He is not a fan:
But my purpose today is to look at the 'stick', trade measures, and the idea of unilateral BTAs, or Border Tax Adjustments in particular.
Let me start by quoting Mencken:
"For every major problem, there is always a solution that is simple, that is direct and that is profoundly wrong".
Unilateral border tax adjustments to counter 'leakage', or competitiveness at risk considerations, is, at least in my view, a perfect example of Mencken's acerbic wit.
At one level, it seems neat: you do not wish to impose a price on carbon that will simply reduce their relative competitiveness and, ceteris paribus, risk losing jobs and production to other producers in other countries which do not face a price on the carbon they emit. A border tax adjustment, while useless to address relative competitiveness of your exports, could therefore in theory be used to protect you from imports, not subject to a price on the carbon emitted during their production and distribution.
There is a huge and growing academic literature around this. Most of it is highly technical, around core WTO provisions like Article XX of the GATT and associated WTO jurisprudence such as the Shrimp/Turtle case. However, the core points are not technical.
First, if you were going to impose unilateral border tax adjustments that would have any underlying moral or political rationality, you would presumably wish to treat imports from countries that were doing the right thing by climate change - ie were meeting their international commitments - [differently] from those countries that were not. You could of course take a different view - just slam everyone regardless whatever they were doing to help address climate change. But I will assume a minimum of sophistication and international civility.
Houston, we have a problem. The core problem is how would you distinguish between compliant and non-compliant countries?
Of the Kyoto concepts that are highly likely to survive into any conceivable second commitment period, one stands out: the principle that a final audit of your compliance or non-compliance will need to await the end of the commitment period. NZ for example is highly likely to meet its Kyoto obligations. That is because the obligation is expressed in net emissions and the latest satellite data suggests we had underestimated the sequestration of our forests. But we will not know for certain until 2014, when the definitive audit of all those who have ratified Kyoto will have been completed.
Think about the implication. A unilateral border tax adjustment would be like an anti-dumping or CVD investigation on steroids - a bureaucratic monster, given the complexity of modern supply chains, with armies of officials trying to calculate the carbon-equivalent tax to impose on imports made from components produced in perhaps 20 different countries. It would be like the Politburo on a bad hair day. It conjures up Bertolt Brecht's limerick:
"Saw civil servants, green with mildew, keeping their huge manure contraption on the move. So badly paid for all their bullying and creeping, I only hope their salaries improve".
That massive administrative complexity aside, if a unilateral BTA regime were to rest on the political distinction that you would not wish to hit those who were doing the 'right thing' by the planet, as it were, you would not know whether country X or Y was or was not compliant until two years after the end of the second commitment period, say 2020 or 2022, depending on what is finally negotiated. As a political response to the problem, that is, as the Australians say, about as useful as a back pocket on a singlet.
Second, and even more to the point, it would be likely to spark a trade war and the world today does not need a trade war. Certain Europeans have already said they would retaliate against imports from the US if the US ever tried to do this to Europe's exports to the US. China has made it clear not only that it would immediately retaliate but even told us how - a retaliatory regime based on per capita emissions. This idea, to put it mildly, ain't looking too flash at this stage. The day has long passed when the world can unilaterally impose its will on China, thank goodness.
