I will refrain from naming for public ridicule all those who opposed the carbon tariff provisions in the House version of US climate change legislation and confidently predicted that “saner” heads would prevail in the Senate. Ten Democratic Senators have written a letter to President Obama stating their support for a “border adjustment mechanism” in “any climate policy crafted by Congress.” (h/t WSJ’s Environmental Capital Blog).
The letter contends that “longer-term” carbon tariffs are vital “to prevent the relocation of carbon emissions and industries if other major carbon emitting countries fail to commit to an international agreement requiring commensurate action on climate change.” That language almost guarantees the imposition of tariffs on China because there is no way it will agree to action “commensurate” with the US on climate change.
The letter becomes more nuanced in terms of tariff-avoiding climate change commitments on its second page.
The border adjustment mechanism could also assist efforts to reach a global climate change agreement at the upcoming United Nations Framework Convention on Climate Change (UNFCCC) summit in Copenhagen. By eliminating the competitive benefit of not acting to address this global problem, it should spur countries to reach a comprehensive accord. The border adjustment can be avoided in those energy intensive industries for nations that reach a binding, equitable, and verifiable international agreement or international sectoral agreements.
The key characteristics here are “binding, equitable, and verifiable.” That seems fair enough. Furthermore, the letter suggests that energy-intensive sectoral commitments (as opposed to economy-wide commitments) would also be sufficient. In my opinion, if China does not agree to a deal that is “binding, equitable, and verifiable,” then the US should not be entering a deal with it. Thus, I think the letter establishes a fairly low threshold for tariff-avoiding commitments.
As the letter points out “steel produced in China results in roughly three times as much carbon being emitted into the atmosphere as steel produced here in the United States.” What is wrong with making a US consumer of carbon-intensive Chinese steel pay for the added harm to the environment caused by the production of that steel? The knee jerk reaction against tariffs in this case has always puzzled me. Yes, I know that calculating the correct value of such tariffs will be difficult and that European countries could impose carbon tariffs on US goods if US carbon commitments are not as aggressive as European ones. But, hasn’t there been a general global consensus that trade advantages should not be obtained through lax controls on environmental degradation? Isn’t this an issue that cries out for global uniformity; wouldn’t a global carbon price make trade fairer?
The real issue doesn’t involve free trade so much as arguments about historical responsibility for carbon emissions. Developing countries are supposed to get a bye in at least the first round of carbon controls because what is in the atmosphere now is primarily traceable to developed countries. That is a legitimate point, but doesn’t it simply suggest that the revenue collected from the tariffs should be provided to the country of origin of the goods to help them finance carbon reductions? Any other system produces perverse price signals.
There are those who contend, based on their intimate familiarity with the Chinese psyche, that the Oriental mind does not react well to threats, and that they are counterproductive when dealing with the Chinese. I understand that it is easy for those with no experience of China to fall for this nonsense, believing that somehow the universal rules of human nature do not apply in the Eastern Hemisphere. Who does react well to threats for God’s sake? That’s the whole point! It is for this reason that they have proven a time-honored negotiating tactic in every corner of the globe. The “carrot and stick” approach has worldwide efficacy.
In any event, it is not the US climate negotiators who are threatening to impose tariffs; they don’t have a tariff arrow in their quiver. It is Congress that is branding the tariff threat, and that distinction is not lost on the Chinese.
In light of this strong support for “border adjustments,” I suspect that they will become a feature of the Senate bill. Those who oppose them in the Senate care too much about the climate bill in general to jeopardize its passage over tariffs. The Senators who sent the letter to the President, however, could go either way. Their support is absolutely essential for the passage of climate legislation. As the WSJ Environmental Capital Blog puts it “[w]ithout the support of these lawmakers, you can stick a fork in the climate bill-it’s done.” Get ready to live with “border adjustments.”
5 responses so far ↓
1 Adam Minter // Aug 7, 2009 at 12:00 pm
Charlie, this is just great:
“There are those who contend, based on their intimate familiarity with the Chinese psyche, that the Oriental mind does not react well to threats, and that they are counterproductive when dealing with the Chinese. I understand that it is easy for those with no experience of China to fall for this nonsense, believing that somehow the universal rules of human nature do not apply in the Eastern Hemisphere.”
Let this comment be notice that I plan to steal these words and use them in everything I write about China for the foreseeable future.
2 Nathan Rive // Aug 7, 2009 at 4:30 pm
While border tax adjustments (BTAs) may be morally and legally justified, they are actually not very effective from an economic perspective in preventing carbon leakage. Although we don’t have a case study to work from (as far as I know), partial and general equilibrium models in the literature have suggested this to be the case.
As an example: Say Chinese steel is taxed at the US border based on carbon intensity. US demand will fall, as will the market price of Chinese steel. These lower prices will generate an increased demand for Chinese steel elsewhere (in China itself, or countries without a BTA). Any lost US demand that is not mopped up elsewhere will just mean reduced Chinese steel output - and reduced demand for its inputs (e.g. coal). This will then mean a fall in the price of coal, and an increased demand for coal elsewhere. This cascading effect of price and demand means that on balance, the BTA is actually quite inefficient at preventing carbon from leaking from US to China. While some leakage is prevented, much of it will just move elsewhere in the world.
The question, then, is whether carbon leakage is the main objective of a BTA. If it is to protect domestic US steel, the WTO would rule against it.
But what if a BTA is intended to motivate Chinese firms to improve energy efficiency. Barring any WTO concerns, this may also be tricky because the incentives that the Chinese firms face depends greatly on the way the BTA is set up.
If a single BTA is set up for all Chinese steel coming into the US, and it is based on the China-wide average of steel carbon intensity, it may paradoxically actually incentivize an overall worsening of carbon intensity. This is because any improvements that a single firm makes in its own efficiency will yield gains for all firms, because it reduces the efficiency average, and thus the BTA. With private costs and public gains, these firms may simply not bother.
As such, an average-based BTA may actually get individual firms to reduce their efficiencies to save costs: private gains with public costs. To make the BTA effective from this viewpoint, all firms need to be individually rewarded, or at least firms need to be able to be individually rewarded with a reduced BTA if they request it (e.g. via auditing). Given the number of firms in China, this could be a lot of work.
That is not to say there isn’t a good solution in there somewhere - we just need to think about it very carefully, not just have a knee-jerk protectionist approach to the whole thing.
3 cmcelwee // Aug 10, 2009 at 11:22 am
Nathan, thank you so much for your thoughtful post, and forgive me for taking so long to acknowledge it. I’m intrigued by the issues raised in your analysis of the consequences of a BTA on carbon leakage. Looks like we need a global tax on carbon.
Although I don’t want to say it too loudly, I can fully support knee-jerk protectionism that doesn’t kick in until 2020 at the earliest because by that time we will either have a deal that both the US and China can live with or we will have problems on our hands much larger than a trade row.
4 Nathan Rive // Aug 11, 2009 at 2:42 pm
You make a good point about having a BTA that would start in 2020. The Chinese themselves have said they would/could have a carbon cap by 2020: if they reneged on this “promise”, a BTA could be a reasonable response.
And as you say, if we’ve not yet started to peak global emissions by 2020, we’ve got a bigger problem…
5 Greg // Aug 12, 2009 at 2:06 pm
Carbon trading is such a sham that will only make traders and financial houses rich and this is the reaction to it.
A flat carbon tax based on how much energy went into producing, shipping and storing an item for sale is the fairest way to go about it. With regards to China, it would force producers to be more efficient to compensate for the GHG emissions of trans-oceanic freight, which the Chinese could effectively control with more efficient ships that belong to COSCO and Hutchinson Whampoa.
It could have a similar effect on software and BPO outsourcing as those have measurable energy emissions as well.
Again, carbon trading = bad
Leave a Comment