Present at the Creation of a Climate Alliance—or Climate Conflict

Adam Tooze | 08 August 2021
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The United States and Europe are on the brink of decisions that could save the planet—or tear apart the West.

As news pours in almost daily about extreme weather events, the climate crisis is taking on a more and more manifested reality. Meanwhile, the clock of climate diplomacy is ticking too. The long-awaited United Nations Climate Change Conference (COP26) in Glasgow, Scotland, is now less than 100 days away. If there is to be progress at the conference, positions need to be confirmed and coordinated. Originally scheduled to open only days after the 2020 U.S. election, it is fortunate in a sense that COVID-19 forced its postponement. This allows U.S. President Joe Biden’s administration to play a more constructive role. But not only are the G-20 environment ministers unable to agree, but even between the Europeans and the Biden administration, hopes of climate harmony are proving premature.

The United States and the European Union have both separately raised the promises they made in Paris in 2015. But on how to achieve their goals, they are at odds. Former U.S. President Donald Trump’s climate denial and crude economic nationalism have been banished—at least, for now. Instead, what the world is witnessing is a trans-Atlantic tussle over preeminence in climate policy. The resurgent claim to leadership on the part of the Biden administration clashes with the EU’s famed regulatory power. So much so that following the latest EU package’s announcement, there is talk of a carbon trade war. Will the White House or the “Brussels effect” prevail?

As of yet, it isn’t alienation at the level of Gulf War Mars versus Venus confrontations. But it is reminiscent of mutual incomprehension in 2008 and during the Eurozone crisis. What is at stake, entwined with questions of environmental policy, is the kind of regime we govern contemporary capitalism with. From Brussels, it looks like a choice between Europe’s rule-bound solution based on market principles against the United States’ improvised, politically dictated adhocracy. Viewed from Washington, Europe’s decarbonization program is dictated by attachment to unworkable systems of carbon pricing and divisive proposals for carbon border adjustments.

Democratic Party experts may not share Trump’s scorn for Europe. But deep down, one suspects many U.S. experts regard European environmental policy with the same suspicion they regard the eurozone with—as a set of schemes that perhaps looked good on paper but are disastrous in practice. The future of trans-Atlantic climate policy depends not only on finding a modus vivendi between very different policies but also on finding new and more constructive ways to frame the North Atlantic economy as a springboard for decarbonization.

When it comes to climate policy, the EU and the United States are on entirely different timelines. Americans are desperately scrambling to restart their policy process after years of paralysis under Trump. They know the clock to congressional midterms is ticking fast. Without even a full staff in place in most government departments, the best bet seems to focus on regulations requiring utilities to end fossil fuel burning and whatever infrastructure investments, in transmission lines and electric vehicle charging stations, can be passed through the labyrinthine processes of Congress.

Europeans, by contrast, have been working on the problem for decades. They have had a carbon pricing system in place since 2005 and are now making it a key part of their strategy. Along with the investments of the NextGenerationEU package, extending carbon pricing from industries and utilities to transport and domestic heating will broaden the pressure for decarbonization. This will face resistance from business lobbies and some national governments, such as Poland, which are wedded to coal. But Brussels is gambling that political support for green policies is solid enough to push forward. And, so far, the momentum seems to be on its side. Even Europe’s conservative central bankers have agreed to consider green criteria not just in bank regulations but also in asset purchasing programs. The Federal Reserve System, by contrast, is standoffish. And given the precarious political balance, that may be for the best. The advocates of green policy in the United States need to pick their battles very carefully indeed.

"Even Europe’s conservative central bankers have agreed to consider green criteria not just in bank regulations but also in asset purchasing programs. The Federal Reserve System, by contrast, is standoffish"

This is a matter of politics, no doubt. But it also reflects structural differences. When it comes to energy, the United States and Europe are very different places. Carbon tax or not, EU energy prices have always been eye watering. Thanks largely to energy taxes of various kinds, a kilowatt-hour of electricity in Germany costs more than twice what is charged in the United States, and the same is true for a gallon of petrol. As a result, European energy consumption and carbon emissions are far lower. The average American in 2019, before the COVID-19 shock, emitted 15.52 tons of carbon dioxide annually. The average German emitted 8.52 tons in 2019, and the average French person emitted 4.81 tons in 2019. The EU imports around 60 percent of its overall energy needs—above all, oil. With the shale revolution, the United States has recently become an energy exporter and would like to export more, including to Europe. And it goes beyond economics: The United States’ entire way of life—sprawling suburbs, strip malls, and air conditioning—depends on the consumption of vast quantities of energy, oil, and gas. In its relationship to natural resources, the United States has far more in common with other settler colonial states—such as Canada, Australia, or Russia—than it does with the EU.

Bringing the odd couple of the EU and the United States together on climate issues requires an act of political will. On the U.S. side, it requires hope against hope on the part of successive Democratic administrations that the politics of climate policy will work in their favor. From the Europeans, it demands strategic patience and a willingness to carry the can when the United States periodically, though inevitably, absents itself.

Since the advent of global climate diplomacy in the 1990s, the United States has learned about the kind of arrangements that work and the kind that do not. What does not work is Kyoto Protocol-style binding global agreements. An international treaty of that kind simply has no chance of passage in the U.S. Senate. Indeed, the fact is no binding climate treaty of any kind has any hope of passing.

Instead, agreements have to be based on national commitments to decarbonization without, in the U.S. case, the ultimate imprimatur of Senate ratification. This was the secret to the Paris Agreement’s success—a “bottom-up” agreement by all countries in the world to submit national climate plans. The aim was a commonality of purpose, without pretending the same methods would work everywhere or even that national governments were willing to make the same level of commitment to decarbonization. Countries can opt out, as Trump did. But they can also opt back in and recommit, as Biden has done. Periodic reviews exercise pressure on all participants to progressively raise their ambition. The latest of those is what will be held in Glasgow in late 2021.

John Kerry. U.S. President Joe Biden's special envoy for the climate, meets with Italian Minister Roberto Cingolani during the meeting of the G-20 environment ministers in Naples on July 23.

A laissez faire approach along these lines has obvious attractions. But it begs two questions. If the aim is to generate momentum, if necessary at the expense of coherence, how do you prevent the unevenness of national approaches undermining the efforts of those who are most ambitious? If a country pushes a costly national policy of decarbonization, how does it prevent that from being undercut by cheap, high-carbon imports from the rest of the world? This is a matter of fairness to your own industries. But for Europe and the United States, this is no longer merely a matter of industrial competition. It goes to the heart of the entire rationale of climate policy.

We are no longer in 1990s climate politics. Europe and the United States have a huge historic responsibility for the climate crisis. If we start counting in 1715, the United States has been cumulatively responsible for 25 percent of all global emissions, and current EU members plus the United Kingdom have been responsible for 22 percent. Still today, Europeans and Americans consume far more than their fair share of the global carbon budget. But taking the EU and the United States together, they will account for less than a quarter of global emissions in 2021. Whether they decarbonize or not, the climate crisis will go on. No dimension of world affairs is more multipolar than the climate crisis. The Western states are rich and can do more than most to protect their populations, but as to the climate crisis itself, they no longer have their fate in their own hands. They, therefore, have an existential interest not just in pursuing national climate policies but in gaining leverage over others to ensure the world achieves the overall reduction in emissions vital for climate stabilization.

The solution favored by the majority of economists—including critical voices like economist Joseph Stiglitz—is carbon pricing. Properly pricing the damage done by emissions raises the cost of energy consumption, squeezing demand and incentivizing alternative supplies. It also creates markets for capital investments in clean energy and thus creates the foundation for green financial innovation. The price can be imposed by taxes or by means of cap-and-trade systems, which require polluters to compete in a market for emissions certificates. Carbon border adjustment—tariffs on imports from countries where carbon is still underpriced—prevents undercutting and enables climate leaders to exercise strategic leverage. A large market setting a high environmental bar becomes a standard setter for those who want to export to it.

"Properly pricing the damage done by emissions raises the cost of energy consumption, squeezing demand and incentivizing alternative supplies. It also creates markets for capital investments in clean energy."

This, at least, is the theory. As researchers Danny Cullenward and David G. Victor show in their important and timely book, Making Climate Policy Work, the reality is different. Although they enjoy overwhelming support from economists, few carbon-trading systems have been put into effect. In Australia and Canada, carbon markets have been rolled back. Where trading in carbon permits continues, more often than not, it is perfunctory and marred by exemptions and giveaways of free polluting permission. The result is not true market discipline but, as Cullenward and Victor call it, “Potemkin markets.” The only major system of carbon currently in operation is that of the EU.

The EU’s Emissions Trading System is a cap-and-trade system that has been in effect since 2005. Licenses to pollute are bought and sold between power generators and industrial firms. It has had a checkered history. At first, certificates were simply handed out to industrial firms, which they could sell, providing them with a gratuitous subsidy. At times, the oversupply of certificates was such that it caused the price to crash to zero. But in recent years, the system has tightened. Central control has been imposed by Brussels, and the price for the emission of one ton of carbon dioxide surged to more than 50 euros (or almost $60) in May. With the EU having announced ambitious new climate targets, speculators are expecting those prices to rise much further, possibly to 100 euros (or $119) or more. That is painful for the businesses that need to buy the permits. But Brussels, backed by Berlin, is doubling down. The carbon price system is seen as the key to driving investment in the energy transition. Unsurprisingly, Europe’s industries are lobbying to protect their access to free allocations of carbon certificates. To relieve this pressure, Brussels is now proposing the introduction of a carbon border adjustment mechanism to be phased in between 2023 and 2025. The pressure of carbon pricing will continue, but European industry will be shielded against foreign competition.

The primary purpose of this proposal is to deflect opposition within the EU, but it is also a strategy deliberately designed to raises tension with trading partners. As European Commission Vice President Frans Timmermans bluntly put it, the aim of the game is not to raise revenue from carbon tariffs on imports but to persuade countries to trade with Europe to adopt policies that make tariffs unnecessary. The EU has some experience with these kinds of tactics. It has successfully forced palm oil producers to introduce more sustainable plantation practices. And it is also pressuring exporters in Brazil to demonstrate they are not driving deforestation in the Amazon. The question is whether such tactics will work with the United States. The Biden administration does not like having its arm twisted, especially when it comes to carbon pricing.

The idea of carbon pricing first garnered attention in the United States in the 1970s as a way to reconcile environmentalism with the doctrines of market economics. In the 1990s, the Clinton administration attempted to introduce a carbon tax. Following the Europeans, the Obama administration tried cap and trade. Both failed. The idea of carbon taxation still retains support from powerful figures like U.S. Treasury Secretary Janet Yellen. But the whole idea of carbon pricing has fallen out of favor with the climate left, who now denounce it as a regressive outgrowth of neoliberalism. The nail in the coffin was the Greenpeace sting operation that exposed an ExxonMobil lobbyist boasting the company had come around to supporting carbon taxation because it was obvious it would never happen. In Washington, carbon pricing is dead.

The Green New Deal advanced by the political left after 2018 was new precisely because it did not mention carbon pricing but instead focused on investment and regulation. At least outwardly, the Biden administration has so far followed the same line. Rather than offering price incentives, administrative regulations and legislation will mandate a shift to clean energy on the part of utilities. The switch to electric mobility will be driven not so much by the cost of petrol as the promise of affordable Teslas for everyone. The engineering and infrastructure obstacles are significant as is likely opposition from courts stacked by the Trump administration. But since carbon pricing is dead, infrastructure and regulation are the only games in town.

"U.S. climate envoy John Kerry gave the Europeans notice that the United States wanted to haggle over carbon border adjustments. But Brussels was following its own timetable"

This does not mean, however, that the question of prices is irrelevant. Requiring utilities to supply green electricity comes at a cost as does a new generation of clean cars. It will be some time before they are cheaper as well as better. So that puts carbon border adjustment also on the United States’ agenda. Indeed, it is fully in keeping with the protectionist mood of the moment. Proposals were brought before Congress in both 2017 and 2019 with bipartisan support. Biden mentioned the idea on the stump. And it has now been proposed as an amendment to the latest congressional draft of the $3.5 trillion infrastructure package.

It might seem like the United States and EU have the makings of a common approach—a giant carbon club that would tax imports that came from countries without adequate climate policies. But the devil is in the detail—in this case, in the manner carbon cost adjustments are calculated at the moment they cross the border. Pragmatically, proposed U.S. legislation will permit any type of decarbonization measures to count when assessing tariffs. By contrast, the Europeans insist that to escape their carbon levy, countries will need to put a carbon pricing system in place, whether through taxation or cap and trade. For the United States, that feels like an unnecessarily prescriptive and counterproductive approach. It is also a standard it has no hope of meeting. Hence the raised hackles in Washington.

On his first trip to Europe in March, U.S. climate envoy John Kerry gave the Europeans notice that the United States wanted to haggle over carbon border adjustments. But Brussels was following its own timetable and saw no reason to wait for the leaden decision-making process in Washington. Now, only months before COP26, they have a proposal on the table that would require Europe to impose tariffs on U.S. imports. That, in turn, would trigger the penalty clause in U.S. legislation where a country can be given exemption only if it both prices carbon adequately and is not, itself, imposing sanctions on the United States. The world has the makings of a carbon trade war between two major economic blocs, both of which are committed to decarbonization—a gift to all those who would prefer not to engage with the climate issue at all and a huge missed opportunity to address areas where Europe and the United States might actually lead the decarbonization push.

The volume of trade between the EU and the United States is huge. It involves hundreds of millions of tons of embodied carbon annually. But neither EU nor U.S. proposals for carbon border adjustments touch more than a tiny fraction of it. This is because both the European and U.S. plans for carbon border adjustments so far extend only to basic commodities, which are carbon intensive, and for what is reasonable to assume that carbon costs can be assessed. The EU’s list is limited to iron and steel, cement, fertilizer, aluminum, and electricity generation. The U.S. list adds natural gas, petroleum, and coal. Between them, those account for a tiny fraction of trans-Atlantic trade that is dominated by high-value, manufactured goods like pharmaceuticals, chemical products, cars, aircrafts, and machinery.

When applied to the North Atlantic, the push to count carbon pushes the world back to an earlier era when trade was dominated by the exchange of raw materials for manufactured goods and was driven by cost advantages, such as wage differentials, raw materials, or energy costs. Since 1945, as the rich core of the capitalist world developed, that pattern was left behind, and the introduction of carbon pricing in the EU did nothing to alter that fact. Europe has not shifted carbon-intensive manufacturing to the United States and so does not need to protect itself from the resulting outsourced production. On net, it is Europe that exports carbon to the United States—in the form of German cars, for instance—not the other way around. If one ranks the trading countries of the world by the degree Europe’s proposed carbon border adjustment regime will impact them, the United States ranks two spots behind Mozambique, one of the poorest countries in the world. In total, a volume of no more than a billion dollars in U.S. exports are affected, mainly consisting of aluminum. Trump started a pointless trade war with Europe over steel and aluminum; it would be even more absurd if that dispute was continued in the Biden era in the form of a green trade war.

"Trump started a pointless trade war with Europe over steel and aluminum; it would be even more absurd if that dispute was continued in the Biden era in the form of a green trade war"

The EU’s carbon border adjustment is not aimed at the United States but at the countries from which the EU imports lots of carbon. At the top of that list is Russia. Other important trading partners that will face stiff bills include Turkey and Ukraine. The entire purpose of the EU policy is to strongarm them into adopting decarbonization policies. That is eminently in the interests of the United States as well.

The United States trades very little with Russia, Turkey, and Ukraine. The trade partner the United States and EU have in common is China. From the 1990s, both the United States and Europe offloaded polluting industrial production to China; not for nothing, China was known as the smokestack of the world. And China lurks in the background of the EU-U.S. tussle over the intersection of climate and trade policy.

In the summer of 2020, the EU raised the issue of a carbon tax with Chinese diplomats only weeks before Chinese President Xi Jinping made his historic announcement regarding China’s decarbonization plans to the United Nations General Assembly. China has followed EU climate policy development closely. For several years, it has been preparing a carbon market that, when it comes into effect, will be the largest in the world. It is still in its early stages, but the power plants that will be covered are responsible for as many emissions as the entirety of the United States. If the EU’s experience is anything to go by, it could take years before it begins to bite.

Given the mood in Washington right now, the vision of a carbon club involving the EU and China seems like a dream or perhaps a nightmare from a bygone era. There are few policy combinations more likely to arouse universal opposition than carbon pricing and détente with China. Whether the EU and China can make progress will depend on how willing China is to silo the climate issue and insulate it from broader deteriorations in relations. It remains to be seen how seriously Beijing will push forward with Xi’s promises of decarbonization. COP26 will be a test. Meanwhile, the question for the EU and United States is whether they can get past their differences over carbon border adjustments and re-envision a North Atlantic decarbonization partnership in more constructive terms.

The fundamental difference in approach to decarbonization on either side of the Atlantic Ocean can only be resolved by some process of mutual recognition. This is what U.S. legislation proposes, and the EU would be well advised to swallow its pride and accept a compromise. On the U.S. side, there is simply no room for maneuvering on carbon pricing, and forcing the issue will only play into Republicans’ hands. The volume of businesses at stake is comparatively tiny, and it is a distraction from the areas where U.S.-EU cooperation is not just important but also essential for rapid decarbonization. As befits a preeminent arena of manufacturing trade, trans-Atlantic policy should focus not on harmonizing carbon pricing but on industrial policy. As Cullenward and Victor argue, the approach should be sectoral, focusing on key technologies for key industries.

If steel is to be an issue, let us focus our attention not on minor issues of cost advantage but on the question of how we make this essential material without burning coal. Since the Trump administration gratuitously opened the question of steel trade and imposed tariffs, there is an opportunity, as trade experts Todd Tucker and Timothy Meyer argued, to shape a Green Steel Deal for the North Atlantic region. If Europe and the United States are going to pursue carbon border adjustments for steel imports, let them do so together and divert the revenue toward supporting the rapid development of new green steel technologies. Neither the United States nor Europe will ever be a low-cost producer, but they do have the capacity to force the pace of technological development. One might imagine, for instance, advanced market commitments as were offered to vaccine developers—a promise to buy the first million tons of steel produced with hydrogen, funded out of a common tariff.

"Together, Europe and the United States inaugurated the mass manufacture of cars in the early 20th century. They should now work together to end global trade in internal combustion engines"

A sector that is no less vital to climate change and one the United States and Europe play a more important role in as producers is the auto industry. Together, Europe and the United States inaugurated the mass manufacture of cars in the early 20th century. They should now work together to end global trade in internal combustion engines. After China, the United States is the world’s second largest market. Cars and trucks are an industry where—due to the large volume of European exports to the United States—Washington has considerable leverage. By the early 2030s, Brussels aims to end the sale of internal combustion vehicles in the EU. It should not be acceptable for European producers to go on exporting them to the United States or manufacturing them in factories there.

California will end the sale of internal combustion engines by 2035. Ford and General Motors are already aligning with that target. That year, at the latest, should also be the endpoint for trans-Atlantic trade of internal combustion engines. It would be a deal that would bind not just Europe and the United States but also Mexico and Canada, which are key to the U.S. production system. With the EU and the United States forcing the pace, major manufacturers in Japan and South Korea will have little option but to join the export ban on internal combustion engines. On a sectoral basis, why shouldn’t a deal be possible also with China?

The one sector in global manufacturing critical to decarbonization and Europe and the United States have a near monopoly of is aircraft manufacturing. If global passenger travel is to be decarbonized, the world needs dramatic progress in aircraft and aeroengine technology. That can only come from Boeing, Airbus, CFM International, Pratt & Whitney, General Electric, and Rolls-Royce. The rise of Chinese competition has resulted in a cease-fire in the long-running Airbus-Boeing dispute. Both sides must recognize this as a sector where the free market is ultimately a fantasy. Both the EU and the United States have, for decades, been involved in intensive industrial policy. It is time to make a concerted push toward decarbonization. Both sides should set ambitious standards for emission reductions and should agree on terms saying they will support the development and sale of low-emissions aircraft to customers around the world. Rather than suing one another at the World Trade Organization, they should egg one another on in a race to develop a new generation of aircraft and aeroengines.

The proposal to adopt sectoral cooperation between the United States and Europe is not without its risks. Sectoral strategies, with government policies designed to cater to particular industries and the major firms in those industries, are at risk of capture. Opposition to industrial policy was not merely a neoliberal neurosis. It reflects painful experience with misguided programs that serve the interest of producers more than they serve the public.

The signal example of this on both sides of the Atlantic is agriculture policy. As recently as 1950, farming was a sector far larger in both the United States and Europe than the fossil fuel sectors are today. From the 1930s onward, as farming in rich countries entered a chronic depression, the agriculture sector was integrated into national protection regimes, which, in Europe, were fused into the common agricultural policy. The results are some of the most dysfunctional regimes of economic and social policy ever devised. They are expensive, regressive in their social impact, damaging to the environment, and prohibitive of fair-trade deals with developing countries. The last thing the world should want for the declining fossil fuel economy is something similar.

The sectoral model that is more inspiring is the European Coal and Steel Community (ECSC) that, after 1950, became the embryo for European integration. After three decades of war and depression, the ECSC tied together the heavy industrial complex of Western Europe, ensuring common prices and competitive conditions. It imposed supranational control on overmighty private cartels. It was established—it is easy to forget—as a regime for managing what was expected to be a slow-growing economy with heavy industrial overcapacity. Hence the need for a complex supranational cartel structure.

"If a full alignment of national policies is unrealistic, sectoral solutions recommend themselves"

That prediction was rendered obsolete by the historically unprecedented pace of economic growth after 1945. The ECSC’s legacy was less economic than political. It pointed toward a future for Western Europe as an integrated bloc, focused on regional integration rather than the radical globalization of the late 19th and early 20th centuries. It created buy-in for a new regime of managed capitalism. It created deep-vested interests, which—for better or for worse—have propelled the European project down to the present day. It spawned an entire social science of integration, tracing the functional logic that one step toward integration leads to another.

If decarbonization is to gather momentum, the world needs to engender a similar process of buy-in, both nationally and transnationally. If a full alignment of national policies is unrealistic, sectoral solutions recommend themselves. Above all, this may serve to give some continuity to U.S. policy. The North American Free Trade Agreement, North America’s relatively light-touch model of economic integration, survived Trump’s nationalist onslaught, rebadged as the United States-Mexico-Canada Agreement. It did so thanks in large part due to the lobbying of businesses that were deeply invested. Perhaps a series of sectoral trans-Atlantic pacts, bound in major producer interests, could give a similar resilience to decarbonization.

Adam Tooze is a columnist at Foreign Policy and a history professor and director of the European Institute at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World, and he is currently working on a history of the climate crisis. Twitter

This article was originally published on Foreign Policy.
Views in this article are author’s own and do not necessarily reflect CGS policy.