Talking Carbon Tariffs
Here’s Paul Krugman, defending the proposed Waxman-Markey carbon tariffs:
What’s happening here, I think, is that people are relying on what Paul Samuelson called an economic “shibboleth” — they’re relying on some slogan rather than thinking through the underlying economics. In this case the shibboleth is “free trade good, protection bad”, when what the economics really says is that incentives should reflect the marginal cost of greenhouse gases in all goods, wherever produced — which in this case happens to imply border adjustments.
And here’s Ezra Klein, agreeing with him:
I think, again, that we’re in one of these situations where all else being equal, it would be better not to be mucking around with tariffs. But all else is not equal. We’re triggering the largest change in the climate since the Ice Age. That may, indeed, be a fate worse than tariffs.
Leaving aside the fact that the impact of global warming is quite a bit more ambiguous than this suggests, let’s take a look at how carbon tariffs would actually be implemented through the World Trade Organization.
The international framework for resolving environmental disputes is maddeningly vague. Under WTO law, a punitive tax on foreign imports can only be implemented if it is deemed a legitimate countermeasure to an unfair competitive advantage. The Agreement on Subsidies and Countervailing Measures defines the specific conditions under which a country can pursue import restrictions. If a government directly transfers funds to certain industries, forgoes the collection of due revenue, or provides goods and services to a company other than basic infrastructure, another country may legitimately impose countervailing measures. Beyond these narrow guidelines, the agreement defers to the General Agreement on Tariffs and Trade (GATT). And therein lies the problem. Article XX, section (g) of the GATT indicates that measures “relating to the conservation of exhaustible natural resources” are allowed as long as they are “made in effective conjunction with restrictions on domestic production or consumption.” Which seems to imply that any country with domestic greenhouse gas regulations has the right to impose punitive tariffs on neighbors who lack reciprocal emissions restrictions. The EU and France have already made threatening noises about exploring this possibility.
The WTO’s ambiguous guidelines pose a serious problem. Given the complexities of the scientific debate surrounding athropogenic global warming, I think it would be a bad idea to empower a body of non-experts to determine the costs of foreign emissions. Is the WTO really the appropriate forum for assessing the impact of the global warming? Keep in mind that this is an organization intended to mediate trade disputes, not formulate global environmental policy.
On a broader level, it’s a bit disconcerting to see liberals – many of whom oppose coercive diplomacy in other areas (non-proliferation, for example) – rush to support punitive measures that were added to the climate change bill as a sop to Midwestern business interests. Do we really think China and India are going to respond favorably to carbon tariffs? Really?
Credit goes to Scott, my former debate partner, for inspiring this post and talking me through the WTO dispute mechanism.