E3G

Europe’s World: An EU-China pact is key to a global climate deal

By Nick Mabey

As economies integrate, the competing needs of producers are commonly set in the public mind against those of importers and consumers. A good example of this dilemma is the way concerns over carbon leakage and loss of competitiveness (when high emitting industries are re-located to developing countries) have spurred discussion in the EU and the US on imposing tariffs on carbon-intensive imports.

Many of the claims over company relocations are overstated. Research suggests that pricing carbon is a major factor in only a small number of industries, accounting for a few percentage points of European GDP. These projections also fail to recognise the reality of global supply chains, or the potential for new technology to change the economics of energy-using sectors. As EU Trade Commissioner Peter Mandelson has asked, how do we define what is a European company in a world of global supply chains and multinational assembly lines?

Whatever the true economics, the politics of carbon leakage are nevertheless important. Unilateral action to impose border tax adjustments outside any global climate agreement would be likely to prompt retaliatory action, posing further threats to the already fragile multilateral trading system. It would also dampen trust and weaken present efforts to conclude a global climate deal in Copenhagen. Yet politicians in Europe and the US are now discussing legislation that would impose unilateral border sanctions, even if a global climate deal is in place. This undermines the very idea of the global climate negotiations; for if the “deal” turns out not to be a deal, then how are developing countries meant to accept that the industrialised nations are negotiating in good faith? The relocation of some energy intensive industries may be the price Europe has to pay to secure a global climate deal, and we cannot renege on the agreement if that is part of the outcome.

Two divergent paths lie ahead. One is the road of old-styled mercantilism and the obsessive cultivation of national champions. The other would take advantage of globalisation’s opportunities for win-win solutions that bring not only economic benefits but also energy and climate security.

Ensuring that China and other developing countries gain a sizeable economic share of the low carbon future is critical to the viability of the second path. Early movers are better able to maintain their competitive edge in a world of volatile energy prices. These potential gains may also persuade China to play a larger role in climate negotiations.

But winning public support for closer cooperation between the EU and China will not be easy, not least because of the present political tensions over Tibet. Europe’s political and business leaders must therefore begin shaping this debate on future foreign policy choices. If they fail, efforts to construct a low-carbon and secure energy future will be frustrated by the narrow concerns of special interest groups. And if we fail to secure climate security for Europe, or China, the result will be far higher economic costs than any marginal gains by energy-intensive sectors.

Bernice Lee is the Head of the Energy, Environment and Development Programme at Chatham House, the UK’s Royal Institute of International Affairs, and Nick Mabey is the Founding Director and CEO of E3G – Third Generation Environmentalism.

This article has been published in the autumn issue of Europe’s World, available here.