Thursday, August 13, 2009

Carbon Tariffs are not Terrific

For negotiators working on the Doha Round of world trade talks, and the Copenhagen Climate Conference , the links between climate change and trade policy are already apparent, not to mention problematic. In the US, the intersection of these policy areas has added a further political dilemma to the already convoluted Waxman-Markey bill’s progress, creating a further forum for lobbyists of all persuasions to pursue their agendas. At the official level, though, debates about the two issues have descended into trading accusations of protectionism.

The connection between the issues takes two main forms. The first is the more basic: the level of tariffs imposed on traded ‘environmental’ goods and technologies, including for example solar panels or windmill components. The second is more complex: the question of whether countries restricting carbon emissions have a right to charge compensatory tariffs on imports from countries that do not restrict emissions, and whether it is a good idea to do so.

Tariffs on environmental goods are a bad idea. Tariffs on any goods are a bad idea, but tariffs on technologies that can help lower emissions are particularly foolish. The principle value of such technologies (unless you’re an energy independence activist) is to help ameliorate the global issue of climate change. Just as we should be agnostic about where in the world emissions reductions are made, so long as they are made, we should be agnostic about where the technology to help us make those reductions comes from. Be they Korean solar panels, American car batteries or colossal German windmills , anything that encourages their use and transfer is welcome. Which is why removing government levies on their cross-border movement (which raise costs by up to 5.2% in the US, and by up to 35% in China ) should be an easy win. However, even here, domestic politics and interest groups can jam a stick in the spokes.

At the international level, a deal was being negotiated on the fringes of the UN Climate Conference in Bali in December 2007. Led by the Bush administration and with the backing of the EU, it proposed to eliminate such tariffs. It ran aground on the objections of Brazil and India, with Brazil’s complaints focusing on its omission of ethanol as a carbon-cutting technology. Brazil obviously has a great deal of interest in being able to reach new markets with one of its biggest growth sectors. But in one of those target markets – the US – the ethanol sector is already tied up in political favors and long-standing subsidies.

President Obama has lectured extensively on the advantages for job creation of a ‘green revolution’. Specifically, he has spoken of the creation of American green-collar jobs. And here we run into a problem. With the American public still reticent to support carbon-reduction measures for their own sake, the only route to winning the political argument has been to offer other benefits. In many cases he’ll be right – that American ideas and workmanship will lead the market. But in other cases, exposed to global competition, Americans might lose out. Ethanol, regardless of whether or not it is good technology, is one such area where open markets instill fear in the agricultural lobby. Does the White House (or for that matter the Planalto) have the will or the public backing to accomplish even a basic step like this? Because the steps involved in addressing the second trade-climate problem will be much more challenging.

One major fear for countries considering carbon constraints is that heavy industries will ‘leak’ overseas – failing to reduce net carbon emissions (and possibly even increasing them if the new producers’ regulatory systems are more lax), while taking jobs with them. To address this, some politicians have touted the idea of imposing a tariff at the border to bring the price of these goods to what it would/‘should’ be were the carbon generated in manufacture priced. Energy Secretary Steven Chu suggested it back in the spring, but was apparently speaking beyond his purview, since US Trade Representative Ron Kirk explained a few days later that carbon tariffs were not currently a preferred method of the administration. European leaders have also raised the issue, with French President Nicolas Sarkozy (who scarcely met a tariff he didn't like) in the vanguard . The idea was also rejected, by the European Trade Commissioner shortly thereafter.

While appealing from a strictly environmental perspective, carbon tariffs pose enormous problems. The first and most obvious is the likelihood of retaliatory tariffs leading to a trade war. Carbon tariffs have yet to be determined legal by the WTO (although evidence seems to indicate they would be permissible if they were completely non-discriminatory. How easy that benchmark would be to meet, I cannot speculate). If China, for example, began reinstating tariffs on US exports, the value to domestic industry of carbon tariffs could be limited. And, at a time of global recession, anything which serves to depress growth-generating trade is a highly risky proposition. It may also be an environmentally harmful one; after all, China is most likely to engage in carbon-reducing activity if its prosperity continues to increase – reductions in trade volumes would certainly restrict its development.

A second problem arises with the ability of carbon tariffs to impact on the intended sectors and manufacturers. The bulk of Chinese carbon intensive heavy industry produces for domestic consumption . It is not evident that carbon tariffs imposed by the developed world would have a significant effect on manufacturing cleanliness in the developing world.

For now, carbon tariffs are a problem for the future. With policymakers focusing on a worldwide deal at Copenhagen, they could well be made moot by progress in December. Of course, the economists around will have noticed there is nothing here that wouldn’t be solved by a worldwide carbon price. However, if the negotiations do not yield a deal that comprehensive, which seems doubtful, carbon tariff legislation could well make a comeback in the following year. It was a positive development that carbon tariff plans were trimmed from the Waxman-Markey Bill between the March discussion draft and the passed version from June . Those comments at that time were unnecessarily provocative in a fragile world economy and were already prompting diplomatic displeasure. But the politics of the issue, especially in the US, are such that their return has a grim inevitability to it.


  1. Great post Simon. Functionally, clean tech subsidies result in the same manipulated market and skewed trade balance as tariffs. From a diplomatic perspective, they're not nearly as controversial. Still, developing nations can not play the subsidy game to the degree of developed nations. What would you recommend to give these developing nations more leverage in this emerging market? (And removing subsidies is not an option).

  2. First off, I would observe that unlike the market for, say, grain or oil, the benefits of clean technology are for the most part indirect and dispersed. If developing countries can't get food, people die; if they can't get oil, people don't work. Green tech isn't quite like this. The benefits of cutting 100 tonnes of Co2 are more or less the same if they occur in Austria or Angola. So competitiveness is less important for developing countries in this market than it is in others. They have a general interest in costs coming down, as do we all, because this will speed uptake, and hopefully reduce the dangers we all, but they especially, face. But as long as somebody's buying, it doesn't necessarily need to be them.

    What would I do? First of all, some kind of CDM-esque measure is still a good idea. Rich countries should be able to pay for emissions cuts in developing countries if it's cheaper than doing it at home. Since geography is irrelevant here, I'd remove any limits on the amount of savings that can be had abroad in some future agreement, so long as the auditing was sound enough to prevent it being an excuse for fraudulence. In the early stages, these projects would be cheap and appealing, but being probably fewer in number in LDCs than in developed and rapidly-developing economies, would probably be exhausted fairly rapidly, forcing the wealthier nations to turn their attention back home.

    I'm sure what we'll get is some kind of international (UN, G8, G20, OECD, who knows who'll administer it) fund to subsidize this kind of tech in the manner of other foreign aid payments. My fear is this may crowd out investment, or get less good value, than private buyers would get - assuming some continuance of Kyoto-like carbon trading is the post-Copenhagen path...

    I hope this answers the question, at least partially.