Recently, I came across two arguments for the U.S. and EU to use tariffs as penalties designed to bring down carbon emissions:
- Senator Sheldon Whitehouse suggested that "laggards and high polluting countries [will be] forced to step up and comply by virtue of the economic pressure on them to stop having their goods tariffed so heavily";
- And Joseph Stiglitz, Todd Tucker, and Isabel Estevez argued for tariffs that "restrict imports of dirty steel and aluminum—that is, metals produced with a high intensity of carbon emissions—from entering their markets."
For reasons I have set out before on this blog, I think an approach that relies on U.S./EU tariffs to punish other governments for their carbon emissions will be ineffective. In response to the arguments set out above, I offer two additional/supplementary reasons. (I'm going to focus here on the policy as it arises in the U.S. more than the EU, because both of the arguments above come from a U.S. perspective).
The first reason is that many people in the U.S. seem to be operating under the assumption that the U.S. is cleaner than most others in terms of carbon emissions, and as a result the U.S. government has the moral high ground to push others to reach our level. But focusing on the key metric, per capita carbon emissions, this is simply not true. Among larger economies, only Canada, Australia, and Saudi Arabia are worse than the U.S. That leaves the U.S. with low credibility to pressure others here. (Maybe the latest developments in U.S. legislation will make a big dent in these figures, but my sense is that there is a lot of uncertainty about that and the achievements will be modest at best.)
The proponents of this approach focus on manufacturing, where U.S. carbon emissions are relatively low. They want to focus on production because the U.S. is good there, but then ignore consumption, where the U.S. is bad. However, from what I can see based on the per capita figures, it is clear that the U.S. is among the worst overall, and focusing on an area where the U.S. is better can't disguise that. If the U.S. takes the approach of penalizing other countries in areas where they are worse (e.g., manufacturing), there is a good chance these other countries will retaliate in kind, e.g., imposing tariffs on the U.S. for its overall higher per capita emissions in order to induce the U.S. to "step up and comply."
Not surprisingly, the focus of these arguments is often China, as Whitehouse makes clear with this statement: "You know, you can hector and plead and wheedle with the Chinese all day long about trying to do better in terms of pollution, but what's really going to get their attention is when their exports to the US and the EU are being tariffed heavily. They will move much more rapidly to get away from that pressure than they will to try to meet the approval of the West at functions in Davos." Whenever someone brings up China these days, the discussion tends to go off the rails, so let's think about India instead. How would India react if the U.S. imposed tariffs on its steel/aluminum because it is relatively dirty in terms of its carbon emissions? Well, there have already been calls in India for action based on the level of per capita carbon emissions in a country, so no one should be too surprised if that happens. (And then going back to China, we already saw what happened when the U.S. imposed tariffs on China under Section 301: China retaliated with tariffs of its own).
The second reason I'm skeptical about this approach is that the steel and aluminum sectors are particularly bad industries in which to carry it out because of their history with trade remedy tariffs. If the idea behind these tariffs on dirty steel/aluminum proposals is that high tariffs would be imposed on dirty steel/aluminum and low tariffs would be imposed on clean steel/aluminum, so as to give countries an incentive to produce the cleaner variety, I can see how that would work to some extent. (I don't think it's a particularly effective approach to the problem, and a revenue-neutral carbon tax would be better, but I see the logic.)
But it's important to understand that the Global Steel and Aluminum Arrangement under discussion right now will not provide those incentives, because clean steel will not be charged low tariffs. Ordinary U.S. tariffs are not very high on these products, but trade remedy tariffs often are: "As of April 19, 2017, Commerce has 152 antidumping (AD) and countervailing duty (CVD) orders in place on steel from 32 countries." (See also, World Tariff Profiles 2021: AD, p. 209; CVDs, p. 218; Safeguards, p. 225) The point here is that even if India or China could come up with a way to produce steel that, let's just say for the sake of argument, sucks carbon out of the atmosphere, it would still get hit with high U.S. tariffs. And if you are already subject to 100% AD tariffs, an extra 25% because your products are dirty won't have much impact.
So if these proposals won't accomplish their environmental goals, what might we do instead? One way to have an impact here would be to change the current system so as to charge lower tariffs for clean steel/aluminum. To this end, the U.S. could lead an effort for governments to lower tariffs on clean versions of these products in order to provide an incentive to produce this way. While U.S. ordinary tariffs are low, other countries have higher tariffs, so convincing them to charge lower tariffs on clean steel and aluminum could have an impact. Exempting these goods from anti-dumping tariffs could allow the effort have an impact in the U.S. as well.
An initiative along these lines is kind of a variation of the negotiations for the Environmental Goods Agreement. The EGA identifies goods that are considered green, and lowers tariffs for them; this initiative would lower tariffs for goods that are not inherently green but have been greened to some extent.
Another possibility is to encourage governments to provide subsidies to upgrade domestic manufacturing facilities to ones that emit less carbon, with part of this effort being a promise not to impose countervailing duties against those subsidies or to challenge them at the WTO (which could lead to authorized tariff retaliation). In effect, there would be an environmental exception applied to these particular subsidies that exempts them from tariffs that might be applied under domestic and international trade law.
To sum up, my basic point is this: If we want to provide incentives to change behavior, we have to offer something substantive in terms of opening markets to clean energy products or otherwise providing incentives to make these products. Unfortunately, under the current "tariffs as penalties" proposals, there does not seem to be much chance of progress. In contrast, a "removing tariffs as an incentive" approach could work.
