Tuesday, November 10, 2009

Will China Soon Impose a Carbon Tax to Avoid Future Carbon Tariffs?

Sounds like a bit of a stretch to me, but the Energy Tribune's Michael J. Economides and Xina Xie sure think so:
...China, the world’s manufacturing behemoth and the ever careful superpower, does not want to take any chances. The threat of carbon tariffs proposed by countries such as France, Germany, and the US worries the Chinese enough that two major reports, one by the National Development and Reform Commission, the country’s highest authority, were released on how to cope with the situation. Both reports suggested that China may begin imposing a carbon tax in the next five years.

While on the surface such a tax may appear ludicrous, increasing the cost of energy and products in China itself is a masterstroke.

The logic, as outlined in the Chinese reports, is compelling. Since the recent global financial downturn, trading frictions are surfacing. Climate-change-related initiatives and carbon tariffs by Western countries are nothing more than trading protection schemes, using the pretext of climate change to put pressure on China, especially under the current economic situation. The clincher for the Chinese is this: Carbon tariffs not only violate the World Trade Organization (WTO) free trade, and most-favored-nation status principles, they also violate the Kyoto Protocol and the tenet of “different responsibility.” This kind of trading protection will have fatal effects on the economic future of developing countries, prominent among which is China.

Because carbon tariffs from the developed countries are to push the developing countries towards “promising” carbon emission reduction, saying “no” to the pressure of carbon tariffs is not a safe option. A proper measure has to be adopted, such as collecting carbon tax inside China before a carbon tariff is charged in a foreign country. The reports conclude that if China sets a national policy to collect carbon tax, it will be considered as a “promise” for carbon reductions by the international community.

After applying a carbon tax, carbon tariffs on the same product by Western countries would amount to double taxation, expressly not allowed by the WTO. Without a carbon tax in China, carbon tariffs might be permitted by WTO. This will put pressure on the US to reconsider any carbon tariff legislation. For the Chinese, passing these costs to foreign consumers and finding new tax revenues can look very good domestically by reducing other taxes.

The recent report by the NDRC suggests that China start with energy tax collection immediately, gradually transforming the energy tax to a carbon tax over the next five years or so. The actual action should be consistent with the international climate change legislations, such as the expiration of the Kyoto Protocol in 2012, and the upcoming Copenhagen pact, if any.

The message from China is clear: it is not eager to jump on climate related initiatives but it will not allow other countries to collect carbon tariffs on products made in China. Taxes can be collected and kept in-house, as an energy tax or a carbon tax, or whatever name one likes to call it.

Actually, China has been trying hard to reduce air pollution and emissions. Thousands of small, inefficient coal-fired power plants have been shut down and more will be eliminated in the coming years; new pollution-control equipment has been installed on about 60% of the coal-fired power plants in the country to scrub sulfur and remove particulates. Nuclear power capacity is expected to increase ten-fold over the next 10 years and a lot of money has been invested on wind power.

But China’s GDP per capita is still one of the lowest in the world, only $3,300 in 2008, about one fifteenth of the level in the US. To close the gap, China needs a lot of energy, especially cheap and abundant local coal. The country will simply not sacrifice its economic development for the sake of Western worries about “climate change” which, if real and anthropogenic, is not a concern for the Chinese. Pushing China towards a massive emission reduction will simply make China to play the name game from “energy tax” to “carbon tax.” And that tax will ultimately be paid largely by Western consumers.
Given the rapidly diminishing likelihood of any Copenhagen agreement or the passage of US climate change legislation, I'm skeptical of the authors' claims that a Chinese carbon tax is coming very soon.  However, the strategy itself makes a lot of sense: rather than let Western bureaucrats and their domestic interest (read: lobbying) groups dictate the climate-based taxes (i.e., carbon tariffs) to be imposed on Chinese exports, the Chinese will tax themselves, and at a far lower rate than anything the bureaucrats would devise.  In so doing, Chinese exports would gain a competitive advantage in Western (e.g., US, EU, Canada, etc) markets over exports from other developing countries that don't have domestic climate change measures (and thus face carbon tariffs). 

Even more interesting is the prospect that Chinese exports might also gain a leg up on the domestically-manufactured like products in the US/EU/Canada/etc if the Chinese carbon taxes are lower than the new costs imposed by the US/EU/Canadian/etc systems on their own industries.  For example, if a US cap-and-trade system results in a 10% cost increase for domestic integrated steelmakers, but Chinese steelmakers only face a 6% carbon tax, Chinese steel exports would actually gain 4% on their US competition in the US market.  Thus, eco-protectionist carbon tariffs could actually end up harming the very industries they're designed to protect, at least vis-a-vis their Chinese competitors.

Now that would be some awfully rich irony!

Finally, and hypotheses aside, there's one other thing that this report makes abundantly clear: the biggest loser in any of these climate change schemes is always the consumer who will pay higher prices when exporters, importers, domestic manufacturers, retailers and whoever else inevitably pass on their higher energy and input costs.  That much is unavoidable, regardless of the system imposed or the country imposing it.

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