TAX THE EXTERNALITIES:

In his How To Avoid A Climate Disaster, Bill Gates proposes a quintupling of the $22 billion he estimates the government now spends on "clean energy R&D". One example is small modular reactors, a technology into which TerraPower (founded by Bill Gates), will pour $1 billion and more. Gates hopes these SMRs will produce power at a cost competitive with new combined-cycle gas plants. 

Other developments include work being done by private cement companies -- which account for about six per cent of global emissions -- to develop concrete that can store carbon dioxide (adding 15 per cent to costs). European and American steel makers are researching ways to make steel without using fossil fuels (adding more than 60 per cent to capital spending). About 80 per cent of the burden will fall on those two industries. 

The broader point is that, to be successful, R&D must draw on the financial and intellectual resources of private-sector players to the greatest extent possible, particularly players sensitive to the possibility of purchasing carbon offsets to net against their emissions if that is more efficient than new manufacturing processes. 

But R&D take a while to get results. Gates says that TerraPower's design "exists only in our supercomputers" and that "we're still years away from breaking ground on a new plant." Losses will be incurred by investors exploring many approaches, and the patience of a democratic polity sorely tested. 

During this period of research and development, which should include deepening markets for carbon offsets which provide the "net" in "net-zero carbon emissions", adaptation might take pride of place. After all, over generations people have adapted to changes in climate because that is what they had to do to survive and be comfortable. 

The process of mitigation has a virtue: it can be costly. As voters see with their own eyes and feel in their own wallets the cost of mitigation and adaptation, carbon taxes might come to be seen as the least expensive, most efficient and fairest way to cope with warming.

The IPCC bureaucracy has not been the only one at work since Paris. The European Commission has unloaded a fully developed, 291-page "Proposal for a Regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism". The essence of the proposal is a border tax on the carbon content of imports. This comes most perfectly upon the hour in America: President Biden needs quite a lot of cash, "pay-fors" as they are called by legislators, to fund his infrastructure programme and welfare state expansion. A carbon border tax -- Democrats prefer "a polluter import fee" -- would provide at least some of that cash: about $500 billion over the next decade, according to Maryland senator Chris Van Hollen. 

Putin's Russia reluctantly and belatedly joined the Paris accord in 2019, but with no intention of reducing emissions: a carbon border tax would hit his country's troubled economy and its industries hard. KPMG says that border-tax surcharges on Russia's high-carbon-content exports would total $60 billion between 2022 and 2030. But RUSAL, Russia's giant aluminium producer, is spinning off its dirtiest plants into a subsidiary that will sell only in domestic markets, and will use its cleanest plants to serve export markets. Such "circumventions" are anticipated in Article 27 of the European Commission-proposed regulations. 

China also would be hard hit. Its manufacturers rely heavily on coal-fired electricity: about 58 per cent of China's energy use is coal-based (the roughly comparable US figure is 23 per cent), and since 2011 China has consumed more coal than the rest of the world combined. Its CO₂ emissions per tonne of steel are about three times those in the US and the EU. Little wonder that China's vice-environment minister, Zhao Yingmin, says a border tax is a form of protectionism that will hurt global growth. 

Call it what they will, the Chinese authorities know the EU will present them with a choice over the next decade: reduce the emissions embedded in your exports -- thus raising manufacturing costs -- or face border taxes that will reduce their competitiveness in the EU and US markets that account for around 40 per cent of China's exports.

Brussels's proposal must be approved by the European Parliament, 27 countries with widely varying interests. Negotiating details with the industries affected will not be easy, and is expected to take two years. But the goal is worth fighting for. Markets work better if prices reflect production and consumption costs more accurately. And pollution charges, rebated for lower earners, send signals not only to consumers considering how to spend their incomes, but to investors who decide where to employ their capital. Asian investors such as the Mitsubishi UFJ Financial Group are already joining US banks in ending the flow of capital to coal projects. 

Climate change measures expand the reach of government. But markets are more efficient than men in making most decisions directing resources and only a well-functioning price system can process such information efficiently. Embed the social cost of emissions in the prices consumers pay and innovators face, and most of the rest that needs to be done will be done by the millions of participants in the world's energy markets.

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