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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Economists are rarely ever unanimous. But one matter on which they almost all agree is the need for carbon pricing. Their support is paying off. The principle that polluters should pay is in increasing force around the world. In an interview with the Financial Times last week, Ngozi Okonjo-Iweala, the head of the World Trade Organization, said that globally there were 78 different carbon pricing and taxation mechanisms. They cover close to one-quarter of international emissions, up from just 5 per cent in 2010, according to the World Bank.

The expansion of carbon pricing policies is welcome. They provide an incentive for polluters to shift to cleaner energy sources and to invest in green technology and efficiency. Emissions covered by the EU’s Emissions Trading System — which combines a cap on emissions with a mechanism to trade allowances — have fallen by close to 40 per cent since 2005. China is looking to expand its ETS; Turkey and Brazil plan to introduce one, too. But as more nations place a price on their carbon emissions, whether through taxes, trading schemes or indirectly via regulation, global trading tensions are also rising.

The EU’s carbon border adjustment mechanism, launched last year, is a case in point. Eventually it will require exporters to the bloc, who pay lower or no carbon prices at home, to pay a levy linked to the EU’s carbon price. The idea is to level the playing field for European manufacturers that pay the ETS. But it is already triggering complaints from trading partners — in particular, that it burdens poorer nations with additional costs and administration. Countries could levy equivalent carbon taxes at home, to avoid the border charges, but they struggle to do so politically, or think it is unfair they should have to.

Okonjo-Iweala says the answer is a global carbon price. That is logical. Aligning carbon price regimes would reduce trade frictions, and alleviate concerns around arbitrage, where heavy emitters move to areas with lower prices. Reaching an agreement on prices, let alone regulatory equivalence, at an international level, however, will not be easy — or fast. And given signs that the world is warming faster than expected, carbon prices swiftly need to grow wider, and higher.

There is a way forward. First, more governments should realise that hesitancy over carbon pricing is increasingly futile. The world is shifting away from fossil fuels, and green subsidies are expensive. Politicians can build support at home by using revenues from carbon taxes to cushion their impact, reduce debt, or raise public investment. Income from carbon pricing schemes globally surpassed $100bn last year, a record.

Second, as more countries adopt their own carbon pricing, trade distortions and threats to competitiveness will ease. Indeed, the potential additional cost of trading with the EU, has jolted others into action. Given its prominence in global trade, expanding the bloc’s CBAM to more industries, will in turn help widen the scope of carbon pricing elsewhere. The US is now exploring carbon pricing on its imports, too.

Third, however fraught, efforts to synchronise global trade and climate policy should continue. Nations will want to adopt bespoke carbon measures, but over time they can be clubbed together. Multilateral institutions can champion this bottom-up process. That means providing expertise and administrative support to developing nations seeking to develop carbon regimes, and acting as a forum to nudge the biggest economies towards alignment.

Carbon pricing is just one part of the large policy arsenal needed to tackle global climate change. But failing to build on recent momentum would be a missed opportunity.

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

A gas explosion at a coal mine in southeastern Iran has killed at least 33 people and about 20 others are believed to be trapped underground, state media reported on Sunday.

The death toll could be higher as local media, including the semi-official Tasnim news agency which is affiliated with the elite Revolutionary Guards, have reported a figure of 51 killed.

The blast, thought to have been caused by a sudden release of methane gas that then triggered a chain reaction, occurred on Saturday evening in one of the mine’s tunnels.

The incident happened as 69 miners were working in two sections of the privately owned mine operated by Madanjoo company in Tabas, a desert town about 540km south-east of Tehran.

Rescue efforts have been hampered by dangerously high levels of methane gas, with emergency services struggling to reach affected areas almost 500 metres underground. The concentration of methane remains a critical obstacle, preventing further entry into the mine, state television reported.

Iran’s President Masoud Pezeshkian, before he departed for the UN General Assembly in New York, ordered ministries to dispatch additional rescue teams to the site. Iran’s judiciary has also launched a full investigation into the incident, vowing to hold those responsible accountable.

The Tabas mine is one of the largest coal mining operations in Iran, a country rich in natural resources but whose mining sector has been stunted by a lack of foreign investment, largely due to US-imposed sanctions.

Saeed Samadi, secretary of the country’s coal association, told local media that coal mines generally suffered from inadequate equipment and he criticised the government for not allocating any budget for mine safety since last year.

However, he added that the Tabas mine had high compliance with technical and safety standards, having received no safety warnings in the past 20 years and importing top-quality equipment.

“It is too early to draw conclusions about the incident, but my 30 years of experience suggest that a sudden gas explosion is likely the cause of this large-scale incident,” he said.

“The Tabas mine accident appears to have occurred above the workers in one of the workshops and the explosion was so extensive that it resulted in a high number of fatalities, including the death of the mine’s safety manager.”

Previous major mining incidents in Iran include a similar coal mine explosion in 2017 that claimed the lives of at least 42 people.

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

All foreign policy is in part economic. Most economic policy is also of geostrategic import. These basic facts are well appreciated in Washington and Beijing. Not so in the capitals of Europe.

That is why, of the numerous thoughtful proposals in Mario Draghi’s report on European productivity, none is as intriguing or potentially far reaching as his call for a European “foreign economic policy”. The very realisation that none exists is a step forward.

What would it mean for the EU to have one? Most obviously, that even domestic economic policy would be made in light of geostrategic goals. Draghi explains such policy as “statecraft . . . to co-ordinate preferential trade agreements and direct investment with resource-rich nations, build up stockpiles in selected critical areas, and create industrial partnerships to secure the supply chain of key technologies”.

The need for such statecraft goes much further than Draghi’s focus on securing critical resources, to green industrial policies broadly and beyond.

For example, the EU’s new carbon tariffs have incentivised other jurisdictions to adopt carbon-pricing schemes of their own. Yet this effect, very much in the EU’s interest, is an afterthought rather than the policy’s principal purpose. (That was to prevent green European industry from being undercut by carbon-intensive imports.) It was more happy coincidence than statecraft.

New EU rulemaking on supply-chain sustainability (over deforestation, for example) has caused diplomatic frictions, with trade partners seeing it as protectionist. This caught Europeans unawares — something a foreign policy perspective could have avoided.

The point is not that such a perspective would or should have tempered the pursuit of domestic goals. On the contrary, placing geostrategic considerations at the centre of domestic economic decision-making would more often than not raise the level of ambition.

Take the European Central Bank’s work on a digital euro. It has largely focused on effects on the Eurozone’s domestic monetary system — which has led to a consensus on tight limits on the digital euro amounts anyone could hold to protect legacy banks’ business models. A foreign policy perspective would lift the euro’s international role and the strategic advantages it could bring. It would thus emphasise that letting foreign users hold ample digital euros easily would encourage euro invoicing in international trade, and tie other economies more strongly to the EU’s.

Similarly, a foreign policy perspective would inject much-needed urgency into the projects to unify EU banking and financial markets. National divisions sap Europe’s collective economic strength and increase its dependencies on other countries.

The issue of decarbonising Europe’s car fleet is where an EU foreign economic policy approach is most starkly needed. It should be obvious that EU countries need both a larger inflow of Chinese electric vehicles in the cheaper segment and also a sufficiently large domestic market for EU carmakers to confidently make the investments necessary to ramp up their own EV production capacity.

This requires a combination of policies: a managed openness to Chinese imports, a much stronger tilt of consumer subsidy and procurement policies towards EU-produced EVs, and an overall quantitative judgment of how much of each is optimal. Crucially, that judgment must be explicitly calibrated against what Beijing is willing to do in return. The obvious asks are for China to use more of its soaring EV production capacity itself and reduce its complicity in Russia’s egregious violation of Ukraine’s sovereignty.

Such joined-up policymaking is only possible if foreign policy and domestic economic and industrial policy are made as one. Simply put, that means Kaja Kallas — the EU’s incoming top foreign policy official — must be involved in decisions about taxation of corporate vehicles, and decision-making on EU’s capital markets and banking union must keep foreign ministers in the loop.

The structure of the EU discourages that. Commission president Ursula von der Leyen has tried to overcome this through an extreme centralisation of decision-making, but that is politically unsustainable outside the most acute crises. The make-up of her new commission suggests a welcome attempt to institutionalise joined-up thinking.

But that leaves national leaders who ultimately hold the most power in the EU. Realising an EU foreign economic policy requires enough national leaders to jointly make economic policy with collective strategic goals in mind. Europe will become strong in national capitals or not at all.

martin.sandbu@ft.com

US banks made a $1tn windfall from the Federal Reserve’s two-and-a-half-year era of high interest rates, an analysis of official data by the Financial Times has found.

Lenders got higher yields for their deposits at the Fed but kept rates lower for many savers, the review of Federal Deposit Insurance Corporation data showed. The boost to the US’s more than 4,000 banks has helped pad out profit margins.

While rates on some savings accounts were raised in line with the Fed’s target of more than 5 per cent, the vast majority of depositors, especially those at the largest banks, such as JPMorgan Chase and Bank of America, got far less.

At the end of the second quarter, the average US bank was paying its depositors interest at the annual rate of just 2.2 per cent, according to regulatory data that includes accounts that do not pay interest at all. This is higher than the 0.2 per cent they paid two years ago but far lower than the Fed’s 5.5 per cent overnight rate that the banks themselves can get.

At JPMorgan and Bank of America, annual deposit costs were 1.5 per cent and 1.7 per cent, respectively, according to this data.

Those lower payments to depositors generated $1.1tn in excess interest revenue for the banks, or about half of the total dollars banks brought in during that time, according to the FT’s calculations.

This is in sharp contrast to Europe, where some governments imposed windfall taxes on banks which benefited from higher interest rates.

The Fed tightened its main policy rate this week, cutting by half a percentage point. Some US banks sought to pass the cuts on to depositors as quickly as possible, a move that would shore up their margins.

Hours before the Fed rate cut on Wednesday, Citi told its employees at its private bank, whose wealthy clients typically receive preferential rates, that if the US central bank were to cut rates by half a percentage point the bank would do the same to its rate on accounts paying 5 per cent or more, according to a person familiar with the matter.

At JPMorgan, bankers have been told that clients with $10mn in cash or above would see their savings rates cut by 50bp and future cuts would move in lockstep with the Fed’s actions, people familiar with the matter said.

Because of the Fed’s rate cut, banks will “certainly” have “the ability to reduce deposit costs”, said Chris McGratty, head of US bank research at KBW. “The degree of aggressiveness will, I think, vary bank to bank.”

JPMorgan said the bank aimed to ensure a fair and competitive rate. Citi declined to comment. Bank of America declined to comment.

A report earlier this year from the Risk Management Association compared banks to petrol stations, which are typically quick to raise prices and slow to cut them. Banks, by contrast, are slow to raise the rates they offer on deposits and savings accounts but quick to cut them.

When the Fed began to tighten monetary policy in March 2022 many analysts predicted that competition from new financial technology companies and the growing ease with which consumers can move cash would force banks to dole out a greater share of the higher rates to their depositors.

But the FT’s calculations show that they were able to hold on to much of the benefit — although slightly less than in previous Fed tightening cycles.

The failure of Silicon Valley Bank and others in early 2023 forced many mid-sized and smaller banks to raise their rates in order to keep depositors from fleeing. Larger banks saw an influx of cash during the flight for safety, allowing them to delay the need to match higher rates elsewhere.

Overall US banks captured about two-thirds of the benefit of the Fed’s higher interest rates from March 2022 until the middle of this year, according to the FT’s calculations based on the latest data available. They paid depositors nearly $600bn in interest.

The last time the Fed raised interest rates, from early 2016 to until early 2019, US banks captured 77 per cent of the benefit.

Although the Fed has now begun to loosen monetary policy, bank stocks reacted positively on Thursday as investors bet that lower rates and a relatively healthy economy would create more demand for borrowing and boost investment banking dealmaking activity.

Nonetheless, the highest interest rates in more than a generation have pushed more money than ever, nearly $3tn, into certificates of deposit, which typically pay the highest rate of any bank deposits and also cannot be changed overnight.

As that money becomes unlocked, banks will be able to adjust their rates down, but not before, analysts said.

“It will be a slow grind down,” said Scott Hildenbrand, chief balance sheet strategist at Piper Sandler.