Today’s FT reports that John Kerry has suggested that the U.S. would be willing to link a U.S. carbon trading system to that of the EU. I have heard proposals for such a transatlantic carbon market, but I have never understood the logic of how it would work politically. Maybe some one can explain this to me.
Here is the problem:
Imagine that the US and Europe decide to partner, and between them decide to allocate (for simplicity a nonsensical number) 1,000 emissions permits shared equally across all industries. Lets further say that, say, Germany, finds itself in a bit of economic trouble in its economic competitiveness for auto manufacturing, and decides to create an exemption for its industry under the trading plan, and allocates its industry an additional 50 permits. This decision raises several difficult questions. Among them:
1. In this example, would the German government accept the need for U.S. acceptance of changes to its economic policies? If the situation were reversed would the US public accept having to get EU approval for changes to its economic policies?
2. If Germany could act unilaterally, then its decisions would have an effect on carbon prices (it is a market after all), with direct effects on the U.S. economy. Would U.S. voters be happy knowing that they could be, in effect, taxed without representation?
So in either case — shared decision making or unilateral decision making — linked carbon markets across sovereign states are a political nightmare. And in democratic systems you can’t eliminate the possibility for policy makers to tinker with policy.
The only solution I can see is for a linked carbon market to work would be for the U.S. to join the EU, which doesn’t really seem likely. Barring a global carbon authority with the right to overrule national governments, linked carbon markets seem a fantasy. But maybe someone can show me what I might have missed.