The failure of the emissions market that still threatens the planet

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Nearly 20 years ago, economist Nicholas Stern, in a ground-breaking report for the UK government, memorably called climate change “the biggest market failure in history.” That, unfortunately, remains largely true. The costs of emissions are still primarily borne by the planet rather than borne by polluters. The OECD says 60 percent of carbon emissions from the world's major economies are unpriced, and only 10 percent is taxed at a level that likely reflects the true cost of carbon. It is an indictment of governments and their global institutions that all this time they have not produced coordinated action. Divisions between and within rich and poor countries, institutional jealousies, and the aversion of some great powers (particularly the US) to multilateralism have impeded progress. Interestingly, one of the most likely paths to creating a global carbon pricing regime is a campaign of governments suing each other at the World Trade Organization, an institution whose credibility has been eroding for decades.

The global response to climate change and carbon emissions is inevitably linked to trade. Without convergence on carbon pricing schemes, or border measures to charge imports for untaxed emissions created during their Job Function Email Database manufacturing, there is a high risk of carbon leakage as production moves to dirtier economies. One of the largest repositories of expertise on climate change and trade is the Paris-based OECD, which conducts research and organizes technical debates among member governments. But the organization's actual policymaking function is essentially a forum for ad hoc negotiations rather than a permanent, binding legal framework, and its history as a club of rich countries weakens its legitimacy. The organization made promising progress in 2021, for example, when governments signed a draft global agreement to reduce tax evasion by multinational corporations. But the deal faces strong opposition in the US Senate and among developing countries (led by India, often the main malcontent on global economic governance issues), which complain it will reduce their incomes.



The logical place for a binding agreement on carbon and trade would be just over three hours away by train in Geneva at the World Trade Organization. But the WTO's cumbersome and politically divided negotiating function has achieved few major successes since its creation in 1995. Its member governments are now holding non-binding “structured discussions” on climate and trade. When negotiation fails, litigation fills the void. Perhaps the most substantive and immediate talks are coming from governments (India in particular, again) threatening to bring cases against the EU's carbon border adjustment measure to the WTO dispute settlement process for discriminating against their exporters. CBAM is being rolled out this year and will begin collecting taxes from 2026. It provides incentives for countries to tighten their carbon regimes by charging imports the difference between their emissions prices and those of Europe, down to the level of individual producers.