Who Would Pay a Carbon Tariff?
There are a bunch of indications that one of the things that may have to be done to get a climate bill through the senate is the inclusion of some kind of “carbon tariff” to prevent a cap-and-trade program from disadvantaging US-based manufacturers vis-à-vis their developing world rivals. In theory, the carbon border adjustment idea makes a lot of sense, but almost everyone I speak to is skeptical that it would actually work correctly in practice as opposed to becoming a venue for a lot of gamesmanship.
One reason for skepticism is that I’m actually skeptical that a properly implemented set of worldwide carbon border adjustments would actually achieve its intended purpose of boosting American manufacturing. After all, despite all the China hype we do much more trade with developed countries—countries with considerably less carbon-intense economies. Combining data from here and here I present the following chart of leading trade partners:
The EU, Canada, and Japan are in the aggregate much more significant trade partners than China/Mexico/Brazil. And the case for them charging us carbon tariffs seems about as good as the case for us charging the Chinese.
47 Responses to “Who Would Pay a Carbon Tariff?”
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October 14th, 2009 at 9:20 am
The graph makes your point, but, uh, units?
October 14th, 2009 at 9:34 am
You have to consider that with this issue we are contemplating not just today’s trade patterns, but the trade patterns of many decades to come–and that those trade patterns could well be responsive to our decisions about carbon tariffs.
That said, it is true that if carbon tariffs become the international norm, we may well have to step up our efforts to reduce carbon emissions in order to preserve our exports to the rest of the developed world. You might also consider whether or not that is actually a bad thing.
October 14th, 2009 at 9:36 am
The point of a carbon tariff is to prevent the substitution of a carbon-intensive foreign-produced goods for carbon-cap-compliant domestic production. So the question would be, is US manufacturing as carbon-efficient as other sources, for the same sorts of goods? And that isn’t answered with a global we-use-lots-of-carbon analysis.
October 14th, 2009 at 9:38 am
Perhaps dollars are not the correct measure in this case. After all, I imagine that the typical European trade good has a lower emissions-to-dollars ratio than the kind of things we’re getting from China. Fancy cheese and swiss banking may cost a lot, but they’re not going to be as affected by a carbon tariff.
Furthermore, a reasonable condition for a carbon tariff is that it will exempt other nations that have carbon trading schemes similar to ours.
October 14th, 2009 at 9:40 am
Regardless of who wins and who loses, cap-and-trade just doesn’t work too well without a carbon tariff. If a business can avoid the costs of cap-and-trade just by moving its carbon-intensive activities to a country without an equally stringent cap-and-trade regimen, then it will advantage them over their competitors to do so. (Or will disadvantage them not to do so, once their competitors do so first.)
And what DTM said: That said, it is true that if carbon tariffs become the international norm, we may well have to step up our efforts to reduce carbon emissions in order to preserve our exports to the rest of the developed world. You might also consider whether or not that is actually a bad thing.
In terms of saving the planet, it sure seems like a good thing to me.
October 14th, 2009 at 9:44 am
You might also consider whether or not that is actually a bad thing.
It’d be a good thing, of course. But that still leaves the question of whether the politicians pushing for carbon tariffs are actually interested in a world of properly implemented carbon tariffs.
October 14th, 2009 at 9:44 am
Furthermore, a reasonable condition for a carbon tariff is that it will exempt other nations that have carbon trading schemes similar to ours.
In fact that is basically the only way you can get these tariffs past the existing trade agreements–you have to credit countries for any pricing of carbon that they have already imposed upstream, thus using the tariff only to level the price of carbon between imports and domestic products. If you actually made the price of carbon for imports higher than for domestic products, that would often be a straightforward trade violation.
October 14th, 2009 at 9:44 am
Or as I wrote in the post: “In theory, the carbon border adjustment idea makes a lot of sense, but almost everyone I speak to is skeptical that it would actually work correctly in practice as opposed to becoming a venue for a lot of gamesmanship.”
October 14th, 2009 at 9:45 am
The chart, with or without denominated units, is foolish at best.
It does not distinguish between exports and imports and more importantly gives no idea of the carbon value of the trade goods.
October 14th, 2009 at 9:46 am
@4: Minor point: Switserland is not in the EU. ANd besides I think the bulk of EU exports to the U.S. consist out of manufactures (cars and chemicals from Germany, planes from France).
October 14th, 2009 at 9:49 am
How would our placing carbon tarriffs on Chinese products inevitably lead to the EU putting them on US products? (I’m not saying it’s not a possibility, but a little jaw jaw could probably prevent it, seeing as the Europeans wouldn’t be harmed…)
October 14th, 2009 at 9:58 am
Its hard to comment without knowing what kind of gamesmanship would take place.
On the merits, I’ll echo the other commentators in saying that a carbon tariff is complementary to cap and trade, because we don’t want to reward carbon intensive manufacturing overseas.
October 14th, 2009 at 9:58 am
It’d be a good thing, of course. But that still leaves the question of whether the politicians pushing for carbon tariffs are actually interested in a world of properly implemented carbon tariffs.
Thanks for the response.
In many cases, undoubtedly no, they aren’t. But part of my point was that even if in their minds this is just a way of introducing the possibility of a little more gamesmanship into trade regulations, the likely ultimate outcome of that game being played out on an international basis is that the U.S. will have to increase its efforts to reduce carbon emissions. In that sense, their motives for playing the game matter less than the nature of the game that they are playing.
So to sum up, sure, we will likely deviate from the ideal carbon tariff scheme from a technocratic perspective due to gamesmanship. But nonetheless, both total global and U.S.-specific efforts to curb carbon emissions will likely be racheted up with such a process in place.
And at this point, that is the key consideration: how can we set up structures that will lead to greater efforts to reduce carbon emissions in the future? Because right now, the will does not exist yet to simply do what is prudent.
October 14th, 2009 at 10:01 am
While your rationale for this tariff is entirely different, in practice it will work every bit as well as Smoot/Hawley did.
Trade war here we come
October 14th, 2009 at 10:03 am
In theory you want the price of carbon emissions to be the same everywhere. The way to do that is probably not carbon tariffs, but rather an international agreement which we work cooperatively over time to improve. The only possible role of tariffs is as a threat to countries like the US who seek to gain advantage by not capping their emissions.
October 14th, 2009 at 10:06 am
WTF is Yglesias doing in the comments section? It’s nice, but a little disorienting.
October 14th, 2009 at 10:14 am
I thought Yglesias had a special comment format (posts backgrounded in blood red or something) to distinguish him from pretend-Yglesiases. It came out of the Jennifer Palmieri debacle.
October 14th, 2009 at 10:15 am
Yeah, but, aren’t many of the imports from Canada and Mexico…carbon?
October 14th, 2009 at 10:16 am
Actually, Canada currently has extremely weak environmental policies. Would not group Canada with the EU.
October 14th, 2009 at 10:18 am
While your rationale for this tariff is entirely different, in practice it will work every bit as well as Smoot/Hawley did.
Always nice to hear from our resident members of the Ignorance-is-a-Virtue Chorus.
October 14th, 2009 at 10:19 am
I would think that the whole point of creating a Carbon tariff would be that countries with superior or equal environmental practices would be exempt. It would only be to prevent the existence of any kind of new competitive advantage as a result of lack of environmental standards. While a new green regime would in theory create advantages for Europeans who would then not be affected by a fair tariff, it’s only because they’d have been ahead of the game –and it’s not as if the developed world steals a lot of American jobs through lower environmental or labor standards anyway, even if they have a lot of trade with the US.
If you wanted a carbon tariff, it’s not as if you couldn’t work together effectively with Europe to create one that wouldn’t be a precursor to a trade war. (Especially not with the rest of the developed world) Would a nation like China really rather fight environmental standards that everyone else is assuming and face off against virtually all of its’ customers rather than sign on? I doubt it.
October 14th, 2009 at 10:19 am
WTF is Yglesias doing in the comments section? It’s nice, but a little disorienting.
He does this once in a while. I have detected no pattern to it.
October 14th, 2009 at 10:26 am
If you wanted a carbon tariff, it’s not as if you couldn’t work together effectively with Europe to create one that wouldn’t be a precursor to a trade war.
In fact the Europeans in their own discussions about adopting a carbon tariff scheme have explicitly discussed needing to coordinate with the U.S. (and other developed nations, but the U.S. is the most obviously necessary partner) to make it work. Of course they are just as aware as we are of how disasterous a U.S. versus EU trade war would be for all concerned.
So the real issue is whether a country like China would be willing to start a trade war with a largely unified developed world in protest over such a carbon tariff regime. And if the answer to that question isn’t obvious, you don’t know much about the economy of China–nor indeed about what the ruling elites in China need to happen in order to stay in power.
October 14th, 2009 at 10:36 am
This unnamed skepticism is the same sort of policy purity that wasted a number of years debating carbon tax vs cap-n-trade. (Not that anything would’ve gotten done while Bush was President anyway).
I don’t think there’s been any serious suggestion from Krugman, Senator Kerry or any other serious carbon tariff advocate of enacting a non-WTO compliant tariff. If it was found non-compliant the trade litigation process is clearly adequate to address those issues and bring the carbon tariff into compliance. On one side we have a clear political and policy case for enacting phased in carbon tariffs. On the other we have unnamed skeptics armed with unnamed skepticism…compelling!
DTM- What’s the pattern. Do tell!
October 14th, 2009 at 10:40 am
While your rationale for this tariff is entirely different, in practice it will work every bit as well as Smoot/Hawley did.
The climate disaster that will strike the Earth in the absence of carbon regulation will be worse than the Great Depression. A whole lot worse, if climate scientists are to be believed.
October 14th, 2009 at 10:47 am
I can’t agree with Matt here… the carbon tariff isn’t meant to stimulate manufacturing, it is to prevent nations from gaming the carbon limiting regime by transporting their carbon production to China. The tariff prevents this sort of gamesmanship. Frankly, the Europeans charging us for our carbon emissions makes exactly the same amount of sense as us charging china for theirs, which is to say it makes a whole lot of sense.
Instead, we should just make sure that we charge ourselves for the carbon we produce so the Europeans don’t have to.
October 14th, 2009 at 11:01 am
“If you wanted a carbon tariff, it’s not as if you couldn’t work together effectively with Europe to create one that wouldn’t be a precursor to a trade war.”
Said it better than I did.
October 14th, 2009 at 11:07 am
Having not looked at the sources, I think this graph understates China’s role. Recently, China passed Canada as the US’s biggest trading partner (when thinking of the EU’s members as individual member states, at least).
October 14th, 2009 at 11:08 am
Source:
http://www.google.com/search?q=china+passes+canada
October 14th, 2009 at 11:39 am
@yc, `trading partner’ is not the same as `import source’, although Matt would probably have served his point better using a graph of import sources rather than trading partners.
I just don’t get why the states wants to prop up manufacturing… the point is to essentially `tax’ imported carbon in addition to domestic carbon, it’s supposed to be neutral.
October 14th, 2009 at 12:11 pm
Yes, DTM, I only have the actual history of tariff implementation to fall back on. You, however, have “proof by assertion”. So much stronger…
October 14th, 2009 at 12:36 pm
Graph needs units! Those are billions of US dollars
It may also be helpful to indicate the time period (last year, this year-to-date, whatever it is).
October 14th, 2009 at 12:54 pm
If the units are tons/person of CO2, then the USA and Australia are the major polluter and will pay the most. China is not in the top ten.
October 14th, 2009 at 1:02 pm
James Robertson,
Haven’t you learned yet, “proof by assertion” is the ONLY way this blog works?
October 14th, 2009 at 1:10 pm
I think that preserving mostly free trade while effectively cutting greenhouse gas emissions would be best, and creating trade wars while doing nothing about emissions would be worst, but between ignoring GHG emissions to preserve free trade and creating a cascade of erecting trade barriers to cut GHG emissions, I’ll take the trade war while cutting GHG emissions. If we erected a 50% tariff on imports, which are about 14% of our economy, and, to make ludicrously unfavorable assumptions, this resulted in no import substitution or consumption decline, and the money gathered from the tariff were entirely wasted as a deadweight loss, that would be the equivalent of a 7% hit to GDP. That’d be bad, maybe the equivalent of losing five years of productivity growth, but I still think it would be better than totally unabated climate change. (In reality, of course, there would be import substitution, useful application of tariff revenues, and other things to ameliorate the loss.)
October 14th, 2009 at 1:20 pm
The EU already has in place a more stringent cap-and-trade programme than proposed for the US (the EU ETS). The case for tariffs on EU imports therefore is nothing like “about as good as the case for us charging the Chinese”.
October 14th, 2009 at 1:25 pm
#35 – You forget that other nations would impose tariffs as well, and those tariffs would be ratiatory (i.e., designed to hurt) in nature.
The only way such a trade war will reduce emissions is in the worst way possible – by depressing economic activity (and impoverishing millions).
That’ll be good for the poor. But it’s becoming more and more clear that the environmental left would prefer that the poor died off anyway, in order to reduce the population load.
October 14th, 2009 at 1:34 pm
This vague fear-mongering is different from inactivist rhetoric how again? And who have you talked to and what was their rationale? Anyone that didn’t work for your lobbying firm? Yes, I want to know which neoliberal economists you have spoken to that have endorsed the cap and trade proposal but warned against tariffs to encourage cooperation.
October 14th, 2009 at 1:37 pm
I don’t work for a lobbying firm; I worked for the DoD 20 years ago, and haven’t done anything related to the government since.
But hey, thanks for playing, and for showing the kind of tunnel vision that only true believers are capable of.
October 14th, 2009 at 1:40 pm
True: I assumed that the entire burden of a tariff would be born by the importer. If we assume, more realistically, a mix of the deadweight loss on the importer and exporter (while, of course, revenues would just go to the importer), then one would have to factor in the effects on American exports — but, of course, one would reduce the estimated impact of the US’s tariff. Overall, things would look better, since the US imports more than it exports.
For a trade war itself, this is true. The point is not trade war for trade war’s sake, though, but an implementation of broader GHG-reducing policies.
Libel unworthy of response.
October 14th, 2009 at 1:48 pm
Was I talking to you, you boob? Are you Matt Yglesias? Is this your blog? Did I mention your name or something you said? Take your Narcissistic Personality Disorder to someone that cares, you unemployed fossil.
October 14th, 2009 at 4:20 pm
Yes, DTM, I only have the actual history of tariff implementation to fall back on.
This apple is a fruit. This apple is red. That lemon is a fruit. Therefore, that lemon is red . . . I don’t even have to look at it!
Thanks for playing, James.
October 14th, 2009 at 4:32 pm
This graph doesn’t prove a damn thing. It doesn’t distinguish imports from exports, much less what kinds of trade we’re talking about. Our primary trading commodity with Mexico and Canada is oil. We run a massive trade deficit with China. The EU’s supposedly ‘greener’ manufacturing sector is vastly overstated. China’s manufacturing sector relies heavily on dirty coal plants. If you apply a carbon tax to imports, prepare for an all out messy trade war. And if you don’t tax imports, a carbon tax is dead in the water – like it had a shot anyway.
A carbon tax, much less ‘cap & trade’ is never going to pass congress. Even if it did, it would not reduce greenhouse gasses. The US is already improving quickly and dramatically – far more than liberals are willing to admit – because of the increase in the price of oil, consumer and public pressure and technological innovation. Honestly, congress doing nothing about global warming is accomplishing more that the hot air expended by cap & trade advocates.
October 14th, 2009 at 10:23 pm
[...] is Matt Yglesias. Here is more, including a good chart on which countries are our largest trading [...]
October 15th, 2009 at 10:02 am
If you apply a carbon tax to imports, prepare for an all out messy trade war.
This scenario really makes no sense. The developed world is going to coordinate its carbon tariffs. Developing countries won’t try to start a trade war with a coordinated developed world because their economies would crash and their citizens would riot. Instead, they will negotiate to an accomodation.
October 15th, 2009 at 2:50 pm
Of course a carbon tariff is not the best idea, but it’s a really good bargaining chip for people who want passage of a climate change bill. The effect of a tariff, as Matt shows, would be marginal on developing nations, but it gives cover so Congress people can say that they are protecting American jobs and industry. If that has to be inserted to get serious cap and trade, then so be it.
I feel the same way about offshore drilling. It’s a canard, but if that gets conservatives to support some form of a climate control bill, then it’s a price worth paying.
It’s the same with tort reform: it won’t make a huge difference for healthcare costs, but it appeases Republican lawmakers and provides them cover for supporting a healthcare bill. Why not throw some small bones if there’s a huge payoff?
increaseourtaxes.com
October 15th, 2009 at 3:28 pm
[...] Yglesias has a good post about the negligible effect of a carbon tariff. The idea is that American manufacturers would face a cost disadvantage because competitors in [...]