In a significant development, the United States is reportedly preparing a fallback plan for a Global Emissions Trading Markets system in the absence of clear rules set by the United Nations climate talks in Paris (COP 21). This shift is noteworthy, as the US, which previously failed to ratify the Kyoto Protocol, is now willing to take a leading role in global carbon reduction efforts.
Countries have been cautious about globalizing and standardizing market-based carbon reduction initiatives due to past failures. Instead of a “Kyoto Protocol II,” the Paris Talks will focus on Intended Nationally Determined Contributions (INDCs). However, if the US can rally a coalition of willing nations behind a global carbon currency, it would be a significant step forward for both the environment and the global economy. Market mechanisms are more efficient than regulations, but substantial regulatory efforts will be required if the Paris Talks do not deliver. Furthermore, this move would address concerns of European industries that have borne a significant burden in global carbon reduction efforts while risking their competitiveness.
Expanding the application of carbon pricing would provide political cover for more countries to engage in carbon markets. It would enable countries to align their reduction targets with others in the market, as their competitiveness would not be undermined by disparate carbon costs. The involvement of the US in international trade is pivotal for unlocking the potential of any market, including carbon. Imagining a scenario where the US enforces a level carbon footprint playing field on imports showcases the transformative impact of such involvement.
However, while this development brings excitement, the European Union’s participation in an international carbon market seems unlikely soon. The EU’s ambition for carbon reduction is expected to remain the highest globally, resulting in significantly different carbon pricing. While a global market remains a dream, any progress made towards it is welcomed, particularly in achieving a level playing field for industries across Europe.