It is more likely to hurt countries that implement the tariff more than the countries that export the goods. It is the opposite of unilateral trade liberalisation where the country liberalising benefits most. It creates distortions in the allocation of resources away from economic activity in which those countries have a comparative advantage.
2. How would you set the tariff? What would the exact rate of the tariff be? How would it be implemented? Experience form anti-dumping laws suggest this is no simple issue. The Economist magazine:
A carbon tariff, for example, would be hard to implement. Customs officials would either have to assess the emissions embedded in imports, an impossibly complicated task, or make arbitrary assumptions, a recipe for a trade war. Moreover, it would do nothing to protect exports of energy-intensive goods from cheap competition. [full article]
3. Even if tariffs were imposed with coordination among some large trading countries, for it to have any real impact in coercing countries to put a price on carbon, and hence reduce emissions it would have to be virtually universal and it’s difficult to see any agreement on this in the WTO. The Doha round is tough enough. If you can agree on a carbon tariff why can’t you agree on a carbon price?
4. The biggest problem is how this will corrode the rules of the international trade game. A carbon tariff is a distant second best option for pricing consumption of carbon globally. It only penalizes carbon intensive goods that are traded and consumed across borders not the vast mass of consumption within borders. But worse still it opens the way to opportunistic use of trade instruments wrongly targeted at all sorts of political and other purposes. It would seriously damage reliability in the international trade order.
It is likely to become a protectionist tool of the developed world against the developing world but it’s not just the developing countries that should be worried. The Canadians, looking across the border at the developments in the US, also ought to be worried. Miro Cernetig in the Vancouver Sun reports:
Call it the rise of the carbon tariff. It turns out the “decarbonizing” of the atmosphere is seen by many [in the US] … as a useful lever in saving U.S. manufacturing jobs and reversing the country’s unsustainable trade deficit.
To get goods into the US, foreign exporters will have to find carbon offsets, or credits. But the laws require, at least for many years, that those carbon credits be obtained from inside the US.
Carbon tariffs, or whatever politicians and protectionist economists might call them, are a bad idea for developing countries, developed countries and the world trade system. And they are not likely to solve the problem they are aimed at solving – reducing carbon emissions.
It is a much better idea to give the negotiation of an international carbon emissions pricing regime a serious trial before running to dangerous second or third best options like a carbon tariff.
—
Update: Ben Lockwood and John Whalley have just released a piece arguing this with lessons from history which is worth a read:
While the carbon motive is new, calls for competitiveness-linked border tax adjustments are not. The present debate has overlooked older analytical literature that is highly relevant to today – and it suggests that border tax adjustments may have little effect on trade and related economic activity…
They remind us,
The impact of border tax adjustments on trade and competitiveness does not depend on the motivation for the adjustment…
and conclude
Their potential price level effects may have little to no impact on trade flows and not offset any leakage.
There is nobody who thinks that local emissions policy is better than a global agreement. But what are you going to do if there is no global agreement. All you are saying here is that the government should not have an ETS or carbon tax until all countries agree. We have played that game and the world is losing as a result. Leadership requires moving prior to a global agreement and being effective about it means doing something about trade-exposed industries, full stop.
At no point do I say (or think) that we have to wait on other countries before pricing carbon, ala Brendan Nelson. A carbon tariff is a second best option if we cannot come to some sort of international arrangement but a very distant second best. We actually opted out of playing into the global negotiations until recently: we simply have not played that game. So let’s get serious before we go for the distant second best.
If international negotiations break down for some reason is it then sensible to jeopardize the international trading system? It may appear that a carbon tariff will pressure other countries on carbon control but in reality the signs, as could be expected, as in the draft bills we see in the US, simply embrace populist policies and strengthen protectionists.
[…] Some believe that what this implies is that we need to get international agreements to work prior to having an ETS. I disagree in that wealthy countries need to show leadership on these issues and also, waiting will only make adjustment harder later on. The government’s push to move now is important in this regard and that is why I am willing to accept temporary protectionism (e.g., a carbon tariff) to ensure that those efforts are worthwhile. This I advocate with some degree of nervousness as such policies might stick. But I think you could set it up in a way that it is self-evaporating once other countries come into line. […]
Your allocative efficiency argument seems wrong to me. Theoretically assuming the tariff equals the embodied carbon, then the we will achieve allocative efficiency reflecting the ‘true’ cost of production. If, with the (perfect) carbon tariff the exporting country isn’t still cheaper*, they don’t have a comparative advantage.
Half of the point of carbon pricing is to change the allocation of resources, within and eventually between countries.
Having said that, I agree with reasons 2, 3 and 4. A carbon tariff won’t work until carbon pricing is widespread around the world. Perhaps then it might be used to effectively force recalcitrant countries into the global system.
* By cheaper, I mean opportunity cost, so I’m not arguing absolute advantage.
Personally, I must say my scepticism is rising faster than the alleged rise in global temperatures. Why bother at all when “the science” of human-caused climate change is looking more dubious?
The one mercy in all this hysteria is that we are now seeing testable predictions. At the risk of being labelled a “denier”, “heretic” etc etc may I ask why not wait and see if the Artic icecap does melt within 2 years, as the true believers are now suggesting?
As for the realpolitik, one can expect that climate change will be the cover for many economic sins. Just as the USA embraced the WTO push for “free trade “and used it to enhance patent monopoly protection (to the detriment of consumers), so climate change is being used to impose a range of destructive indirect taxes which the adoption of VAT/GST was supposed to eliminate from the world trading system.
But from a Treasury perspective there is nothing so good as guilt. Persuade someone they are polluting the planet and there is no end to what you can extract from their pockets as tax revenue.