Wednesday, October 21, 2009

Carbon Tariffs Update: Administration Votes "Present"; Sen. Cardin Supports (Kinda); New Scholarly Doubts Emerge

The latest news on carbon tariffs ranges from the entirely predictable to the quite interesting.  First up is the unsurprising news that the Obama administration is publicly waffling on carbon tariffs, neither supporting nor denouncing them (shocking, I know!).  Reuters has the news:
The United States should focus on cutting its own greenhouse gases and developing clean energy technologies before slapping tariffs on energy-intensive goods from developing countries like China and India, Energy Secretary Steven Chu said on Tuesday.

President Barack Obama has made climate legislation one of his top priorities and supports regulating gases such as carbon dioxide blamed for warming the planet with a cap and trade market on emissions.

U.S. lawmakers, now wrestling with competing climate change legislation in Congress, would support such a market if it includes border fees on carbon intensive goods imported from developing nations should those nations not take action to reduce their own carbon emissions.

But the carbon tariffs could be a headache for the U.S. government to administer and it's uncertain that they would be allowed by global trade rules.

"You don't have to talk about tariffs yet," Chu told the Reuters Washington Summit. "Let's figure out what the U.S. can and must do" to reduce greenhouse gas emissions.

Carbon tariffs have been backed by several U.S. senators, especially from manufacturing states hit by high unemployment.

A plan for how the fees would work was included in the climate bill narrowly passed by the House of Representatives in June that promised to reduce U.S. emissions 17 percent from 2005 levels by 2020.

Under that bill, tariffs on imports of goods like steel, glass, cement and chemicals from China, India and other countries would be triggered in the middle of the next decade if the developing countries did not act on climate.

Several senators have supported such border fees as a guarantee their homes states would not lose jobs and business to cheap imported goods.

To start off immediately considering tariffs "does no one good," Chu, a Nobel Prize-winning physicist said at the summit being held at the Reuters office in Washington on Oct 19-21.
I must give the administration credit for consistency: the White House's aversion to confrontation on carbon tariffs is perfectly in keeping with President's whole "voting present" strategy on the really tough issues.  But I'd beg to differ with Secretary Chu on the idea that resolving the US debate on carbon tariffs would "do no one good."  Considering that an increasingly large share of the developed and developing world opposes carbon tariffs, a strong US statement against them would do the world a lot of good.  Now, it might not do the White House - trying to pass ObamaCare and Cap-and-Trade with a flimsy "coalition of the willing" that includes about twelve US senators who strongly support carbon tariffs - any good, but that's a hardly "everyone," now is it?  (And let's not forget that Secretary Chu used to be a strong supporter of Carbon tariffs - you know, waaayyy back in March 2009.)

Moving on, BNA (subscription) reports that Senator Ben Cardin (D-MD) has taken courage to new levels, coming out in support of carbon tariffs, but not wanting them included in the Senate's climate change legislation.  Instead, Cardin wants the whole world to jump on the carbon tariffs bandwagon, baby:
A border tariff system to protect nations that adopt carbon caps from unfair trade competition from nations that do not should be negotiated as part of a global climate agreement in December, providing international resolution to a climate change issue that has divided the U.S. Senate, Sen. Ben Cardin (D-Md.) said Oct. 20.

International climate negotiators, who will meet in Copenhagen, Denmark, Dec. 7-18 in hopes of hammering out a new global climate deal among developed and developing nations, “should establish what every country's responsibility should be” to curb greenhouse gas emissions as well as consequences for those that fail to act, he said.

A new “border adjustment regime” launched under a climate agreement would eliminate the need to include U.S. border tariffs in Senate climate change legislation, Cardin said at a climate forum held by Roll Call and Congressional Quarterly....

Cardin, a member of the Senate Environment and Public Works Committee, which is slated to take up climate change legislation in November, said he recently urged the Obama administration's lead climate negotiator, Todd Stern, to push for establishment of a “working committee” at the Copenhagen talks to take up the border tariff issue.

“If a country does not meet its international responsibility … then their products that enter the marketplace would be subject to a tariff” on imports specifically authorized under the international climate agreement, Cardin said.

Opponents argue that border tariffs placed on such imports would violate free trade provisions enforced by the World Trade Organization and trigger retaliatory sanctions. But such carbon tariffs have strong support from Midwestern and coal-state Democrats in the Senate, who together form a key bloc that could decide the fate of climate legislation.

Introduced Sept. 30 by Sens. John Kerry (D-Mass.) and Barbara Boxer (D-Calif.), the Senate bill (S. 1733) would establish an allowance trading system to cut emissions at U.S. power plants and other operations 20 percent by 2020 from 2005 levels.

The Senate bill must be cleared by multiple committees before it can be brought to the floor, where passage is far from assured; the House passed a similar bill in June (H.R. 2454)....

The Kerry-Boxer Clean Energy Jobs and American Power Act does not include specific border tariff provisions but has placeholder language that could enable members to reach a compromise on the issue. The bill calls for a “border measure that is consistent with our international obligations and designed to work in conjunction with provisions” that will likely set aside free emissions allowances to help protect trade-sensitive industries, according to the provision....

Cardin said an international consensus on border tariffs would respond to concerns that imposing mandatory caps on U.S. emissions would lead to emissions “leakage”—the incentive for U.S. manufacturers to relocate to China and other fast-developing nations that fail to take comparable action on emissions.

“It also removes a major political hurdle to getting climate change [legislation] passed in the United States,” Cardin said.
According to the Cato Institute's congressional free trade ratings, Cardin is not a hardcore protectionist, so his "novel" support for carbon tariffs likely isn't indicative of a secret, insidious desire to inhibit global trade.  Instead, Cardin's closing statement in the BNA piece probably represents his underlying motivations best: he's just looking for a way to purge the carbon tariffs debate from the Senate, where it legitimately threatens to divide Democrats and submarine the current legislation altogether (one can only hope!).  Unfortunately for the good Senator, given the strong public opposition of so many countries (again, from both the developed and developing world) to carbon tariffs, Cardin's "multilateral protectionism" approach appears highly, highly unlikely to go anywhere at Copenhagen or anywhere else.  That said, it'll be interesting to see if the White House takes Cardin's "carbon tariff working committee" suggestion seriously.

Last comes (in my humble opinion) the week's most interesting news on the carbon tariffs front.  A new scholarly article in the Global Trade and Customs Journal [caution: slow-loading link] by Dr. Reinhard Quick of Saarland University, "Border Tax Adjustment to Combat Carbon Leakage: A Myth" demonstrates that carbon tariffs won't actually counteract "carbon leakage" (i.e., the loss of domestic manufacturing shipments and employment to competitor countries that have less stringent climate change policies) or climate change.  Instead, it's just protectionism, plain and simple.  The full piece is available by subscription only, but here's the synopsis:
Discussions about unilateral trade measures as a means to combat climate change have become quite fashionable notwithstanding warnings against unilateralism and protectionism from the leaders of G-8 and G-20 in times of an economic crisis. A system of ‘border tax adjustment’ on imports is suggested in order to countervail the cost of domestic emission trading systems. The proponents argue that without such measures, a country having adopted an emission trading system would not only lose economically but also environmentally. The standard reason given to justify this argument is the notion of carbon leakage, namely, the danger that energy-intensive production would move from countries with domestic policies to reduce greenhouse gas emissions based on a carbon price for emitters to regions that do not have a binding and costly regulatory CO2 regime. Recently, the discussions have been fueled by the Waxman/Markey Bill, adopted on 26 June 2009 by the House of Representatives and by a French non-paper, presented at the informal EU Environment Council held in July 2009. These two initiatives aim to establish, in the context of a domestic emission trading system, a system of ‘border tax adjustment’ against some imports from some countries, namely, those that are seen as not contributing enough in the fight against climate change. The revised European ETS Directive does not provide for border measures. It instructs the European Commission to submit a report to the Council and the European Parliament no later than 30 June 2010 assessing whether energy-intensive sectors are exposed to a significant risk of carbon leakage and explicitly outlines the inclusion of imports in the European Union’s ETS system as one of several actions. The joint WTO-UNEP paper on trade and climate change has been widely regarded as a justification from a legal point of view of such measures. While there are many proponents for such measures, there remains a considerable amount of skepticism; politicians, business organizations, and scholars have warned against such an approach. The following short note will discuss the feasibility of ‘border tax adjustment’ in relation to domestic climate change legislation as well as some WTO legal aspects along the following questions: (1) Are there target countries for border measures? (2) Would border measures help to combat climate change and could they be administered without too much bureaucracy? (3) How should border measures be qualified under General Agreement on Tariffs and Trade (GATT)?
The whole article is worth reading, but for our purposes, Question 2 seems to be the most novel and important one. On it Dr. Quick concludes: "It is a myth to believe that unilateral border measures will solve the problem of carbon leakage." Dr. Quick then goes on to add that, assuming some sort of global agreement is ratified, "[t]hinking that a country complying with its international obligations could be subject to border measures only because another country does not consider such international commitment sufficient is 'naked' protectionism."  Finally, he says that "[b]order measures do not benefit the climate but the domestic budget. They are difficult to calculate and easily circumvented. It is a myth to believe that only US or European installations produce in a climate efficient way as far as greenhouse gas emissions are concerned."

Amen, Doctor. Amen.

So to close this immeasurably long blogpost, let's update the ol' carbon tariffs scorecard:

Pro carbon tariffs - Sen. Ben Cardin, Senators Lindsay Graham and John Kerry, ten protectionist Senators, the US House of Representatives (in Waxman-Markey), France, and Paul Krugman.

Voting present - the White House.

Anti carbon tariffs - the rest of the world.

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