In Short : The statement emphasizes that carbon pricing, while a tool to address climate change, poses challenges and needs global coordination. The World Bank economist Damania likely suggests that the effectiveness of carbon pricing mechanisms, such as carbon taxes or cap-and-trade systems, requires international cooperation to avoid carbon leakage and ensure a level playing field. Tackling carbon pricing at a global level is crucial for fostering equitable and efficient solutions to mitigate climate change.
In Detail : At a time when the United Kingdom (UK) and the European Union (EU) are looking to lower carbon emissions through various measures, including taxation, Richard Damania, Chief Economist, Sustainable Development Practice Group at the World Bank, told Moneycontrol in an interview that carbon pricing is a “double-edged sword” and needs to be addressed globally.
“If one country wants to have carbon pricing to protect its forests but a producer in another country does not protect its forests or aims to reduce carbon emissions, then the latter gets a competitive advantage. That means countries that are willing can’t go ahead with these steps because then they will lose business. So, unless it is a global effort, the problem of competitive disadvantage is not going to be addressed,” Damania says.
Carbon pricing, or putting a price on carbon, entails capturing the external cost of emissions and consequently implementing steps to bring them down by driving investment into cleaner options. One of the measures to achieve this is a carbon tax, which directly sets a price on carbon by defining a rate of levy on greenhouse gas emissions.
The EU has introduced a Carbon Border Adjustment Mechanism (CBAM) starting October 1 this year. CBAM will translate into a 20-35 percent tax on select imports into the EU starting January 1, 2026. India is also said to be considering a carbon tax, especially for exports to European nations.
Excerpts from the interview:
What is your outlook for world trade given climate concerns, especially with certain countries leaning on measures like a carbon tax?
First, trade is vital to moving the economy and also for sustainability. Suppose we did not have trade; then all of us would have to produce our own goods. If you wanted to eat rice, which is a very water-thirsty crop, and you were living somewhere very dry, you would have to grow your own rice. With trade, countries that get more rainfall, like Thailand and parts of India, can grow rice and export it to nations that cannot grow rice. So, you can have a trade that promotes sustainability when it abides by a country’s natural comparative advantage. So, if you are good at doing something, you produce it and sell it. This is not being fully recognised yet, but that recognition is growing now. The World Trade Organisation (WTO) is also pushing for this recognition.
In terms of carbon pricing, it is a double-edged sword. If one country wants to have carbon pricing to protect its forest but a producer in another country does not protect its forest or aims to reduce carbon emissions, then the latter gets a competitive advantage. That means countries that are willing can’t go ahead with these steps because then they will lose business. So, unless it is a global effort, the problem of competitive disadvantage is not going to be addressed. Therefore, I think when we talk about global issues, we need to address those issues globally.
Having said that, you can always make adjustments for special needs. We have always argued that in low-income countries, one can afford to make exemptions. We cannot be rigid about that. Certain exemptions already exist for many countries.
Should developed nations take the lead in funding the transition to climate-friendly practices?
Developed and richer countries need to be in a leadership position on climate finance. Having said that, there are areas in which low-income countries are good at abating emissions. And one great example is the forests of the world. Most of the forests in the world are in developing or middle-income countries, and in the language of economics, they have a natural comparative advantage in terms of preserving their forests. We did a study called Nature’s Frontier that looked at the comparative advantage of forest cover and sequestration of greenhouse gases with forest cover and agricultural production. There are clear patterns across countries. Some countries can very cheaply sequester carbon dioxide for their forests, and it makes sense to compensate them for the opportunity costs because it is so much cheaper. I am hopeful we will see steps taken to protect forests.
India has committed to cut its emissions to net zero by 2070. Is that a reasonable goal?
I am pretty sure India would not have come up with that goal if they weren’t planning to actually do it. Generally speaking, at least in terms of energy aspects, India has, by any standards, done well, if you look at their share in the mix. Long before any of these discussions started, India worked very hard to change its deforestation trajectory. In the 1970s or 1980s, you could take a map and see the shrinking forest frontier, but that has changed over time. I think there are positive signs on the horizon. India also has a massive scale, so if you create a market for something, you will get the demand for it. Therefore, when you get economies of scale, you can produce more cheaply. So, there is a lot of promise; if things go well, then India’s net zero target seems reasonable.
Are wars making it difficult for nations to focus on and push for climate-friendly steps?
I think the wars are terrible; they distract attention not just from climate but from all sorts of worthy things the world needs to do. It is a tragedy for the world. I hope there can be peace. I think negotiated settlements are more durable and sustainable than settlements that are reached by virtue of violence. Wars absorb so much money that if we threw a fraction of that money into going green, the world could have gone green. Wars are a terrible tragedy, a terrible distraction, unnecessary, and unwarranted.
In the context of climate change, do you see India being able to sustain its current pace of economic growth?
Climate change is a longer-term constraint, and it hits through adaptation. Science makes it very clear that agriculture will not benefit from climate change in India; it will actually suffer. So, it could become an impediment to India’s economic growth in the long term. On the positive side, the more you invest in human capital and education, the less you will rely on agriculture. Trade is also going to be very important and necessary to adapt to climate-friendly practices.
How long will India sustain its economic growth at the current pace?
Even if not at this pace, I think growth will be sustained well over the historic rate of growth because the Indian economy has so much going for it. Currently, the growth trajectory is playing to India’s strengths as it is being driven by the digital enterprise. When growth was being driven by other forms of economic enterprise, I think other countries had a greater comparative advantage. I think the current setup is such that it will benefit India.