The Trouble with CO2 Tariffs

by William Yeatman on September 26, 2007

Trade—voluntary exchange—is the essence of economic activity. Trade leads to specialization, which increases productivity. As trade expands so does the arena of economic competition, which spurs innovation. Greater trade also means more economic cooperation across distances, which makes societies less vulnerable to local crop failures and other shortages. Thanks to trade, a tiny island nation like Japan, with virtually no natural resources, can be a major economic power.


A long-standing worry of free-market advocates is that global warming will become a pretext for launching a new era of protective tariffs, non-tariff barriers, and trade wars. Former French President Jacques Chirac called the Kyoto Protocol the “first component of an authentic global governance.” Governing without penalties, punishments, or sanctions is a fiction. A Kyoto without teeth is doomed. The treaty asks countries with mandatory emission limits to bear relatively large costs in the short term for relatively small or speculative benefits 80 to 100 years hence. Moreover, any county that cheats on its obligations or does not agree to limit emissions gains a competitive advantage vis-à-vis emission-limited countries in global trade.


Europe, Canada, and Japan are finding it hard to comply with Kyoto’s initial obligation to reduce emissions 5 percent below 1990 levels by 2008-2012. Just staying within that limit will become progressively more difficult if their populations and economies grow. Yet Canada, the European Union, and Japan are calling for much deeper reductions—emissions cuts of 50 percent below 1990 levels by mid-century. Clearly, Kyoto is unsustainable unless somebody acquires the power to penalize individual countries for non-compliance or for refusing to participate. The most likely enforcement mechanism is trade sanctions—either “carbon tariffs” to offset the cheaper energy costs of non-Kyoto-complying countries or bans on imports from such countries.


Okay, the protectionist logic of Kyoto is clear. But here is where it starts to get weird. President Bush has taken many slings and arrows for opposing U.S. ratification of the Kyoto treaty. Tomorrow, the President hosts a two-day conference of the world’s 16-largest carbon dioxide emitters to discuss climate policy in the post-2012 period. All indications are that President will continue to oppose economy-wide emission caps of the Kyoto variety.


Yet, according to Reuters, C. Boyden Gray, the U.S. Ambassador to the European Union, endorsed “retaliatory” trade sanctions as a means of pressuring China and India to reduce their emissions. “You could probably find a WTO-compliant way—for example you could require goods to have to pay a fee related to the carbon expended in manufacture," he said.


Doesn’t the Administration know that what is sauce for the goose is also sauce for the gander? If carbon tariffs to compel China and India to adopt mandatory emission reductions are legal, then so are carbon tariffs to compel U.S. compliance with the Kyoto Protocol. It gets even stranger, because in the same speech, Mr. Gray argued against the legality of a European Union plan to force all airlines flying into European airspace to abide by new caps on carbon emissions. Allowing U.S. airlines to serve European passengers without complying with the EU caps would allow them to offer cheaper fares than their EU competitors.


The only principled way to oppose the EU carbon cap on U.S. airlines is to oppose all trade discrimination based on the carbon content of goods and services. The world is too energy poor to afford Kyoto—and too poor simply to afford a new era of green protectionism and trade wars.

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