Paul Krugman has a new op-ed on carbon tariffs that made sense in parts but puzzled me in other parts. Here is the part that I thought made sense:
... You can think of national policies designed to limit greenhouse gas emissions as ways to induce a country’s residents to take into account the emissions resulting from the production of the goods they consume. This is obviously true if a nation imposes a carbon tax, or a cap-and-trade system, in which businesses must purchase licenses to pollute. It’s also true, although in a harder-to-measure sense, when countries impose regulations like mileage and clean-energy standards.
The point is that many climate-change policies can be seen as a form of tax on domestic consumers. And as with a VAT, both the economics and, I believe, the law (I’m not a trade lawyer, although I think I understand this issue) say that border adjustments, in this case a carbon tariff, are appropriate parts of a climate strategy. That is, if a country lacks an adequate climate policy, the price of goods imported from that country should reflect an estimate of the greenhouse gases emitted during their production.
What might make carbon tariffs slightly trickier than VAT border adjustments is the likelihood that an important part of climate policy will involve regulations rather than a straight carbon tax. In that case, while a carbon tariff remains clearly justifiable as a way to level the playing field for domestic and foreign producers, setting the appropriate level of the tariff won’t be easy — it won’t be as simple as charging the same VAT rate on imports as that imposed on domestic products. A fair bit of estimation and imputation will be involved, and there will no doubt be arguments about the numbers.
That all seems right to me.
The first thing that puzzled me is something that came earlier in the piece:
Yes, protectionism has costs, but these costs are often exaggerated, and they’re trivial compared with the risks of runaway climate change. I mean, the Pacific Northwest — the Pacific Northwest! — has been baking under triple-digit temperatures, and we’re going to worry about the interpretation of Article III of the General Agreement on Tariffs and Trade?
That last link goes to an old IELP blog post related to VATs and the interpretation of GATT Articles II and III. While I appreciate him linking to this blog, I'm not totally sure why he though that particular post was relevant to the point he was making!
The second part that puzzled me was this:
So two cheers for carbon tariffs.
Wait — why only two cheers? Because carbon tariffs affect only goods that are exported and hence are only a partial solution to the problem of countries that don’t do their part in reducing greenhouse gas emissions.
Consider the case of China, which says that it plans to reduce emissions but is still building a large number of coal-fired power plants. If advanced countries impose carbon tariffs, this will give China an incentive to reduce the carbon dioxide emitted in producing its steel exports. But it won’t impose any penalty for carbon emissions from the power plants that supply China’s cities with electricity. And those emissions, which aren’t related to international trade, are almost surely a bigger threat to the environment than emissions associated with exports.
To fully address the problem of international cooperation, then, carbon tariffs that level the playing field wouldn’t be enough. We’d have to go beyond that to the threat of sanctions against nations behaving irresponsibly.
And that would, I’m afraid, be illegal under current trade law, because it would mean intervening in policies that have traditionally been considered purely domestic. Now, given the threat of climate change, our response should be to revise or ignore trade law. But that would be a big step and won’t happen right away.
I don't want to get caught up in the specifics of China in making this point, but broadly speaking when it comes to these things, I feel like there's an instinct among some people to assume that "we" are behaving responsibly, while "they" are not and will never do so on their own. Under this view, the first step towards international cooperation is often to impose sanctions on "them" in order to provide an inducement to adopt specific measures.
As a matter of policy, I think that is often misguided. For one thing, it assumes that "we" are responsible, and I'm not sure that's the case here (certainly not in the past, and not yet in the present). For another, I don't think the opening step should be so confrontational. Others may be willing to go along with a global agreement, if the terms are reasonable. I think it's worth starting with a proposal that includes reasonable terms and seeing how that goes.
As a matter of WTO law, I would say that it's true that unilateral sanctions without evidentiary support probably would lead to a violation of WTO obligations. On the other hand, if you approach an issue such as reducing carbon emissions in a cooperative manner, try to achieve an international agreement, but fail and then decide to work with a few others to impose reasonable costs on those who did not cooperate in good faith, you might have more luck in justifying your actions under one of the GATT exceptions.
