Carbon Taxes and Global Decision-Making

The European Union's decision to impose a carbon levy on air travel to Europe had the best of intentions but provoked howls of protest. The conundrum now facing the EU emphasizes the myriad of interdependencies and impacts that today transcend borders.
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Co-written by Joshua WallaceThe European Union's decision to impose a carbon levy on air travel to Europe had the best of intentions but has provoked howls of protest from some of the world's largest economies, with both China and India having stated they will not comply. The conundrum now facing the EU -- whether to double down on the idea, modify it, or withdraw the concept altogether -- serves to emphasize the myriad of interdependencies and impacts that today transcend borders.

The EU carbon levy on air travel became effective from January 1st, though airlines will only be billed next year after 2012's carbon emissions have been calculated. The EU insists that the cost of the tax is manageable for airlines and is necessary to help it achieve its goal of cutting carbon emissions by 20% by 2020. China and India consider the tax a unilateral trade levy disguised as an attempt to fight climate change. Fears have surfaced that the deadlock over this issue could spark a trade war resulting in retaliatory measures that would damage all sides. The issue has served to epitomize the brewing battle between the developing and developed worlds over supremacy of the emerging global financial and regulatory structure.

The carbon tax has captured the changing dynamics of global decision making. For many years the West has assumed de facto leadership by determining the framework of global standards and norms, as it has been uniquely positioned to do so, given its resources and capacity to drive its vision of the future forward. However, with western countries slipping from the economic and political pedestal they have long held -- by virtue of their lacklustre growth rates and failure to adapt to the new realities of the 21st century -- the pendulum has been shifting in favor of emerging countries with greater rapidity over the last decade.

With the pendulum shifting, the economic, political and financial clout of the developing world has risen in tandem, and the unilateral decisions taken by western nations have begun to prompt emerging countries to coalesce into unified blocs. Brazil made it clear that at this week's BRICS summit that it will be seeking a united response to the manner in which the EU and US have reacted to the Great Recession, which they believe has damaged medium-term growth prospects for emerging markets. The World Bank has just announced that it plans to partner with a new development bank to be created and jointly funded and sponsored by the BRICS countries. And China is in the process of creating an offshore bond market for the renminbi, to facilitate its internationalization. This may ultimately position the RMB to become a meaningful alternative to the dollar and euro as a global currency in due course. Unilateral and collective actions by emerging countries will undoubtedly afford them greater bargaining power, which will become manifest sooner than many realize.

The Bretton Woods institutions (the IMF and World Bank) -- historically led by the US and Europe -- are also beginning to be impacted by the shifting pendulum, with more and more emerging economies demanding a greater say in how the institutions are run, and by whom. China has demanded a say in the selection of the next World Bank president, and the BRICS nations have all threatened to withhold a portion of the additional financing requested by the IMF to avert a European sovereign debt crisis unless they gain greater voting power. While Christine Lagarde managed to maintain the European monopoly of IMF directorship, Jim Yong Kim -- the US candidate to head the World Bank -- faces fierce competition from a range of candidates from across the developing world -- and rightly so.

The rise of the BRICS nations as viable alternative donors to the developing world, and the idea of an alternative development bank being touted by the BRICS nations, underscore the possibility for meaningful change led by the emerging world. If the institutions that have governed the world economy since their post-war inception are unable to adapt to the new realities, then the emerging world will not wait for them. The flip side of that is that those countries which no longer truly possess 'developing' country status -- such as China, with its immense economy and foreign exchange reserves -- should no longer claim that status and continue to receive funds from multilateral development institutions. Doing so takes precious resources away from truly needy countries and takes credibility away from the collective emerging economy argument that the system must change.

How the EU will respond to its carbon tax conundrum remains unclear, but what is becoming increasingly obvious is that the days of unilateral attempts to impose developed country will on the developing world are numbered. The world already finds itself at a crossroads. The developed world would be wise to embrace the 'rise of the rest,' for it is a force that is unstoppable and has already manifest itself in surprisingly effective ways. If you want a vision of the future, look no further than the important action the BRICS countries have taken this past week.

*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk consulting firm based in Connecticut (USA), Director of Global Strategy with the PRS Group, and author of the new book Managing Country Risk ( Joshua Wallace is a research analyst with CRS.Daniel can be followed on Twitter at: can be followed on Twitter at:

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