InvestMacro

By Noah Kaufman, Columbia University; Chris Bataille, Columbia University; Gautam Jain, Columbia University, and Sagatom Saha, Columbia University 

Rising trade tensions between the U.S. and the European Union, two of the most important global leaders when it comes to climate policy, could undermine key climate initiatives of both governments and make it harder for the world to put the brakes on climate change.

The two have clashed over the 2022 Inflation Reduction Act’s requirements that products be made in America to receive certain U.S. subsidies. The EU recently announced plans for its own domestic-only clean technology subsidies in response.

The U.S. and EU also now have competing carbon tariff proposals, and these could end up undermining each other.

In December 2022, the EU reached a provisional agreement on a carbon border adjustment mechanism. It will put carbon-based tariffs on steel, aluminum and other industrial imports that aren’t regulated by comparable climate policies in their home countries. The Biden administration, meanwhile, proposed a “green steel club” of nations that would cooperate on reducing emissions by levying tariffs on relatively high-emission imports.

At first glance, the two approaches might seem similar. But the EU and U.S. proposals reflect starkly different and arguably incompatible visions for the intersection of climate and trade policies.

A failure to align approaches risks further stoking trade tensions and would likely have international repercussions. Without multinational coalitions, dirtier, lower-cost competition will undercut emerging low-carbon technologies.

A strong transatlantic partnership is a prerequisite to greening the global economy. Without creative compromises and skillful diplomacy, the EU may find that its tariffs lead to reprisals rather than reciprocal action, and the U.S. quest to create climate clubs will not get off the ground.

EU’s textbook approach to tariffs

The carbon border adjustment mechanism, or CBAM, is tied to the EU’s flagship climate policy, its emission trading system. The system requires large European factories and other greenhouse gas emitters to purchase allowances for each ton of carbon dioxide they release. It’s a form of a carbon price.

However, if only European industries have to pay this carbon price, the EU risks domestic production’s losing out to imports from countries with weaker regulations on emissions. This phenomenon, referred to as “carbon leakage,” can result in even dirtier industrial production.

To date, the EU has avoided carbon leakage by compensating domestic producers of certain industrial products with free emissions allowances. But that approach is becoming increasingly expensive as the carbon price rises, with a recent trading range of 70 to 100 euros per metric ton. The CBAM makes it possible to phase out these free allowances by phasing in tariffs on imports from countries without comparable carbon pricing policies. Once finalized, the tariffs could be applied starting in 2026.

The CBAM has been met with some international outrage, with the “BRICS” countries – Brazil, Russia, India, China and South Africa – calling it “discriminatory” and a U.S. senator accusing the EU of going “rogue.”

In reality, the CBAM treats domestic products and imports equally by applying the same carbon price, just as any economics textbook recommends. It also aims to further global climate action by giving other countries the incentive to implement their own carbon pricing policies.

Biden’s climate club approach

Unlike the EU, the U.S. has failed to adopt a national carbon price despite several attempts. The Inflation Reduction Act instead fills the federal climate policy void largely by offering subsidies for producing clean energy.

However, subsidies to American producers won’t reduce emissions from other countries’ production of internationally traded products.

For example, steel accounts for 11% of global carbon dioxide emissions, with the vast majority from East Asia, including 53% of global production from China. Transforming Chinese production is therefore critical to lowering emissions.

Encouraging a global shift to cleaner production methods will require international cooperation, including trade measures that enable expensive low-carbon investments and penalize high-emissions steel production.

President Joe Biden needed an approach to climate tariffs that would benefit U.S. producers without requiring a politically untenable carbon price. His proposed green steel club is an agreement among countries that would commit their steel and aluminum industries to meeting certain emissions standards. Tariffs would be imposed on imports that exceed the standard or come from countries that are not signatories to the agreement.

Most U.S. manufacturers would benefit. U.S. steel typically produces fewer emissions than its competitors. The desire to exploit this “carbon advantage” has taken hold with politicians on both sides of the aisle.

Biden’s plan could be the first “climate club” of nations, consistent with the recommendations of an increasing number of policy experts. In a recent book, Charles Sabel and David Victor suggest building on the international success in phasing out ozone-depleting chemicals: The Montreal Protocol used a combination of cooperative learning, penalties and pools of resources for countries in need of technical and financial support.

Creative ways to cooperate

The two visions for climate policy tariffs involve different paths toward somewhat different goals, so they cannot easily be reconciled. The premise of the EU strategy is that tariffs are necessary to ensure that climate policies impose the same costs on domestic and foreign emitters. In contrast, the U.S. is proposing tariffs that penalize producers with high emissions.

The U.S. cannot pursue the EU approach without some form of a national carbon price. At the same time, the EU is unlikely to abandon its long-planned and laboriously negotiated CBAM, particularly to partner with a White House that may have a different occupant in two years.

There are, however, pathways forward that blend elements of both visions.

For example, parts of the CBAM, including the linkage to the EU carbon price, could be included as elements of climate clubs, including Biden’s green steel club. That may enable the EU to retain hard-fought progress on its emissions trading system.

Alternatively, some U.S. senators are pushing legislation to create a U.S. carbon border adjustment, including a domestic carbon price and a tariff on imports of some energy-intensive products like steel and aluminum. Bipartisan support for such legislation would create a basis for a durable compromise with the EU. However, even a narrow carbon price on industrial products may not be politically viable in the Republican-controlled House of Representatives.

Looking ahead

Any unilateral use of tariffs will strain sensitive geopolitical relationships.

By pursuing compromise rather than conflict, the U.S. and EU can leverage their joint economic strength to create a powerful coalition that encourages low-carbon industrial production around the globe, including in China and India, without ceding domestic advantages.

In our view, both sides have ample reasons to find common ground.

About the Author:

Noah Kaufman, Research Scholar in Climate Economics, Columbia University; Chris Bataille, Research Fellow in Energy and Climate Policy, Columbia University; Gautam Jain, Senior Research Scholar in Financial Markets, Columbia University, and Sagatom Saha, Research Scholar in Energy Policy, Columbia University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By JustMarkets

The US reporting season continues to gain momentum, but indices are reacting sluggishly. As the stock market closed yesterday, the Dow Jones Index (US30) increased by 0.31%, and the S&P 500 Index (US500) decreased by 0.07%. Technology Index NASDAQ (US100) lost 0.27%.

In the technology sector, gains in Apple (AAPL) stocks were offset by declines in Alphabet (GOOGL) stock. The US Department of Justice filed a lawsuit against Google, claiming that the search engine giant violated the antitrust laws by abusing its monopoly in advertising technology. Microsoft Corporation (MSFT), which ended the day just below opening levels, rose by 4% on the release of its report. The company’s quarterly earnings beat Wall Street estimates.

Investors are betting that the Fed will stop raising rates soon, pause briefly, and then begin cutting rates closer to the end of the year. Why are investors waiting for a rate cut? For investors, lower rates make borrowing less expensive and tend to raise the price of everything from stocks to bonds and digital assets. Fed officials predict that their key short-term rate, now at 4.5%, will eventually reach 5-5.25%. Futures markets show that most investors expect the rate to peak at 4.75-5%. Fed officials point to a robust labor market as a factor that can keep inflation high. Now at 3.5%, the unemployment rate is the lowest in 50 years. Businesses continue to raise wages to retain and attract workers, which boosts consumer spending. Employers, in turn, tend to pass on their higher labor costs to their customers in the form of higher prices. Both trends, the Fed fears, will keep inflation well above the 2% target. But the latest news suggests that the labor market is already starting to fall, and the Fed will be forced to stop raising rates.

Equity markets in Europe traded without a single dynamic on Tuesday. German DAX (DE30) yesterday declined by 0.07%, French CAC 40 (FR40) gained 0.26%, Spanish IBEX 35 (ES35) jumped by 0.33%, British FTSE 100 (UK100) yesterday closed the day down by 0.35%.

Yesterday, GfK Consumer Confidence data for Germany showed signs of further improvement. The seasonally adjusted S&P Global Eurozone PMI Composite Output Index was above the 50 mark, indicating that business activity in the region is recovering and the risk of recession is declining.

Norway’s gas riches are causing a wave of optimistic forecasts for the Norwegian krone. Danske Bank A/S and Bank of America Corp. believe the NOK currency is a bargain since Norway is now receiving trillions of kroner from energy exports. Over the past decade, the króna has lost about a third of its value against the euro. According to Morgan Stanley, the Norwegian currency is likely to rise 15% against the dollar this year.

Natural gas is rising cautiously amid projected colder weather. Growing rumors of cold weather approaching the United States and the rest of the Northern Hemisphere are boosting natural gas prices.

Asian markets also traded flat yesterday. Japan’s Nikkei 225 (JP225) added 0.57%, and China’s FTSE China A50 (CHA50) did not trade and will not trade until the end of the week due to the holidays. Hong Kong’s Hang Seng (HK50) also did not trade, India’s NIFTY 50 (IND50) decreased by 1.1%, and Australia’s S&P/ASX 200 (AU200) ended the day down by 0.06%.

The Australian dollar reached a 5-month high on inflation growth. Consumer prices jumped from 7.3% to 8.4% on an annualized basis. The core CPI quarterly reading was 1.9% in December, instead of the expected 1.6% and 1.8% previously. The preferred RBA average CPI was 6.9% annualized through the end of 2022. Interest rate futures markets raised the likelihood of a 25 basis point RBA hike at the February 7 monetary policy meeting.

In New Zealand, the Consumer Price Index rose to a 7.2% annualized rate in the fourth quarter, slightly above analysts’ expectations of 7.1% but below the RBNZ forecast of 7.5%. The data suggests that the RBNZ will raise interest rates by another 0.5% at its next meeting.

The key consumer price indicator in Singapore remained at 5.1% y/y, slightly higher than forecast. Overall inflation fell to 6.5% year-on-year from 6.7%. The central bank has previously stated that core inflation is likely to remain around 5% in early 2023. It also forecast a core inflation rate of between 3.5% and 4.5% in 2023, with the overall inflation rate ranging from 5.5% to 6.5%.

The Japanese prime minister said Sunday that he would appoint a new governor of the Bank of Japan next month, as Kuroda’s second five-year term expires on April 8.

S&P 500 (F) (US500) 4,016.95 −2.86 (−0.071%)

Dow Jones (US30) 33,733.96 +104.40 (+0.31%)

DAX (DE40) 15,093.11 −9.84 (−0.065%)

FTSE 100 (UK100) 7,757.36 −27.31 (−0.35%)

USD Index 101.94 -0.20 (-0.20%)

• – Australia Consumer Price Index (q/q) at 02:30 (GMT+2);
• – Singapore Consumer Price Index (m/m) at 07:00 (GMT+2);
• – German Ifo Business Climate (m/m) at 11:00 (GMT+2);
• – Canada BoC Interest Rate Decision at 17:00 (GMT+2);
• – Canada BoC Monetary Policy Report at 17:00 (GMT+2);
• – US Crude Oil Reserves (w/w) at 17:30 (GMT+2);
• – Canada BoC Press Conference at 18:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By Joshua R. Smith, University of Washington and Zerina Kapetanovic, Stanford University

This experimental setup shows an ultra-low-power wireless communications device that could one day be used in tiny remote sensors.
Zerina Kapetanovic, CC BY-ND

A new ultra-low-power method of communication at first glance seems to violate the laws of physics. It is possible to wirelessly transmit information simply by opening and closing a switch that connects a resistor to an antenna. No need to send power to the antenna.

Our system, combined with techniques for harvesting energy from the environment, could lead to all manner of devices that transmit data, including tiny sensors and implanted medical devices, without needing batteries or other power sources. These include sensors for smart agriculture, electronics implanted in the body that never need battery changes, better contactless credit cards and maybe even new ways for satellites to communicate.

Apart from the energy needed to flip the switch, no other energy is needed to transmit the information. In our case, the switch is a transistor, an electrically controlled switch with no moving parts that consumes a minuscule amount of power.

In the simplest form of ordinary radio, a switch connects and disconnects a strong electrical signal source – perhaps an oscillator that produces a sine wave fluctuating 2 billion times per second – to the transmit antenna. When the signal source is connected, the antenna produces a radio wave, denoting a 1. When the switch is disconnected, there is no radio wave, indicating a 0.

What we showed is that a powered signal source is not needed. Instead, random thermal noise, present in all electrically conductive materials because of the heat-driven motion of electrons, can take the place of the signal driving the antenna.

No free lunch

We are electrical engineers who research wireless systems. During the peer review of our paper about this research, published recently in Proceedings of the National Academy of Sciences, reviewers asked us to explain why the method did not violate the second law of thermodynamics, the main law of physics that explains why perpetual motion machines are not possible.

Perpetual motion machines are theoretical machines that can work indefinitely without requiring energy from any external source. The reviewers worried that if it were possible to send and receive information with no powered components, and with both the transmitter and receiver at the same temperature, that would mean that you could create a perpetual motion machine. Because this is impossible, it would imply that there was something wrong with our work or our understanding of it.

One way the second law can be stated is that heat will flow spontaneously only from hotter objects to colder objects. The wireless signals from our transmitter transport heat. If there were a spontaneous flow of signal from the transmitter to the receiver in the absence of a temperature difference between the two, you could harvest that flow to get free energy, in violation of the second law.

The resolution of this seeming paradox is that the receiver in our system is powered and acts like a refrigerator. The signal-carrying electrons on the receive side are effectively kept cold by the powered amplifier, similar to how a refrigerator keeps its interior cold by continuously pumping heat out. The transmitter consumes almost no power, but the receiver consumes substantial power, up to 2 watts. This is similar to receivers in other ultra-low-power communications systems. Nearly all of the power consumption happens at a base station that does not have constraints on energy use.

A simpler approach

Many researchers worldwide have been exploring related passive communication methods, known as backscatter. A backscatter data transmitter looks very similar to our data transmitter device. The difference is that in a backscatter communication system, in addition to the data transmitter and the data receiver, there is a third component that generates a radio wave. The switching performed by the data transmitter has the effect of reflecting that radio wave, which is then picked up at the receiver.

A backscatter device has the same energy efficiency as our system, but the backscatter setup is much more complex, since a signal-generating component is needed. However, our system has lower data rate and range than either backscatter radios or conventional radios.

What’s next

One area for future work is to improve our system’s data rate and range, and to test it in applications such as implanted devices. For implanted devices, an advantage of our new method is that there is no need to expose the patient to a strong external radio signal, which can cause tissue heating. Even more exciting, we believe that related ideas could enable other new forms of communication in which other natural signal sources, such as thermal noise from biological tissue or other electronic components, can be modulated.

Finally, this work may lead to new connections between the study of heat (thermodynamics) and the study of communication (information theory). These fields are often viewed as analogous, but this work suggests some more literal connections between them.

About the Author:

Joshua R. Smith, Professor of Electrical and Computer Engineering and of Computer Science and Engineering, University of Washington and Zerina Kapetanovic, Acting Assistant Professor of Electrical Engineering, Stanford University

This article is republished from The Conversation under a Creative Commons license. Read the original article.