We economists had climate change all worked out. We recognised carbon emissions were a negative externality, and endlessly econo-splained what negative externality meant. We envisioned governments using carbon prices to make companies bear the cost of their emissions, preferably harmonising prices into a multilateral global one. We scoffed at inefficient state subsidies and regulations compared to market-based mechanisms.
We were right in theory; we always are. But we didn’t necessarily think the trading bloc that followed our prescription would end up facing fierce accusations of protectionism. We didn’t foresee the role of state-backed exports from a geoeconomic superpower. We certainly didn’t predict a helping hand from a ridiculous war started by a climate change denier.
The EU created the emissions trading scheme (ETS) in 2005 and is currently expanding it. The scheme has reduced pollution in covered sectors, though not spectacularly, with the effect diluted by the “free allocations” given to high-emitting industries such as steel and chemicals. The European Commission now wants to include those sectors while protecting them from unfair competition through the carbon border adjustment mechanism (CBAM), which charges importers carbon prices to equalise costs. An example of the EU’s prized “Brussels Effect”, CBAM is supposed to encourage other countries to align with the EU carbon regime via global trade.