From a NY Times op-ed, here is an argument that carbon consumption should be the focus of carbon regulation, which necessarily requires carbon border measures:
A problem would arise, however, if a producer needed to buy permits to make televisions in a country with a carbon cap, while no permits were required in a country without a cap. The television from the country without the cap would be cheaper, consumers would prefer it, and there would be no economic incentive to cut emissions. Environmentalists call this the “leakage problem”: just as a balloon squeezed at one end will bulge at the other, emissions caps applied in only some economies will lead to emissions surges in others.
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If the United States adopted a tradable permit system that treated emissions from domestic producers identically to emissions associated with imported goods, then products that are more emissions-intensive, whether domestic or imported, would require more permits and thus be more expensive. Producers in the United States and abroad would have an incentive to reduce greenhouse gases to make their goods more competitive.
While international agreement is preferable, we have to be realistic about what can be achieved:
“The best policy — both in terms of the environment and in terms of economic theory — would be to have all countries take on binding emissions caps under an international agreement,” said Nathaniel Keohane, director of economic policy and analysis at Environmental Defense, a nonprofit advocacy group. “But we have to recognize that’s not going to happen overnight.” In the meantime, he said, the United States and other developed countries “need to take the lead.” He called carbon consumption caps “a good first step.”
“FROM an environmental point of view,” Mr. Keohane said, “it would ensure that the pollution we cut here at home doesn’t simply end up coming out of a smokestack somewhere else. It levels the playing field for American companies in the global economy. And it also helps us move toward a truly international system, by providing an incentive for developing countries to take on binding caps of their own.”
At the end of the piece, the role of trade agreements is acknolwedged:
The carbon consumption provision will face scrutiny under current trade agreements, but there is sound logic for including it in any emissions legislation. Most important, it would eliminate an excuse for doing nothing.
In my view, it may be possible to set up a measure that discourages carbon consumption in a non-discriminatory manner so that it has a good chance of surviving a WTO challenge. But, it is harder to do so with cap-and-trade than with a tax, and, furthermore, in practice it may be difficult for the legislative process to provide us with a perfectly drafted measure that can satisfy trade rules.
An even better way to do achieve these goals, though, might be to provide subsidies for consumers to be more energy efficient. For example, a tax credit for using solar energy to power homes would be a good way to reduce carbon emissions, and would not, I don't think, conflict with trade rules. There are other, more complicated types of emissions to deal with, of course, but this would at least be a good start.
