In a differentiated carbon price regime there will be strong pressure in the industrial countries to take trade actions against countries that set low carbon prices. Environmental concerns cannot be the basis for such actions because “leakage”—emissions increases in poor countries as a result of emissions cuts in rich countries—will be low. Given the stated level of ambition in the United States and European Union on unilateral emissions reductions—17 percent cuts by 2020 relative to 2005 levels—the emissions increase in low- and middle-income countries will be about 1 percent. Rather, the pressure will emanate from domestic producers of energy-intensive manufactures who will witness erosion in their competitiveness, reflected in export and output declines, which in the United States could amount to 12 and 4 percent, respectively.Non-nerdspeak translation: the imposition of carbon tariffs (and domestic carbon taxes on imports) will have no environmental benefits because it won't affect "carbon leakage" (i.e., the offshoring of carbon-intensive industries and related jobs to countries with lesser or no climate change regulations). Instead, the only justification for carbon tariffs rests on protectionist grounds - i.e., ensuring the "competitiveness" of domestic industries that face higher production costs because of onerous climate change measures. And to top it all off, such protectionism will be devastating for developing countries, crippling their economies and thus very likely instigating serious trade conflicts.
A country that has imposed a tax on carbon emissions domestically (or equivalently introduced a domestic cap-and-trade scheme) can impose a tax on imports either based on the carbon content of domestic production or based on the carbon content embodied in imports.
Our estimates show that imposing tariffs across the board based on the carbon content of imports would address competitiveness concerns of domestic producers and contribute to further emissions reductions. But it would be a “nuclear option” in terms of trade consequences. For example, such an action by the United States and European Union would be the equivalent of imposing a tariff of over 20 percent on China and India—resulting in lost exports of up to 20 percent.
These findings are obviously important for practical reasons - they further remove any environmental justifications for carbon tariffs and expose them as the blatant protectionism that they are. So the next time you hear Senator X or environmentalist Y arguing that carbon tariffs (or other types of "border measures" imposed on imports) are desperately needed to save the world from the Ecopalypse, just stop listening because they're dead wrong.
From a legal perspective, these conclusions/data are also vitally important to stopping eco-protectionism. If a country (say, the United States) imposes carbon tariffs, it is very likely that China, India and others (like Canada!) will challenge the measures at the WTO. The United States would likely argue that, while possibly discriminatory (although they'd probably deny that too), the border measures are allowed under the general "environmental exceptions" to WTO non-discrimination disciplines under GATT Arts. XX(b) ("necessary to protect human, animal or plant life or health") or XX(g) ("relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption"). PIIE's findings, however, make clear that carbon tariffs would have no environmental effects and instead are applied solely to remedy "competitiveness" concerns - a reason for which there is no WTO exception.
Thus, PIIE's conclusions completely undermine one of the primary arguments that a WTO Member might employ to defend its application of (economically destructive) carbon tariffs.