IN JUNE THE IMF made the last of many calls from economists for market-based policy to tackle climate change. “Carbon pricing … is the cheapest option to drastically cut emissions,” he said in a document written ahead of a meeting of the leaders of the g20 group of large economies. Carbon taxes, as this newspaper has long argued, can be a powerful way to force polluters to pay for the damage they cause to the environment by burning fossil fuels.

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In the absence of the political will for a global tax, many places are going it alone. The World Bank estimates that 45 countries and 34 subnational jurisdictions have adopted some form of carbon pricing, ranging from taxes to emissions trading systems. But these programs only cover about a fifth of global greenhouse gas emissions. New research shows that such piecemeal progress can have unintended consequences.

A recent article by Luc Laeven and Alexander Popov of the European Central Bank, published by the Center for Economic Policy Research (CEPR), analyzes data on more than 2 million loan tranches involving banks lending across borders between 1988 and 2021, a period in which many countries imposed carbon pricing. The authors find that carbon taxes at the national level have led banks to reduce lending to coal, oil and gas companies at the national level, but also had the perverse consequence of causing them to increase such lending abroad. The effect, they write, is “immediate” and “economically significant”. The change was most pronounced for banks with large fossil fuel loan portfolios, and loans were more likely to be directed to countries without carbon taxes.

This conclusion follows a CEPR document which revealed that banks are increasing cross-border lending in response to stricter climate policies in their country, the effect being more evident for banks with previous experience of international lending. Steven Ongena of the University of Zurich, one of its authors, argues that banks “use cross-border lending as a tool for regulatory arbitrage” by shifting dirty loans to countries with more lax climate policies.

The results suggest that fighting carbon is a lot like squeezing a ball. Press too hard at the same time and it may burst, but only squeeze in a corner and the air will simply flow where there is less pressure. These effects also reflect concerns about leaks in industrial markets. The EUThe carbon pricing system has used it to grant exemptions to large emitters, lest they otherwise move production overseas. Now as the EU seeks to fill these gaps, it envisages a mechanism of adjustment of the carbon border to level the playing field.

Yet national carbon pricing remains a policy worth pursuing, says Tara Laan of the International Institute for Sustainable Development, a think tank. MM. Laeven and Popov conclude that, even after accounting for their efforts to move dirty loans abroad, carbon taxes somewhat reduce the net fossil fuel lending of the banks studied, as they further reduce domestic lending. Uday Varadarajan from MRI, another think tank, agrees, but points out that complementing national carbon pricing policies with measures to discourage leakage, for example by urging greater transparency, could strengthen the impact of carbon pricing systems. carbon pricing.

The best solution, of course, would be global adoption. The IMF suggests that high-emitting countries start by adopting a modest carbon “floor” to provide a stepping stone to a global price. As evidence of the perverse consequences of localized pricing systems accumulates, the main task of policymakers is to orchestrate global squeeze.

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This article appeared in the Finance and Economics section of the print edition under the title “Squeezing the balloon”

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