Giving international agreements on climate change a chance is very different from saying we need international agreements before an ETS (not sure where he got this point from). I agree with Gans that we need to go ahead with an ETS but we also need to demonstrate leadership in the management of global warming. There are good reasons why developed countries carry this responsibility. Gans’ starting-point is that wealthy countries need not show leadership, and that instead of leading by example and giving our industries a head start on adjustment, the solution is to put punitive tariffs on countries that don’t price carbon. Is this a realistic way forward? To offer no leadership on climate change and increase protectionism while hoping to preserve the international trading system and force those who have a reason for not seeing themselves as yet being culpable into pricing carbon by imposing taxes on their goods? Good luck! Gans admits that there is risk in temporary protectionism but thinks protectionism can be designed to ‘self-evaporate’. Interests become entrenched once you create bad policy and that means they persist. That is why an ongoing subsidy is also a bad idea. The Doha Round is evidence enough of the problem of trying to reduce agricultural subsidies and tariffs. One-off compensation is an acceptable and sensible way to deal with adverse impacts on export competing industries.
In Brief
In response to my concerns about a carbon tariff and the impact it will have on the world trading system, Joshua Gans replies
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.
That makes me think that although the ‘some believe’ links to me, he hasn’t read what I wrote, and that he’s wrong anyway.
Wow I have no idea what you are talking about. I pretty explicitly said we have to show leadership on climate change — real emissions reduction and not something cosmetic. That means not accepting as a tick on our account when emissions reductions domestically are only made up by an increase elsewhere. And guess what, for a few percent of our emissions that is the case and in some industries it is likely to be devastatingly so which is why they have been left out completely (e.g., agriculture).
So let us be clear, am I reading that you would (a) be happy if an industry completely shut down as a result of an ETS and (b) you would argue that that should be a credit in terms of our contribution to global emissions reduction. I am not saying that there is an industry like this — I don’t know if that is the case — but as a matter of plain economics, if there was, is this really what you are saying?
Okay, so it seems you misunderstand me in your point (a). No, I would not be happy with an industry completely shutting down from being disadvantaged relative to foreign competition, from an ETS established independently of a global scheme. A one off transfer of wealth (ie free allocation of permits) would not result in that but rather would assist in the transition to lower carbon emissions globally which is what the objective is after all.
My main point, which is unaddressed, is the problem with carbon tariffs. You seem to share some of the concern I have about them but apparently favour carbon tariffs.
I agree we need to show leadership (and also need leadership from elsewhere) but I think we favour different kinds of leadership.