The [Indian] commerce department has begun mobilising opinion on the proposed carbon tax that developed countries, especially the European Union, are looking to impose on imports from advanced developing countries like India and China.The full text of the new Indian report is here (PDF), and (while admittedly only skimming so far) it appears to be a serious work of scholarship. It contains sections, each drafted in a handy Q&A format on: (i) Trade and the Environment; (ii) Carbon Taxation Systems; (iii) so-called "Carbon Leakage"; (iv) Border Trade Measures (aka "Carbon Tariffs") and their WTO Compatibility; (v) Border Trade Measures, the UNFCCC and the Kyoto Protocol; and (vi) the subtly titled "Impending Trade War." The sixth section provides the conclusions and, as the title suggests, they're quite serious:
The Centre for WTO studies, a research body under the department, has come up with a report on WTO compatibility of border trade measures for environmental protection that also delves into the possible effects of such a tax on India’s exports.
The idea is to be prepared to fight the issue once the need arises, commerce secretary Rahul Khullar said.
The products that could be immediately hit by a carbon tax include iron & steel, aluminium, pulp & paper products, cement, glass and chemicals, the report said.
While the EU justifies the proposed tax as a measure to create a level playing field between polluting developing countries and countries that have agreed to cut emissions under the Kyoto protocol, the feeling in India is that it may be yet another step to render exports from certain countries uncompetitive.
“It is not possible to pretend any longer that this (imposition of carbon taxes and related measures) is not going to happen,” Mr Khullar said, adding that in two-three years time this would be a reality and it made sense to prepare for it. The commerce secretary, however, stressed that India was not in favour of including environment in the trade liberalisation negotiations taking place at the WTO. “There are other forums for framing global environmental laws,” he said, releasing the report on Thursday.
The report, which describes the various forms under which environmental taxes can be levied and the various methods under which they could be challenged at the WTO, is a first in a series of other such reports. “The idea is to make everybody understand what the issues are in simple terms and generate a debate,” Khullar added.
With environmental issues capturing global imagination, especially after the Copenhagen Climate Conference last December, India feels that there is not much time to waste as developed countries could impose a slew of related restrictions on its imports....
[U]nilateral trade measures, taken in a protectionist manner, are likely to be held incompatible with the WTO rules. Unilateral trade-restrictive measures are also prohibited by the UNFCCC and the Kyoto Protocol. Some of the implications of bringing such measures into force would be as under.Like I said, subtle. That said, the Report's main conclusions are hardly surprising. Most obviously, the Indian Government has long opposed carbon tariffs and thus wouldn't loudly trumpet a new report showing their benign legality under global trade rules and the Kyoto Protocol. Second, and as readers of this blog already know, there is now plenty of good, solid scholarship out there - despite what Paul Krugman might have you believe - which supports the Report's main findings, including the likelihood of WTO problems and threat of major trade conflicts caused by countries unilateral imposition of border measures (all available here).
(i) Such measures imposing restrictions on imports on the grounds of providing a “level playing field”, or maintaining the “competitiveness” of the domestic industry, etc are likely to be viewed as mere protectionist measures by the developed world to block the exports of the poorer nations. This is because, there is little empirical evidence that companies relocate to take advantage of lax pollution controls.
(ii) Efforts to address climate change through unilateral trade measures will lead to tit-for-tat trade restrictions. This will spark trade war and will lead to massive, justified, WTO-legal retaliation by the affected countries. In turn, this will generate a plethora of trade disputes. It is doubtful whether the current Dispute Settlement Mechanism of WTO can handle this load. Such actions do not auger well for free and fair trade which the entire international community, as a matter of conscious choice, has strived to promote all along.
(iii) Use of WTO-incompatible trade measures diminishes the prospects for development of the developing countries. Trade generates wealth and offers the possibility to developing countries of investing this wealth in renewable energy and energy conservation measures. This will not happen if they are made poorer by the unilateral trade restrictive measures of developed countries. Thus such measures may prove to be counter-productive.
(iv) Unilateral trade actions may simply lead to a change in trading patterns with no significant reduction in emissions.
What is surprising, however, is the timing of India's big news. The carbon tariff debate has died down quite a bit since last fall, when the US Cap-and-Trade legislation (which included carbon tariffs) still had a pulse, the Europeans were seriously contemplating carbon tariffs as part of their revised Emissions Trading Scheme (ETS), and lots of nations were fiercely debating unilateral trade measures in the run-up to December's big climate change summit in Copenhagen. Since that time, the US climate change legislation has been put on ice, the Europeans - minus France (of course) - have cooled to the idea, and past momentum for dramatic climate change action has been frozen by Copenhagen's inaction, as well as the recent Climategate scandal and its offspring. (Please hold your groans to the end.)
So why is India flexing now? I have two guesses: (1) Bad timing - India's report just happened to be completed in the midst of this recent climate change pullback; or (2) Serious concern about rogue EU action - the Indian Government thinks that the global pullback might cause true believers in the EU to just say damn the torpedoes and do something rash. Sarkozy's certainly pushing the idea; the post-Copenhagen angst among some EU officals was palpable; and some analysts do think that carbon tariffs are inevitable in the EU, given that it has already enacted (and plans to increase) stringent, industry-killing climate regulations. Even the head of the European Commission, Jose Manuel Barroso, is calling for a "rethink" on European climate policy in the wake of the Copenhagen debacle.
Personally, I'm inclined to side with the former reason (bad timing) - beyond some tough talk from a few random officials and committed enviros, momentum for dramatic action on climate change seems unlikely - even in the EU. But you can't really blame the Indians if they're choosing the latter, considering Barroso's rather, umm, committed words today: "[T]his is not the time for the EU to start doubting its commitments.... We need to show that we have not given up on our ambitions, even if many of our partners found it easier to limit themselves to the lowest common denominator. Our core goal must be to bring all partners closer to our own ambitions and to our commitment to a multilateral agreement..."
Hmm. Then again, maybe India should be worried.
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