With the political will for a global tax lacking, many places are going it alone. The World Bank reckons that 45 countries and 34 subnational jurisdictions have adopted some form of carbon pricing, ranging from taxes to emissions-trading systems. But these schemes cover only about a fifth of global greenhouse-gas emissions. New research shows that such piecemeal progress can have unintended consequences.
A recent paper by Luc Laeven and Alexander Popov of the European Central Bank, published by the Centre for Economic Policy Research , analyses data on more than 2m loan tranches involving banks doing cross-border lending between 1988 and 2021, during which time many countries imposed carbon pricing.
The findings suggest that cracking down on carbon is a bit like squeezing a balloon. Press too hard all at once and it may pop, but squeeze only in one corner and the air will simply flow to where there is less pressure. Such effects also mirror concerns about leakages in industrial markets. The’s carbon-pricing scheme used to grant exemptions to heavy emitters, for fear that they would otherwise move production abroad.
Yet domestic carbon pricing is still a policy worth pursuing, says Tara Laan of the International Institute for Sustainable Development, a think-tank. Messrs Laeven and Popov conclude that, even after accounting for their efforts to shift dirty lending overseas, carbon taxes do somewhat reduce net fossil-fuel lending by the banks studied, because they lower domestic lending by more.
Carbon taxes would only make sense at all if they were applied evenly everywhere. But there is no authority in the world that can do that. Far better than Pigouvian taxes is allowing the private sector to work: reduce spending, reduce tax rates, and reduce regulation.
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