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Nevertheless, China's inclusion in a Climate Forum will not be easy. China is suspicious of the G7 initiative and is not inclined to participate in an international format it did not initiate. The Forum should therefore take a proactive stance, accept some risk of confrontation to encourage greater ambition over time, and assume competition between countries. The paper proposes to create a flexible Climate Forum, enabling sub-groups of members to form. Specifically, members would be able to choose the sectors in which they wish to cooperate, decide which members they want to cooperate with, and the time frame of this cooperation. This flexibility will encourage the inclusion of large emitters such as China and India, which are a priori reluctant to join a climate club based on the G7 initiative. By enabling them to cooperate in specific sectors they deem crucial for their decarbonization, the Forum would incentivize countries to increase their participation gradually. Governance: design an open and inclusive Climate Forum To achieve the Forum’s goals, different levels of membership should be considered, involving different levels of integration by sector and by policy. The Forum should allow different subgroups of members to cooperate on certain issues. Companies operating in sectors covered by the Forum should be allowed in as proactive members. Membership requirements must ensure the effectiveness of the Climate Forum, such as the implementation of legally binding policies on the carbon intensity of goods. Carbon pricing: the achievable establishment of a compliance mechanism in a Climate Forum The Forum should be a cooperation platform upon which member countries can work toward harmonizing their carbon pricing policies. The Forum should recognize carbon price heterogeneity in the short to medium-term and become an instrument for cooperation on border carbon adjustment, without aiming at a common carbon border adjustment mechanism for member countries.

While the EU's proposed CBAM would mark the first time any jurisdiction adopts a BCA targeting foreign goods, it is unlikely to be the last. In Canada, the federal government launched a consultation process to consider how a BCA could help the country meet its climate targets. Similarly, the UK Parliament's Environmental Audit Committee opened an inquiry into BCAs. Meanwhile, in the United States, Senator Christopher A. Coons and Representative Scott H. Peters introduced a bill that would impose a fee on imports of certain carbon-intensive products based on the “domestic environmental cost” incurred by U.S. producers under a portfolio of climate policies. More recently, Senator Sheldon Whitehouse has introduced a bill that would impose a BCA on a range of imported goods based on a levy domestic manufacturers would pay for emissions that exceed the industry average. Although designed as a unilateral measure, the EU's CBAM could offer a foundation for international cooperation among like-minded jurisdictions. Recent developments lend support to such a possibility. On the eve of the Glasgow Climate Conference in November 2021, the United States and the EU issued a joint statement on trade in steel and aluminum, an area where the two trading partners have clashed in the past. Under the deal, both sides agreed to expand market access and suspend ongoing trade disputes over steel and aluminum tariffs at the World Trade Organization (WTO), while also launching negotiations on a Global Arrangement on Sustainable Steel and Aluminum scheduled to conclude by 2024. This agreement would, inter alia, commit participants to “restrict market access for non-participants that do not meet standards for low-carbon intensity.” Another suggestion for international cooperation entailing a possible BCA has come from German Federal Chancellor Olaf Scholz, who expressed an interest in forming an international “climate club” during Germany's Group of Seven (G7) Presidency in 2022. While the G7 Statement on Climate Club adopted in June 2022 does not specifically mention BCAs, it commits the G7 to the establishment of “an open and cooperative international Climate Club” by the end of 2022, and expressly mentions “countering carbon leakage at the international level” as one of its goals. While international cooperation on BCAs is thus emerging as a policy option on both sides of the Atlantic, it is less evident what shape such cooperation might take. Some calls for cooperation involving BCAs have invoked the concept of a “climate club” without offering a clear definition of the concept. As evidenced by the vision set out by G7, the notion of a “club” is typically used in a much broader sense than that proposed in economic theory, where it entails an excludable “club good”—that is, a benefit to which only members have access—as well as penalties for non-compliant members and non-members. Several ideal types of clubs can be distinguished: normative clubs, under which like-minded members commit to achieving certain climate policy goals; bargaining clubs to enable more efficient negotiations of objectives, targets, and policies among major powers; and transformational clubs, which set legally binding rules for members and offer incentives for participation and compliance in the form of club goods and sanctioning. While the latter best describes the prominent call for a “climate club” articulated by economist William Nordhaus, the “club” designation is still often used to refer to any form of international climate cooperation with less than universal participation. Irrespective of whether it merits the label of a “club,” cooperation on BCAs between two or more trading partners will have to address three main questions. First, what legal form should international cooperation on BCAs take? International law in “her infinite variety” comprises a range of possible instruments, each of which can generate varying legal effects. Closely related to form is a second question, namely: through what forum—existing or new—can and should such cooperation be pursued? And third, what would constitute the substance of such cooperation, both in procedural and material terms? While not offering definitive answers to these questions, we consider the landscape of options policymakers will need to navigate. In pursuing cooperation on BCAs, jurisdictions have the option of enshrining such cooperation in a legally binding treaty or in more informal arrangements without binding status.Footnote17 A formal treaty would signal a strong commitment, as most states require domestic ratification, usually involving approval by a legislature. Even in the absence of a formal enforcement mechanism, legally binding treaty obligations may exert a “compliance pull,” for instance by making non-compliance less attractive due to the reputational damage caused. Treaties also tend to be more amenable to enforcement in domestic legal orders.Footnote18 While offering greater legal certainty, however, treaties are more cumbersome to negotiate and ratify as compared to informal agreements. Pursuing a treaty containing legally binding provisions may also make it more challenging to attract participation by states, and may altogether rule out participation of subnational jurisdictions, such as provinces or municipalities. By contrast, more informal arrangements—such as a memorandum of understanding—would not only avoid the foregoing drawbacks but could also allow for greater flexibility in the face of evolving circumstances.Footnote19 While details remain sparse, the Global Arrangement on Sustainable Steel and Aluminum, for instance, is likely to be non-binding in nature. Given that BCAs are only beginning to see concrete elaboration, such flexibility appears particularly desirable at this early stage, enabling international cooperation to better adjust to unfolding political dynamics at the domestic and international level. Even if states agree on a legally binding treaty, not all provisions need to be binding: international cooperation on BCAs could include a combination of non-binding objectives and principles as well as binding procedural obligations. Such binding obligations would offer greater legal certainty, but they would likewise be more challenging to negotiate and, depending on their substance, may require ratification at the domestic level. Although international cooperation on BCAs could emerge within its own political and institutional context, as the Global Arrangement on Sustainable Steel and Aluminum illustrates, embedding it within an existing forum could offer benefits. Not only would it provide a setting for the political negotiations preceding cooperation, but it could also afford an institutional “home” with existing administrative and financial resources. Different options exist to institutionalize cooperation on BCAs, each with different implications for the relevant procedures, actors, and political dynamics. One such option is cooperation under the international climate regime. Cooperation on BCAs could be framed as promoting the implementation of parties’ nationally determined contributions under the Paris Agreement. Parties could negotiate the terms of cooperation through existing processes, such as the annual climate summits, and build on operational support from the standing bodies of the international climate regime. Another international regime that could provide a forum for cooperation is the WTO, under whose auspices members could initiate dialogue through relevant bodies such as the Committee on Trade and Environment. Indeed, BCAs are expected to feature in the Trade and Environmental Sustainability Structured Discussions, an initiative recently launched by a subset of WTO members. Given political realities, however, options for more substantive engagement under the WTO regime—such as plurilateral trade agreements or a customs union—are unlikely to offer a basis for cooperation on divisive trade-restrictive measures such as BCAs. “Minilateral” approaches outside a multilateral regime may therefore hold greater promise, although these could again evolve within the confines of an existing institution whose structures and processes would facilitate the necessary dialogue. Germany, for instance, has endorsed discussing its proposed “climate club” within the G7 and, subsequently, the Group of Twenty. Both groups of countries are informal gatherings without a mandate to adopt binding agreements, but they can serve as a vehicle for signaling political commitment. By contrast, the Organisation for Economic Co-operation and Development, which has recently expressed interest in fostering cooperative engagement around BCAs, represents a type of formal organization that possesses a sizeable career staff and abundant technical and epistemic resources, all of which it could leverage to foster cooperation on BCAs. Finally, cooperation on BCAs could occur through bilateral arrangements. The proposed CBAM, for instance, envisions the ability of the EU to “conclude agreements with third countries with a view to take account of carbon pricing mechanisms in these countries.” Although the geographic scope of such bilateral cooperation would be limited, it could provide the nucleus for expanded BCA cooperation over time—for instance through inclusion in regional agreements, such as the Agreement on Climate Change, Trade and Sustainability launched in 2019 by New Zealand, Costa Rica, Fiji, Iceland, Norway, and Switzerland.

Many discussions on how to establish an international climate club center on carbon pricing. The idea is simple: members agree on a common (minimum) carbon price and impose sanctions on countries below the price threshold. Members receive protection from carbon leakage and enjoy barrier-free access to fellow members’ markets (and potentially other “club goods”), while the sanctions make joining the club attractive to non-members. Many influential international organizations – among them the OECD, the WTO and the IMF – have advocated for some kind of international coordination on carbon pricing. A global carbon price could be combined with another policy instrument popular in the climate clubs discussion: the border carbon adjustment (BCA). BCAs apply a price on imports that corresponds to their carbon intensity. They are designed to preserve the competitiveness of industries that face costly carbon prices or regulation by levelling the playing field between them and foreign counterparts that face lower climate-related production costs (in essence, combatting carbon leakage). A BCA includes many design options that, when harmonized across multiple countries, could give the coordinated instruments the function of a climate club. Countries could jointly determine which goods to cover, a system for calculating products’ embodied emissions, how to use revenue, and which countries (if any) to exempt. The mechanism also links neatly with carbon pricing; the implementing country uses its domestic carbon price as the basis for the fee it charges exporters. If exporting countries have a carbon price of zero, they pay the full fee; if their carbon price is lower than the importing countries, their fee is adjusted to reflect the difference. As with the BCA design features, member countries could jointly establish a minimum carbon price on which membership to the climate club is predicated. A climate club premised on carbon pricing, though appealing in its simplicity, overlooks significant implementation problems. For many countries, putting an explicit price on carbon, either through a carbon tax or an emissions trading system, may not be a feasible approach to decarbonization. For some economies, achieving Paris Agreement goals may be better achieved through standards and regulation; for others, carbon pricing is a political impossibility. In the United States, pricing carbon is politically infeasible for the foreseeable future, and a climate club that predicates membership on a carbon price would either face strong opposition from the US (likely hindering the club’s establishment) or exclude one of the world’s largest economies and greatest emitters (diluting the club’s efficacy and the incentive to join). An alternative to basing a climate club on an explicit carbon price would be to instead use an implicit carbon price. Low-carbon standards and regulations impose compliance costs on producers, increasing their goods’ prices. An implicit carbon price captures these costs: it is the difference between the price of a good facing regulation and the price of that good without regulation. Allowing membership to extend to countries with implicit carbon prices would make the climate club more inclusive, broadening the scope of countries that could join and not appearing punitive against countries that, for legitimate reasons, have not implemented carbon pricing policies. Furthermore, implicit carbon pricing can still be combined with a BCA, leaving this potential framework for a club intact. However, club membership predicated on any type of carbon price may still be unrealistic. Beyond concerns of carbon pricing making a climate club too exclusive or unattractive to potential members, coordination on both explicit and implicit carbon prices poses a host of considerable administrative and methodological problems. Carbon taxes and emissions trading systems vary greatly in their design, making it difficult to directly compare one carbon price to another. An implicit carbon price presents an even greater challenge, as it is unclear how such a price would be calculated. No jurisdiction has yet to devise such a metric, and even if various countries did establish implicit carbon prices, they would face the same comparability problems as explicit ones. Many have argued that the transatlantic space has the potential to host the world’s first climate club. After the development of the EU CBAM, Canada announced in fall 2020 that it would start a consultation on establishing a BCA and working “with like-minded economies” on its implementation. Shortly afterwards in 2021, two US congressmen introduced the FAIR Transition and Competition Act, which would establish a BCA on carbon-intensive imports. However, though the EU, Canada and the US are considering implementing similar mechanisms, their harmonization presents immense logistical and political difficulties. To begin, the EU seems poised to only recognize explicit carbon pricing for exemption from its CBAM (though the Commission’s draft proposal seems to leave the door open for bilateral agreements with third countries on crediting for foreign climate policies). While Canada has carbon pricing policies in place, the US does not and is unlikely to have a carbon price anytime soon. The US’s BCA, in contrast, would calculate its fee based on the cost of regulatory carbon compliance (an implicit carbon price). Furthermore, the US proposal explicitly states it will provide exemptions to the BCA only to countries that “[do] not impose a border carbon adjustment on products produced or manufactured in the United States.” This effective singling out of the EU – the only jurisdiction with a BCA in proposed legislation – suggests a BCA-based climate club involving the US and EU is not on the horizon.

BCAs have their downsides. Even if the environmental and distributional motivations are well-intended, BCAs may not raise overall social welfare relative to the same carbon tax without BCAs (Kortum and Weisbach 2017, p. 423). To complicate matters, McKibbin et al. (2018, p. 6) show that the welfare benefits of import BCAs can depend on how the government uses the carbon tax and import BCA revenue. Böhringer et al. (2016) note that whether or not BCAs

“can be designed in a manner that is legal under current international trade agreements is an ongoing and intensively contested debate. Moreover, the task of calculating tariff rates based on foreign pollution levels is likely to be difficult and contentious. For both of these reasons, there may be a risk to disrupting the regime of relatively free trade that has emerged under the …WTO if climate and trade policies are linked via carbon tariffs.”

Leaving aside the multiplicity of ways to address leakage, this paper focuses on BCAs for three reasons. First, border adjustments appear consistently in draft U.S. carbon tax legislation and prominent proposals by climate advocates. Indeed, some argue that a BCA provision of some kind would be an essential component to successful legislation. Second, Böhringer, Carbone, and Rutherford (2012) suggest that BCAs are relatively more effective in reducing leakage and promoting global cost-effectiveness than alternatives like output-based rebates. Finally, while BCA design may superficially appear intuitive, within the policy design lurks a thicket of competing objectives, legal pitfalls, administrative headaches, and unintended consequences. This necessitates a careful review of the options in the spirit of resigned pragmatism. An elegant solution will likely elude us. First, policymakers can only hope to anticipate and counteract some of the myriad ways enterprising actors will game the system. Second, measures designed to deter gaming will likely complicate the administration of the program or incur some other tradeoff. And approaches that simplify administration would inevitably under- or over-compensate some domestic firms and over- or underprice emissions from some imported products. Moreover, approaches that would maximize the diplomatic value of BCAs may be more subject to WTO violations. Finally, the United States should be mindful that whatever approach it adopts might well be applied by other countries with respect to U.S. products. Policy approaches that might seem attractive unilaterally might appeal somewhat less in a multilateral framework. At least three potential motives apply to BCAs: reducing emissions leakage; preserving the competitiveness of U.S. manufacturers; and pressuring trading partners with less stringent climate policies to catch up. 4 These motives reflect proponents’ underlying goals of better environmental results and fairer distributional outcomes. Emissions leakage and competitiveness concerns arise from the uniquely intense incidence of the tax on EITE firms. In economics jargon, the statutory incidence of a tax falls on the person or company that gives the tax payment directly to the government. In contrast, the economic incidence of a tax falls in the lap of the person holding the hot potato after the initial taxpayer and others in the supply chain pass their costs along (Saez 2017). For example, under current law U.S. fuel distributors pay an excise tax to the federal government on gasoline upon taking it from bulk storage terminals. They pass that cost through to their customers, and the tax ends up embedded in the retail price of gasoline (Federal Highway Administration 2018). The statutory incidence falls on the fuel companies, but the economic incidence is on everyone who fills up their tanks and those further down the chain, perhaps riding in taxis and Ubers. For most goods with GHG emissions in their supply chain, a carbon tax will work the same way and eventually pass through to consumers in higher prices. However, shareholders and workers of firms that make EITE goods will likely bear relatively more of the economic incidence of a unilaterally-imposed carbon tax than other firms will bear. If they try to pass their carbon tax burden along, foreign competitors without those costs can undercut them. Such competition threatens both exports and domestic products that compete with imports, especially fungible commodities like ordinary aluminum or cement. If the U.S. carbon tax drives a product’s market share to foreign competitors, emissions from that product would rise abroad, potentially by more than they fall domestically. At the same time, American workers would lose jobs and wages and shareholders would lose wealth. Accordingly, members of Congress would include BCA authority in their bills in the hope of preempting emissions leakage and competitiveness losses and to garner support from powerful constituencies. Emissions leakage can also come from another economic force that BCAs cannot prevent. Price-based leakage occurs when major energy-using countries shift back their demand for fossil fuels and global prices for those fuels fall as a result. Lower global fuel prices increase consumption by countries that do not control their emissions. So, while BCAs can help lower competition-driven leakage, border adjustments have no direct effect on leakage that results from depressed global fuel prices. For that, we need other tools like vigorous diplomacy to promote coordinated global climate action. Some see BCAs as potential leverage in that diplomatic engagement. One can imagine negotiations in which the United States (having adopted a carbon tax) grants countries it deems sufficiently climate-ambitious an exemption from its BCAs. This scenario might start with bilateral or small multilateral agreements and expand until more and more countries are inside the climate club. In this way, the threat or impact of border adjustments, assuming they survive WTO adjudication, could pressure everyone to price carbon – or at least the carbon in their exported products.

On balance, however, I do not think that even the extraordinary economic conditions we are witnessing today are going to have much impact on the likelihood of war. Why? First of all, if depressions were a powerful cause of war, there would be a lot more of the latter. To take one example, the United States has suffered 40 or more recessions since the country was founded, yet it has fought perhaps 20 interstate wars, most of them unrelated to the state of the economy. To paraphrase the economist Paul Samuelson’s famous quip about the stock market, if recessions were a powerful cause of war, they would have predicted “nine out of the last five (or fewer).” Second, states do not start wars unless they believe they will win a quick and relatively cheap victory. As John Mearsheimer showed in his classic book Conventional Deterrence, national leaders avoid war when they are convinced it will be long, bloody, costly, and uncertain. To choose war, political leaders have to convince themselves they can either win a quick, cheap, and decisive victory or achieve some limited objective at low cost. Europe went to war in 1914 with each side believing it would win a rapid and easy victory, and Nazi Germany developed the strategy of blitzkrieg in order to subdue its foes as quickly and cheaply as possible. Iraq attacked Iran in 1980 because Saddam believed the Islamic Republic was in disarray and would be easy to defeat, and George W. Bush invaded Iraq in 2003 convinced the war would be short, successful, and pay for itself.

The fact that each of these leaders miscalculated badly does not alter the main point: No matter what a country’s economic condition might be, its leaders will not go to war unless they think they can do so quickly, cheaply, and with a reasonable probability of success.

SINGAPORE—Turmoil in the U.S. banking sector isn’t just a problem for the U.S. It also increases the risks of a global recession. Many economists expected a significant downturn in global economic growth this year even before U.S. lender Silicon Valley Bank collapsed, because of an expected pullback in spending and investment in the U.S. and Europe amid climbing interest rates. Those concerns eased somewhat early in the year, with data showing surprising economic vitality in Western economies, and the beginnings of a revival in China after Beijing in December ditched its zero-tolerance approach to Covid-19. But now some pessimism is creeping back. Though economists broadly believe that a full-blown financial crisis isn’t likely, they also see heightened risks to global growth from a shaken banking sector and the specter of tightening credit. “It is potentially a rather perilous time for the world economy,” said Eswar Prasad, professor of trade policy and economics at Cornell University. Piling banking-sector problems on top of rising interest rates in advanced economies “could have spillover effects across the globe,” he said. The immediate risk is that banks in the U.S. keep a tighter leash on lending to American households and businesses to ensure their balance sheets stay healthy and depositors sleep easy, economists say. U.S. Federal Reserve Chair Jerome Powell said Wednesday that such a scenario is “potentially quite real” and could “easily have a significant macroeconomic effect.” A U.S. lending squeeze could have an effect on global growth by pinching demand for other countries’ goods and services, such as German cars, French holidays or Chinese-made electronics. More broadly, global trade and the financial system are underpinned by the U.S. dollar. That means tighter U.S. financial conditions—such as less lending, higher borrowing costs, lower prices for stocks and other assets—can quickly spread to other economies. Banks outside the U.S., facing higher dollar funding costs, may rein in lending to domestic households and businesses, amplifying the cross-border hit from weakening U.S. imports. Heavily-indebted governments could find it harder to borrow. Global trade is highly sensitive to shifts in dollar-led financial conditions, according to a January paper by economists at the Bank for International Settlements and Seoul National University. The authors found that trade as a share of global growth expands when the dollar is weak and global financial conditions are easy, as cheap working capital allows companies to expand elaborate cross-border supply chains. When the dollar strengthens or financial conditions get stricter, trade’s share of growth shrinks. “The U.S. dollar greases the wheels of global trade and finance and, by extension, global growth,” said Sue Trinh, co-head of global macro strategy at Manulife Asset Management in Singapore.

Looking at the effect on output and employment is also interesting, especially if some people do not accept the welfare calculation based on the social cost of carbon. To analyze these effects, consider first the effect of an increasing the carbon price on employment using

where the derivation is in the proof of Proposition 5 below. Naturally, a higher carbon price lowers employment. This lower employment is driven by a lower carbon intensity, which lowers productivity ( ∂ log Ai ∂ log ˉpi < 0) and also lowers investment and thus capital ( ∂ log Ki ∂ log ˉpi < 0). Interestingly, these effects are smaller for more sustainable firms with lower si as seen from (22). Similarly, output is also decreasing in the carbon price:

In this paper we advance two arguments. The first is that basic income guarantees are unlikely to achieve the objectives of alleviating poverty, income inequality or poor standards of living, because the proposals have an inherent highly inflationary bias with disastrous consequences for the currency. An understanding of modern monetary systems elucidates why the provision of income without requiring that the recipient expends any effort in exchange drastically reduces the value of the currency. This onset of inflationary pressures, in fact, renders the basic income guarantee self-defeating. By implication then, the proposal cannot ensure the freedom and opportunity that BIG supporters claim it would. The poor bear much of the brunt of inflation and thus precisely those whom BIG aims to help suffer from that very same policy. We next argue that certain direct job creation programs, such as ELR, achieve most of the common goals that income and job guarantee supporters share, without introducing the crucial problem of inflation. We explain that such programs can be designed so that they are not coercive or demeaning. Neither should they be means tested. An ELR program is neither slavery, nor unemployment by another name. Using the Argentinean experience with job creation, we demonstrate how ELR can advance a sense of civic duty, citizenship, social cohesion, reciprocity, and community involvement while guaranteeing full employment-all without the harmful consequence of price instability. In addition the Argentinean experience demonstrates that an ELR program can contribute to the redefinition of the meaning of work, by commanding recognition that certain forms of labor, such as caring and community involvement, are socially useful. The Argentinean program Jefes de Hogar (Head of Household) has also promoted democracy by empowering individuals that had previously been marginalized. All of these consequences are considered highly desirable by basic income supporters.

Carbon taxes, and their functional equivalent disguised in the form of energy taxes, have faced political obstacles and serial failures to take effect ever since the debacle of the 1993 Clinton–Gore “BTU” tax. Now a bipartisan group of American lawmakers has  a “border carbon adjustment” tariff intended to reduce society’s use of hydrocarbons and usher in energy innovation. But carbon taxes have failed, so far, for good reason: they’re a bad idea and would do little to cut hydrocarbon use or stimulate productive innovations. And whether framed as a border adjustment or as the broad-based levy that Congress toyed with enacting three years ago, any carbon tax would be inflationary—meaning this latest proposal couldn’t come at a worse time.

It’s easy to ignore the benefits of cheap energy when, well, it’s cheap. Energy is needed for everything that is fabricated, grown, operated, or moved. Since hydrocarbons directly supply 84 percent of the world’s energy and are indirectly embodied in all the rest, the inflationary potential of any carbon tax is clear. In normal times, energy typically accounts for only about 10 percent of the cost of most products and services. But double the spending on energy, and the average overall final price tag for a product or service rises at inflationary levels. With today’s energy prices already doubled, or more, the consequences are apparent. Over half of wheat’s , for example, is a direct result of higher prices for natural gas, the fuel needed to make fertilizer.

“The main reason for our cut is that the recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” he said.

The chief economist cited resilient U.S. economic activity, saying second-quarter GDP growth was tracking at 2.3%. The rebound in consumer sentiment and unemployment levels falling to 3.6% in June also added to Goldman’s optimism.

There are good reasons why governments may not want to use carbon taxes, and one of them relates to their welfare impacts. For example, a carbon tax on fossil fuels is often regressive in its impact- hurting poorer people relatively more than richer ones. Even when it might be progressive, poorer people still suffer a welfare loss when prices rise, making their consumption basket more expensive. Devising transfers to compensate them for this loss is not a simple matter. Compensation systems may not be well developed, and it may be difficult to identify those hurt or to get funds to them. Thus, even if governments impose a tax, they may still balk at levying a carbon tax high enough to reduce emissions to the extent they desire. Another reason that governments may hesitate is that adopting new taxes can be politically difficult because there are entrenched business interests that would lose.

The core idea behind a BCA is to prevent emission “leakage” related to competitiveness effects. In this context, this includes the potential for increased emissions in countries without (or with less ambitious) carbon mitigation policy compared to other countries that put forth more ambitious mitigation plans. These incentive misalignments between trading partners reduce the net effect of an ambitious country’s policies and could even end up increasing overall emissions.

Border adjustments may also reduce the competitive pressure on industries to lower the carbon intensity of their operations and products versus manufacturers of similar products, as carbon content becomes less relevant to pricing.  Of course, consumers will still have an incentive to seek out substitutes to carbon-intensive goods, to the extent they’re available.  But the pressure on companies to become more carbon efficient versus their direct competition is diluted.

And it might be argued that by preserving jobs in fossil energy production and carbon-intensive manufacturing, border adjustments do ultimately help consumers.

The effectiveness of carbon price in reducing greenhouse gas emissions through carbon leakage is undermined due to a lack of global coordination combined with international trade. Carbon pricing aims at incentivizing firms to curb their own emissions by assigning a value to each ton of carbon dioxide emitted. Carbon can leak if local production is moved abroad in a country with lower carbon price or substituted by imports from this country. Carbon leakage does not only harm the economy (employment, profits, tax collected including through carbon pricing) but also harms our climate since the emission reductions targeted by carbon tax, or the cap on pollution allowances, are not met. 

Militaries consume enormous amounts of fossil fuels, which contributes directly to global warming. If the US military were a country, for example, it would have the 47th highest emissions total worldwide.

Bombings and other methods of modern warfare directly harm wildlife and biodiversity. The collateral damage of conflict can kill up to 90% of large animals in an area.

A trade war would do enormous damage. It could foster a resentful and aggressive China and lead to the situation foreseen by Mearsheimer (2001), where a declining America decides to halt China’s rise. Decisions for war or peace Andrew J. Nathan and Andrew Scobell’s China’s Search for Security (2012) is noteworthy for its systematic inclusion of economic factors in a security oriented analysis. The driver of China’s foreign policy is its search for security, the book claims. Where the offensive realist Mearsheimer sees regional hegemony and global power as means to acquire national security, the defensive realists Nathan and Scobell distinguish between security and hegemony: Beijing wants security but not global power. When Beijing says it wants peace it means stability so it can ‘concentrate on economic development’ (Nathan and Scobell, 2012: 28). A country’s foreign policy is driven by its factual interests, although the causal path from interest to policy may be distorted by misinformation, miscalculation, value commitments, institutional weaknesses or leadership shortcomings. Nathan and Scobell think China will remain a ‘status quo power in a system designed by the West’ but hold it possible that future Chinese leaders may challenge US pre-eminence if Washington does not keep up the economic foundation for US power (Nathan and Scobell, 2012: 13, 346, 357). What could unravel the global system would not be China’s rise but US decline. This is the main risk, as they see it. If ‘the West weakens itself to the point of creating a power vacuum’, then China will acquire bases around the world and replace the dollar with the renminbi in its foreign trade. The US would thus have to decide whether and when to resist, and this could lead to war. The recipe for peace is that the US maintains its strength and conducts a cautious foreign policy. China is likely to act rationally on the basis of its search for security (Nathan and Scobell, 2012: xi, 359). It follows from their reasoning that the risk of war will increase if China can no longer depend on the US for its economic development, while the US retains sufficient military power to believe it can win a war. Again it is seen that a politically motivated reduction in the Sino–US economic interdependence is a likely precursor to any crisis leading to war. If Nathan and Scobell’s reasoning is combined with Roach’s analysis of financial politics and Copeland’s ‘trade expectation’ argument it seems that the key to minimizing the risk of war is to rebalance the global economic system in a way allowing the major powers to remain codependent. A combination of mutual nuclear deterrence and economic interdependence is likely to preserve global peace as long as no major power expects to see a rapid decline in its relative power. Deterrence and inter-dependence are both, however, precarious. One depends on credibility, the other on the expectation that flows are kept open within a mutually beneficial financial and trading system.

From a legal perspective, import charges in WTO-compatible BCAs may not be sufficient to bring many pollution-intensive countries into a carbon-pricing coalition51,78. Moreover, the use of BCA as leverage for country-specific actions, as opposed to leakage prevention, could violate common but differentiated responsibilities principles. In international climate negotiations, BCAs could lead countries to reduce their voluntary commitments under the Paris Agreement, which would undermine the strategic value of BCA as a sanctioning instrument. China, as a prime example, responded to the EU’s proposal for import adjustments by saying such a policy would seriously undermine international efforts to fight global warming; other large non-OECD countries, such as India, Indonesia and Thailand, share the view that BCA is a protectionist and discriminatory policy measure that they will oppose81.

Technological innovation — backed by a carbon tax to make it competitive — is the essential requirement for transition to net-zero carbon emissions by 2050. And trade, by stimulating competition, is a catalyst of innovation. 

Three areas of technological transformation stand out. Australia and its Asia Pacific neighbours have a stake in each of them.

The international economic architecture built after 1945 was based on a powerful idea: economic interdependence is crucial, if insufficient, for global peace and prosperity. The International Monetary Fund, the World Bank, and the predecessor to the World Trade Organization were founded in response to the three preceding decades of ceaseless instability, when the world had been devastated by two world wars, the Great Depression, and political extremism. It had also been a period of deglobalization, in which countries retreated into increasingly isolated trading blocs. In the rubble of World War II, governments sought to construct a new system that, by linking countries in a dense web of economic ties, would consign such chaos and division to history.

For much of the past 75 years, policymakers from across the world recognized the power of economic interdependence. Countries tore down trade barriers, opening their economies to one another. On balance, their record was impressive. Closer economic integration went hand in hand with rising global prosperity, an unprecedented reduction in poverty, and an unusually long period of great-power peace. Since 1990, the share of the world’s population living in extreme poverty has fallen by three-quarters. At the center of this great leap in human well-being was a 20-fold increase in international trade volumes, which helped lift per capita incomes by a factor of 27 over the last six decades.