Nicholas Stern: We must create a level playing field for carbon emissions trading

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The only future for sustainable economic growth in the medium- and long-term is low carbon. High-carbon growth will eventually be choked off, first on high fossil fuel prices and ultimately by the massive potential costs of unmitigated climate change. Low-carbon growth offers many opportunities, but we need to manage the transition from high-carbon economies carefully.

Climate policies could distort competitiveness, but this risk applies only to a small and local share of the economy and a narrow group of companies. Claims that emissions regulations will prompt many companies to flee across borders are unsupported by evidence and are little more than slogans without numbers. The levels of carbon prices being discussed are dwarfed by factors that affect commercial decisions, such as access to markets, raw materials, skills, technologies and infrastructure, and favourable political, legal and tax regimes. For most companies, it is labour, not energy, which drives costs.

But for some industries, such as steel, aluminium, cement and paper, competitiveness might be affected in the short-term, leading to carbon leakage, with emitters relocating to avoid regulations and restrictions. Good policy and international collaboration is needed to address this risk. Ideally, a level playing field should be created. A global emissions trading scheme, for instance, would ensure a common carbon price between different regions. If such a scheme cannot be established, imbalances can be addressed through domestic measures for affected sectors, such as the allocation of emissions permits, international production standards for relevant industries and export price subsidies.

Punitive trade measures against those that do not factor in emissions costs would be damaging, especially if introduced unilaterally. The trade barriers that have been advocated are often far higher than could be justified by the actual costs, and are little more than “green protectionism”, which should be resisted. Nevertheless, we should not rule out the option of eventually imposing multilateral sanctions on “dirty” countries that remain outside international agreements.

Lord Stern, chairman of the Grantham Research Institute on Climate Change and the Environment, was speaking at the Peterson Institute for International Competitiveness.