Save the Environment, Save American Democracy

The U.S. withdrawal from Afghanistan got all the attention, but it is not the only important change to American foreign policy this year. In the same month that President Joe Biden declared he would end the United States’ longest war, he also announced a target for dramatic reductions in America’s greenhouse gas emissions by 2030. Fulfilling this promise will be difficult in view of partisan polarization and thin Democratic majorities in Congress, but doing so is essential for maintaining a livable environment for the twenty-first century.

Biden’s announcement, delivered on Earth Day, holds the potential for opening a new chapter in the political economy of the United States. His target of reducing emissions by roughly 50 percent by 2030, on the way to reaching net zero emissions by 2050, will entail a massive reorientation of the United States’ economy and its foreign policy. But the gains from doing so would be equally massive: the Biden administration could rescue the global environment and renew the tattered U.S. social contract by advancing a pro-climate vision that inspires a new generation of Americans.

Decarbonization requires creative destruction. The United States must take steps that will result in the demise of the fossil fuel economy and its replacement with a clean energy economy that would be both more efficient and better for people’s health and welfare. Multiple reports demonstrate how technological advances have made this feasible: mass clean electrification that fuels an electric vehicle revolution is possible now, and other building blocks for a green economy, from hydrogen-fueled vehicles to very low-emission industrial processes, are on the cusp of becoming a reality.

This effort would require substantial government investment in clean infrastructure and major changes to industrial policy. However, it would also create millions of jobs assembling wind turbines, retrofitting buildings, and constructing new manufacturing facilities. The benefits of such green reindustrialization are enormous and the long-term economic costs modest, especially compared with the costs of inaction. For reasons of both equity and political viability, the federal government also needs to use its fiscal resources and regulatory powers to ensure that the new jobs in renewable energy are as well paying and unionized as the jobs in fossil fuel industries that they replace.

Climate policy is not just domestic policy: it is foreign policy. For U.S. environmental efforts to succeed, they must not compromise the global competitiveness of American industry or encourage greater emissions by its trading partners. Climate policy must therefore be multilateral, allowing the United States and countries across the globe to take bold steps toward decarbonization without seriously damaging domestic industries and generating tremendous political resistance.

TOOLS OF THE TRADE

While domestic policy goals often conflict with foreign policy objectives, this is not the case with climate policy today. The United States faces a historic opportunity simultaneously to help save the planet, build social solidarity at home, and strengthen ties with its allies in Europe and Asia.

Between 1947 and 2017, U.S. trade policy was directed at reducing protectionist barriers both at home and worldwide. This objective was first accomplished through reciprocal trade agreements and then through international institutions such as the General Agreement on Tariffs and Trade and the World Trade Organization. A fundamental rule of GATT and WTO is nondiscrimination: foreign supplies may not be treated in materially different ways than domestic suppliers, except under strictly defined circumstances.

The European Union has historically been a major proponent of free trade, but its approach to the climate challenge is now causing it to adjust course. In July 2021, the European Commission proposed a path that would make it the world’s first economic bloc to reach net-zero greenhouse gas emissions by 2050. The plan, dubbed the European Green Deal, would extensively revise EU laws and regulations in eight major policy areas and commit one trillion euros to climate-related investments. It would also expand the EU’s carbon market, known as the European Union Emissions Trading System. The EU ETS requires industries in the European Union to purchase carbon credits to offset their emissions—and for the first time, greenhouse gas emissions now incur a significant price, roughly 55 euros per ton of carbon. The commission can take some of these actions on its own but will need approval by the European Council and member governments for the most important measures.

Climate policy is not just domestic policy: it is foreign policy.

If the EU were to adopt this policy without levying tariffs against outsiders, it would severely disadvantage local industries and economic sectors. It would also do little to help the environment: manufacturing would shift to countries with weaker rules, driving up those countries’ emissions. The European Green Deal therefore includes a “carbon border adjustment mechanism”—essentially a tariff imposed on imports of industrial goods covered by the emissions trading regime.

The CBAM would focus on industrial sectors that are big carbon emitters, and its penalties would apply only to countries lacking comparable domestic carbon fees in order to equalize costs on domestic and foreign producers. If enacted unilaterally, it would surely face objections under WTO rules. Not surprisingly, the Organization for Economic Cooperation and Development (OECD) has held high-level meetings on this issue to reconcile a CBAM with WTO rules. These meetings have exposed extensive disagreement on several fronts, including objections raised by the Biden administration.

A CBAM unilaterally instituted by the United States would encounter the same problems as a measure enacted by the EU. Both policies are guaranteed to generate tremendous political resistance from trading partners, and suffer from the economic inefficiency of tariffs. However, a multilateral CBAM is an entirely different story, which is why the EU and OECD initiatives present the United States with a historic opportunity—as well as a difficult negotiating challenge.

If the United States were to enact a CBAM in agreement with the European Union, it would both exempt the EU from any penalties and provide strong incentives for other countries to follow suit. The combination of a U.S. and an EU CBAM, introduced in coordination with each another, would also encourage China and other countries to enact their own carbon-price measures to avoid being subjected to U.S. and EU tariffs.

The beauty of this arrangement is that no tariffs would ever need to be levied. Politicians who are serious about reducing climate change should leap at the chance to increase their own domestic carbon prices while shifting blame to foreign governments. A multilateral CBAM with near-universal adherence could avoid having any negative effects on trade and could generate a win-win-win situation—economically, politically, and environmentally.

The Biden administration could renew the tattered U.S. social contract by advancing a pro-climate vision.

This policy would have the dual benefits of averting a trade war and combating climate change. Senate Democrats are already developing plans for a border carbon tax. The Biden administration should embrace these proposals and shape them in a coherent multilateral way rather than resisting them.

The challenge is that a carbon border tax will be tricky to implement technically unless the United States sets a price on carbon emissions, which is politically unlikely at least in the short run. In the absence of a carbon price, the calculations needed to ensure comparable levels of climate regulation will be difficult. Still, economists see it as feasible.

Two other major developments over this past summer add promise and urgency to the CBAM issue. Under Prime Minister Yoshihide Suga, Japan has renewed its climate commitment by pledging to reduce emissions by 46 percent by 2030 and reach net-zero emissions by 2050. And on July 16, China opened its carbon trading market under its new nationwide Emissions Trading System. Prices in China are still low—but the EU ETS also began with low prices, and carbon credits became more expensive with time. The more serious Japan and China are about curbing emissions, the more attractive an initiative to implement CBAMs globally should be to them.

SEIZING THE MOMENT

The Biden administration should see an effective climate policy not only as essential for the health of the planet but also as a way to unite Americans around a shared sense of national purpose. When it comes to the environment, trusting fully in the efficiency of markets is unrealistic because of market failures, which occur when the costs of pollution are not paid by the polluter. Vigorous government responses are necessary to correct market failures that pose existential threats to human life on this planet.

Over the past two decades of the “war on terror,” the United States has witnessed a breakdown of social cohesion that has both threatened its democracy and made vigorous climate action more difficult. The Biden administration’s withdrawal from Afghanistan provides it with an opportunity to reverse these trends.

The United States’ extreme polarization has weakened its foreign policy. A pro-climate policy at home, coupled with measures to encourage other countries to adopt similar policies, could help restore Washington’s global leadership. Organized with sensitivity to issues of social equality in the United States, the push for decarbonization could help provide the sense of purpose to forge a broad-based political coalition that survives from election to election. This would in turn help rebuild a sense of national solidarity: by generating well-paying green jobs and rebalancing the social contract between the wealthy and the working class, policies designed to both save the climate and reduce inequality could regenerate social cohesion and anchor a more consistent U.S. foreign policy.

The Biden administration faces serious obstacles in Congress to placing the United States on a path toward decarbonization, and the multilateral carbon border adjustment mechanism that is necessary for decarbonization will be difficult to negotiate. But the White House should not be deterred. Already, wildfires and floods in the United States, as well as similar emergencies in China and Germany, are providing vivid illustrations of the destruction that will be wrought by a climate disaster. If Biden succeeds in implementing a multilateral pro-climate policy, he will achieve three essential goals: sustaining the world’s environment, bolstering the United States’ global leadership, and strengthening American democracy.