In a new paper, law prof Tim Meyer offers a defense of combining (1) discriminatory regulations such as local content requirements with (2) subsidies to reduce carbon emissions. In the abstract of the paper, he says:
Second, like all policies, green trade policies usually pursue multiple objectives. The fact that green trade policies often have mixed motives means that assessing their effects through a Puritan lens is a fool’s errand. The quest nations are on today is not for trade policies that promote sustainability in the least trade restrictive way possible. Instead, they are looking for policies that can generate the political support to address urgent environmental crises while still promoting economic growth.
He then lays out his argument on this point as follows:
The second comparison often drawn is between a green trade barrier that contains a discriminatory or coercive component and an identical policy without the discriminatory or coercive component. The argument is that reducing discrimination or coercion will improve the measure’s ability to achieve its green objectives. Discrimination, the argument goes, is inefficient. Introducing inefficiencies into government policies designed to promote the growth of a green economy, and in particular a green industrial sector, will only slow the growth of the field, distort innovation, and artificially prolong the business life of inefficient import-competing producers.
The problem with this comparison is that it ignores politics. Discriminatory conditions like local content requirements (LCRs) or measures that contain some degree of protection for domestic producers ... make it easier to build political coalitions for green policies. Environmental policies, after all, are often public goods—pursuing them imposes concentrated costs while creating diffuse benefits. Because the benefits are diffuse, political support for the policies does not match the benefit created. As a result, the policy is undersupplied relative to the benefits it creates.
For example, decarbonizing the steel sector creates significant environmental benefits, as steel production is highly energy intensive and still involves the burning of coal—the dirtiest fossil fuel—in some places. But decarbonization also imposes costs for producers that invest in decarbonization and their consumers who may face higher prices. Consumers and producers thus may lobby the government to continue to allow the burning of coal to produce steel. These groups typically consist of companies that are well-organized, have access to government, and thus have the ability to influence policy outcomes. Citizens that benefit from cleaner air and tackling climate change, on the other hand, are likely to be poorly organized and less well-resourced in terms of obtaining political influence. Because climate change is not their business, in other words, it does not incentivize organization and investment by those who benefit from regulating it on the same scale as businesses that oppose regulation. Nevertheless, the diffuse benefits of decarbonizing the steel sector for these citizens outweigh the costs to participants in the steel industry itself.
Scholars of political economy have long understood that the solution to this problem is to provide private benefits to those who support public goods.59 Some degree of protection for domestic production serves this function. It creates advocates for green policies by providing concrete economic benefits to those that support, for example, the consumption of biofuels or subsidies for renewable energy.60 Absent these benefits, green policies might not exist at all. In the context of the steel example above, using recycled steel and electricity drawn from renewable sources can significantly cut carbon emissions. ...
LCRs attached to subsidies, such as those in the US Inflation Reduction Act, are another common method to achieve this conversion. In the case of environmental law, LCRs provide financial benefits to industries that both reduce their environmental impact and also provide political lobbying and support for government subsidization of a green economy. Recent fights over the implementation of the local content rules in the Inflation Reduction Act, with US Senators arguing that watering down those rules is inconsistent with their support for the legislation in the first place, indicate just how important this political support was to the passage of the measure.61 Moreover, recent research into the effectiveness of LCRs in generating local economic benefits has refuted the argument—often made in the context of trade disputes—that LCRs cannot achieve their objectives. Instead, studies find that LCRs can effectively promote local economic growth when certain preconditions are satisfied.62 Put differently, the realistic counterfactual comparison is almost never between a policy with a discriminatory or coercive condition and the identical policy without such a condition. The comparison is much more often going to be between a government policy with a discriminatory or coercive condition and a watered-down policy that might even then fail to obtain sufficient political support to pass. Mixed motive policies are, in other words, hardier political policies than are pure policies that seek to achieve only a single goal.63
Of course, the reality that some degree of protection may be necessary to ensure political support for green trade policies does not mean that any trade barrier should be ok. The key is to find—either through negotiation or the development of case law—an approach that allows governments the space to engage in politics that advance ambitious and politically realistic green trade policies, while at the same time preventing protectionism from becoming the sole objective. The leadership of the US and the EU, in their different ways, have created multiple fora in which nations can attempt to develop one or more approaches to address this problem. The answer(s), though, will not be technical ones, even if they are presented as such by specialists making argument about legal texts. Rather, they will be political comprises that attract sufficient support to provide a stable balance between nations’ environmental, economic, and political objectives.
For me, a key issue with political compromise is the level of contribution you are hoping to make towards solving the problem at hand. If you compromise too much, your actions might not make much of a contribution. There has never been a question that you can make political compromises to help ensure that the government takes some action, but if that action falls far short of being a solution to the problem, it may not be worth doing.
And I think that's the issue we are dealing with in the context of reducing carbon emissions. In the case of the IRA, proponents of the measure often point to this study, which found: "Our preliminary estimate is that the IRA can cut US net greenhouse gas emissions down to 31% to 44% below 2005 levels in 2030—with a central estimate of 40% below 2005 levels—compared to 24% to 35% under current policy."
I have three reactions here: (1) these sorts of estimates tend to be a bit uncertain, so I wouldn't count on a 40% reduction in US carbon emissions from 2005 levels; (2) given the scale of the problem, the 7-9% extra from the baseline doesn't sound like that much; and (3) lots of carbon emissions are outside the US, so we need to think carefully about how to work with others on these issues, and LCRs are likely to have a negative impact here.
Having said all this, I do understand the political difficulties with taking action on reducing carbon emissions, and it's worth thinking about ways to deal with it. If compromise with protectionist interest groups is not the answer, then what is? One obvious possibility is for political leaders to make the issue more of a priority than it currently is, and to talk about the issue bluntly and honestly. What we often see instead are politicians claiming that action to address climate change will create 20 million jobs. From what I can tell, most people look at those claims pretty skeptically. It would really help to have someone who could articulate the problem and convince people to take it more seriously. (Maybe that's true for all issues, but it's particularly true here!)
Another possibility would be to offer direct subsidies to people who might be hurt by the actions that are necessary to reduce carbon emissions. I think this approach would be better for the economy than Tim's plan for combining the carbon reducing action with protectionist measures that harm the economy broadly speaking and create international conflict.
Finally, it is also worth noting that it is possible to adopt the protectionism Tim thinks is necessary to reach a political compromise, but do it within the rules. For example, instead of local content requirements that are difficult to monitor and evaluate, and which clearly violate WTO rules, governments could just use tariffs that are negotiated and incorporated into their WTO Schedules.
