TRUMP, TRADE WARS AND CLIMATE POLICIES

An opportunity to introduce a rational and positive element to retaliatory measures.

Trump’s USA seems to be hell-bent on destroying every element of the pre-Trump international order, the WTO, presumptions in favour of free trade, and US participation in the Paris accord on climate. But a recent piece in Nature magazine proposes a neat way of turning some of this to a climate policy advantage.

The recent tit-for-tat on punitive tariffs has been based first and foremost either on targeting industries that are the source of the grievance, notably steel in the case of Trump, or products where the retaliatory tariff will cause pain in the USA, famously Harley Davidson.

The novel suggestion however is that the prospect of a global trade war provides an opportunity for the introduction of tariffs that, unlike many forms of trade barrier, can be considered to be almost unequivocally beneficial in their effect on human welfare. The suggestion is a simple one. Place the retaliatory tax on the products with the highest carbon footprint, relative to the alternatives of domestic production. Indirectly this will also counter at least to a small degree the environmentally reckless policies Trump and the Republican party are promoting at home.

Ideally of course this should be part of a wider set of agreements on effective carbon pricing, but “border carbon adjustments”, or BCA, clearly have a lot going for them. Nor is the idea new or without political support. “In 2017, French President Emmanuel Macron called them ‘indispensable’ for European climate leadership, and Canadian environment minister Catherine McKenna recommended closer scrutiny. Mexico included them in its Paris pledge” according to the Nature article. The US House of Representatives backed a similar approach in the Waxman–Markey Bill in 2009, but the bill failed to reach a vote in the Senate.[1]

Wholesale implementation, by the EU for example, of such an approach on a global basis would have a number of technical difficulties, but its examination in the context of retaliatory tariffs could provide some interesting outcomes. It would of course tend to hit those states in the USA that are most keen to protect their coal industries. As it happens that includes a number with a strong Republican base.

The other advantage is that what starts as a rather crude device, and as part of a trade war, could also evolve over time to become a significant component of mainstream decarbonisation policy.

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[1] California, it is claimed,  has  introduced a version of  BCAs but this is confined to its energy market.

G20 POLITICS, TRADE, AND CLIMATE.

This blog will remain quiet over the next several weeks as the author is also working on some substantial papers about low carbon issues, not to mention some summer relaxation.

Angela Merkel has indicated she will not shrink from confrontation with Trump in the forthcoming G20 talks, where free trade and climate change are both on the agenda. I suspect this is a good demonstration that trade, energy and climate will increasingly be interlinked in international affairs. Trump of course has unconventional notions of what free trade actually is, and, albeit somewhat incoherently and inconsistently, seems wedded to the view that the threat of climate change is some kind of hoax. Nations that have committed to Paris and are following through on low carbon technology and investment are not going to take kindly to unfair competition from producers who can undercut them by refusing to take climate policy seriously.  Some economists have even gone so far as to propose border adjustment taxes, a form of tariff on imports, to level the playing field. Trump’s position is in any case inexplicable even in normal rational terms of US self-interest. But this row will also put the UK’s own Brexiters somewhere between a rock and a hard place. Will they go with the rest of the world, or will they follow Trump, the DUP, and the apostles of right-wing fundamentalism – Lawson, Redwood, Rees Mogg etc, in the delusion that the clear messages from the science on climate change are simply wrong?

One of Trump’s most important bases for political support is the “rustbelt” regions of coal and steel, which have suffered dramatic economic decline in recent years. Part of the story, for coal at least, is that it is being pushed out of the energy mix in the US by the success of fracking in making the US close to self-sufficient in oil and gas. Inter alia this has also had some knock-on effects, reducing the price of coal on world markets, and increasing coal consumption in some EU countries. So trade has been at least a partial relief for a hard-pressed US coal industry.

More generally Trump’s policies seem to care little for the “left behind” in the rustbelt. One possible reconciliation, between declining coal and a rising urgency for action on climate, might have been investment in carbon capture technology, widely seen as an essential technology for a low carbon future, simultaneously protecting or even increasing domestic coal demand and providing new jobs in infrastructure, but that option has not even featured on the radar. Trump prefers to stick to the unthinking slogans of his campaign, professing support for American jobs while doing little in reality to support the “left behind”. In fact an isolationist US that ignores new low carbon technologies will most likely cost American jobs, probably in the short term and certainly in the long term.

Brexit, Free Trade and the Hard Right in the UK

But another interesting paradox is the position of British politicians now trying to take the UK out of Europe, and out of the single market and customs union, in the interests of more free trade in a global environment that will be increasingly unfriendly to countries that choose to ignore their responsibilities on carbon emissions. An important part of the “official” argument for leaving the EU was for free trade with the rest of the world, but a very large part of political establishment support for Brexit also coincided with vigorous opposition to taking any action on climate – Lawson, Redwood and Rees Mogg being just three of the more extreme polemicists in this area[1]. Outside the “establishment” UKIP and Farage have followed the same line, and I drew attention in earlier postings to the close correlations between support for Brexit and opposition to climate policies. This was evident not just among politicians, but among Leave supporting economists, including Leave’s most prominent economists Patrick Minford and Roger Bootle, who argued that exiting the EU would enable the UK to escape EU regulations linked to climate change.

To be fair to Minford, he was at least in some respects consistent, arguing both that trade deals, post Brexit, were an irrelevance, and that the UK should accept the further decline of its manufacturing base, concentrating instead on services. But, unsurprisingly, that has not been the Leave political line, nor would it have played well with Leave voters in the North of England. 

May’s government, faced with the appalling consequences of actually leaving the single market and the customs union, is however desperate to be able to demonstrate the prospect of a lucrative new trade deal with someone else. Step up to the plate, the UK’s largest trading partner after the EU – the USA and Mr Trump. Never mind the negative sides of such a deal for British farmers and consumers, the reality is that Mr Trump appears to believe in bilateral balances, the next best thing to barter in the modern world. Since the UK has a surplus with the USA, one of the few major economies for which this is true (it is in deficit with the EU for example), this looks like a recipe for disaster in any trade deal. Opposing Trump on climate matters is hardly going to help.

In fact May is now signalling solidarity with Merkel on climate at least, although whether we should put this down to the UK’s legal obligation under the Climate Act, or to a growing realisation that perhaps the EU does matter after all, not to mention global climate, is not clear.

Trade, Climate, and Carbon Taxes

If nothing else the prospect of conflict on both climate and trade, in the forthcoming G20, demonstrates the potential for close political connection between the two. But the inseparability of the issues has always been clear, however much that may upset the ideological position of most of the Brexiters. . A corollary of “free and fair” trade means, in a post Paris world, going along with what is now the global consensus on climate. Defaulters cannot be allowed to compete on an equal basis with countries who are taking measures that may damage their competitive position. This idea also sits behind the EU’s understandable, though not very effective or successful, attempts to establish an EU-wide arrangement for trading emissions. This at least provides a level playing field for intra-EU trade.

Two Oxford economists, Hepburn and Helm, have long proposed, most recently in a February 2017 letter to the FT, a carbon border tax.  Lakshmi Mittal made the case for a carbon border adjustment to put European steel on a level playing field with global competitors, to inhibit “leakage” of emissions to other countries. Hepburn and Helm simply extend the argument to other energy or carbon intensive sectors. It is increasingly clear that carbon taxation regimes are likely to be more effective than rather inflexible emissions quota trading. Needless to say, such a regime would have major ramifications for trade. Not least it would have demolished the cost advantages for EU generators in switching to cheap US coal dumped on world markets. Even if it has yet to gain much political traction, the idea of carbon border taxes emphasises the close interactions of trade and climate policies.

           

           

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[1] The Brexit trio of Johnson, Gove and Davis also have form in this area, but are somewhat more nuanced.

TIME FOR A REALITY CHECK ON UK ENERGY PRICES

DON'T BLAME BRUSSELS AND DON'T BLAME CLIMATE POLICIES

Few topics compete with industrial energy prices for the level of misleading information and analysis they generate. The reality is that energy prices are rarely decisive in determining an industry's ability to compete, UK power prices in particular are high by international and European standards, but this has little to with Green climate policies and even less with Green policies imposed from Brussels. It may well reflect other issues in the way we have chosen to run our power sector. These deserve critical examination in any case.

Brussels attitude to energy intensive industry

David Buchan of OIES has commented on my blog on the UK steel issue, drawing attention to the link with Brexit arguments. His comment is worth repeating. "It is misleading to blame the EU for high energy costs related to renewable energy subsidies, when the UK’s own Climate Change act mandates more ambitious emission reductions than EU legislation, and to suggest that Brussels does not allow the UK to offset the extra cost of clean energy policies for energy-intensive industries."

David goes on “The Commission is keen to keep energy-intensive industries in Europe for the carbon leakage reasons you give”. It makes good sense, as I argued earlier, to encourage energy intensive industries towards countries capable of providing low carbon energy supply; currently this does not include China or Germany or India.

Moreover the Committee on Climate Change notes that “steel producers face EU ETS costs for their direct use of fossil fuels. However, they also receive a free allocation of allowances under the EU ETS and estimates suggest this has more than covered that direct cost”.

If Brussels is to be faulted it is for its failure to deal with German behaviour (contravening the spirit of a competitive internal market) or with Chinese dumping. According to the FT’s correspondent, [Kiran Stacy, 3 April 2016], “Germany has handed over 40 times more in energy subsidies to heavy industry since 2013 than the UK, highlighting one reason why British steelmakers are in such trouble.” Whether a UK outside the EU, and not part of any other trading bloc, could have made a better job of handling unfair competition from Germany, or the dumping of steel by China, is a very different question.

But how much do energy prices matter to industry anyway?

Industry lobbying suggests energy costs are a major factor in competitiveness, and one would expect this to be true a fortiori for steel.  But the same FT article quotes research from the Committee on Climate Change indicating that energy accounts for just 6 per cent of all the costs of running a blast furnace, and other evidence that it is about 5 to 10 per cent of production costs. In this instance it seems that, notwithstanding German subsidies to energy costs, it is other factors, mainly the very low price of steel, and dumping, that are the main problem for the steel industry.

One other macro-economic factor, not often mentioned in the debate, is the exchange rate. This is likely to be much more important than energy costs, since it relates to a much higher proportion of total costs, including labour and other domestic economy related costs, including much of the content of the energy costs themselves.

More deep rooted causes for high UK energy costs.

A historical perspective is useful and there are plenty of data sources. The International Energy Agency publication, Energy Prices and Taxes, gives a long annual series of prices for EU and other IEA countries. This international price comparison provides a useful historical perspective. In 1989, the last year the UK electricity sector was in public ownership, UK industrial electricity prices (excluding taxes) were about 7% above the IEA median and 20% lower than those in Germany. They were 25% higher than in rapidly decarbonising France.  By 2007 UK prices had climbed to be 42% above the IEA median, 15% higher than Germany, and 50 % higher than France. UK prices. 2007 was the last full year before the UK’s 2008 Climate Act, so the increase cannot be attributed to excessive zeal in reducing emissions.   By 2014, the UK was 44% above the IEA median, 58% above Germany, and 50% higher than France.

International comparisons are notoriously difficult, and a number of obvious explanations suggest themselves. These include the possibility of subsidies and cross subsidies in the German power sector, the de facto artificially low exchange rate that Germany enjoys within the Eurozone, and special factors such as shale gas impacting prices in North America.  The figures also reflect the very different fuel mixes in the IEA, France benefiting very obviously from nuclear power. And of course there may be many other factors, including geographical endowments, differences in reliability standards, and forms of ownership with different demands for a return on capital employed.

It is however rather disappointing that the UK should appear to be doing so badly, given its leadership role in the market liberalisations of the 1990s, and the exceptionalism that is sometimes claimed for the performance of UK liberalised markets. There is however little or no evidence that zeal in pursuing climate policies is a major factor, and none that European policies on emissions trading have had any impact at all.

NEED TO LIMIT CLIMATE CHANGE SHOULD MAKE A CASE FOR UK STEEL

BRITISH STEEL DESERVES A FUTURE FOR THE SAKE OF OUR CLIMATE.

There is a strong strategic case for the UK to continue steel production, not least because it has the capacity to show a lower future carbon footprint than its competitors. There would be a strong case now, if all steel producers were obliged to reflect the costs of climate damage. But it would be strengthened immeasurably if the UK proceeded with plans for carbon capture and storage (CCS) where we have, in the North Sea and our oil industry expertise, a natural comparative advantage.

In a rational economic world, competition and free trade are supposed to ensure that we produce what we want and need at the lowest possible cost. Unfortunately that is not the world in which we live. Most of the world’s national steel producers, including China and Germany, find ways to protect their own industries. Even more important is the distortion caused when none of them are obliged to factor in the huge damage and possible catastrophe that CO₂ emissions are inflicting or will inflict on our climate. This threat was recognised in words though not in actions at the Paris summit, and emphasised by the record global temperatures observed in February 2016.

The rapidly growing urgency of action to curb carbon emissions means that any rational economic analysis ought to give a huge comparative advantage to retaining energy intensive industry in countries which are able to provide low carbon power and low carbon industrial processes. With this perspective how do some of the other major steel producers stack up?

China, although it recognises the gravity of its situation in relation to climate, and is building large numbers of nuclear reactors, is still, for the foreseeable future, an economy heavily dependent on coal – the worst form of fossil fuel.

Germany, despite its Green pretensions, has set its face against both nuclear power and carbon capture, the two most important technologies for rapid baseload deployment in a low carbon economy. It continues to commission new coal stations without CCS. Energy cross subsidies to German industry are a long running concern for fair competition in Europe, and German industry benefits further from the artificially low de facto exchange rate that Germany enjoys within the Eurozone.

The UK has a potential advantage in terms of lower coal dependence. But this would be magnified many times over if we proceeded with plans for a CCS network. It is therefore doubly unfortunate that the government should have cancelled its funding of CCS projects in November 2015.

Even this is not the whole story. Politicians and industry lobbyists prefer to concentrate on relative energy prices rather than exchange rates, although the latter are often an order of magnitude more important than the former.  The UK currently runs a record deficit on current account, making the current valuation of sterling ever more dependent on the “kindness of strangers”, to quote the Governor of the Bank of England. Losing a steel industry will only add to that, increasing the likelihood that any major shock, like the risk of Brexit, will provoke a sudden slide in the currency, which might of course make UK steel competitive again. But by then of course it may be too late.