US-China Climate Deal: Walking on Water?

Jan Zilinsky (PIIE) and Sean Miner (PIIE)
November 14, 2014 7:45 PM

One of the biggest headlines to come out of the APEC meetings in Beijing was the accord between China and the US on limits of CO2 emissions.  The U.S. agreed to cut emissions by 26 to 28 percent from its 2005 levels, while China said its CO2 emissions would peak around the year 2030 and that it would reduce the use of fossil fuels.

Not an iron commitment but a start

One writer on the US Chamber of Commerce website, taking a short-term view, decried the climate deal as an attack on the American economy. But there is a broad menu of options to lower emissions while limiting the costs to the economy. Emissions will probably not be reduced in the most effective (or, for that matter, equitable) manner, but the real threats to public health – and therefore the growth potential for national economies – warrant a bold response.

Most approaches we like involve the use of price signals. A market-based regulatory system such as cap-and-trade (including the ability to “bank and borrow” emissions allowances) would reward efficient producers and correct several environmental externalities. It would also create pressure on polluters to focus on innovation in energy efficiency.

Some form of a global tax on carbon would also correct the existing incentives, but raising taxes is always a thorny path. For the latest example, we only need to look to Massachusetts, where voters approved the “Gas Tax Increase Repeal Initiative.” The majority of voters said that annual inflation adjustments in gasoline tax were undesirable. In other words, they want the gasoline tax to be falling, in real terms.

This shows how difficult it is to implement or keep economically reasonable policies. But this has too often been used as an excuse to delay action. We do not necessarily interpret the US-China agreement as an iron commitment, but by agreeing to lower emissions now, the US, and the world, will be better off in the longer term.

Momentum for 2015?

Publicly announcing targets is valuable (although not sufficient), and the announcement at APEC could be useful for building momentum prior to the Paris climate conference. Still, various local factors suggest that the French foreign minister Laurent Fabius is too optimistic (he wrote on Twitter that it “will be the most important diplomatic meeting ever.”)

For success at the Paris conference, the major economies (US, China, and the EU) need to be prepared to act. But the U.S. president’s power on fighting climate change seems to be eroding (Martin Wolf wrote that the “[e]lection result may bury what little hope remains of getting to grips with risks of climate change”). The start of the new EU Commission has been rocky (several publications have called for Juncker to resign) which may erode the appetite for environmental issues.

These recent events show that a desirable outcome in Paris is not guaranteed. But the US-China negotiations are encouraging.

Prior to APEC, there were already international efforts to fight climate change by making clean products more available. The US and China, along with 14 other WTO members, are also negotiating a plurilateral agreement on the environment.  The Environmental Goods Agreement (EGA), launched earlier this year, looks to reduce tariffs on as many as 400 products related to combating climate change.  This could, as Obama said, “help more countries skip past the dirty phase of development and join a global low-carbon economy.”

The EGA is similar to the Information Technology Agreement (ITA), a plurilateral agreement to reduce tariffs on electronic products, which had a breakthrough at the APEC meetings and looks to be concluded next month.  This could help push the EGA to a faster conclusion, and once tariffs on goods for environmentally friendly products are reduced, negotiations on non-tariff barriers and environmental services will be next on the agenda.

Obama is also expected to announce that the US will contribute $3 billion “to a new international fund set up to help poor countries deal with the effects of climate change and lower their greenhouse gas emissions.” With Paris in the spotlight for next year, we hope leaders will not only celebrate the launching of new multilateral endeavors but also finish what they had started.

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