In reaction to the proposal for carbon border measures noted here the other day, the Economist's Free Exchange blog expresses skepticism:
There are good reasons to react cautiously toward this idea, however.
In the first place, developed nation carbon pricing is likely to be helpful to the fight against climate change with or without leakage. Per capita emissions in America are among the highest in the world, and given our position as one of the leading global producers of carbon, reductions at home can have a significant effect on the global path of emissions growth. Much of our economy is concentrated in non-tradables or involves trade with other developed nations (who, one guesses, would adopt similar carbon rules), and should therefore be immune to leakage pressures. Developed nation carbon regulations would also jump-start investments and innovations in efficiency technologies, which would make later adoption of carbon pricing cheaper and easier for countries like China and India.
It's difficult to imagine how import permits might be deployed in a cost effective way. The principle challenge is likely to be setting the right price. If we price carbon near the source, then that price trickles throughout the supply chain, saving us hard choices about how much to weight different aspects of the production process. Pricing a good at the final stage, however, is sure to be a nightmare. How do we weight the emissions of components produced from scattered locations across the globe? How do we price a carbon permit for an outsourced computer programmer in Bangalore? End-stage pricing is sure to be complicated, and that complexity will increase the chance of politicisation. Domestic firms, after all, will have a powerful incentive to use carbon permits as instruments of protectionism.
China is also unlikely to take such rules lying down. No stranger to trade manipulation, China could easily fiddle with the yuan or provide hidden subsidies to domestic producers to overcome the cost of the permits. Cases could also get bogged down at the WTO, and broader patterns of trade could be threatened. But most importantly, China might just turn its focus to production for domestic consumers, of which there are quite a few. As a long-term solution, import permits do not bring rapidly growing industrial powers into the regulatory scheme, and as such, they fail.
They conclude with a plug for international regulation on the issue:
The obvious best option, as Dean Baker notes, is to establish an international regulatory environment that includes developing nations. Felix Salmon says it will never happen, but I have a difficult time understanding why. We have not yet seen what kind of agreement is possible with strong American leadership pushing negotiations ahead. Our lack of seriousness in international talks means that we don't even know what concessions developing nations might require, if any. Eventually, we may need to decide that the perfect ought not be the enemy of the good, but there's no reason to do that without first giving the perfect a good-faith effort.
I confess that I have a hard time believing that meaningful international regulation in this area, in terms of carbon caps or carbon taxes, will be achieved any time soon. Part of my skepticism comes from the fact that even the most serious proposals seem weak and ineffective to me. Even if they were adopted as proposed, which they are unlikely to be, I'm not sure how much carbon reduction would actually be achieved.
