on countries’ greenhouse gas emissions, claiming that American companies deserve protection as the Biden administration moves forward with aggressive policies to reduce greenhouse gas emissions. The proposal might even make it into Biden’s incoming new monster of a bill. Rumour has it, meanwhile, that both Canada and Japan are considering similar mechanisms.

    Well-intentioned as they are, these proposals are bound to have broader political consequences. Beijing’s response is indicative: “We need to prevent unilateralism and protectionism from hurting global growth expectations and the will of countries to combat climate change together.” And, speaking of fair play, China raises another interesting point, reminding tariff-eager western politicians about a core principle of the Paris Agreement, that wealthier countries should bear greater responsibility for cutting emissions.

    Well, life is unfair, as most of us learn to accept early on, and carbon taxes are no exception. The tariffs may still be mere proposals but judging by their popularity, they should be taken seriously. Rather than sulking, countries and companies that see the wave of new legislation coming their way are well-advised to get their act together and adjust. Preferably by cutting their own carbon emissions.


    Image by Gerd Altmann from Pixabay

    [1] Carbon leakage occurs when there is an increase in greenhouse gas emissions in one country as a result of an emissions reduction by a second country with a strict climate policy. It is defined as the increase in CO2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries, expressed as a percentage.

    Julia Axelsson
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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